Rent vs. Buy: Which One Will Give You the Good Life?

Rent vs. buy: Which is better?

…Trick question.

You could call the U.S. a nation of homeowners, with the majority of Americans (64.8%) choosing to own a house as of 2018. But it’s all a matter of perspective and planning.

Rather than search for that black-and-white answer, you should navigate this decision based on your individual priorities, which will shift as you enter different stages of life and financial circumstances.

The net worth of a homeowner is 44 times greater than a renter’s. Yet 63% of millennial buyers have regrets about their purchase. This isn’t an easy choice.

While online calculators give you a great start on the financial differences between average rents and mortgage payments for your area, we’ll help you sort through the other factors that influence what’s right for this moment in time: your personal and professional goals, leisure and recreation habits, and how you prefer to spend your time and money, to name a few.

Let’s get to it!

A family with a young child opening a box of diapers
Source: (Brandless/ Unsplash)

Family and long-term plans

Whether you plan to start a family or add a few pets to the mix, seek more privacy and space, or aren’t sure how long you plan to stay in a particular area, these factors related to your family situation and living preferences should weigh heavily into your decision to rent or buy.

Ready to settle in and stay awhile

Americans are staying in their houses for a median 13.3 years as of 2018. That’s a long span to be in one place if you’re anxious to move around. However, if you have no intention to leave your current location and would like to take steps to settle there, then you stand to reap a number of benefits:

1. Extra space and privacy

As you’d expect, people tend to buy homes as they get older, build up some capital, and make the decision to get married and start a family.

When you plan to add kids or pets to the equation (or perhaps relatives who’d like to move in with you in the future or parents who’ll need your help), you’ll value the extra space and privacy a single-family home can offer.

The average apartment size is around 934 square feet, compared to nearly 2,700 square feet for newly built single-family homes. These are some key reasons why you see more Americans owning than renting across all age groups except for 20-somethings.

2. Sense of pride

Single women accounted for sizable 18% of recent buyers, according to the National Association of Realtors 2019 Profile of Homebuyers and Sellers. Their primary motivator? Simply having a space to call their own.

When you’re a renter, you sign a contract and put down a deposit, which both limit your ability to settle into your housing the way you can when you’re a homeowner. You may need to get permission to paint a room in a bright color, or even to simply pound a nail into the wall to hang a picture.

When you’re an owner, you never have to ask anyone’s permission to repaint the walls, replace the bathroom faucets, or even rip out and remodel the kitchen.

Once your home is all done up in the colors, styles, and finishes that you’ve selected, you’ll feel a great sense of accomplishment and the desire to show off all the hard work you’ve done to family and friends.

3. Long-term value gains

Historically real estate values appreciate over time — at a rate of between 3% and 5% per year, making it a solid investment if you’re a bit patient.

“I’m a firm believer in the home purchase,” says top agent Ann-Marie Sharp of the Atlanta, Georgia suburb of Cumming.

“If you’ve been a renter for 10 years, that’s a lot of money to pay to live in a place that you don’t own.”

“If you’d paid that same amount toward a mortgage, you’d have gained equity in that long-term property investment,” she adds.

Imagine you buy a house in 2019 for $250,000, and it gains (on average) 3% in value (or $7,500) every year that you own. Over a decade, your investment is now worth $325,000. Meanwhile, had you been renting, you could expect the cost of rent to increase 3% each year you’ve stayed.

Plus, not having to worry about lease renewal and rehashing the terms every year or two can be a relief.

4. Room to grow

Buy a house now with several spare bedrooms, and soon you may find that what felt like trying on a pair of clown shoes fits you perfectly in a few years.

One room could become a nursery, your home office, or your hobby room for whatever passion fuels you: art, music, or crafting.

Can’t sit still for too long

Let’s play devil’s advocate.

The average American will move 11.4 times in his or her life, according to a FiveThirtyEight analysis of Census Bureau data. If there’s a chance you’d like to uproot in the near future, or aren’t sure if the city you’re in now will be where you’d like to stay for the long haul, then it’s best to hold off on buying a house if possible.

Buying a house is not a get-rich-quick scheme

Buying a house may be the biggest investment you make in a lifetime — but unlike other investments, such as the stock market, it’s not one where you can expect a quick return.

