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Buying vs. Renting a Home

In this topic, we cover:

  • Why buying a home may not be the best idea for everyone.
  • Potential benefits of home ownership.
  • Potential advantages of renting.

Small model house on top of a pile of 1 dollar bills.

Many people wonder whether purchasing a home makes good financial sense - and with good reason.

For most people, buying a home is a good long-term investment. Homes have historically built value at a rate equal to or better than the general rate of inflation, may offer tax advantages, and unlike stocks or bonds, a home is an investment that you can enjoy every day - a place and community all your own.

But the right answer for each individual is not so clear. Is there a chance you may need to move to a new town in the next few years? If you can’t expect to stay in the same place for at least four or five years, most experts recommend against home ownership. And unlike the real estate market of years past, in which yearly double-digit gains and flexible mortgage terms were common, the real estate market in your area could be different. After the housing market crash of 2008-2012, home prices still haven't fully recovered in some parts of the country. Those who bought at peak prices may owe more on their home than it's worth.

So what should you do?

Whether buying makes sense depends on factors including the length of ownership, the rate of property appreciation in future years, whether there will be unforeseen ownership expenses, and the cost of renting a comparable home during same time period. Since no one can guarantee a certain rate of appreciation, buying a home, especially if for five years or less, involves substantial financial risk.

Popular wisdom tells us that paying rent is "throwing money away," since no equity is built while renting. But not owning can offer some significant benefits as well:

  • Renting offers a predictable housing cost, at least during the term of the rental agreement. Any maintenance or repair expenses are the responsibility of the landlord. Home owners are completely responsible for any housing expenses.
  • Renting can reduce financial stress. Not only could unforeseen ownership costs be expensive, the time and effort required to maintain a home could be an unwelcome distraction from school.
  • Renting does not involve a long-term financial commitment. A typical rental agreement is for one year, after which it could be renewed or simply cancelled if a better housing opportunity was found. Home owners must usually sell their homes before they can afford to move.
  • Renting involves no upfront costs other than a one or two-month deposit. Buying a home involves a down payment of thousands of dollars and possibly thousands of dollars more in closing costs.
  • If you have savings, paying off debt (especially high interest credit card debt) offers an immediate, guaranteed return since you would minimize interest payments.
  • Rents are often lower than mortgages for comparable homes in most parts of the country, even when considering the tax benefits of owning.

While there are certainly intangible benefits of home ownership that may make home ownership attractive, from a financial perspective, most experts suggest that owning tends to make sense only with a time horizon of five years or more. Otherwise, the expenses associated with buying, maintaining, and selling a home may be higher than any gains from building equity and home appreciation.