Homeownership has long been a sign of success, but comparing renting to buying isn't all that clear cut. Renting is less capital intensive, and it gives you the freedom to move when you please. But buying a home will help you build equity and wealth.
There are many financial implications and lifestyle factors you should consider when you're making the choice of whether to rent or buy. Learn more so you can make the best decision for you.
Key Takeaways
- Buying a home involves significantly higher initial costs and heftier ongoing expenses for repairs, maintenance, and property taxes.
- Renting a home doesn't give your money a chance to grow unless you save or invest that which you aren't paying on the higher costs of homeownership.
- Renting vs. buying isn't a once-in-a-lifetime decision. You can revisit the question at any time if you experience lifestyle or financial changes.
- Calculate your price-to-rent ratio to figure out which is the best financial option for you at any point in time.
Renting vs. Buying a House
| Renting | Buying | |
|---|---|---|
| Costs | Cheaper upfront costs and your deposit may be returned | Higher upfront and ongoing costs |
| Wealth | No opportunity for wealth accumulation | Opportunity for wealth accumulation and tax breaks |
| Responsibility | The renter is not responsible for maintenance | The buyer is responsible for maintaining the home |
| Flexibility | Freedom to move | Freedom to remodel at will |
Cost Factors
You're not only responsible for your monthly mortgage payment when you're a homeowner. You have to pay for repairs, maintenance, taxes, homeowner's insurance, upgrades, and possibly HOA fees. These additional costs can easily make owning a home more expensive than renting, and not all home-related costs build equity. Renters are generally responsible for only rent and utilities. The property owner is responsible for everything else.
The upfront costs of renting and buying are dramatically different. You may have to pay an application fee and security deposit to move in as a renter. Buying a home means a much more significant down payment, origination fees, closing costs, taxes, and other expenses.
Building Wealth
You'll build equity in your home as you pay down your mortgage balance. Equity also increases as your home value goes up due to your local real estate market. Home equity adds to your net worth and can serve as collateral for a loan or line of credit if you need to borrow money in the future.
Note
Gaining equity through appreciation isn't guaranteed. Home values can decline. You can even end up owing more than your home is worth in some cases.
Homeowners who itemize their tax deductions may be able to reduce their income tax bill by deducting the mortgage interest they paid, but you must itemize to claim this deduction. You can deduct home mortgage interest on the first $750,000 of indebtedness, or $375,000 if you're married and filing a separate tax return.
Wealth building isn't impossible for renters, but you'll need another plan. You can increase your net worth by consistently investing the difference if renting is less expensive than buying.
Responsibility for Repairs and Maintenance
Owning a home is a major commitment. Ryan McCarty, CFP and owner of McCarty Money Matters, says the first question he asks young buyers is whether they're ready for the responsibility. You're fully responsible for maintenance and upkeep as a homeowner, whether that means doing the work yourself or hiring a professional.
Your landlord will handle the bulk of the maintenance and repair needs if you rent. But the landlord will require you to pay for the damage in most cases if you're the one who caused it.
Flexibility To Make Changes
Renting is a more flexible option if you think you might want to move in the future. You can move at the end of your lease, or you can break your lease and pay any fee that's called for in your rental agreement if your job changes or you want to relocate.
But renting generally means that you have to accept the space as is. You don't have much flexibility to make cosmetic changes to the premises. You have creative freedom over your living space as a homeowner. You can paint, redesign, or remodel the interior however you like without anyone's approval or consent.
Homeownership doesn't provide much flexibility when it comes to relocating, either. You'd have to sell or rent your home, or even leave it vacant. But homeownership does protect you from the risk and consequences of eviction. And you have full control over when you leave the home, if ever, McCarty notes, assuming you don't default on your mortgage.
How To Decide If You Should Rent or Buy
Understanding how both renting and buying will impact you financially is a major part of making the decision. Comparing your local market rent to your estimated mortgage payment can give you an idea of which option is better for you.
Calculating your price-to-rent ratio can help you determine whether it makes more financial sense to rent or to buy. You can calculate your price-to-rent ratio using the formula below from the National Association of Realtors:
median home price / median annual rent = price-to-rent ratio
Buying is the better decision when the price-to-rent ratio is 15 or less. A ratio of 21 or more means that renting is the better choice because house prices may be overpriced.
Note
A buy vs. rent calculator can help you crunch the numbers.
You can still build wealth by investing if you're not ready to buy a home. McCarty recommends first maxing out the employer match on your 401(k) if you have one, then maxing out your Roth IRA. Finally, consider contributing to an S&P 500 fund in a brokerage account.
