One of the most contentious issues in personal finance is whether it’s smarter to buy a home or to rent. Those who prefer owning argue that renting is the same as throwing your money away, as you give up the opportunity to build up equity in a home. But as any homeowner knows all too well, there are plenty of responsibilities involved with home ownership that renters don’t have to worry about.
There are a host of financial and personal reasons that go into whether you prefer to own a home or to rent, and as Motley Fool personal finance expert Maurie Backman points out, the arguments in favor of home ownership can be compelling. But many people will find that in their personal and financial situations, renting is simply the better choice. Here are a few reasons why.
1. You don’t expect to be in one place very long
Buying a home involves a number of one-time costs, and the longer you expect to live in the home, the longer the period of time over which those costs get spread out. But if you only think you’re going to be living in a certain area for a year or two, it’s a calculated gamble whether any price appreciation in that particular real estate market will make up for costs like mortgage origination fees and real estate brokerage fees when you sell. In most cases, it takes several years to make up the difference, and that makes renting smart when you don’t want to commit for that long a period.
Rentals are also a good choice when you first move to an area that you don’t know well. By renting, you can get a feel for whether a given neighborhood is a good fit for you while being free to explore other parts of the area. Then if you decide to stay in the vicinity, it’ll be far easier just to buy a home later on in the part of town you really like, than it would be if you bought immediately and then later changed your mind about exactly where you wanted to live.
2. You have no interest in dealing with home maintenance issues yourself
The eye-opening experience that every homeowner has comes the first time something in their home breaks. Unless you have home warranty protection, things like a broken furnace, burst pipes, a leaking roof, or a faulty electrical system are entirely your responsibility. Those who are handy around the house can often take care of minor problems themselves, but even the best do-it-yourselfers can find themselves out of their league and needing to call professional help at a substantial cost.
When you rent, all you have to do is call the landlord to take care of all of that. So many financial comparisons of home ownership look only at monthly rent compared to mortgage payments without incorporating maintenance costs into the equation. Moreover, for many people, just the time and effort involved in dealing with repairs is a major hassle that makes buying a home look a lot less attractive.
3. You want better returns on your money
From a financial perspective, many experts tout the benefits of owning versus renting, arguing that even when you consider taxes, insurance, maintenance, and ancillary costs on top of mortgages, you’ll still end up ahead with a home. Even when the numbers support that argument, they still leave out one thing: the opportunity cost of having money locked up in home equity.
As homeowners learned all too well in the mid-2000s, home prices aren’t any more guaranteed to go up than stock prices are. In the long run, real estate markets in most areas have risen gradually in value, but even there, you won’t generally get anywhere close to the same returns that taking that money and investing it in the stock market would produce. If you rent but make sure to invest the difference in stocks, then you’ll often find that you come out ahead of owning over the long haul.
Weigh the factors
Most people will find that making a smart decision about buying or renting is difficult, because some factors point toward renting while others support buying. By knowing both the financial and non-financial elements that are important to consider, you’ll be better able to make a smart choice you can live with.