If you had asked a real estate agent, financial consultant, or anyone remotely knowledgeable in the housing market five years ago whether it's smarter to rent or buy, you would’ve heard that owning was the best choice across the board. Times, they are a-changing, however. Nowadays the answer isn’t so clear.
Sure, what you should do depends on your economic situation. But if you have the wherewithal, do you know what would work best for you?
We’ve asked a few experts whether renting or buying is the better path to take, and their responses may surprise you.
Why the Debate Is So Popular
For years, the popular rhetoric has been the same: Renting is a waste of money, and purchasing a home is the smarter choice. But now more than ever, the conversation has started to change, and the renting versus owning debate is on the mouths of just about everyone looking to find a new home. But why?
“Renting versus owning is a popular topic because there are more people choosing to rent than ever before,” says Beth Martínéz, a financial and homeownership educator at Michigan State University Extension.
“Part of that is due to a more mobile population with younger people less likely to own. During the Great Recession a large amount of families lost their homes due to foreclosure. Many are now reluctant or unable to purchase again.”
Add to it that fewer homes are available for purchase today than in previous years, making renting the only option for some.
And don’t forget about finances. This fickle factor is often a driving force behind the rental trend.
“For people who were able to buy before 2003/2004, prices were reasonable,” says Isaac Tabner, PhD, director and senior lecturer in finance at the University of Stirling in Scotland.
“Since then, prices are so high relative to earnings and the savings of a typical household that buying is becoming a much riskier financial proposition.”
The Case for Renting: Why You Should
Renting looks appealing now more than ever in the eyes of many.
Here are some of the reasons:
You have a built-in handyperson.
If your dishwasher goes out, your window breaks, or your home suffers any kind of damage, your landlord will likely take care of it for you.
Usually these services are included in your rent, which will be far less expensive than hiring someone to come and do the work for you.
Leaving is easier.
Bad neighbors, a new job, or simply not liking your location are all reasons to get out of Dodge. When you’re renting, it’s far easier to leave than if you own your home, because you don’t need to sell it before you can purchase another. Once your lease is up, you are free to go, typically without any further obligations.
It can save you money.
Yes, you read that right. Some rental situations are cheaper than homeownership, which means more bills in your pocket, says Tabner.
“The landlord’s obligations often extend to providing and maintaining the furniture,” he says.
“Once these cost savings are taken into account, the monthly rent is often similar to or less than the interest that many households would pay on a mortgage to buy a home of similar quality. So, in fact, rent is often not ‘money down the drain’ at all, but very good value.”
Disadvantages of Renting
Renting isn’t the ideal choice for everyone. Unfortunately, one of the biggest problems people face with leasing is dishonest landlords.
Unpaid Mortgage or Property Taxes
Once tenants give their rent checks to their landlords, they often assume that they are using the money to take care of financial obligations with the property, but that isn’t always the case.
Once the rent is paid, there is no way to know if the landlord is then meeting their obligation.
“Once the rent is paid, there is no way to know if the landlord is then meeting their obligation regarding paying the mortgage and property taxes,” says Martínéz. “This is a big problem in Detroit, where residents faithfully pay their monthly rent only to find out down the road that their landlord hasn’t paid the tax bill and realize the property is being foreclosed upon.”
Landlords are often able to terminate rental contracts with just a few months’ notice, says Tabner.
This can leave renters scrambling to find a new place to live without much time to do so.
The Case for Buying: Why You Should
Owning your own home has long been touted as the “American Dream.”
And for good reason: Not only does it give you more freedom with what you are able to do to your property, but it’s also often beneficial for your bank account.
You can get your design on.
Landlords are typically strict with how much creative license they extend to their tenants. When you own your home, however, you can usually decorate it however you’d like.
Eviction is more difficult.
As long as you pay your mortgage, you can generally stay in your home as long as you want. This doesn’t always happen with renting, because your landlord can decide not to renew your contract, leaving you in the weeds.