“Some people are disappointed if they don’t gain a lot of equity in a year of homeownership. But buying a house isn’t meant to be a short-term investment,” advises Sharp.

Experienced house flippers can make good money buying, updating, and selling houses in the short term, but they treat it as a business, often investing in multiple properties at once.

This quick-flip mindset simply doesn’t work if you’re just buying one primary residence with plans to sell within a year or so. Not only will you probably have to pay capital gains tax if you sell within two years, but you won’t have had much time to build up any home equity.

“It’s risky to buy a house with plans to sell it within a year. If the market softens, you might wind up with negative equity,” explains Sharp. “So, if you’re only going to be living in an area for a year or so, and you’re not interested in keeping the house as a rental after you move, I would not suggest buying a house.”

If you still need the space, rent a single-family home

Single-family homes now make up 35% of all rental housing following the U.S. financial crisis. No longer do renters have to choose between buying a house or renting an apartment. In fact, single-family rentals on the market increased faster than apartment rentals in 22 of 30 major cities in the decade leading up to 2016, according to a 2018 study by RentCafe.

You can rent a house and enjoy the same perks as you would as a buyer while living there, such as additional space, quiet, and your own yard. However, you’ll still be subject to rent increases, and your landlord could try to sell the home while you’re still in it (though as a tenant you can exercise certain rights depending on the lease agreement).

A person deciding between rent vs buy.
Source: (Julie Tsujimoto/ Death to the Stock Photo)

Career and professional goals

The stage and trajectory of your career — whether you’re new or established, satisfied or on the lookout for a different job, and the nature of the work you do — will also help determine whether you should rent or buy.

Happy where you are with opportunity to grow

Eighty-five percent of Americans say they are, overall, happy with their jobs. But satisfaction with your career at the moment doesn’t necessarily indicate you’ll be happy there long term. Here’s a few signs that you are, in fact, on a sustainable path (and would be smart to start investing some of your earnings into a house):

Your company appears to be financially stable

Employees don’t always have full transparency into a company’s financial health. But growing revenue, flat expenses, and low turnover, as well as clarity around company values, a positive work atmosphere, and constructive conflict resolution are signs of stability.

Your city offers a thriving job market

Your area’s overall number of job opportunities, employment growth rates, unemployment rate, average starting salaries, and annual incomes say a lot about its job market. WalletHub analyzed these factors to rank its 2018 Best Cities for Jobs. The top 5 include:

  • Scottsdale, Arizona
  • Columbia, Maryland
  • Orlando, Florida
  • San Francisco, California
  • Colorado Springs, Colorado

Cross-reference that list with the firm’s Best Cities for First-Time Home Buyers and you can see where job opportunities are plentiful and housing remains affordable.

You’re overall satisfied with the day-to-day

Time flies when you’re at work, you feel challenged but also like you contributed value every day, and you’ve got a good relationship with your boss and coworkers — all of these are positive signs that you’re on the right career track.

According to Harvard Business Review, employees also tend to be happy when they have three things: career (professional development and autonomy); community (connectedness and recognition); and cause (a sense of purpose). These satisfaction indicators will likely align with a decision to stay in a city long term and — if you so choose — to buy a house.

Entrepreneur at heart or hungry for something new

On the other hand…

As of 2018, the median number of years Americans had been with their current employer was 4.2 years, according to the U.S. Department of Labor, down from 4.6 years in 2014. A survey from staffing firm Robert Half found that 64% of workers prefer “job-hopping,” defined as staying at a job for less than two years.

Considering that selling a house typically takes two months, it’s certainly easier to uproot for a job across the country if you don’t have to list your home on the market, find a buyer, and close a complex real estate deal first.

Will you need to relocate for a job sometime soon?

Homeownership is just one of life’s huge goals — most people also have big plans for their careers, too. Before you buy a house, assess whether your career plans could require you to relocate.

Maybe your chosen industry is flourishing in another city and you need to move to find work. Or perhaps you’re in line for a promotion at your company’s out-of-state location.

Although job relocation in general is on the decline (only 11% of job seekers relocated for work over the past decade) you may even need to move because you’re re-assigned to a distant facility in your current city that doubles or triples your commute.

In any of these scenarios, you’re in for a world of hurt financially if circumstances force you to sell a house that you’ve owned for less than two years (capital gains), or if you’re underwater on your mortgage.