Purchasing a home comes with a lot of upfront expenses. It will take several years for you to break even on your costs. Staying in your home longer gives you the best chance to gain equity as you pay down your balance and the value of your home increases.
Note
You may lose money after covering the transaction costs if you have to sell your home within the first few years of ownership.
Renting offers more flexibility if you travel a lot or think you might want to relocate soon. "The world is your oyster when you rent," said McCarty. "Live near your job so that your commute is easy. Find a nice downtown area in the suburbs that sits near the train and your favorite bagel shop."
When To Reconsider Renting vs. Buying
It's smart to reevaluate your living situation as your life and the real estate market change so you can be sure that your choice is still the most beneficial option. A growing family and the need for more space could be motivating factors for buying a home. Increasing rent prices or falling home prices may make buying a better choice.
Having an idea of your ideal homebuying scenario can make it easier to recognize the right time to purchase your dream home. Once you're ready to buy, don't delay, McCarty advises.
Frequently Asked Questions (FAQs)
What percentage of people are buying houses vs. renting?
About 36% of households in the U.S. were rentals in 2019, according to the most recent comprehensive census data.
How do rising interest rates impact someone's decision to buy vs. rent?
Rising interest rates lead to fewer people purchasing homes because mortgages are more expensive. They also become more difficult to qualify for.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Internal Revenue Service. "Publication 936 Home Mortgage Deduction."
(Video) WHY Renting May Be A BETTER OPTION Vs Buying A Home! | Minority MindsetNational Association of Realtors. "Price-to-Rent Ratios by State From 2014-2019."
U.S. Census Bureau. "Selected Housing Characteristics."
FAQs
Is it more worth it to rent or buy? ›
Renting provides much more flexibility. However, if you have returned to the office, either full-time or partially, and assume you'll remain in your current job for a few years, then buying might be wiser. A common rule of thumb is if you plan to stay in the home for five to seven years, then buying is a good option.
What is the main reason to avoid renting to own? ›A major disadvantage of renting to own is that renters lose their down payment and other non-refundable charges if they decide not to purchase the home. Some sellers may even take advantage of renters by making it difficult or unappealing to purchase the home — with the goal of keeping the down payment.
What are two advantages of renting? ›- Payments tend to be lower than a comparable house payment.
- Rent may cover utility costs for an additional savings.
- Relocating is easier.
- Maintenance and repairs are not your responsibility.
- Credit requirements are less strict.
- Your landlord can increase the rent at any time.
- You cannot build equity if you're renting a property. ...
- There are no tax benefits to renting a property.
- You cannot make any changes to your house or your apartment without your landlord's approval.
- Many houses available for rent have a “No Pets” policy.
Disadvantages of renting a home
As a renter, you're essentially paying off someone else's mortgage; your money is not increasing your wealth or investment opportunities. There's also a lack of security in renting. While leases are fixed for a period of time, it's rare you'll ever sign one for longer than 12 months.
Rent-to-own may be a good option for those with low credit scores, because it gives you time to work toward improving your score before you need to apply for a mortgage. If you don't qualify for a mortgage right now, you can use a rent-to-own agreement to start working on buying a house sooner rather than later.
Why renting is smarter than buying? ›Unlike homeowners, renters have no maintenance costs or repair bills and they don't have to pay property taxes. Amenities that are generally free for renters aren't for homeowners, who have to pay for installation and maintenance.
Why you should own a home? ›The pride of ownership, home value appreciation, mortgage interest deductions, and potential property tax deductions are a few of the best reasons. Other benefits include the capital gains exclusion, preferential tax treatment, building equity through mortgage reduction, and equity loans.
Why do celebrities live in rented houses? ›Being in the film industry forces celebrities to relocate for long periods. Therefore, they live on rent.
Do you ever regret buying a house? ›Nearly three in four Americans have at least one regret about their new home or the homebuying process, according to a new survey from Anytime Estimate, a homebuying website, based on homebuyer experiences throughout 2021 and 2022.
Is renting throwing money away? ›
Renting a property is often referred to as throwing away money. That's because, unlike with a mortgage loan, renting doesn't help you build equity. Renting isn't necessarily the wrong move for everyone though.
Is it smart to own property? ›In the long run, owning a home is a good investment. When you rent, your money goes to your landlord, whereas when you put your money toward a home, you can see a return on your investment over time.
Is renting a house ever a good idea? ›For those who aren't quite ready to purchase their own home, renting is a very viable alternative to buying. Renters get to save on upkeep and recurring expenses, and costs such as taxes, insurance, and maintenance are less of an issue as a renter.
