However, like every other major life choice, the decision to rent vs. buy property deserves careful consideration. So we asked personal finance experts to help us navigate the often intimidating process. Keep reading for everything you need to consider and all the tough but necessary questions to ask when deciding between being a homeowner or a renter.
Focus on What You Want
You may have heard the common warnings that renting is wasting money, or that owning a home is the only way to build wealth. However, these arguments are conditional, and it’s important to cut through the noise to determine what you value most in your life. If you’re considering whether to rent or buy your next home, Marsha Barnes, a certified financial social worker, recommends getting a notepad and writing down some big questions. Do I want to move states in the near future? Do I plan on extending my family? Do I want to work remotely or in person? “Some of these may not be answers that you have readily available, but it’s definitely important for us to consider these little soundbites or voices that we hear [about renting versus buying] in the context of what this means for our lifestyle as individuals,” Barnes says. In other words, ignore what others say you “should” be doing and focus on what you want. “There is no one-size-fits-all approach to where you live and how you pay for it,” says Andy Taylor, vice president and general manager of Home & New Ventures at Credit Karma.
Consider Your Life Situation
Many financial experts challenge the blanket statement that renting is a waste of money. “If [renting] provides you with a roof over your head and a place to live, all of us have to have that,” says Barnes. “So it’s definitely not a waste of money.” Taylor agrees, saying, “It all comes down to what you can afford and where you’re at in your life.” For someone who’s still saving for a down payment, or who’d rather let a landlord manage the upkeep of the property, renting is a great option. “Or maybe you’re exploring a new city or trying out how a new neighborhood feels,” Taylor says. Sometimes, the flexibility that renting affords you is more than enough to make up for what you’re paying in monthly costs, he explains.
Crunch Some Numbers
If your goal is to take the most cost-effective route, it’s important to compare all the numbers involved. In some cases, purchasing a home can save you money on your monthly expenses. “You may find that what you’ll pay on a monthly mortgage is less than what you’d pay in rent for a comparably priced space, even as you’re building equity,” Taylor says. However, that widely circulated argument that renting is throwing away money can also be applied to certain situations of homeownership. The return in the stock market on investment might be averaging at about 10% year over year, says financial expert Shang, host of the Money Confidential podcast. And the average annual growth in home prices might be 4% a year. “If I’m talking to an average person who’s considering putting money into the stock market versus trying to build equity slowly into a home, I just look at those two numbers, and I say that doesn’t match up,” Shang says. “You’re actually throwing away more money by buying that house.”
Determine Your Readiness to Own a Home
The vision of having your very own home can be a beautiful thing—but that vision doesn’t often include all the upkeep and expenses that come with it. “Owning a home comes with more than just the sticker price—things like property taxes, maintenance, and utilities add up,” Taylor says. If you’re not ready to be (or interested in being) solely responsible for all the upkeep of your home, then continuing to rent may be a better option for you. However, Taylor says, “there is something truly special about your own patch of dirt, being able to paint the walls or install a dog door, that has its own appeal.” If you’re ready to take on all the less-glamorous aspects that come with this dream, it might be time to think seriously about buying a home.
Assess Your Financial Standing
Once you’ve decided you’re ready to own a home, there are several steps to take. “Getting your finances in order should always be the first step in your home-buying journey, and it’s never too early to start,” Taylor says. Taylor recommends that you assess your financial standing: Are you secure in your job? Do you feel confident you’re in a position to continue earning a steady income? How’s your credit? Are you underwater on high-interest debt? While the answers to these questions won’t determine a definite answer to whether you’re ready to buy a home, they can provide a map for what you need to do to become more financially ready. Barnes also suggests calling in help from an expert like a mortgage lender, because they can provide you with a checklist and help you create a plan.
Take Your Location Into Account
Sometimes, you might be financially ready to own a home—just not in the place you’re currently living. For example, you may be more than able to afford a home in a state like Michigan, but the same (or less) amount of real estate could cost you twice as much in a city like New York or Los Angeles. Conversely, if you’re living in an area where the homes are out of your price range, you’ll have to consider whether the dream of owning a home is worth moving to a more affordable area, or if it’s more important to stay where you are and continue renting.
Explore Renting and Buying
Sometimes, you don’t have to pick just one option. If you’re financially ready to buy a home somewhere but aren’t ready to give up your renter lifestyle in a more expensive city, consider buying a property elsewhere and continuing to rent where you are. You can also invest in a home to rent it out, creating another income stream for yourself and building equity in a property, while also renting your own home. To Shang, buying a property to rent it out can offer a much better return on investment than simply buying a home to live in. “If you pull back, you look at the investing portfolios of people in much higher net worth stratospheres, the bulk of their net worth does not sit in homes that they live in, but it can be in real estate that they rent out,” she says on the podcast. “And that’s a key difference for me. I’ve come to learn that a home is an investment if I’m a landlord, but if it’s a home that I live in, there are so many costs on top.”
Determine Which Choice Might Set You Up for Future Success
One of the most common arguments for homeownership is the opportunity to build equity with your home. However, owning a home doesn’t always offer the best return on your money, so it’s important to be smart about your choices—not just follow the most popular trajectory. “There’s so much emphasis on [the ideas that] you’re not an adult until you’re independent and in your own home,” Shang says. “But I would also say adulting means being responsible with the money and assets that you have and being able to take care of your future self through your retirement plans, your retirement funds, [and more].” Shang continues, “If owning a home actually prevents you from taking care of your future self, then that’s not adulting, that’s digging yourself a hole that’s going to be very difficult to climb out of.”