Do you need cash on reserve for your business or employment situation?

Serial entrepreneur Gary Vaynerchuk encourages his followers think about putting their net worth toward their professional endeavors, rather than use it for a down payment (the average down payment in 2018 was $15,490).

His point is not that buying a house is a bad investment, but that entrepreneurs should use their capital to go “on the offense” for their business.

Additionally, you should make sure you have enough money left over in savings after the down payment in the event that your employment situation suddenly changes — personal finance expert Suze Orman recommends having at least 8 months’ worth of savings in the bank.

What if your company is open to remote work?

A 2019 study by Owl Labs found that 48% of U.S. workers work remotely at least once a week while 30% work remotely full-time. If your company offers remote flexibility or you’re in an industry where remote work is more popular (including healthcare, technology, and financial services, according to the same study), this growing trend could impact your homebuying decision in one of two ways:

  1. You could see it as an opportunity to live anywhere for as long as you want without worrying about relocation. That makes homeownership an attractive option, complete with your own amazing home office setup. Think: big-city salary, affordable living.
  2. You could also take the opportunity to work remotely and move every so often to experience new places while maintaining job stability. If that sounds more like your style, stick with renting.

Leisure and lifestyle

What are your travel and vacationing preferences? Do they align with your dreams of homeownership? What do you like to do in your spare time? Will buying a home help support those activities, or not? Let’s think through some of the trade-offs.

A man holding a spatula standing next to a lit charcoal barbecue grill
Source: (Vincent Keiman/ Unsplash)

Loves hosting barbecues, big backyards, and local attractions

A single-family home may be just what you need to fully enjoy your leisure goals. Let’s say you love gardening, or hosting backyard BBQs — neither of those activities are as enjoyable when you’re living in an apartment.

According to research from Kiplinger, 87% of buyers want a house with a patio. Who can blame them when outdoor spaces offer the chance to entertain friends or catch some fresh air on a nice day? Sure beats a measly balcony off a second-floor unit.

Frequent flyer with expensive tastes

On the other hand, from a financial perspective, buying a house ties up your equity in a way that may curtail your leisure activities if your hobbies trend toward the expensive — like world traveling or wine collecting.

“Don’t overextend yourself to buy a more expensive house if you want to maintain a lifestyle that offers the financial freedom,” advises Sharp. “For example, if you want to travel, make sure your living expenses will allow that — whether you rent or buy a house.”

It’s not so easy to drop everything for a three-month trip abroad when you’ve got home to manage. Unexpected home repair bills and monthly maintenance commitments like mowing your lawn may curtail your ability to travel or engage in hobbies in a way that renting won’t. You should plan to set aside 1% of your home’s value for maintenance every year (on a $250,000 house, that’s $2,500), and more if your house is on the older side.

Plus, you need emergency funds in the event that the furnace quits or a pipe breaks. If that’s not a commitment you’d be willing to make, then stick with renting which offers fixed monthly housing costs through your lease term.

Is it the right time for you to buy a house?

You’ve gathered the information. You’ve run the numbers. You’ve weighed the pros and cons of all of the factors which influence your decision between staying a renter or buying a house.

No matter which route you choose, this is an intensely personal decision. If you’d like the convenience and simplicity of renting, then you’ve made that choice knowing the trade-offs.

If the answer is “get me the keys to my own house ASAP, please!” then start with HomeLight’s simple home affordability calculator to do a little budgeting homework.

Then, connect with a lender to start discussing your finances. (HomeLight Home Loans conducts a full financial underwrite for borrowers upfront so you can shop for a home with confidence… just saying.)

Lenders will verify your income, check your credit, and calculate what’s called your debt-to-income ratio (your monthly debt payments divided by your gross monthly income) to determine whether you qualify for a mortgage, and if so, how big of a loan you qualify for. These days, a 43% debt-to-income ratio is the highest amount a lender will typically allow.

“Qualifying to buy a home is a process, so I recommend speaking to a lender as soon as possible,” says Sharp. “You might find that it’s not in the cards now, but a lender can help you get a plan together to work toward homeownership.”

No matter your timeline, congratulations on the adventure ahead!

Header Image Source: (Artem Beliaikin/ Unsplash)

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