Homeownership has always been thought to be better for a person’s bottom line than renting.
“The advantages are stable housing costs, tax benefits, and an ability to build equity with your investment in property,” says Martínéz.
Owning is beneficial for the area around you.
Renters are often in and out of a home in a year’s time, making getting to know the people around you difficult. When you own, however, you may feel like you are helping to create something good around you.
Homeownership builds communities, stabilizes neighborhoods, and leads to crime reduction.
“Homeownership builds communities, stabilizes neighborhoods, and leads to crime reduction,” says Martínéz.
It may be cheaper to buy.
Landlords notoriously drive up rental prices to make a profit. As such, some find that purchasing a home is actually more economical than renting, which was the case for Deanna Hunley and her family.
“We purchased our first home in 2002 when we were first married,” says Hunley of herself and her husband, Keith, who have both rented and purchased homes. “We had looked for a rental here in Maryland and were very disheartened by the cost. We found a very affordable home with a great mortgage rate, which ended up being several hundred dollars cheaper per month than any rental we found.”
You can make a profit.
One of the biggest reasons purchasing was recommended for so long is because of the profit you can make from your home.
“By and far, real estate has been one of the best performing assets a person can have,” says Jim Prince, vice president of sales for 1st Financial Inc., a mortgage services company with locations in Maryland and Florida.
“Predominantly, homes have appreciated over the years—although we have seen some market corrections—and will likely continue to appreciate.”
Disadvantages of Buying
Not everything about buying a home is appealing. Becoming a homeowner often means huge responsibilities that don’t work for everyone. Having a mortgage is also sometimes more than a person can take on financially.
A home is usually the largest purchase a person will ever make. As such, you can expect to drop some serious cash before you even move in.
“A required down payment is anywhere from 3 percent to 20 percent or more depending on overall qualifications and the type of mortgage chosen,” says Martínéz.
This can mean paying thousands of dollars before you walk in the door.
You can lose money.
The housing market is known for being temperamental. The home you purchased even just a year ago can depreciate so much that you actually lose money when you try to sell.
Home prices sometimes go down.
“Home prices sometimes go down and if you need to sell after they have gone down, your equity can be wiped out if you have a large mortgage,” says Tabner.
You may be stuck.
Depending on their leases, renters may be able to move out by giving their landlords notice. The same cannot be said, however, when you own a home, which can make things difficult if you suddenly need to move.
“We like the flexibility that renting provides, as life changes and job changes are easier when there is no home to sell,” says Hunley.
What should you do?
Obviously it's up to you to decide if renting or buying works best for you. There are a few things to keep in mind, though.
Purchasing may be easier than you thought.
People are often intimidated at the thought of buying homes because they are worried about their finances. But you likely have the wrong idea, says Prince.
“There is a very common misconception that you need to have 20 percent of the purchase price saved up for a down payment when in reality there are many different loan programs with low down payments,” he says.
“There are down payment requirements as low as zero percent depending on the loan program, and many grant programs for home buyers often make it so that you don’t need any money at all. It really is near the easiest time ever to buy a home.”
The future looks a little scary.
Although fluctuations in the housing market are common, today’s current economic state can have damaging effects on a homeowner’s bottom line.
“Housing choice is highly emotional and tends to be influenced by the received wisdom and experience of friends, family, the media, and cultural norms,” says Tabner.
Even a gradual reversal of the trends experienced in the last 40 years would be extremely painful if not devastating to the wealth of many home owners.
“The problem is that these beliefs have developed over 40 plus years of rising prosperity, positive inflation, and declining interest rates that have driven house prices upward. With interest rates close to zero, inflation—and especially wage inflation—sluggish, even a gradual reversal of the trends experienced in the last 40 years would be extremely painful if not devastating to the wealth of many home owners.”
Having an honest conversation with yourself (and perhaps a financial advisor) is really the only way to determine whether buying or renting is the best fit. Once you figure out your decision, look for a highly qualified real estate agent to make your next move your best.