For decades, owning a home has been a core element of the American Dream, frequently cited as a milestone toward becoming a successful and responsible adult. For a generation transitioning into adulthood amidst record home prices and who find themselves carrying record levels of debt, is it time for this ethos to change? Is there more to the question of should you rent or buy a house?
There are so many opportunities in this world, so many paths you can follow to happiness, financial success, to simply being you, and very few are universal. Yes, having at least a minimal emergency fund or taking advantage of employer matches benefits nearly everyone, but most choices along your journey are a little more nuanced. You don’t have to follow others to find your way.
Thank you to our wonderful community who make this all possible. A special thanks to Nick and Ellie for providing thoughts from the prospective of both a renter and a home owner to provide context and balance to this article.
Table of Contents
Why is Renting Stigmatized?
It can be difficult to envision that renting could make sense from a financial perspective. The belief that home ownership has intrinsic value or that rent is simply throwing money away is entrenched in the public conscious.
It is easy to consider only the monthly rent a monthly expense, which does not build equity. Many do not consider what could be achieved with those assets, which otherwise would have gone to the additional upfront cost a home purchase. It’s easy to ignore the opportunity cost of buying a home.
Sometimes You Simply Need Space
Home ownership can provide a sense of belonging, an opportunity to have a safe space insulated from the rest of the world. Your home can provide security and privacy beyond what most renters can rely upon. As the world transitions to flexible remote work, individuals may find they desire greater control over their space. Through more time spent at home, or a desire to separate your work area from your after-hours space, home ownership ensures you can inject your personality into your pace to a greater extent than most rentals.
Rentals can provide you a space where you can relax from the outside world without the additional concerns of maintenance. Some rentals include utilities and yard/snow maintenance simplifying these expenses allowing one to relax upon returning home. This separation of responsibilities between the renter and property owner affords the renter better visibility over their future expenses, making their monthly cash flow more predictable.
If you are an animal lover, their needs must factor into your decision. I love both dogs and cats, yet in the past, I have lived for years without, living in rentals that would not give them the space and entertainment to serve their needs. A rental without windows meant even a cat would have to wait. Most animals can be happy and fulfilled in rentals as long as it is suited to their needs.
Home Ownership can Be Stressful
Buying a home is likely to be the single largest financial commitment of your life and closing on a new home can be stressful. If you are at a point in your life where you simply cannot deal with additional stress, consider renting until things calm down.
Purchasing a home with a partner comes with its own unique burdens and challenges that can strain even the most concrete of relationships. If you are not entirely ready to commit to your current relationship, purchasing a home without some of the protections marriage provides invites financial and legal ambiguity and headaches you may wish to avoid.
While the lower commitment of a rental can be simple enough to work out if the relationship ends, untangling the financial ties of a home can prove much more difficult. It is unlikely that either partner will simply be able to buy out the other’s interest in the house, making the ideal solution to sell. Any stress in the ending relationship may lead to difficulty selling if the timing is bad or the market can only support a lower sell price than you had initially paid.
If you and your partner wish to purchase a home together, work with a lawyer to ensure both of your interests are protected outside of the emotion of the relationship.
The Power of Leverage
Real estate became one of the greatest generators of wealth due in large part to it providing a unique opportunity to leverage debt. You pay off your home over decades, but the home appreciates against its full value from the beginning. Presuming a reasonable mortgage rate, and an average real estate market, your investment in your home can net you a solid return on investment.
Where you are in your financial life (as well as current economic factors) can have an enormous impact on the terms of the loans available to you. If you have some blemishes on your credit report, it may behoove you to rent while you clean them up. Taking this time to polish your financials (and slightly raising your credit score) can save you tens of thousands over the course of a mortgage.
Be honest yourself; are you comfortable carrying debt? If you know that carrying any debt causes you stress, and that you will pay it down as quickly as possible, you are fighting against one of the key advantages of buying a home.
Tax Benefits
*ed. Note- amount/amount is used to denote the maximum amount for single tax filers/married couples filing jointly.
Owning your own home can be an amazing asset at tax time. While your taxes will become more complex as a homeowner, you are likely eligible for a myriad of dedications renters will never see. You can deduct the interest you pay on your mortgage on the first $375k/$750k in payments. You can additionally deduct up to $10k of paid state and local sales or income taxes. With more and more of the world working from home, turning part of your home into a home office can additionally allow you to deduct up to 1% of your mortgage costs for each percentage of your home dedicated exclusively to your business.
The benefits continue on to the sale of a home. If you live in your home for two of the five years leading up to the sale, your first $250k/500k in profit is tax-free. The IRS taxes any additional profit as preferential capital gains.
While home ownership can provide some of the highest tax benefits the average person will ever see, it’s not a complete refund. You are still paying 65-90% of those interest payments. For most renters, taxes flow through the landlord as part of their rent, presenting no cost beyond that single payment.
