10 Reasons Where Renting Makes Sense
Buy or rent? Millennials everywhere are faced with this question in one of the hardest eras to find affordable housing. This question may even be on your mind right now. You may feel like everyone in your life is pressuring you to buy a house citing that renting is “throwing money away”. When it comes to personal finance very little is ever black and white and to be honest it shouldn’t be. This especially rings true with a large financial decision like housing. With that being said, there are some very clear signs where it may make sense to rent versus buy.
1. You don’t want to own or add the extra responsibility.
The first and perhaps most clear sign that you should probably rent rather than buy is that you don’t want to own or add any extra responsibility to your plate that home ownership brings. If you get anxiety thinking about home ownership or just don’t have a desire to own a home then listen to your gut. Don’t let friends, family, and social media tell you that you HAVE to own.
2. You hate fixing things yourself.
When you own a home you become the landlord. If you dislike fixing things or resolving items where you live then that is something to consider with ownership. If you own a home and your heat, A/C, water heater, or something else goes out then it’s on you to resolve the issue as soon as possible.
Also, calling a contractor or handyman for everything that needs to be fixed becomes costly very quick. Remember, ongoing maintenance is something you should save for on an ongoing basis so keep that in mind.
3. You don't envision staying where you’re at long term.
Buying makes the most sense, financially speaking, if you plan to live in the home for at least 5-7 years. That’s the general breakeven point for the transaction/closing costs required to buy your home. Most people choose to roll these costs into the balance of the mortgage.
Those that frequently buy homes in a short period of time incur significant transaction costs in doing so and pay mostly interest towards their mortgage all while building very little equity in their home. So if you’re not sure where you’ll be in the next 5-7 years then it makes sense to rent.
4. You’re new to an area.
More and more people are relocating due to work, to be near family, or simply because they want to live somewhere else. I recommend renting when you’re first new to an area. Give yourself time to learn the the area and everything that’s in it. Discover where the useful amenities are, the best schools (if applicable), commute times between various places, business/store locations, and any other important things to you.
Also, you may discover the town or the job isn’t working out and you may be out of there as quickly as you arrived. If you buy then it’s a much more difficult process to leave.
5. When renting allows you to stay on track with achieving your financial goals.
Rent and home values are typically set by market supply and demand. However, with ownership you have to explicitly add in taxes, insurance, HOA fees (potentially), and maintenance costs to what you’re spending each month or year. This can all add up and reduce your ability to save for your financial goals.
When renting, some of these costs are likely “baked in” to your monthly rent BUT there’s a good chance that you’re still under the cost of ownership on a monthly or annual basis. This isn’t to mention the pressure to furnish, update, and renovate a home which can also hinder progression on your financial goals.
6. Your career and personal life consume a good portion of your time.
Like I said above, when you own a home you then become the landlord. You take on all the added responsibilities and costs. Perhaps one of the biggest costs is the time it requires which will vary based on how much of the work you outsource (see #2 above). For many in their 20s and early 30s, they can think of a handful of better ways to spend their time outside of work and sleep. So as you can see, home ownership tends to put a tension on time, money, and energy.
7. You’re okay with, or even want, a roommate.
Let’s face it, it can be fun and beneficial living with other people. Not only can it be great emotionally and relationally, it can also be great financially. Having a roommate affords all the benefits of having a place to live at a fraction of the cost (depending on how many roommates you have). This can free up cash flow for you to allocate towards other more important things such as saving for goals, retirement, a house down payment, high interest rate debt, and more.
Do note that you can own a home and have a roommate by way of lease. However, you’re basically adding a side job to your life. The benefit is you’d likely be doing the same maintenance but now you’re being compensated for renting out a portion of your house.
8. Your credit score is sub-optimal and you need time to improve it.
Credit scores have a huge impact on the price we pay for things. This is because it’s a metric that’s used to gauge how “risky” we are as individuals. Your credit score is impacted by a handful of things ranging from payment history to credit utilization (the % of credit that you use of the overall credit that is extended to you) to length of credit.
No matter what is hurting, or has hurt, your credit it makes sense to get your credit score as high as you can before looking to buy.
This is because even the smallest interest rate increase, due to your credit score, can have a large impact over time, especially when applying it to one of the largest purchases you may make in your life. We’re talking thousands if not tens of thousands of dollars and potentially even six figures in the most extreme cases!
Let’s look at an example:
As you can see, there are material differences in monthly payment (principal and interest) amounts as well as total interest paid across the different FICO score tiers. The difference in total interest paid between the best and worst credit scores is almost $200k!
If your goal is to eventually own but your credit score needs work then please focus on improving your credit score because it will save you thousands of dollars.
9. You envision home ownership as an "investment".
It’s okay to view home ownership from a purely financial perspective. With that being said, primary homes aren’t very good investments. Why? They cost a lot and they don’t appreciate as well as other assets do. The FHFA reports that average annual home price increases has been about 4.3% since 1991 and 4.7% since 2000. These figures also include the significant bump in prices homes received due to the pandemic. Before the pandemic the average home appreciation was even lower.
From a financial cost perspective, home ownership has the highest fees and expenses related to assets (insurance, taxes, maintenance, etc. ). Your costs can look like this:
Closing costs: 3-6% of the mortgage amount
Homeowner’s Insurance: 0.25% - 0.50% of home value
Real Estate Taxes: 0.50% - 2.50% (tax rate on assessed value)
Maintenance: 1-3% per year
As you can see, high cost for below ideal appreciation. This isn’t to mention the time and energy to maintain your “investment”.
This is why I always encourage people to view a primary residence as a lifestyle asset. You own it for many of the non-financial reasons: freedom, flexibility, location, stability, and more.
Yes, home ownership does come with financial benefits (e.g. housing inflation hedge, capital gains exclusion, etc.) but if you’re just thinking about owning for financial reasons then renting could be a better financial move for you. We’re seeing many more individuals utilize the difference in rent and the total cost of ownership of a home to invest, save for goals, enrich their lives, etc.
10. You want to be debt-free sooner rather than later.
Unless you're paying for a house in all cash, unlikely but possible, then you're committing yourself to years, if not decades, of debt.
The most popular mortgage is by far the 30 year fixed mortgage because of its flexibility. This option tends to offer the lowest payment possible (for fixed mortgages) while allowing the buyer to buy the most house they can.
If you hate the idea of a 6-figure debt load on top of the other debt you may have then renting may be a better route for you. The caveat with buying a home is at least you have a loan backed by an asset (e.g. collateral) that SHOULD be able to be sold and pay off the loan. However, this doesn’t always happen. Sometimes home values fall below the cost of the outstanding mortgage, this is called being “under water”. Being underwater isn’t a good place to be as you’re typically very limited on your options (get above water or seek a “short sale”).
So if being debt-free is ultra important to you then renting offers the quickest route for you to do just that.
As you can see buying vs renting isn’t as cut and dry as many make it out to be. Your finances are personal as well as your beliefs, goals, and vision. Don’t let anyone make you doubt or second guess those things. Do what’s right for you even if that means renting. Because there are many scenarios where it could make sense for you.
