Conventional wisdom holds that owning a home is wiser than renting over the long haul. But deciding whether to rent or buy a home depends on various factors like how long you plan to stay in one place, your area's economic health and your financial situation.
Renting means making regular payments to use a property, which allows for easy moves without dealing with property sales. It involves fewer responsibilities and avoids the risk of losing money if property values drop. By contrast, buying a home involves regular mortgage and tax payments but builds equity over time and serves as a long-term investment. Owning a home offers stable housing payments, potential investment growth, tax benefits and the freedom to customize your living space. Weighing these pros and cons can help determine the best choice for you.
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Pros and Cons of Owning a Home
Homeownership offers benefits like building equity, stable mortgage payments and potential tax breaks when you sell. It also gives you more control over your living space and often enhances your community involvement and personal pride. However, homeownership also involves responsibilities and risks. Weigh your options with these homeownership pros and cons.
PROS
The key advantages of homeownership are:
Builds Equity and Investment Potential
Homeownership acts as a forced savings account. You pay your lender every month, but ultimately the cash comes back to you in the form of equity as the market value of your home appreciates over time. Historically, U.S. home prices have risen by an average of 5.5% annually from March 1992 to December 2023. Although housing markets can be volatile, buying today can likely lead to appreciation, especially in areas with a strong job market.
Stable Payments
With a fixed-rate mortgage, your monthly principal and interest payment is set for as long as you keep the loan. Sign a rental lease, however, and you could see your rent rise the following year, the year after that and so on.
Control Over Lifestyle and Family Decisions
Homeownership means you are the boss and have the biggest say in your lifestyle and family decisions. Suppose your kids are in public school, and you don't want to risk having them change schools because your landlord doesn't renew your lease. Owning a home removes much of the risk of having to move.
Customizable Living Space
Homeownership allows for personal customization of your living space, from interior design to landscaping.
Tax Benefits
U.S. income tax policy offers significant breaks to homeowners. While mortgage interest and property taxes are no longer tax-deductible, selling your primary residence can exempt you from capital gains tax on profits up to $250,000 ($500,000 for married couples filing jointly).
Community Involvement
Homeownership goes hand-in-hand with voting, volunteering at schools and general civic roots. If you own a home, you may be more likely to put roots down and connect with the people in your community.
Pride of Ownership
Owning a home can foster a sense of pride and stability, contributing to long-term personal satisfaction.
CONS
Consider these homeownership drawbacks:
Maintenance Costs
Homeownership means you bear all maintenance and repair costs, which can be significant and unexpected. You are the on-site property manager who handles a burst pipe on a frigid winter morning or a broken air conditioner.
Risk of Decreasing Value
Homeownership is never risk-free. You may end up purchasing in a period that's followed by economic decline, which affects your home's value. Predicting the future is out of your control and often depends on local or state politics.
Down Payment
Before you can apply for a loan, you must come up with funds for a down payment that can be as little as 3% but can rise to 20% or higher. Once you choose to purchase a home, you are effectively placing a large bet on a real estate asset over another type of financial investment, such as stocks and bonds.
Difficult to Move
If you want to move, you'll need to market your house and wait for a buyer to offer the right price before you cash out the equity in your home. Depending on the market, you may end up waiting a lot longer than you'd like before you can move elsewhere.
HOA Fees
You may be required to pay homeowners association (HOA) fees, which can be expensive and subject to increase. You may exercise little control over the amount or timing of these fees, especially if you don't sit on the association's governing authority.
Property Taxes
Be prepared to pay several thousand dollars a year in property taxes. Your municipality imposes property tax based on your home's assessed value, which you may dispute, but you must keep your property clear of tax liens.
COSTS ASSOCIATED WITH HOMEOWNERSHIP
Buying a home involves several upfront and ongoing costs. Here are the key expenses to keep in mind.
- Down Payment: Usually 3% to 20% of the home’s purchase price, depending on the loan type and lender requirements.
- Mortgage Payments: Monthly payments include principal and interest.
- Closing Costs: Fees paid at closing, usually 2% to 5% of the loan amount, including appraisal fees, title insurance and attorney fees.
- Homeowners Insurance: Protects the home and personal property, typically costing $1,000 to $2,000 per year.
- Property Taxes: Annual taxes based on the home’s assessed value, varying significantly by location.
- Maintenance and Repairs: Ongoing costs for home upkeep, including routine maintenance and unexpected repairs.
- HOA Fees: Monthly or annual fees for properties in communities with homeowners associations.
- Utilities: Electricity, water, gas, internet and other services.
Pros and Cons of Renting
Renting is practical in high-cost markets where buying a home is unaffordable. It often provides affordable monthly payments, greater mobility and less financial risk if you relocate frequently. It frees renters from maintenance costs and property taxes but has drawbacks like potential rent increases, no equity building and limited customization options.
