Choosing a place to live is an exciting experience. Your imagination might run wild as you go through postings and compare new neighborhoods and cities, or even states and countries. Perhaps you want a charming flat in the heart of a bustling street with shops downstairs, or a secluded plot of property in the mountains.

Of course, the financials appear at some time throughout the dreaming. Naturally, financial factors enter the picture, reminding us that, while we strive for the perfect home, we must strike a balance between our ambitions, requirements, and budget. Finding the ideal location where comfort meets cost is all part of the exciting journey toward your next chapter in life!

Furthermore, owning real estate has long-term financial repercussions that go beyond determining which housing option best matches your monthly budget. Home equity is a major driver of net worth in the United States, and property tax considerations are critical because they persist even after your mortgage is paid off.

Previous conventional knowledge held that buying is usually the best option if you intend to stay somewhere for longer than a few years. However, the financial landscape has shifted in recent years, with changes to the housing stock and home financing stirring things up. It’s worth taking another look at whether renting or owning makes more sense for you.

In this blog, we’ll go over initial prices, the long-term implications of accumulating equity, and other considerations to help you choose the housing option that best meets your needs and preferences!

Should I Rent or Buy?

When selecting whether to rent or buy a home, you must examine a variety of aspects, including your own financial situation, lifestyle preferences, and the housing market dynamics in your area.

Your Financial Situation

Your financial condition and stability are important considerations when deciding whether to rent or buy a home, as it is one of the most expensive investments a person can make in their lifetime. Consider your current income, its stability, and any potential future income increase depending on your industry, education, and degree of competence.

Realistically, a constant and predictable revenue stream indicates greater fitness for homeownership, because consistent income increases the possibility that you will be able to fulfill your mortgage and property taxes. If your income is inconsistent, it can be difficult to qualify or feel comfortable taking out a home loan.

Another aspect of your financial status is your savings to cover the initial costs of acquiring a home. We’ll go into the specifics later, but you’ll need to save enough for a down payment, closing expenses, and, of course, an emergency fund. If you have enough savings, owning may be more realistic for you – or you may be able to enjoy some of the benefits of renting, which we’ll discuss soon!

The Local Real Estate Market

Supply and demand in a given location have a significant impact on the home-buying process. Buying a home is not like other types of purchases, when you can simply stroll into a store, peruse the stocked shelves, select what you want, and check out in a few minutes. Some real estate markets move quickly with limited inventory, while others have plenty of possibilities at your price point. If you have your heart set on a specific place, look into the rental and for-sale housing inventory. That can help you decide if renting or buying is a better option at this moment.

If you’re willing to living in a variety of regions, investigate them and filter by price point (either monthly rent or total purchase price) to get a sense of what types of housing are available.

Your Lifestyle

Of course, money isn’t everything. Money is a tool to support your lifestyle, so consider your lifestyle needs and wants in your home hunt. You may value being close to family or friends, job opportunities, schools, or recreation options. You may want the hustle and bustle of living in the heart of the city or maybe you prefer living out in the country where you can be one with nature. You may delight in tinkering around your home, or maybe happier to have someone else take care of maintenance for you. 

Read Also: Top 10 Tips for Finding the Perfect Rental Property

Homeownership offers stability and the freedom to customize your living space; renovate your kitchen into the 1950s retro style or build a rock-climbing wall in your basement – it’s up to you! It’s also ideal if you seek long-term roots in a community. In contrast, renting provides flexibility, making it a great option if you’re still establishing yourself or if you may have location or lifestyle changes in your future.

Costs of Renting and Buying a Home

As previously discussed, your financial status has a significant impact on whether you should rent or buy. Let’s look at the prices of both so you can determine which choice makes the most sense for you.

Initial Costs of Renting

Renting has cheaper beginning expenditures than buying. A new rental’s initial expenditures typically include a security deposit, the first month’s rent, and, in some regions, broker fees. If you rent from a larger property management company, you may be able to get a lower security deposit (in the hundreds of dollars) than if you rented from a small-town landlord because these companies operate on a large scale, allowing them to spread expenses across multiple properties. If you’re moving to a new region, renting in a large complex is generally easier and less expensive than searching for a single-family house to rent.

Ongoing Costs of Renting 

After moving in and getting settled, you’ll adjust to the ongoing costs. These include the monthly rent, amenities or pet fees (if applicable), and renter’s insurance. Renter’s insurance provides protection for personal belongings and liability coverage, with costs as low as $10 per month. 

While these costs typically remain stable throughout the lease period, it’s important to note that the monthly rent may increase at the end of each lease term. Zillow reports that from 2016 to early 2024, nationally, year-over-year rents increased from a low of 1.5% in September 2020 to a peak of 16.1% in February 2022. Depending on any rent stabilization laws in the area or areas you’re considering living, you could face a steep increase in rent upon lease renewal time, leaving you to choose between absorbing the rent increase or moving to a more affordable rental.  

