Should You Rent or Buy Your Next Home?

Photo (cc) by Images_of_Money

Owning your own home: Many people consider it the American dream, but no dream is one-size-fits all.

While owning a home can increase your net worth, there are potential downsides as well: additional labor, hassle, and cost, to name a few. So in many cases, renting makes sense.

So how can you know which is best?

Last year, at what may turn out to be the very bottom of the housing market, Money Talks News founder Stacy Johnson did a story called Housing Has Bottomed – It’s Time to Buy. So he’s a believer. But he also knows before you can make a good decision, you need to consider both sides. Watch the following video, then read on for more.

Now let’s spend more time on the pluses and minuses of home ownership

1. Time

The minuses

Owning a home is a huge time commitment. When you rent, maintenance is someone else’s problem and repairs are solved with a phone call. When you own, you’re the maintenance man and gardener. When something breaks – and it will – it’s on you to fix it or find someone who can.

Then there’s the lack of flexibility. As Stacy said in the video, home owners should plan to keep a house at least five years, because transaction costs – agent commissions and other sales expenses – are high. The sooner you sell, the harder they are to recoup.

The pluses

What you can do to make a rental property uniquely yours is severely limited.

One of the joys of home ownership is investing time to make it yours and make it worth more. What you can do to customize a home you own is limited only by your imagination, budget, and local zoning restrictions.

The bottom line: If you want to stay mobile, don’t enjoy home improvement projects, and don’t care that much about expressing yourself with your surroundings, rent. If you’re staying put and watch a lot of HGTV, buy.

2. Money

The minuses

If you rent a house you’ll pay the first month’s rent, a security deposit, and maybe a pet deposit. Buying means a down payment, closing costs, and other expenses far exceeding rent.

For example, I rented my house. Here’s the breakdown:

  • First month’s rent – $750
  • Security deposit – $750
  • Pet deposit – $150
  • Total: $1,650

If I bought the house for the average price in my neighborhood – $185,000 – Zillow’s Closing Cost estimator says I would have paid:

  • Down payment – $37,000 (20 percent)
  • Closing costs – $6,822
  • Total: $43,822

Then there’s the additional monthly expense: The calculator says my monthly payment would be $990: $240 more than I pay now. And that doesn’t include insurance, property taxes, or maintenance.

According to the Insurance Information Institute, in 2010 the average annual homeowner’s insurance premium was $909 (or $75.75 a month). Property taxes vary widely depending on where you live, but run from hundreds a year to thousands.

The pluses:

When you pay rent, you’re making your landlord richer. When you gain equity by gradually paying off your mortgage, you’re making yourself richer. You’ve got to live somewhere, and that’s going to cost money monthly. Using those monthly payments toward a mortgage means in 15 to 30 years, you’ll own your home free and clear. Other than property taxes and insurance, you’ll pay nothing. How much will renters be paying every month 15 to 30 years from now?

Then there’s appreciation. Granted, our nation is still recovering from a housing crash, but declining home prices are the rare exception, not the rule. If past is prologue – usually a good bet – a house offers inflation protection and the opportunity to own an appreciating asset.

Uncle Sam also helps offset the higher cost of ownership. Mortgage interest and property taxes are (so far) deductible.

The bottom line: If you don’t have the money and/or credit score necessary to buy a home, the question is moot. But if you can afford to own a home in a desirable area with an expanding population, you’ll probably be rewarded.

Can an online calculator help with the decision?

One way to run the numbers is to use buy vs. rent calculators like these:

But I wouldn’t waste too much time on them. While certainly helpful, the answer you get from a calculator will depend on the information you provide – information you can’t possibly know.

For example, among other variables, most calculators will ask how much the house you’re buying will appreciate annually, as well as how much equivalent rent will increase over time. If you know the answers to these questions, you don’t need a calculator; you need a job on CNBC.

So use a calculator, but don’t count on one for definitive answers.

Buying? Don’t get in over your head

Leaning toward buying? To lower the risk of home ownership, buy what you need, not the max you qualify for. The average house in 1950 was less than 1,000 square feet. Today it’s more than twice that. Remember that whatever you buy, you’re going to have to furnish, heat, cool, insure, clean, and maintain it.

Don’t just be ready emotionally, be ready financially. If you have bad credit and only qualify for a high-interest mortgage, it will cost you tens of thousands of extra dollars over the life of your loan. And the more you put down, the less you borrow and the less risk you take. Build your credit and your savings before you build your house.

Finally, if you decide it’s time to buy, hope for appreciation, but don’t count on it. To increase your odds, buy in an area with rising employment. When the demand for housing (or anything else) outstrips the supply, prices rise. The single biggest factor influencing demand for homes? Jobs. If the community you’re living in has both expanding employment opportunity and population – easy factors to determine – prices are likely to rise over time. If you live in an area that’s shrinking, you’re probably better off renting.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
13 Small Gadgets Under $20 That Make Life Better
13 Small Gadgets Under $20 That Make Life Better

These inexpensive electronics will make your day-to-day life a little easier — and happier.

The 10 Best and 10 Worst States for Raising a Family in 2020
The 10 Best and 10 Worst States for Raising a Family in 2020

There are trade-offs no matter where you live. However, some states have big advantages when it comes to choosing a home for your family.

This Type of Social Security Benefit Is Often Overlooked
This Type of Social Security Benefit Is Often Overlooked

The Social Security Administration is not helping certain people get money to which they are entitled, a report says.

The 5 States With the Worst Health Care for Retirees
The 5 States With the Worst Health Care for Retirees

All of these states are located in the same region of the nation.

15 Free Streaming Services to Watch While Stuck at Home
15 Free Streaming Services to Watch While Stuck at Home

These free streaming video services offer thousands of movies and TV shows, including recent releases and beloved classics.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

This Is the Cheapest Place to Buy a Used Car
This Is the Cheapest Place to Buy a Used Car

Looking for a good deal on a set of wheels? This should be your first stop.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

7 Surprising Features That Boost Your Home Value
7 Surprising Features That Boost Your Home Value

You can add value to your home without hiring a contractor to do expensive renovations.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.