Should I Rent or Buy? Pros & Cons of Both Scenarios

by  Jeff Ostrowski

Conventional wisdom holds that owning a home is wiser than renting over the long haul. Perhaps the most important factor in the rent vs. buy calculation is the length of time you plan to stay in one place. The deeper your roots, the more logical it is to own your home. But other factors come into play: The economic health of your hometown or state, your financial discipline and your aptitude at home improvement projects, to name a few.

The Case for Homeownership
1  Stable Housing Payments
If you finance your home purchase with a fixed-rate mortgage loan, you will know the precise amount of your principal and interest payments for the life of the loan, whose term could last as long as 30 years. This long-term predictability fosters financial stability. If you rent, however, you’ll have much more difficulty accurately predicting your monthly rent for years to come. You’ll likely be at the whim of your landlord and the rental market every year.

Of course, for a homeowner, principal and interest payments are only part of the homeownership equation. Homeowners insurance premiums aren’t fixed, and they can — and sometimes do — soar. Property taxes and homeowners association dues are additional variable costs. Don’t forget repairs. If you need a new roof or air conditioner, you’re on the hook for the replacement costs.

Nonetheless, taking out a 30-year fixed-rate mortgage means you can expect the same cost for principal and interest for 360 months, which provides considerable peace of mind. Also, if your income rises during that time, your principal and interest will dwindle relative to your overall budget.

2  A Home as an Investment
One of the most compelling reasons to buy is the realtor’s mantra: Why throw away money on rent when you can buy a home? During the seven decades from the end of the Great Depression up to the Great Recession, that was decent advice. For the most part, home values were stable or rising during that time. During the bubble of 2005 to 2007, double-digit price appreciation meant the folks who timed the housing market just right made out like financial geniuses. Then came the crash of 2008, and home prices in many markets plunged as much as 50 percent. Now, though, prices are bouncing back. If you buy today, your home’s value will likely appreciate, especially if you live in an area with a strong regional job market. However, you should never depend on rapid appreciation. Even if your home value remains steady, your home will provide another type of investment: A mortgage is a forced savings account, one that requires you to essentially pay yourself every month.

3  A Tax Break When You Sell
Uncle Sam wants you to own a home, so much so that U.S. income tax policy long has dangled several fat breaks to entice would-be homeowners. One longstanding break came in the form of the mortgage interest deduction. However, this loophole mostly disappeared with President Donald Trump’s tax reform of 2017. Taxpayers also lost the ability to deduct property taxes every year. However, another tax break remains: You pay no capital gains tax on the profit you reap after selling your home, up to a limit of $250,000 for single taxpayers and $500,000 for married filers.

4  You’re in Charge
Predictable monthly payments, return on investment and significant tax benefits – these are all sound, logical reasons to own a home. But they’re also bloodless. Let’s face it: Homeownership is quite often an emotionally charged decision, one driven in large part by lifestyle preferences. 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 would remove much of the risk of having to move. Do you have pets you don’t want to part with? Apartment complexes can be finicky about dogs, cats, rabbits and reptiles, but if you own your house, you’re generally the captain of your menagerie. Do you love gardening or redecorating? Need a place to store your boat? As a homeowner, you can more easily enjoy these leisure activities without worrying about logistics or restrictions.

5  Your Kids Will Have Stability
Researchers have found that children of homeowners tend to do better in school, spend less time staring at screens and generally have healthier upbringings compared with children of renters. Of course, there’s a huge chicken-and-egg question here: Does homeownership really create better parents or is it simply that the folks who can afford homes also suffer from less financial stress? Sure, great parents can rent and terrible parents can own. In general, though, the evidence seems to bolster homeownership as a better environment for children, according to a National Institutes of Health’s sponsored study that refers to the “intangible benefits” of homeownership among differing income classes.

6  It’s Cheaper Than Renting
If you stay put in your house for more than five years, owning is generally a better deal than renting. A rent vs. buy study by the listing site Trulia found that in cities such as Miami, New Orleans and Oklahoma City, buying is nearly 50 percent cheaper than renting, assuming you stay in the same home for seven years. Even in pricey markets such as Honolulu and San Francisco, people who can afford to buy save more compared to renters. Nationwide, homeownership is 35 percent cheaper than renting. Of course, that’s just an average – if your home value skyrockets, you’ll do even better than average. If it plummets, you’ll probably wish you had rented.

Homeownership Pros & Cons
Homeownership is a tricky decision, one that brings both advantages and disadvantages. Do you like the idea of repainting your white picket fence every five years and filling your basement with clutter? Maybe owning is for you. As you weigh your options, here are some factors to consider.

PROS
Building Equity

Barring another price crash, homeownership is the equivalent of 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.

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.

Customizing Your Living Space

Love purple wallpaper? Have a hankering to plant wildflowers? Found the perfect spot for your grandmother’s crystal chandelier? If you own a house, have at it.

Tax Benefits

Mortgage interest and property taxes no longer are tax deductible. But when you sell your primary residence, you can avoid capital gains tax on a profit of $250,000 (or $500,000 for married couples).

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

Ever been on a home tour in an apartment complex? Didn’t think so. Renting a place can feel temporary, but ownership often fosters a sense of pride.

CONS
Pay for Your Maintenance

Toilet flooded? Fridge on the fritz? That’s on you — homeownership means you bear all the unexpected expenses. You are the on-site property manager who handles a burst pipe on a frigid winter morning or a broken air conditioner on a sweltering August afternoon. On these days, homeownership can be a drag.

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. What is the economic strength of the city you want to live in? What trajectory is your city or state riding — stable growth, likely decline, boom and bust? Predicting the future, especially that of a specific region, is out of your control and often depends on local or state politics. A downward trend may negatively affect the equity in your home.

