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August 21, 2020

Should you rent or buy in the current housing market?

The decision of where to live is almost always based on personal circumstances or emotions. Where one lives is often attached to where they work, where their community or family is, what stage of life they’re in, and what they consider “home.”

First things first: renting or buying isn’t fundamentally good or bad

For many generations, owning a home was the marker for financial success and signified family status. Then, when the housing crisis happened, owning a home could mean financial ruin. Since that shift occurred, the younger generation has eschewed becoming a homeowner in favor of renting for longer periods of time. In this super charged pendulum of a topic, let’s get one thing on the record: buying or renting isn’t fundamentally good or bad, but one or the other can be right or wrong depending on your circumstances.

In other words, you’re not better off or worse off than your peers because of either option, despite what recent headlines or traditional wisdom will have you believe.

The argument for buying

For some, home ownership holds serious appeal (not having to deal with leases and landlords is definitely part of it). Here are some common benefits associated with buying a home:

You build equity: When you pay off your home, it’s yours. You eliminate the expense of housing once you’ve paid it off. Many people consider paying off their home a part of their retirement planning: as income most likely decreases when they retire, the benefit of having a paid off home is that they can keep their expenses very low by not having to worry about a mortgage or rent.

It can be a good investment: If the home appreciates more than you’ve paid in mortgage, interest, taxes, and maintenance over time, you’ve earned a return, or you break even.

You get tax benefits: Tax credits help offset some of the cost of home ownership.

Stability: You’re protected from rent hikes and lease renewals.

The argument for renting

There are equally solid arguments in favor of renting:

Cheaper: Pockets of large cities notwithstanding, rent payments tend to be lower than mortgage payments in general. Your rent may also include other costs such as utilities, water, and internet.

Flexibility: In a time when you can rent virtually everything, from clothing to a villa in a different country, it’s easy to see why renting your home might be an attractive option. Most places give renters the option to lease for one year (with the possibility of renewals), but it’s also possible to rent month-to-month for additional flexibility. In today’s mobile job market, it may be helpful to have flexible living options.

Little or no maintenance: If you’re not very handy with tools, things like the dishwasher breaking down or the bathroom flooding can feel like a nightmare. If you own your home, you have to learn to take care of the issue or pay money to someone who can. If you’re renting, your landlord is likely responsible for maintenance and issues like these (just make sure to check your agreement beforehand!)

Financial freedom: As a renter, you’ll likely have more free cash to sink into investments and retirement planning.

Graph of reasons 18-34 year olds are opting out of home ownership
Source

What to consider when making your decision

When considering whether to rent or buy, you might consider the following factors in order to make the right decision for yourself:

How long you’ll live in the home: This varies depending on the market, but in general, the longer you’re in the home, the better, because your costs are spread out over time. Ideally, prospective buyers should aim to live in the property for 5 years or more.

The cost of housing in your area: In large cities like San Francisco and Boston, people rent because buying a home is just too expensive, but it all depends on the market in your area. If renting is extremely costly in your area, it might be more affordable to buy a home.

Additional expenses like taxes and insurance: You might be able to afford the mortgage, but have you considered irregular expenses like taxes and insurance? As a renter you might not be used to paying extra for utilities or HOA, but as a homeowner you’re responsible for any and all costs associated with your home.

Job stability and future earnings: It’s obviously hard to know what will happen in the future, especially in today’s perilous job market, but a renter may need to consider how stable their job is (and how likely they are to get promotions and raises over the coming years), and how stable their career path is (might they move cities or states to work for a different company or attend graduate school?)

The opportunity cost of a down payment: You might have heard the argument that if, instead of making a down payment on a property, a homeowner had invested that money in the stock market instead they’d be a lot richer. But, is that a false choice? How likely is it that the money would probably be in a low yield savings account instead or would just be spent on daily expenses?

How to invest in real estate if you’re renting

If you’re renting and don’t foresee that changing in the near future, you might be experiencing FOMO (fear of missing out) when you hear about real estate returns and diversification benefits. Fortunately, there’s a cheaper (and way less time-consuming) alternative to shelling out the big bucks needed for a rental property. Look into REITS, which are companies that own real estate investments and are publicly traded on the stock market. Buying REITs essentially ties investors into the price appreciation and steady cash flows of real estate.

The takeaway

The truth is that there’s a huge grey area when it comes to the rent versus buying debate and individual factors probably matter more than anything else when it comes to making a decision. Consider the pros and cons of both buying and renting but remember that the decision almost always comes down to what’s important to you and your family.

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