What is the biggest risk of owning a rental property? ›Getting a tenant who cannot pay reliably is one of the biggest risks of owning rental property. Tenants who are chronic late payers can be a constant source of stress. Tracking down rent payments takes time and effort, and may cause your mortgage payments to be late, putting you in financial hot water.
Is owning a house important in life? ›A Beneficial Investment
The potential benefit of providing your family with a quality home to grow into goes beyond investment portfolios and financial security. You will be transmitting this sense of exclusivity, accessibility, and safety to future generations as the years go by and your family expands.
Are rental properties a good investment right now? If you have your financial house in order, especially as interest rates climb, rental properties can be a good long-term investment, Meyer says. A rental property should generate income monthly, even if it's just a few dollars at first.
Which is better own house or rented house? ›Renting relieves one of the burdens of EMI fees, property taxes, and other legal problems that come with owning a home. 2. Renting gives the impression of less responsibility. In metro cities, a house worth Rs 50 lakh can be rented for just Rs 10,000-15,000 per month.
What are 5 advantages of owning? ›- 1) Financial stability. In terms of both lifestyle and monetary stability, buying a home provides a new sense of reliability to first-time homeowners. ...
- 2) Financial strength. ...
- 3) Tax benefits. ...
- 4) Permanent residence. ...
- 5) Sense of community.
Yes, you can get rich as a landlord. You can go broke, too. And in between those two extremes, you can find yourself dealing with a bunch of problems like leaking roofs, non-paying tenants, and economic downturns. The risks of building wealth with real estate are substantial.
Is it really cheaper to own than rent? ›At the national level, the gap between home buying costs and rent widened in 2022. Overall, first-time home buyers paid an average of $561 more per month than the median renter ($2,437 versus $1,876) in June. That monthly discrepancy compared to $171 ($1,815 versus $1,644, respectively) in 2021.
Is it cheaper to own or rent? ›
In most areas of the U.S., buying a home is actually cheaper. According to a National Association of REALTORS® report, after 6 years, a homeowner's mortgage payment is lower than that of a renter. This is assuming the rent has a 5% increase each year and the homeowner is paying a fixed monthly payment.
Is it actually cheaper to buy than rent? ›At the national level, the gap between home buying costs and rent widened in 2022. Overall, first-time home buyers paid an average of $561 more per month than the median renter ($2,437 versus $1,876) in June. That monthly discrepancy compared to $171 ($1,815 versus $1,644, respectively) in 2021.
What is the 5% rule when comparing renting vs buying? ›Multiply the value of the home by 5%, then divide that number by 12 to get your breakeven point. If the monthly rent on a comparable home is below the breakeven point, it makes financial sense to rent. If the monthly rent is higher than the breakeven point, it makes financial sense to buy.
Is it cheaper to buy instead of rent? ›Here in California, buying is significantly more costly than renting. For example, nationally, the year-over-year cost to buy increased 37%, whereas the cost to rent only increased 6%.
Is it smarter to rent or buy a home? ›Buying a house gives you ownership, privacy and home equity, but it's expensive when it comes to repairs, taxes, interest and insurance. Renting an apartment is lower maintenance and more flexible, but you may have to deal with rent increases, loud neighbors or a grumpy landlord.
Does it make sense to buy a house? ›The short answer is yes. If you're financially ready, buying a house is still worth it — even in the current market. Experts largely agree that buying and owning a home remains a smarter financial move than renting for many. If you're on the fence about a home purchase in 2022, here's what you should consider.
What month do houses sell best? ›Sellers can net thousands of dollars more if they sell during the peak months of May, June and July versus the two slowest months of the year, October and December, according to a 2022 report by ATTOM Data Solutions.
What is the 1% rule for rental property? ›The 1% rule of real estate investing measures the price of the investment property against the gross income it will generate. For a potential investment to pass the 1% rule, its monthly rent must be equal to or no less than 1% of the purchase price.
What are the disadvantages of renting rather than buying? ›- By renting, you're paying off your landlord's mortgage rather than your own.
- It's harder to put down roots and settle in an area when you're renting.
- A rental property isn't yours – so you can't decorate or make changes.
- Your rent could increase when your tenancy is due to renew.
...
Homeowners vs. Renters Key Stats
- Over 70% of U.S. homeowners are 45 or older, while more than a third of renters are younger than 35.
- The median age of U.S. homeowners is 56, and the median age of renters is 39.
- 75% of U.S. homeowners are White.
Why you should buy a house? ›
The pride of ownership, home value appreciation, mortgage interest deductions, and potential property tax deductions are a few of the best reasons. Other benefits include the capital gains exclusion, preferential tax treatment, building equity through mortgage reduction, and equity loans.