Home ownership used to be one of the most significant qualifiers for tax deductions ever created. The 2017 Tax Cuts and Jobs Act doubled the standard deduction, reducing the value gained from the tax deductions available to homeowners for most owners. As a homeowner, you should certainly run the numbers and see what credits and deductions are available to you, but it is no longer a given that you will see a significant benefit at tax time.
Home Ownership Can Embed You Within a Community
Home ownership may provide you with a sense of belonging and of connection to your local community. Kids can quickly develop ties, incentivizing one to settle down. A spouse or significant other may form personal ties or establish themselves within a local business.
If you are unsure how long you may live an area, a short-term rental, and the flexibility it provides, may make sense. With moving between companies often being the quickest way to advance in both salary and prestige, the flexibility of a rental may be one less roadblock or point of hesitation when considering a new offer. As companies become more and more open to remote work for valued employees, this may become less of a concern.
Location, Location, Location
Location is a common refrain in real estate and can factor into your happiness and your sense of belonging. How close are you to your support group? To the ocean, national parks, or mountains? To the family and friends that make you happy?
A tiny apartment in downtown Manhattan derives enormous value from the vibrant community around it. A home in an area abandoned by its largest employer can see its value plummet. When you buy a home you are also buying into the community around it. Growth in the surrounding area, is likely to increase the value of all homes as demand increases. Alternatively, as the value around them grows, renters do not directly benefit. Compounding this issue, their rent is likely to increase.
Depending on the area, renting may make it possible to live in a safer neighborhood, closer to public transportation, better schools, or other places of interest. In order to buy something equally affordable, you may find yourself sacrificing on other factors, or increasing tangential costs such as gas and time of commute.
Accelerating environmental changes, and the push towards remote work, are changing the landscape. With the ability to work and employ anywhere, millions are transitioning out of high cost-of-living areas, a movement that is likely to continue, and potentially accelerate, in the future.
Opportunity Cost
Upfront Costs
While you pay the purchase price of a home over years or even decades, the upfront cost is still significant.
While the average down payment on new homes is around 6%, it is often a good idea to pay a down payment high enough to avoid Mortgage Insurance. Avoiding this premium insurance requires a down payment of around 20% of the cost of the home. With the median sales price of just over 400k, 20% down would represent an opportunity cost of $80k.
Home buyers are often responsible for closing costs, which can be as much as 5% of the home loan. Inspection costs are often less than $500. Finally, most home buyers will need to pay for homeowner’s insurance and pay six months of property taxes upfront.
The upfront cost of renting, while dependent upon area, is significantly less than buying. Renters often find themselves responsible for:
- the first and last month’s rent.
- A security deposit typically the equivalent of an additional month’s rent.
- Renters can often insure their rental for around $15 a month.
The lower upfront cost of renting provides you with an opportunity. That money can be invested elsewhere and grow in value. I and many others have the financial freedom that we now do, in large part, because we made the choice to rent while investing out money in other opportunities.
Recurring Costs:
First-time homeowners often neglect to consider the recurring cost of owning a home. Aside from their mortgage payments, homeowners should consider property taxes as well as internal and external upkeep of the property. Annual maintenance costs average out to about $1 per square foot but can be very inconsistent with large expenses, such as a new roof or water heater, requiring a substantial outflow of cash.
Many renters may find themselves responsible for some portion of property maintenance, perhaps lawn care or snow removal, but rarely have to account for unexpected cash outflows for something like a leaky roof.
Why You Should Buy a House Instead of Renting
+ Equity– capital invested into the home builds of equity, a tangible asset that belongs to you.
+ Cheap Leverage- Home loans are among the more manageable forms of debt one can have and will often result in a net return in equity.
+Boon to your Credit Score– As you make pay off your mortgage on time, you show yourself to be a responsible borrower and your credit score will increase.
+ Privacy- Typically more space, more control, and more privacy when at home.
+Major Tax benefits– mortgage interest is often eligible to be deducted from your taxes.
The doubling of the standard tax deduction has eroded much of this value for all but the rich.
– Opportunity cost-The money you place into a home is money you cannot invest other places. At any given moment, there may be better opportunities in other markets.
Why You Should Rent a House Instead of Buy
+Greater Flexibility– Life can change unexpectedly and renting makes it far easier to adopt to move whether to capitalize on a job opportunity or because of other major life events.
+ It May be cheaper to rent- depending on the factors we have discussed, renting may end up being a cheaper option for you long term.
+More Stable Expenses – For those living on a tight budget the consistent cost of a rental may better fit their immediate budget than the uneven expenses that come with ownership
What is Important to You?
The question of if you should you rent or buy a house ultimately comes down to what matters to you. It’s fair to question the refrain that owning a house is the only way to, or even a milestone towards, being a responsible or successful adult. As with every step in life. There is no one universal truth. Your location and family, the current loan and real estate environments, and outside opportunities will all factor into what is best for you.
Renting can be a financially viable approach, and I think over time, this has become true for more and more of the population. I’m cognizant of the fact that others in my situation face this ethos that not owning a home is somehow a failure. I see that mindset that one fragmented part of someone’s life can so define it, continuing to shift over time as more and more individuals stand up and disprove such beliefs.