However, when you rent, you won’t suddenly have to fork over the cash to replace a big- ticket item like an appliance, nor have to save in advance for big projects like replacing a roof. You can budget predictably at least until the end of your lease. 

One final note on the cost of renting: when you rent your home from someone else, they can make decisions about their property that impact you. If you rent from a private landlord, they may choose to sell the property which can force you to move or re-negotiate with the new owners. The property owner may put the property under new management which may come with new policies or increased fees even midway through your lease. Plus, some property owners may not maintain their properties as well as they should – we’ve all heard landlord horror stories – which can mean you’re picking up the slack and/or bill to make your home more comfortable. 

Ultimately, this may mean that you find yourself moving (and dealing with the time and costs associated) sooner than you thought. When you rent, it’s important to know your rights as a tenant but also be prepared for things to change.  

Initial Costs of Buying 

Compared to renting, buying often has a substantially higher upfront cost.

To begin, it is widely known that for many prospective house purchasers, the down payment is one of the most significant expenses. How much do home buyers put down? According to Realtor.com, the typical down payment set a new high in July 2023, at $30,000, with an average percentage of 14.7%. However, ATTOM Data Solutions reports that as of Q3 2023, the top ten metros in the United States had median down payments ranging from 21.5% to 26.2%. Ultimately, it varies greatly by area. Speaking with a real estate agent will help you get a sense of what’s going on in your region. This might help you set expectations before you start browsing.

There are home loans with much lower down payments required – from 0% to 3.5% – such as Veterans Affairs loans, Federal Housing Authority Loans, and Physician Loans. Look into those to see if you qualify. That can help make homeownership a reality sooner by lowering the savings hurdle required. 

Additionally, closing costs, which include fees for services such as title insurance, appraisal, real estate commission and attorney fees, are another important line item to account for. Rocket Mortgage reports closing costs are typically 3-6% of the home’s purchase price. 

One thing first-time home buyers may not know: property taxes are also often due up-front at closing, adding on another chunk of cash to fork over. 

Other fees to be aware of include inspection fees (for assessing the home’s condition and determining any necessary repairs) and loan origination fees (paid by lenders for processing the mortgage application).

Aside from those required charges, after you purchase a home, you may incur additional expenses for repairs or optional modifications before moving in. These could range from small repairs to significant overhauls, depending on the condition of the house and your tastes. If you intend to buy a home, unless you just want move-in ready properties or new construction, you will most likely need to do some maintenance. Even if it’s only painting and flooring before you put your furniture in, it all adds up!

Ongoing Costs of Home Ownership

Owning a home has several line items that make up the ongoing cost. These are the key expenses to consider: 

• Mortgage principal 
• Mortgage loan interest 
• Private mortgage insurance 
• State and local property taxes 
• Homeowner’s insurance 
• Home maintenance

The overall cost of these line items will vary depending on the home you purchase, your financing terms, and your location, making it difficult to provide an accurate estimate of what to expect. As a starting point, Forbes stated that by October 2023, homeowners may expect an annual cost of $14,155 (or $1,180 per month) in “hidden costs” such as utilities, maintenance, and property taxes. According to CNBC, experts advocate setting aside 1% of your house’s value each year for home maintenance, improvement, and repairs.

However, homeowners can recover part of these expenses. Each mortgage principal payment increases equity. Home upgrades can help enhance the value of your property, which you can benefit from if you sell or rent it out in the future, or if you pass the home down to family members. Certain home modifications are eligible for federal income tax credits, such as the Energy Efficient Home Improvement Credit. You can also deduct mortgage interest from your taxes, up to a specific limit. All of these elements can reduce your overall ownership cost over time.

Crunching the Numbers

To determine whether buying or renting makes more sense financially, you’ll need to crunch the numbers and account for both short-term and long-term considerations.  

Short-term considerations should include what makes the most sense for you in the near future. Consider your current income and budget, and the best use for any cash you’ve saved. That may look like a down payment, but it could also include paying down debt to reduce your overall cost of debt and improve your debt-to-income ratio before applying for a mortgage loan.

Or, it might look like putting it in a high yield savings account and letting the annual percentage yield grow your savings into a more substantial down payment. For some, that cash could be best put toward catching up on retirement savings. Speak with a financial professional for recommendations to identify the best money moves for you.

You’ll also want to weigh long-term implications. If you want to be a homeowner someday, you should make a plan, even if it isn’t right now. You will need to evaluate the implications of equity. Other key aspects are the mortgage rate market and the price increase of the residences you want to buy. With a nationwide real estate shortage and rising property prices as demand outstrips supply, you may find it more cost-effective in the long run to lock in something sooner rather than later. Granted, most of that is dependent on future events that no one can foretell.

Finally

The decision between renting and buying a property is more than just cost; it also takes into account long-term financial strategy and personal situations. If you’re unsure which is best for you, go to a local real estate agent who is familiar with your area. An experienced agent can assist you in evaluating your alternatives and making a better informed decision.