Rent vs. buy: Which is right for you?

Deciding whether to rent or to buy is a big financial decision. Taking an objective look at both opportunities might help you make the right choice for your lifestyle. With both renting and buying, you’re exchanging money for a place to live. The main difference between the two is the end goal — renting gives you a place to live for the length of your lease, while buying leads to homeownership.

Neither renting nor buying is better than the other. One of them might be more suited, though, to your specific needs. Let’s look at some of the things to consider when renting and buying, and the pros and cons of each.

What to consider when renting vs. buying

One overlooked consideration is that renting and buying varies by state. If you live in a city with high property taxes, for example, renting may make more sense. If you live in a city with low property taxes but high rent, buying might be the better option.

Some people consider renting a home as throwing away money, but this isn’t necessarily true. You’re exchanging your money for a place to live. Not to mention, there’s a landlord that’s responsible for your home repairs. While the word “renting” is often thought of as a stepping-stone to buying your own place, many people rent their home for their entire lives.

If you opt for buying a home, you’ll have a monthly mortgage payment that goes toward building equity. This might be looked at as an investment, but keep in mind, this investment isn’t liquid. Until you sell or refinance, your home is more of a liability than an asset. Additionally, there are a variety of factors that could affect your investment such as appreciation and location. If you’re looking to liquify your equity, you can consider a cash-out refinanceec-cost-living-houston, which lets you borrow money against the equity you’ve built up. Your lender will give you a new mortgage for more than what you owe so you can treat the extra money as cash. Homeowners often use this cash for home renovationstax-deductibility-heloc-cash-out-refinance-hl000065 or to pay off higher-interest debtdebt-consolidation-hl000039.

Owning a home means putting money into maintenance, renovations and repairs, on top of your monthly mortgage payment. Property taxes can go up and increase your monthly payments, or they can go down. A lot of things can change the value of your home in the short term, but you can potentially profit in the long term by selling or renting out your property. Staying in your home for five years minimum is often recommended to recoup or profit. 

The pros and cons of renting

Both buying and renting come with their own unique pros and cons. These considerations may vary in importance, depending on your specific needs. Let’s explore the potential upsides and downsides of renting a home.

Pros of renting

• From leaky faucets to roof replacements, maintenance and repairs are typically handled by the landlord — saving you time and money. However, this can vary depending on your lease agreement terms.
• Renting is a short-term commitment. You can sign a lease for one year and move somewhere else after if you choose to do so.
• Taxes and other local expenses are covered by the landlord.
• It can be cheaper, depending on where you rent.

Cons of renting

• Depending on your city and state, the landlord or management company will likely increase the rent on an annual basis. You may need to find a roommate to offset the cost or move.
• Amenities can be out-of-date depending on various factors such as the age of the building.
• With renting, there’s an overall lack of control. For example, repairs are on someone else’s timeline (usually your landlord’s or property manager’s), and you can’t make major alterations to the space unless you get permission.
• Renting may offer less stability than owning. Your landlord can sell the property, change the lease terms during renewal or raise prices past what you can afford (unless your residence is rent stabilized).
• You will not be able to build equity in a rental.

The pros and cons of buying a home

Like with renting a home, buying a home comes with its own set of pros and cons. Let’s break them down to better understand this option.

Pros of buying

• As you make consistent payments on your mortgage, you are building equity which can be a potentially valuable appreciating investment.
• Many mortgage options provide more predictability and stability for your monthly payments, unlike rent which may be increased with renewal.
• As a homeowner, you may qualify for certain mortgage tax benefits. Consider consulting a qualified tax advisor to understand the specific benefits available to you.
• Homeowners are free to alter, decorate and renovate without landlord approval.
• Home value may appreciate with time, offering a potential profit upon selling your home.

Cons of buying

• Homebuying typically comes with significant upfront costs and fees, such as the funds for a down payment, closing costs, real estate agents, loan applications and more.
• Mortgage payments don’t cover maintenance and repairs; if something breaks, it’s on you to find and pay a professional to get it fixed.
• Building equity takes time, requiring a longer commitment to see a potential for significant returns.
• Your home’s market value can fluctuate for various reasons beyond your control, such as interest rates, economic factors and other market conditions.
• Homeowners also pay property taxes and home insurance, adding to the costs of homeownership.

Questions to ask before deciding to rent or buy

The decision to rent or own a house, apartment, condo or other dwelling is personal. Both offer several potential advantages and disadvantages as outlined above.

After weighing the pros and cons, this should answers offer insight into whether you might be ready to buy. If you feel that you’re ready to stay in one location and have the financial stability to take control of property ownership and home maintenance, consider setting a goal to buy a home. If you still crave flexibility or plan to move, renting may be your ideal solution.

Homeownership generally comes with higher cost factors as opposed to renting. In addition to the costs listed above, homeowners may have to pay property taxes, homeowners insurance, and condo or homeowners association (HOA) fees. Renters generally avoid these fees, although some landlords may require tenants to purchase renter’s insurance.

Of course, homeowners can also benefit financially from the opportunity to build equity through homeownership, an option not available to renters. A portion of each mortgage payment goes toward building equity, which may offer financial benefits in the future: for example, if you plan to downsize in retirement and live off the proceeds from the sale of your home.

The right decision for you depends on your unique financial situation, goals and aspirations.

In summary

There are many things to consider when deciding to rent or buy a home. How much you can afford, the length of time you plan on living there and how much responsibility you're ready to take on are all things to consider. Not to mention, the way real estate prices vary depending on the market and where you live. If you’re looking to learn more about homeownership and the type of loan you may qualify for, speak with a home lending expert today.