For most of us, buying a home (or not) is the biggest financial decision of our young adult lives.
There’s no easy answer to the question “Is it better to rent or buy?” It depends on so many factors: your age, your finances, your neighborhood, your future plans, the current real estate and mortgage market, just to name a few. Regardless, everybody you know will have an opinion.
If you’re deciding whether to rent or buy, the first thing you should do is tune out other people’s advice, however strongly stated or well-meaning. There was a time in recent history when buying a home was the benchmark for financial success. But as we learned from the mortgage crisis of 2008, an expensive home can become an albatross around its owner’s neck in hard times.
At the same time, plenty of people (including friends and family) have benefited from long-term real estate appreciation. From their point of view, their home was a great investment, so anybody else would be foolish not to follow suit. But remember that past performance does not guarantee future results. And whoever is telling you to buy or not to buy is not you.
The New York Times features an interactive tool that can show you the break-even point for buying a home based on over a dozen factors: the home price, how long you’ll stay, your tax rate, and current mortgage rates.
Want a faster, simple way to compare buying and renting? Try our buy vs rent calculator.
For example, let’s say you’re looking to purchase a $250,000 home with 20% down and a 4.02% rate on a 30-year mortgage.
The line for whether to rent or buy depends on how long you’ll stay in the home. If you plan to move after five years, renting is better if you can find a comparable apartment or home for $863 a month. If you can stay for 10 years, you’d have to find a rental for $733 a month to make renting the better scenario.
If, however, you’re only going to stay somewhere for two years, you’ll be better off renting a place for up to $1,265 a month.
Unless there are affordable rentals in your market, these numbers favor buying as long as you’ll stay put for at least four to five years. In your early twenties, that might be a lot to ask. Career and romantic opportunities have pushed most people I know (including myself) to relocate at least once or twice during their twenties.
But in order to make buying a home better than renting, you have to be financially ready. There are fewer routes to financial ruin faster than taking on too much of a housing payment and squeezing your budget until you need to borrow money just to keep up with monthly expenses.
And the number one mistake I see new home buyers make is to fail to appreciate just how much owning a home costs (in addition to the mortgage, property tax, and insurance).
I’m at the stage of life where many of my friends are buying first or second homes. And I can’t think of a single one who didn’t move in only to discover some big repair that wasn’t caught during the home inspection. A broken appliance, a leaky pipe, you name it.
Those are the needs, but with new home ownership comes a long list of wants, too. What new homeowner doesn’t have the experience of suddenly finding themselves on weekly (or daily) trips to Home Depot and Bed, Bath and Beyond (if you have enough time). Furnishings, decorations, window treatments, landscaping: Cha-ching, cha-ching, cha-ching.
We all know that we shouldn’t try to spend our way to happiness, but a recent study showed that, despite the fact we love to improve our homes, purchases on our home bring us surprisingly small levels of happiness. Hint: Spending money on experiences, travel, and hobbies is the way to go.
I can’t give you some easy rubric to help you decide whether to rent or buy, but here are the takeaways:
Unless you’re confident you’ll stay in your home for at least four to five years, rent
Many people buy a home and then upgrade within a few years and choose to become a landlord by renting out their old home. This could be a savvy move long-term, but it’s harder in the short-run than most people realize. It can be challenging to get two mortgages (even if you find a tenant), and many people I know are surprised when the rent doesn’t cover their mortgage and other expenses, costing them a few hundred dollars a month to hang onto the old home.
Yes, it is possible to be successful and earn passive income as a landlord, but the guys I know who are good at this are super-selective about the properties they buy because they know ahead of time they can get positive cash flow from the rental. The homes that we would choose for ourselves might not fall into that category.
If you’re financially ready and you find the right house, buy
Most of us want to own a home. The problem is we can get so eager to own a home, and that we start to compromise on things that are important—really important.
For example, you find a house you love and buy sooner than you planned—perhaps putting less money down or settling for a higher interest rate because your credit wasn’t as good as you hoped it would be.
On the other hand, you might reach a financial place where you can buy a house but not a house you’re going to be happy with. Most of us will always have financial limitations on the kind of home we can buy, but don’t get too pressured to buy just because the market is hot.
If you don’t want to be a homeowner, rent
Even if you’re financially ready to buy a home, you might just not want one. There’s nothing wrong with that. If you’re hyper-focused on career or travel, taking on the responsibilities of owning your own place might not make sense. As I’ve written before, renting is not necessarily an unwise financial decision. At the very least, you’ll have some money left in your pockets that homeowners are giving to the appliance guy and Home Depot.