The Pros and Cons of Renting versus Buying
Published on: Tuesday, July 28th, 2020
Source: Rent Cafe’ Blog
Author: Alexandra Ciuntu
One of the most common personal finance questions out there is whether you should rent or buy your home. Its frequency comes from the lack of a straightforward answer. Unlike clearer debates such as credit cards vs debit cards — where most people agree credit cards hold most advantages — renting vs buying does not have a clear-cut a winner. The answer depends on your particular situation.
Below we’ll walk through the pros and cons of each option, which hopefully will help you make the right decision for you.
The Pros and Cons of Renting
In general, renting is the right solution if you are looking for a short-term home. Typically, if you’re staying somewhere for less than 5 years, renting is the way to go. However, it’s not always clear for how long you’ll be staying somewhere, so you should consider some other pros and cons, which help clarify the renting lifestyle.
- Ultimate Flexibility:
When renting a home, you can easily pick up and move whenever. Yes, you have a lease to worry about, but oftentimes there are ways to minimize the penalties (especially in unpredictable scenarios), which are much easier to go through than the process of selling your home.
- No Surprise Costs:
When renting, you pay monthly rent and utilities, and that covers the housing costs. You are not responsible for any home maintenance like you would be if you owned the place. The landlord is responsible for additional costs unless you caused the damage directly.
- No Additional Taxes or Fees:
- It’s an Expense:
Compared to homeownership, where most of your monthly payment (besides the interest) goes towards building equity in the home, renting might not be the best idea for long-term financial planning. However, if you carefully plan your budget, you can end up saving money while renting and then invest the savings into something that will return a profit.
- No Tax Benefits
You do not get a lot of tax benefits (or deductions) when renting. However, given the standard deductions in 2020, this might not be that big of a con for many renters (or pro for many homebuyers). You should keep in mind that if you do your research, you might find some tax deductions which apply to renters.
- Stability Risk:
When renting, life is more unpredictable, because of the fluctuating rates of rent and uncertainty towards the landlord. You should always use a secure website to find your rentals, in order to avoid any problems. There are laws to protect you, but they differ from state to state, so you might run the risk of being kicked out at any time if you’re unlucky. Although it’s rare, it can happen.
The Pros and Cons of Buying
Not surprisingly, buying is usually a better long-term decision. If you plan to stay somewhere for a long period of time, buying can often pay back more so than renting. This is because the one-time costs you face upfront (like closing costs) have a longer period to amortize over.
- Building Equity:
The biggest pro to buying a home is the equity you build when doing so—you are investing in that property. The monthly payments you make towards your mortgage is not an expense, but instead, by paying down the debt you owe, you build trust and define yourself as a customer.
There is larger freedom when it comes to design when you own a home. This doesn’t mean that when renting you cannot adapt your space to your style, but it’s more complicated having to go through a landlord and get their approval for every change you want to make. Sure, renovations will cost money, but if you do this right, then you can also add value to your home.
- Tax Benefit:
When you own a home, you get a tax deduction which is more significant than the available tax deductions for renters. Although this might not be a pro for as many people heading into 2020.
- One Time Expenses:
The most common (and worst) one-time expense when buying a home is the closing cost. These up-front expenses have an opportunity cost associated with them. For example, instead of investing in index funds to receive a +7% annual return, the money is gone.
- Housing Market Returns:
Historically, the housing market has underperformed the S&P 500 (and most other broad stock indices). This con gets at the core question between the rent vs buy dilemma—is it better to own a home and receive the slower housing market returns, or forgo the one-time expenses associated with ownership and reap the rewards of the stock market? It’s up to you.
- Cost of Ownership:
As a homeowner, you also own the responsibility of paying for general maintenance and repairs. While insurance can help with major surprises (just like with renting), you’re still on the hook for everyday expenses.
Which one of these do you think is for you? Are you looking for flexibility and freedom, or do you want to have the stability of your own home? There is no choice that is clearly better; instead, assess your individual situation. It’s up to you to decide between being a homeowner or a renter.