It’s an ages-old question, and we’re still debating the answer: should you rent, or should you buy a home?
In the past, the automatic response was to buy because renting meant “throwing money away.” Instead of building equity in a property you owned, you gave your money to a landlord and missed out on a chance to invest in a powerful asset.
Plus, people argued, you often paid a premium to rent. It was cheaper to make a monthly mortgage payment than it was to make the rent on a similar property.
But with a changing economy and housing market, that idea doesn’t always hold up today. The actual costs largely depend on where you live and what the real estate market looks like there.
Perhaps even more important than the practical concerns around comparing costs, the right answer to the rent versus buy argument also depends on your personal financial situation, what you plan to do in the next 5 years, your job (and budget, and life) stability, and plain old personal preferences.
To determine the right move for your situation, ask yourself the following questions. Your answers will give you insight into the best option.
What’s the Cost of Renting Versus Buying?
The first factor to look at is basic cost. In some cities and real estate markets, paying a monthly mortgage on a home you own is actually cheaper than sending a rent check to someone else each month.
But that’s not a hard and fast rule, because so much depends on things like:
- Where you live and the general costs of living in that location
- What the housing market is doing in the area you want to buy (and conversely, what the rental market looks like)
- The price of the home you want to buy, versus the cost of similar rental housing in that area
- What kind of mortgage you want and how much of a down payment you have (because different term lengths, interest rates, and financing options will raise or lower a monthly mortgage payment)
- How much you will need to spend to maintain a property once you own it
- How many additional fees you rack up with renting (like deposits, broker expenses, moving costs, and more)
Clearly, there are a lot of moving parts here! One of the best ways to assess your individual situation (outside of working with a financial professional who can help you plan, like a fee-only certified financial planner) is to use a comprehensive rent vs. buy calculator.
One of the best such calculators is this one from the New York Times. It takes the above factors into account and then some.
Just remember: any calculator that you use can only give you results as good as the data you put in. So take the time to review what information you need to input, then do your research to get accurate numbers if you need to.
By doing so, you can get an informed estimate on how much it might cost you to buy versus how much you’ll spend to rent.
Do You Want to Invest Money and Time into Your Own Property?
Buying a house gets a lot of attention. What’s not talked about as much? All the work that goes into maintaining that property over time.
When you rent, you can call a landlord if anything goes wrong. You don’t need to deal with any regular work or unexpected emergencies that pop up.
As a homeowner, you’re the sole responsible party when it comes to making repairs, installing upgrades, performing maintenance, and taking care of every interior (and exterior!) inch of your house.
Are you prepared to put your time and money into this responsibility? The answer may well be “yes.” But if you feel hesitant or aren’t sure, take some more time to think about the decision before you start browsing your local housing listings.
There’s nothing wrong with not wanting to deal with the amount of effort and energy — financial and otherwise — that a home requires. What’s important is recognizing that you may not want to spend your weekends doing housework and lawn care, and making an appropriate rent vs. buy choice based on your preferences right now.
Will You Want to Live in the Same Place for At Least 5 Years?
A home can be an asset to a property owner. The ideal situation: you buy your home, you live in it and enjoy it, and you sell for a profit when you’re ready to move on.
That works out for many homeowners. But because these assets appreciate slowly over time, you can’t count on it happening quickly.
That doesn’t mean you can’t sell before you hit your 5-year homeownership anniversary. But if you do so, you are more likely to break even — at best — for two reasons:
- Homeownership costs are largely front-loaded; you pay more upfront thanks to mortgage closing costs, moving costs, initial work you want to do to make the place yours, and so on.
- Home values don’t usually rise enough to make up for these heavy costs you incur immediately upon buying.
Another factor to consider is that homes are illiquid. That means it’s harder to move if you need to move suddenly. You can’t just walk away from your home. You need to go through the process of selling it, which can be costly and span months or even a year or more.
There are some exceptions, but the 5-year rule is a good guideline to use to determine if you’re ready to buy or not. If you know you don’t want to live in the same place for that amount of time, you may want to wait a little longer before buying.
But if you’re ready to put down roots for at least a few years, buying a home might be a good way to invest your money.
Do You Feel Like Your Income (and Your Lifestyle) Is Stable?
You have probably calculated the kind of monthly mortgage payment that can fit in your budget right now. But don’t forget to think about what you could likely afford in a year from now.
If your job doesn’t feel stable, or you work for yourself and your earnings swing wildly from making a lot of money to barely scraping by, that could be a problem. If your current income sources evaporated in a few months, you might struggle to pay your mortgage.
Similarly, think about whether a mortgage payment will cause your currently stable budget to verge on overstretched. The way your life is today, maybe you can max yourself out and afford a $2,500 monthly payment. But if you know you want to dramatically change your lifestyle in the next couple years — like getting married or starting a family — your budget may not be able to stretch to accommodate a big mortgage payment and these new expenses.
When you rent, you have flexibility to change your living situation as your financial situation changes. When you buy, you have a commitment to pay your mortgage every month without fail, regardless of what happens in your life. If your income goes down or your spouse decides to quit their job to pursue a passion, you’ll still need to make that payment.
This doesn’t mean you need to have everything figured out. Just consider your current budget and lifestyle, and how both might change in the near future.
If you expect major fluctuations, you can still buy a home — but you need to factor in these variables, as they’ll impact how much house you can actually afford.
Do You Have Savings for a Down Payment (and Closing Costs)?
Prospective homeowners should ideally save 10-20% of a home’s purchase price in cash. You’ll want to use this money as your down payment on a mortgage.
In many cases, you will want to take a loan for no more than 80% of the purchase price of the home. By putting at least 20% down, you’ll present less of a risk to a lender which means you won’t need to pay private mortgage insurance. That can save you anywhere from $50 to $500 per month on your mortgage payment.
Before you go to buy, ask yourself if you have enough cash to put down a 20% down payment. If you do, that’s one more financial green light for buying. If you don’t — but have 10% saved – then you have the option of partnering with a home ownership investment company like Unison. The Unison HomeBuyer program can contribute up to half of your down payment in return for sharing a portion of the appreciation or depreciation in your home’s price whenever you choose to sell it.
What Do You Want?
Ultimately, this might be the most important question to consider and answer. What do you want? Many people get caught up in what they think they “should” do. Maybe you think you have to buy before you have a baby. Perhaps you think you really should rent until you get that job promotion you’re angling for, and you can’t buy until all your professional stars align.
Neither of these is true. The most important question you can ask is, “what do I want to create in my life?” From there, you can make the financial plan that lays out the appropriate action steps for you to achieve your goals — whether that means enjoying the flexibility of renting in your favorite neighborhood, or buying a house that’s entirely yours to turn into a dream home.
Share this Post