Is It Better to Be a Homeowner or a Renter? This Guide Will Help You Decide
Homeownership is the great American dream. Investing in a property not only offers a place to live, it builds equity over time. But buying a home doesn’t pack the punch it once did. Renting makes more sense for an increasing number of consumers. In fact, a recent poll found many younger Americans prefer renting because of the flexibility and affordability it comes with. If you’re trying to decide whether to rent or buy, we’re here to break down the pros and cons.
Should You Rent or Buy? Pros of Renting
Renting gets a bad rap. For many people, though, renting simply makes more sense. Here are some financial reasons renting might be a better choice for you.
1. Flexibility
In real estate, a longtime rule has applied to home selling. The 5-year rule says you should stay in a home at least five years before selling it. This rule isn’t set in stone, though. Ideally, you stay in a home until you earn enough equity to recoup your closing costs while making a profit on the deal.
“If someone is single and does not have dependents whose life would be impacted by a move, they are more likely to move for, say, a career opportunity,” said Bobbi Rebell, CFP® and Personal Finance Expert at BadCredit.org. “In that case, it makes sense to be a renter. However, if someone owns a brick-and-mortar business in a specific community that ties them down there and maybe has a family as well, it is unlikely they are going to be choosing to or forced to move anytime soon. In that case, home ownership likely makes sense.”
2. Less Responsibility for Repairs or Maintenance
An emergency fund is essential for homeowners. You never know when you’ll need to call a plumber or HVAC repair person. One of the best things about renting vs buying is with renting, your landlord is responsible for repairing and maintaining your home. As Justin Haywood, CFP®️ and president and co-founder of Haywood Wealth Management, explains, this can be beneficial not only for younger homeowners but also for those who want to simplify as they head into retirement.
“For many retirees, the decision to buy or rent depends on their financial situation and lifestyle preferences,” Haywood said. “Selling their home and moving into a retirement community can make sense, especially if they want to downsize, reduce home maintenance responsibilities or free up equity for other retirement expenses. Renting in a retirement community can also provide flexibility and access to amenities without the long-term commitment of homeownership.”
Cons of Renting
Renting does have a couple of downsides. For some, the lack of privacy that comes with apartment dwelling is a deal breaker. But even if you rent a house on its own property, a couple of financial cons apply.
1. Lack of Equity
As a homeowner, part of your monthly payment each month goes into paying off your mortgage. In time, you’ll build equity that will allow you to make a profit when someday you sell. Nate Towers, director and financial advisor, CRPC, at Five Pathways Financial acknowledges the freedom that comes from renting, but he also has some words of caution.
“I’ve seen people stay in the renting cycle for life because they never seized the opportunity to buy when they could,” Towers warns. “It’s easy to get stuck renting forever, and the longer you wait, the harder it can be to come up with the required down payment.”
2. Periodic Rent Increases
Yes, that monthly rent payment is stable, but only for the term of your lease. Because most rental leases are one year, that means you’re only locked in for 12 monthly rental payments. Your landlord can raise your rent at the end of every lease term. Local laws might limit the amount of that increase, but not always.
“Another thing is, if you set yourself up with a fixed mortgage, it might feel tough to make that payment in the beginning, but over time it actually gets easier,” Towers said. “That mortgage payment doesn’t change, while rents tend to go up with inflation. We’ve definitely seen that happen in recent years.”
Pros of Buying
While renting has its benefits, there’s no denying homeownership comes with its rewards, too. Here are a couple.
1. Building Equity
A home is an investment. You’ll borrow money to purchase it, then pay monthly payments for the term of that loan. Yes, a portion of that payment will go toward interest, homeowners insurance and property taxes, but an increasing chunk of that payment will go toward the borrowed amount, known as the principal.
“As you pay off your mortgage, you own more and more of your home, and one day, it’s completely yours,” explains Joseph Camberato, CEO at National Business Capital. “Plus, homeownership gives you options — you can sell, rent it out or borrow against it if needed. It gives you a lot of financial flexibility over time.”
2. Tax Deductions
As a homeowner, you’ll enjoy a nice perk at tax time. You’ll receive a form each year from your mortgage company, and that form will include expenses you can use as a tax deduction.
“There are deductions tied to the interest paid on a mortgage, as well as deductions on real estate taxes,” Rebell says.
Cons of Buying
Despite what some will tell you, there are financial downsides to homeownership, including the high cost. Here’s what you need to know.
1. Upfront Costs
Often the biggest factor when deciding to rent or buy is finances. According to the National Association of REALTORS®, the upfront cost of buying a home breaks down as follows:
- Down payment: Varies by lender.
- Loan origination fees: 0.5% to 1% of the mortgage amount
- Appraisal: $300 to $500
- Service fee: $300-$500
- Title search: Up to $2,000
- Transfer taxes: Varies by location
All told, you’ll likely need thousands of dollars to close. But cash-strapped homebuyers can find alternatives to high down payments on conventional loans.
“There are options that can help you get in the door, like FHA loans, which only require a 3.5% down payment,” Camberato explains. “It’s lower than the typical 20% down for conventional loans, but you’ll likely have higher mortgage insurance costs or other trade-offs to consider. If you’re not ready for that, the best advice is to start saving. It might take time, but having a solid down payment gives you more options and flexibility when you’re ready to buy.”
2. Ongoing Maintenance
The expenses don’t end once you’re in the house. You may have homeowners association fees, which can cost hundreds of dollars each month. You’ll also need to take care of your home and tackle any emergencies that occur.
“Renters aren’t responsible for maintenance, property taxes or major repairs, which keeps upfront and ongoing costs lower,” adds Tyler Meyer, CFP® and founder of Retire to Abundance.
Whether you want to rent or buy, it’s important to crunch the numbers and make sure you have the funds to support your decision. This rent vs buy calculator can help you decide. Only you know the best living arrangement for you.
Stephanie Faris is a professional finance writer with more than a decade of experience. Her work has been featured on a variety of top finance sites, including Money Under 30, GoBankingRates, Retirable, Sapling and Sifter.