Down Payment

Homeownership comes with a steep buy-in in the form of a down payment that can be as little as 3 percent but can rise to 20 percent or higher. You must come up with the funds for a down payment before you can apply for a loan. And 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

Renting is freedom; ownership creates roots. So 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

Depending on where and what you buy, a homeowners association or condo association could require you to pay hundreds of dollars a month in fees. The association may increase fees to keep pace with inflation or at times impose special assessments to pay for capital improvements. 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, which for many municipalities constitute the bulk of their revenue. In some parts of the New York metro area, the average tax bill tops $10,000. Your municipality imposes your property tax based on your home’s assessed value. You probably won’t always agree with the assessed value and hence the property tax amount, and you might attempt to appeal the assessment, but you are obligated to keep your property clear of tax liens.

The Case for Renting
1  Renting Cheaper in Some Areas
In the nation’s priciest housing markets, homeownership appears out of reach for many Americans. The median home price in San Francisco was $1.35 million in the third quarter of 2019 — and only 8 percent of homes sold there fell within the median-income family’s budget, according to the National Association of Home Builders’ affordability index. Mortgage website HSH.com calculated the numbers another way and reached an equally daunting conclusion: To buy a $1.3 million home in Silicon Valley, you need to make Google money — $250,000 a year — even with rock-bottom interest rates. If you have an average income, renting is the only option in high-cost cities.

Compare this with low-cost cities, such as Cleveland, Detroit and St. Louis, where you can earn less than $35,000 a year and afford a median-priced home. Does this mean you should go out and buy a house just because it’s cheap? Not necessarily — the median home price in Detroit has fallen 10 percent over the past two decades, even as home prices in some cities have more than doubled.

2  Rapid Mobility at Low Cost
If you’re an upwardly mobile worker in an industry that rewards or demands frequent relocation, renting can be the right call. For career-minded professionals who think they might be in Atlanta this year, Los Angeles in 2016 and Chicago a few years after that, renting offers you the flexibility to pick up and go with minimal financial penalties. In these cases, the answer to the rent vs. buy question seems obvious. “Renters can move very rapidly and get a better return to their income,” says Ken Johnson, a real estate economist at Florida Atlantic University. Homeownership roots you in a place where your prospects might not be so great. Indeed, during the Great Recession, economists lamented that many workers couldn’t move to areas with better job prospects because they were stuck in homes they couldn’t sell. Even in a normal market, the transaction costs of buying and selling are steep — brokerage fees, closing costs, inspections, appraisals, repairs.

3  Not Stuck With a Depreciating Asset
The housing crash has come and gone, but the hangover remains. In some boom-and-bust markets, home prices fell by 50 percent, which wreaked financial havoc on buyers who purchased near or at the peak. Many of their homes wound up in foreclosure or short sale, hurting the former owners’ credit scores and, quite possibly, draining their bank accounts. True, the housing collapse was an aberration in a housing market characterized by decades of stable, steady price gains. But the crash also proved that homeownership isn’t a risk-free endeavor.

Renting Pros & Cons
No perfect solution to the rent vs. buy conundrum exists. Every homeowner experiences moments when buyer’s remorse overshadows the upsides of owning, and every apartment dweller grows weary of the noisy neighbor upstairs. But if you break out in hives at the mere thought of a trip to Home Depot, you might be a renter. Here are some factors to consider.

PROS
Easy to Move

Weary of your once-charming neighborhood? Move when your lease is up. Job offer in another city? Take off and take it. Looking to downsize to cut costs? Easy to accomplish. No house to sell before you can book the movers.

Not Stuck With a Depreciating Asset

Holding real estate can be risky, as the housing crash proved. If you rent, the risk belongs to someone else. You’ll never risk getting stuck in a home because you’re underwater on the mortgage loan.

Repairs are Paid For

Plumbers, electricians, carpenters, air-conditioning guys? That’s the landlord’s problem, not yours.

No Property Taxes

You don’t get the property tax bill, so you don’t pay it. But your landlord may pass this cost on to you, so you still end up paying it in a roundabout way. And if you find that your landlord is passing on too much for your liking, you can always move on by moving out.

Avoiding a Bad Investment

There’s a reason the smart money is in the stock market rather than single-family homes: Stocks are often a better investment, but if you’ve already put your money in homeownership, the only way to back out of your highly illiquid investment is to sell your property.

CONS
Rent Can Increase

How much will your rent cost in a year or two? You won’t know until the time arrives, which means your annual budget is always uncertain. If real estate prices appreciate rapidly, you’re stuck with significantly higher rental payments.

Doesn’t Build Equity

Your monthly payments are building up your landlord’s wealth, not yours. The idea of throwing away money is depressing.

Can’t Modify Property Without Owner’s Consent

Want to add a hot tub? Hankering to replace the Formica with granite? Don’t bother.

No Tax Benefits

If you long to stick it to Uncle Sam, renting’s not for you. No mortgage deduction, no property tax deduction, no break on capital gains when you move.

Must Be Disciplined Investor

Homeownership forces you to build equity, but renting makes it easier for you to blow your extra money. To build a nest egg, you need the discipline to save outside your rent.

Weighing Your Rent vs. Buy Options
Homeownership rates correlate almost directly to age: The older you are, the more likely you are to own a home, with the exception of a slight dip in homeownership for Americans 75 and older, who are prone to health problems that hamper their ability to live independently. In the first quarter of 2015, only 34.6 percent of Americans younger than 35 owned their homes, according to the Census Bureau. But 79 percent of Americans 65 and older owned homes. Low homeownership rates among young adults are an American tradition. After all, most people in their 20s have yet to marry and have kids, and they’re not in their peak earning years, so they lack the motivation to buy and the ability to afford homes. For decades, Americans have followed the pattern of higher homeownership as they mature.