comparing renting to buying a home

Should you rent or buy a home? The answer is seldom in black-and-white terms

For generations, buying a home was seen as not only a measure of financial aptitude but an expected next step in the journey to successful adulthood. But then came the real estate collapse and mindsets quickly shifted. Maybe renting wasn’t such a bad idea after all. Maybe renting was actually the smarter choice?

Of course, the reality is that both options have pros and cons; the right choice is the one that’s right for you.

Factors to consider when deciding to rent or buy

To make an informed decision, consider the following:

How long will you stay in your next home?

As a general rule of thumb, the longer you stay in a home, the better the rate of return for purchasing a home.

What are your long-term family and career goals?

Do you want the freedom to move across the country for the right job? Are you looking for a place that can accommodate a large family or several pets? All are important considerations when weighing your options.

Can you afford unexpected home repairs and expenses?

Mortgage payment is just one part of homeownership. Leaky roofs, tree trimming and trash pickup are just a few examples of expenses you should be prepared to pay for if you want to buy a home.

Compare costs

Here are two ways to evaluate expenses:

Use a mortgage calculator to estimate monthly payments

Bankrate.com has an mortgage calculator that can help you better understand expected monthly costs such as principal, interest, homeowners insurance, property taxes and homeowners association fees. Once you have a figure in mind, compare it to the amount you anticipate paying in rent each month.

Use the price-to-rent ratio

Typically, the price-to-rent ratio is used to evaluate housing markets, but it can also be used to estimate whether it is cheaper to rent or to own property.

To determine the price-to-rent ratio, divide the price of a home by the annual rent amount for a similar property. In general, if the resulting number is less than 20, purchasing the home is seen as a smarter move than renting. If it’s higher than 20, renting is probably the better idea.

Evaluate the pros and cons

There are some general advantages and disadvantages of renting vs buying a home, but be sure to add your own considerations as well.

Buying

PROS:

  • Build equity over time
  • Possible tax advantages
  • Privacy from shared walls
  • Freedom to make it your own

CONS:

  • Unforeseen expenses
  • The time and expense of upkeep and maintenance
  • Less flexibility to move
  • Home values may fluctuate

Renting

PROS:

  • More flexibility to move
  • No upkeep and maintenance costs
  • No investment risk
  • No property taxes or HOAs

CONS:

  • No tax advantages
  • Rising rent rates
  • No equity/investment potential
  • Less freedom to personalize your space
  • Potential lack of privacy
  • Upfront costs, including security or pet deposits, first and last month’s rents, etc.
  • Fixed-term lease agreements may be required

Make the choice that’s best for you

At the end of the day, the choice is yours. Deciding to rent or buy is a complicated process that’s best handled with patience and careful evaluation. Don’t force yourself to make a decision without weighing the financial and emotional investments for each option.

Get more financial insights with the Nimbl app.

NFM-19007AO (11/19)