Whether to rent or to buy the place in which you live is a major decision.
It doesn’t just affect how much money you have left at the end of the month; it also affects your lifestyle and the size of the savings you accumulate over the years. Every day, people buy homes when financially they’d be better off renting, because it’s important to them to have a place to put down roots and because they see owning a home as an investment that can grow and as a source of tax deductions. Similarly, people rent all the time for the flexibility and minimal responsibility it offers, even though they’d amass a larger net worth over time if they bought a place.
Of the two options, the bias often veers towards ownership: It’s a big business for everyone from mortgage lenders to real estate agents to home improvement stores, so we are bombarded with the message that home ownership is the key to happiness and part of the American dream. But owning isn’t universally better than renting, nor is renting always simpler than owning. Consider the pros and cons of each to figure out whether renting or owning is best for you.
Stability vs. Flexibility
Home ownership brings intangible benefits such as a sense of stability, belonging to a community and pride of ownership. However, it’s not good for restless or nomadic types. Real estate is the original illiquid asset. You might not be able to sell when you want if the housing market is down, and even if it’s up, there are significant transaction costs when you sell. Changing your mind about where you want to live is far more expensive when you own.
Renting means you can move without penalty each time your lease ends, but it also means you could have to move suddenly if your landlord decides to sell the property, turn your apartment complex into condos or bump up the rent by more than you can afford. (To deal with such issues, see Easy Ways To Cut Rental Costs.)
The biggest myth about renting is that you’re “throwing away money” every month. Not so. First of all, you need a place to live, and that always costs money, in one way or another. Second, while it’s true that you aren’t building equity with monthly rent payments, you also aren’t building equity with much of the money you’ll put into owning a house. The overall cost of home ownership tends to be higher than the overall cost of renting, even if the monthly mortgage payment is similar to (or lower than) the monthly cost to rent.
Here are some expenses you’ll be “throwing away money” on as a homeowner that you don’t have to pay as a renter:
- property taxes
- trash pickup
- water and sewer service
- repairs and maintenance
- pest control
- tree trimming
- homeowners insurance
- pool cleaning (if you have one)
- lender-required flood insurance, in some areas
- earthquake insurance, in some areas