PROS
The key advantages of renting are:
Affordable Monthly Payments in Some Areas
In the nation's priciest housing markets, homeownership often remains unattainable for many. For example, the median home price in Contra Costa County, California, is $875,183. High costs in areas like Silicon Valley require substantial incomes, leaving renting as the only viable option for many. In more affordable large cities like Detroit and St. Louis, lower incomes can more easily support home purchases. However, low-cost markets may not guarantee long-term property value appreciation.
Protection From a Depreciating Asset
Real estate can be risky, with property values potentially decreasing. Renting ensures that you won’t be left dealing with an asset that has significantly depreciated in value. The risk belongs to the property owner.
Easy to Move
If you're an upwardly mobile worker in an industry that rewards or demands frequent relocation, renting can be the right call. It offers the flexibility to pick up and go with minimal financial penalties, including the transaction costs of buying and selling a home such as brokerage fees, closing costs and repairs. Renting also allows for easy relocation at the end of a lease, which is beneficial for job changes or downsizing.
Repairs Are Paid For
Maintenance and repair costs are typically the responsibility of the landlord, not the tenant.
No Property Taxes
You don’t get to pay property taxes but your landlord may pass this cost to you. If you find that your landlord is passing on too much for your liking, you can always move out.
CONS
Consider these renting drawbacks:
Rent Increases
Rental rates can change, which means your annual budget is always uncertain. Rapid increases in real estate values can result in higher rents.
Doesn't Build Equity
Your monthly payments are building up your landlord's wealth, not yours.
Can't Modify Property Without Owner's Consent
You cannot make significant modifications to the rental property without the owner's approval.
No Tax Benefits
Renting does not provide tax benefits such as mortgage interest deductions or property tax deductions available to homeowners.
Must Be a Disciplined Investor
Homeownership forces you to build equity, but renting does not. Therefore, you should have the personal discipline to save and invest money elsewhere.
COSTS ASSOCIATED WITH RENTING
When renting a home, consider these common expenses to ensure you budget effectively.
- Monthly Rent: The primary expense, which may increase annually based on lease terms and market conditions.
- Security Deposit: Typically one to two months’ rent, refundable if there’s no damage or unpaid rent.
- Renters Insurance: Covers personal property and liability, usually costing $15 to $30 per month.
- Application Fees: Costs for credit and background checks, generally ranging from $25 to $100.
- Moving Costs: Expenses for moving services or rental trucks when relocating.
- Utilities: Electricity, water, gas, internet and other services.
Weighing Your Rent vs. Buy Options
When deciding whether to rent or buy, consider various financial, personal and market factors. Evaluate how career mobility, financial readiness, personal and lifestyle preferences, market conditions and future plans align with your goals.
Feeling Grounded vs. Being Free to Move Easily
The decision to rent or buy is a matter of preference that comes down to individual emotions. If freedom is your primary concern, then rent. If putting down roots is more important, you should buy.
Mobility Required in Your Chosen Career
If your career requires you to move frequently, renting makes more sense. Homeownership has high transaction costs and illiquidity, making it less suitable for those who need to move often. Renting offers flexibility and fewer financial penalties when relocating.
Long-Term Economic Development in Your Area
The economic health of the region you live in affects property values. If you're considering homeownership, evaluate the area's long-term economic prospects. In areas with strong economic growth, home values are more likely to appreciate. Conversely, in regions with stagnant or declining economies, renting may be the safer option.
Market Conditions
Market conditions refer to the current state of the real estate market, including home prices, interest rates and inventory levels. Understanding whether it's a buyer's or seller's market can help you determine the best time to buy or rent. Favorable market conditions can make homeownership more attractive, while unfavorable conditions might make renting a better short-term choice.
Financial Readiness
Assess your financial situation, including your ability to make a down payment, handle maintenance costs and manage mortgage payments. Homeownership requires a significant financial commitment and stable income to cover unexpected expenses and property taxes.
Lifestyle Preferences
Evaluate how owning or renting aligns with your desired lifestyle. If you enjoy customizing your living space or prefer a stable, long-term home, buying may be the better option. If you prioritize convenience and less responsibility, renting might be more suitable.
Future Plans
Consider your long-term plans, such as starting a family, career aspirations or retirement goals. Homeownership is more suitable for those looking to settle down for several years, while renting offers flexibility for those with uncertain future plans.
Ask the experts:
I'm debating whether to buy a place or to keep renting. What factors should I consider?
Associate Professor of Real Estate at California State University, Northridge
There is nothing wrong with buying or renting. Both have advantages and disadvantages. Renting has the upside of allowing you to move more easily if your life demands that you move. However, you have the downside of little control over how long you can stay and what you can do with your space. Additionally, buying allows you to build equity over time. A home is often the biggest source of wealth for people and purchasing a home for yourself is the first step to building familial wealth.
