Is It Better to Rent or Own?

The financial world has numerous debates with strong opinions on both (or all) sides of any given topic. One such question is whether it’s better to rent or own the property where you live. With the spring buying season approaching, house fever is in full swing. Maybe you’ve been waiting a long time to buy, and you think now is the time. Or maybe you’ve been holding onto your property, waiting for the right time to sell, downsize, and rent.

Now I’m going to spoil the rest of the article so you don’t have to keep reading (But I hope you do). If I had to boil it down, give you a rule of thumb, and cut to the chase:

Buy for the long term, rent for the short term.

Actually, rules of thumb are good until they aren’t and don’t fit your situation. Every financial decision is personal because everyone’s situation can be unique. I’m going to spend some time discussing the pros of renting and the pros of buying so you can start to consider the variables that might lead you to bending the rule of thumb.

The Pros of Renting

I want to dispel a common myth right away: “Renting is Bad.” As we’ll see, renting is NOT bad. So don’t let you or anyone else pressure you with that false idea.

Renting gives you flexibility: If something changes in your life, renting is the ultimate liquidity event in comparison to owning a property. Because your lease has a specific term, you can find alternate housing or transition to ownership more smoothly. Before signing a lease, make sure you’ve thought through how much flexibility you need: month-to-month, six months, or a year. If, for some unexpected or worst-case scenario, you have to leave before the agreement is up, your loss is limited to the terms of the contract (e.g. rent for the remaining months, security deposit, early termination fee) and not a larger loss from something like the sale of a house during a market downturn. (Been there, done that!)

Renting gives you time to decide: While renting, you’ll have time to decide what’s best. Let’s say you’re on the fence about staying in town because you have dreams of living near the slopes. Or you could be waiting for some milestone before picking a longer-term living situation like a family member getting done with medical treatments or finishing school. Maybe you’re unsure how much you can afford because you might be getting a new job or promotion with a pay change. Any way you slice it, renting gives you more time to decide what to do, so you have better control over the process and avoid rash decisions. Rash decisions are rooted in stress, and when you’re under stress, you’re probably impaired from processing all the information coming your way and making the best decision. (Been there, done that!) Slow down and take your time.

Renting removes hassle: Home ownership is a lot of work! Anyone who says otherwise must be paying someone else to do the work. And that’s why renting removes the hassle factor from where you live. The water heater goes out; that’s on the landlord to take care of. Fixing the leaky roof, not your responsibility. Paying the taxes and HOA dues, not you, either. One payment takes the hassle of ownership out of your hands and puts it on the landlord.

Here are some situations where renting might make sense

• You just moved to a new city.

• You are newlyweds.

• You’re not sure where in town you want to buy.

• You can’t afford a house, but it’s time to get out of Mom and Dad’s pronto.

The Pros of Buying

What about the advantages of buying? Here are three to consider.

Buying locks in your biggest line-item expense: When you buy, your housing cost is fixed, so as everything else gets more expensive (including rent), your housing cost takes up a smaller and smaller percentage of your expenditures. Locking in that cost is a hedge against inflation, and the longer that hedge is in place, the lower the proportion of your total outflows go toward housing. Contrast a 15 or 30-year mortgage with the ever-increasing and, most importantly, unpredictable rise in rent over that same period. Once you’ve paid off your mortgage, your housing cost is eliminated, and eliminating your housing cost brings a lot of stability, especially in retirement.

A home is an asset that increases in value: There’s no doubt that home ownership brings power to wealth building. Increasing the equity percentage in your house by paying a mortgage, paying down extra principal, or through a down payment is a forced savings mechanism. It’s even more so for those with lower incomes because those with lower incomes tend to save and invest less statistically, so home equity is a greater share of their wealth-building (1). Having ever-growing asset value can impact the next generation significantly.

Sense of ownership and “home”: When your name is on the title of a property, it lends to a sense of pride and responsibility. You have more than a place to live. But that home can turn into a nightmare of stress when finances and upkeep become a burden. So, make sure you set yourself up emotionally and financially so that your home is a place of peace and blessing where you can build memories and a life you love.

Here are some situations where buying might make sense

• You’re out of debt and have an emergency fund.

• Your income is rising, and your job prospects are stable.

• Homeownership aligns with your other life goals, like building a family.

• You can afford the payment because you’ve built a 5-20% down payment, and the monthly payment is within your reach.

It’s a big decision. Make the best choice for you and your family today with an eye toward the future. As a trusted advisor, we’ll provide you with information and ask questions to help you uncover the wisest path.

References

1 Cook, L. (2023, April 20). Here's Who Benefited the Most From Homeownership Over the Past 10 Years. Retrieved from Money: https://money.com/build-wealth-owning-a-home-study/