If you’re looking for a new place to live, you may have noticed one glaring fact – it can be increasingly expensive to either rent or own a home in the U.S, where are prices are on the rise.
When choosing between renting and owning a home, you have several key factors to consider, as we’ll review in more detail below. Among them:
- Monthly cost
- Your financial situation and budget
- Investment potential
- Long-term moving plans
- Home responsibilities
On strictly a monthly cost basis, it’s better to buy because owning a property is considered better for your financial health in the long-term than renting. In many U.S. markets, the average mortgage payments tend to be significantly lower than rent on the same property type and size, whether it’s a condo, townhome or single-family home.
However, that doesn’t mean buying is better than renting for you. Just because owning a home may cost less and is championed as a smarter financial move, it also comes with some downsides. At the same time, renting has several perks.
Consider all the pros and cons, as well as your own financial situation, before you decide if it is better to rent or buy a home.
1. Monthly Cost of Renting Versus Owning
In the Annapolis housing market, you can save money each month by owning a home – whether it’s a condo, townhome or single-family home.
When you’re comparing “apples to apples” properties, the cost of monthly rent is usually higher than the mortgage payments, including property insurance and tax costs.
For example, in Annapolis, Md., a 2-bedroom, 1,111-square-foot condo was listed for $279,000 as of October 2020. With a 20% down payment, Zillow estimates monthly costs would be $1,230.
Compare that to a 750-square-foot, 2-bedroom apartment right down the road in Regatta Bay Apartments. With rents starting at $1,899, those smaller rental units cost significantly more in monthly payments than the monthly cost of buying the condo.
2. Your Financial Situation and Budget
Owning a home is a good financial milestone, but not everyone is ready for it yet. Just because monthly payments are lower doesn’t mean it’s the better financial move for you.
First, buying a home usually requires you have a down payment, typically 20%. Even for mortgages that allow for no or very low deposits, you will face closing costs in the thousands of dollars, not to mention extra costs like inspections, when you buy a home.
Saving up for a deposit can take time. If you have debt, especially credit card debt, then you should consider paying that down before focusing on a down payment. Otherwise, interest payments can snowball and work against to you put you deeper in debt.
If you’re not in the right financial position, it might be better for you to rent for the time being.
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3. Investment Potential
Most people have heard that owning a home offers great long-term investment potential. You may be surprised to learn that renting has its own advantages for long-term investing.
When it comes to investing …
- Pros of owning a home: Build a long-term asset, monthly housing payments go toward real estate investment, likely to increase in value over time
- Pros of renting: Cash can go toward other investment opportunities like stocks, which may gain more value over time
After you’ve paid off your mortgage, you will own an asset that can bring stability both to your portfolio and your life.
Historically, U.S. housing prices have proven they increase steadily, with rare exceptions like the housing market crash of 2008.
On average, home prices rise about 3.5% per year as a rule of thumb. However, that’s an average over a timeframe of decades. Each year sees different trends in housing prices.
So, putting your monthly housing allowance toward your own home instead of rent (money toward a landlord’s mortgage that you never see again), sounds like a healthy financial plan. Generally, it is.
However, renters do have their own long-term investing advantage – the potential to make more money with investments like stocks, instead of real estate. The stock market is volatile, with cycles of ups and downs, but it has historically made gains that are greater than the gains in housing price increases. Most analysts use 7% as a rule-of-thumb annual increase for stocks over the long-term, although estimates vary.
If you don’t put your money toward a down payment, you could take advantage of other investment opportunities and perhaps see higher returns.
4. Long-Term Moving Plans
If you don’t plan to move frequently, homeownership can be ideal. Otherwise, you have some costs and other factors to weigh.
Owning a home, does carry significant expenses for people who move frequently. The closing costs to both buy and sell a home can be significant, in the thousands of dollars.
With owning a home, you’ll have to plan well in advance with each move. It often takes months to buy and sell a home.
If you own a home, but want to purchase a different one, you would likely have to rely on selling your home to finance the new home. And there is no guarantee your home will sell in a certain timeframe – or even at all.
The cost of renting, on the other hand, remains about the same when you move frequently. You may have to put security deposits down each time, but you can also get those back at the end of your lease, assuming there are no damages to the property.
Renting has more flexibility for moving quickly. Typical leases are about a year and then can go month to month. Even if you need to break a lease, the fee is usually a month’s worth of rent. But the process to move with renting is much faster.
5. Home Responsibilities
Renters often say one of the biggest advantages to renting is that they are not responsible for regular maintenance.
When tenants have a problem with a major appliance, they simply call the landlord, who is responsible for getting it fixed. Landlords do not pass repair and maintenance costs on to the tenants.
In contrast, homeowners must factor in the cost of maintaining their home. So, if a water heater breaks, they are responsible for replacing it. Over the years, homeowners must budget for expense like new flooring, yard maintenance, painting, appliance upgrades, plumbing or electric issues and more.
For many homeowners, the effort and cost of maintaining a home well worth the other advantages of being a homeowner. Others prefer the low-maintenance lifestyle of renting.
Rent or Buy a Single-Family Home?
Rent for single-family homes can be close to the monthly cost of owning, although the market is usually smaller.
Renters won’t find nearly the number of choices in single-family homes as buyers, and the homes offered for rent tend to be much smaller than the average size home here. Still, renters do have options.
Rent or Buy a Townhome?
The U.S. housing market has an abundance of townhomes, and the monthly costs with buying a townhome is much cheaper. Many Realtors say they are typically easier to sell than condos because they can usually accommodate either single occupants or small families.
One cost to consider is homeowners association fees (HOA). Some townhomes have HOA fees that range in the hundreds of dollars. Others have no HOA fees.
Rent or Buy a Condo?
In many U.S. market, you can get a lot more bang for your buck by buying a condo instead of renting. Monthly expenses with buying are significantly lower when compared to renting a similar-sized apartment unit. By renting a condo instead of buying one, you often pay a lot more and get a lot less.
The Bottom Line
On a purely monthly cost basis, mortgage payments are generally cheaper than rent payments in many U.S. markets. But the answer to whether you should rent or buy a home is more complex than that.
Review your own market’s trends. Know your financial goals, your debt situation and budget as well as all the pros and cons of renting and owning real estate before you decide.
Whether you’re buying or renting, take time to review several properties so you can make sure you find the right fit for you.