When Does Renting Make More Financial Sense Than Buying?

Financial experts often tout the benefits of homeownership as a significant financial goal for just about everyone. Although homeownership certainly has a lot of advantages, financial and otherwise, it may not be the right choice for everyone.

Most of the time, people must evaluate their circumstances and their plans before deciding to take on the additional rights and responsibilities of being a homeowner. There are different costs involved, and other factors may influence the choice as well. In these instances, people may have reason to wait on buying a home or might even prefer to remain a tenant.

When You Need Flexibility

For many people, buying a home involves a decision to stay in the same place for several years. Although some homeowners can purchase a home and sell it for profit within a year or two, it is possible that people in this situation will end up with a net financial loss. 

Sellers usually need to pay a percentage of the home’s value to sell it, which could exceed their equity in the home.

People who are not sure where they will get a job, or possible locations they may want to settle down, might prefer to rent for the time being. A delay of even six months or a year could allow them the time they need to determine where they want to live, find a secure job and plan to buy a home.

When You Need Predictable Expenses

Homeownership comes with the benefit of being able to control a person’s housing arrangement, as well as the responsibility to keep it up. While being a homeowner conveys the benefit of making choices concerning the home’s layout and systems, it can cost more to make those choices. At the very least, these costs do not occur at a predictable pace.

Tenants may not need to keep as much in savings to cover these costs. For example, a sudden failure in the roof or plumbing could cost thousands of dollars to fix.

A homeowner would be responsible for paying for it, while a tenant would contact their landlord to pay for the repairs. When it comes time to replace certain features of the property, homeowners must pay for those as well.

When Costs Associated With Buying Don’t Fit the Budget

Buying a home often involves a significant outlay of cash to close on the purchase. Common costs include:

• Down payment
• Closing costs
• Initial repairs or home improvements
• Furnishing the home
• Purchasing appliances
• Monthly payments

People who are not sure whether they can afford these expenses should research what they are likely to pay. Advance preparation makes it easier to determine whether the budget can handle the increased costs.

Down Payment

Most home buyers are not expected to make a down payment of 20 percent, but there are important factors to consider for those who do not.

Many loan programs allow qualified applicants to make a low down payment as little as 3 percent or even nothing and still be able to buy a home. However, these loan programs often come with:

• Restrictions on eligibility
• Higher interest rates
• Requirements to pay private mortgage insurance
• Limits on the amount of closing costs that can be paid by the seller

People who are worried that a down payment would completely wipe out their savings may consider renting to be a reasonable alternative. Using up all the money to buy a home does not leave much left for unexpected expenses.

Closing Costs

Unlike the down payment, buyers may significantly underestimate the amount of closing costs they are expected to pay. As a general rule, average closing costs represent 2-5 percent of the property’s sale price. An applicant who is buying a home with a 3 percent down payment may have to pay the same amount or more in closing costs.

Common closing costs include the expenses to originate the loan, get a home appraisal or inspection, and payment in advance for interest and insurance.

Monthly Payment

Once , they will be expected to make regular payments until the loan is paid off. There are several costs included in the monthly payment, such as:

• Principal
• Interest
• Property taxes
• Private mortgage insurance, if applicable
• Homeowners insurance

While homeowners may be able to shop around for a loan that allows them to pay less in interest or more in principal, they probably will not have control over the cost of property taxes or insurance.

In some areas, property taxes can exceed $10,000 per year. People who cannot make the payment with all costs included may prefer to rent.

When You Are Rebuilding Credit/Income

Although there is no set income or credit score that applicants must have in order to buy a home, lower numbers tend to make it harder. People who are in the process of rebuilding their credit or improving their income might need to rent at least until they can increase their buying power. Someone with a lower income or credit score can expect to pay higher interest rates and make a larger down payment in order to qualify.

They may not have as many options based on their income, and they may not be able to get access to certain loan programs.

When You Need Access to Amenities

People who rent may have much more access to various amenities than homeowners, although it depends on the property.

For example, a tenant in a large apartment complex might have access to a small gym, laundry services, rental space for events, or entertainment rooms. Property owners who live in a condominium could have access to similar services, but they will usually pay extra in the form of a homeowners association or co-op fee to maintain it.

People who want or need access to these kinds of services will have more choices if they rent.

When Your Local Real Estate Market Is Volatile

If the local real estate market is moving quickly upward or downward, people may choose to watch and rent until it stabilizes before buying.

As a general rule, properties will appreciate in value over time. Of course, trends across decades often do not show decreases in property value due to a recession, or minor changes in the market from one year to the next. Someone who buys at the top of the market may have a harder time getting a home they can afford, and end up underwater on the loan for a few years afterwards.

Similarly, a buyer who is trying to get a home in an area that is depreciating may struggle to maintain the value necessary to make improvements.

When You Want to Keep Your Investments Flexible

Property is certainly an asset, but it is not always easy to turn that asset into cash on demand.

Someone who buys a home for $250,000 with a $50,000 down payment already owns a significant portion of the property. However, that money is tied up. If they decide that they want or need to get the money out of the home in order to pay for an unexpected expense, it may take months to resolve.

Financial experts recommend that people keep money in a variety of possible places, including savings, real estate, and investments. For people whose net worth chiefly resides with the home, homeownership can represent a significant opportunity cost in the ability to save money in a liquid savings account or make other investments.

A tenant may have much more flexibility.

Buying a home can be an excellent financial decision, but it is not for everyone. People who decide to purchase property without being sure that they are content to live there for years might find themselves losing money in the process.

People who try to buy before they are ready may end up with too many limits on their buying power. By considering each of these common factors, it is easier for people to determine if they are better off renting or buying.