Buying a home with a finite period of time in mind may not be the best option since the market can change and may not be timed with your needs. However, that should not dissuade people from buying a home. If a person thinks that they may have to move within five years, then they should think about the property from the perspective of an investment that they will rent to themselves. You will build equity while you live there, assuming you have a fixed rate fully amortized mortgage. The key to consider at the moment of purchase is who will be your renter once you move out. If the investment makes financial sense with that future tenant and you can hold the investment indefinitely, then you should be safe to purchase the property and live there until you need to move.
The biggest downside to being a property owner is that you can't call your landlord when something goes wrong. You will need to contact somebody to fix the problem and you will need to pay for it. This can be a big enough discouragement for some people and will result in them being renters indefinitely.
FAQ: Renting vs. Buying
Because choosing between renting or buying a house involves considering various factors and personal circ*mstances, we’ve answered some common questions to help guide your decision.
What’s the difference between renting and buying a house?
Renting a house means paying monthly rent to a landlord without gaining ownership of the property, allowing for flexibility to move without the burden of selling. Buying a house involves paying a mortgage and property taxes, but builds equity and can be a long-term investment.
Is it cheaper to rent or buy a house?
The cost depends on various factors, including the local housing market, interest rates, property taxes and your financial situation. In some areas, renting is more affordable, while in others, buying may be a better long-term investment.
What is the 5% rule when comparing renting vs. buying?
The 5% rule suggests that if the total cost of owning a home (including mortgage interest, property taxes, maintenance and insurance) exceeds 5% of the home's value annually, renting might be more cost-effective.
What details will you consider as you decide to rent or buy a home?
Evaluate your budget, job security, down payment savings, long-term plans, lifestyle preference and the economic outlook of the area you're considering.
How long should I plan to stay in a home to make buying worthwhile?
Generally, staying in a home for at least five to seven years can offset the costs of buying and selling, allowing for potential property value appreciation and equity building.
Is it better to buy or rent when you are 70 years old?
This depends on your financial situation, health, desire for stability versus flexibility and ability to handle home maintenance. Renting might offer more flexibility and less responsibility while owning can provide stability and potential equity.
Expert Advice on Renting vs. Buying
Whether you already have enough saved to buy a home or you are just at the planning stages, consulting with a financial advisor or expert to see which option makes more sense for you is a wise move. We spoke to experts to help you weigh the benefits and drawbacks of renting versus buying:
- I'm debating whether to buy a place or to keep renting. What factors should I consider?
- The conventional wisdom is that if you're going to stay in a house for less than five years, you should rent. What do you tell clients?
- What's the biggest challenge faced by potential buyers?
- Is there anyone who shouldn't buy a house?
- So you're a mortgage broker who advises clients not to take out mortgages?
- When does it make sense to buy?
- You're skeptical about the benefits of homeownership. Do you own a house?
- You mentioned Kalamazoo's weak home prices. Why is it that the flat markets seem like bastions of affordability, while the markets that are really good investments look unaffordable?
Ed ConarchyMortgage Advisor, Cherry Creek Mortgage
Ken H. Johnson, PhDAssociate Dean & Investments Limited Professor at Florida Atlantic University
Ray CalnanAssociate Professor of Real Estate at California State University, Northridge
Additional Resources
We’ve curated some resources and tools that can help you decide between renting and buying a house:
Rent vs. Buy Calculator: A helpful tool to compare the financial aspects of renting versus buying a home, including cost breakdowns and future value projections.
Mortgage Calculator: Estimate your monthly mortgage payments, including principal, interest, taxes and insurance.
Rent-to-Income Ratio: Explains the rent-to-income ratio and how it impacts your ability to afford rent.
Zillow: Provides comprehensive real estate listings, market trends and mortgage calculators to help you evaluate home affordability and market conditions.
Realtor.com: Offers property listings, buying guides and tools for calculating mortgage payments and comparing the costs of renting versus buying.
Trulia: Features real estate listings, neighborhood information and tools for evaluating the costs and benefits of renting vs. buying a home.
Redfin: Provides property listings, market analysis and tools for calculating home affordability and comparing renting versus buying costs.
Guide to Homeownership and Down Payment Assistance: Offers resources and information on various assistance programs to help potential homeowners.
Rental Assistance and Rights Guide: Details rental assistance programs and tenants' rights to help renters understand their options and protections.
About Jeff Ostrowski
Jeff Ostrowski is a veteran business journalist with over 20 years of experience covering real estate, business and the economy. He is a board member of the National Association of Real Estate Editors and has won awards for his housing coverage. He contributes housing and real estate content to MoneyGeek.
Ostrowski has a master’s degree from the University of Illinois at Springfield and a bachelor’s degree from the University of Illinois at Urbana-Champaign.
sources
- CEIC. "United States House Prices Growth." Accessed June 6, 2024.
- IRS. "Topic no. 701, Sale of your home." Accessed June 6, 2024.
- Homebuyer. "The Most Affordable Cities to Buy a House, Ranked 1-800." Accessed May 15, 2024.
