Last Updated: August 16, 2010
As the housing market continues its long crawl back, it makes sense to ask whether it really is a better idea to rent than to own a home. But it’s a decision that goes beyond the current state of the market.
One of the best first stops is a visit to a financial planner, someone who is trained to look at the big picture of an individual’s finances. The decision to rent vs. buy is an important financial decision due to the sheer amount of money most of us spend on housing — but some people think of it as the only major financial decision they should make. Whether to rent or buy is only one part of a complete financial picture — in some regions, housing prices might make buying and all its requisite tax benefits a better deal. In others, it might be better to rent and put the extra expenses related to property ownership in other investments or toward other purposes.
The bottom line — the decision to buy or rent doesn’t exist in a vacuum. It should always be tied to other factors — lifestyle, community, and where your personal investments stand. And most lenders are now sticking to that old caveat that you shouldn’t spend more than 28 percent of your monthly income on a mortgage payment.
That said, there are some interesting resources that have surfaced to help you start the decision-making process. A website called Trulia.com and research from the Center for Economic and Policy Research in Washington, D.C. have reported their opinion that homes are fairly valued in a city when they cost about 15 times a year’s rent. In simpler terms, if you’re spending $18,000 to rent a place and the house costs more than $270,000, then think twice about buying. The New York Times also has an interesting rent vs. buy calculator that’s worth checking — it goes beyond what prices are doing in an area and adds other factors like how long you plan to stay in your home.
Here are other factors to consider:
- Understanding neighborhoods: If you’re seeing pricing capitulation in a neighborhood you really like, it’s going to be a tighter call between renting and buying. But if a neighborhood takes a turn for the worse or you see an opportunity to move somewhere else, a renter can make a move much quicker than an owner.
- Understanding the responsibilities of ownership: The condominium movement has created a class of homeowners who never have to trim a bush or mow a lawn, but they obviously have to pay for those services. Renters don’t have to care about painting a home or paying an assessment — they don’t have ownership, but they have freedom. And with a look at motivation and financial considerations, it’s possible to make a more informed decision.
- Understanding what it really costs to buy a home: Assuming you can’t pay cash, it costs money to get a mortgage — closing costs can run into the thousands at the start of the game. A financial planner can help you detail the typical financial outlay at the start of home ownership and advise you on how not to get into spending trouble once you get the keys.
- Understanding risk: Homeowners today understand risk as never before. Most have seen the value of their property stagnate or fall in the past three years. As with any investment, the question with homeownership is the same — can you handle the risk of an extraordinary drop in value? If not and other factors work, it might be better to rent.
- Understanding your lifestyle: Lifestyle means different things to different people, but renting can be a relatively low-headache lifestyle with the right property. It also allows for relative freedom to move away from the financial responsibilities that come with ownership. People often say that if you expect to live in a community for a short time, renting might be the best choice; age is also a factor. Only you know what will be the best indicators based on your life situation.
- Understanding your savings and investment picture: The high cost of home ownership may limit travel, lifestyle or other opportunities. Renting may enable a more comfortable life from a financial perspective for some people. But this is why it’s so important to examine this question with a financial and tax expert — because everyone’s experience is different. Big financial decisions need to be made with the widest selection of variables.