As demand for housing continues to outpace supply, the number of people opting to rent instead of buying a home is on the rise. Currently, rental rates have increased nearly three percent since last year, according to a survey from Apartment List, and this has driven rental prices up. Over the past year, rental prices have risen significantly in many major cities, with some cities seeing monthly costs of more than $2,000.
Although young adults often start out renting an apartment or renting a house, many know from the beginning home ownership is their end goal. But it can be difficult to decide between renting versus buying. This guide will help you determine when renting may be a better option, as well as offering tips to get you started on home ownership if that is your choice.
Pros and Cons of Renting
In early adulthood, you’ll likely find renting is necessary while you establish employment and set aside the costs necessary to purchase a home. But there are instances where renting makes the most sense, even if you have the money and credit standing to buy. Many of the downsides to buying relate to the closing costs that are part of every home purchase.
The amount you’ll pay in closing costs depends on the purchase price, as well as the state in which you live. A $200,000 home with a 20 percent down payment will run between $1,800-$2,500, according to Bankrate. If you’re in a position in life where you simply can’t spare approximately $2,000 before you can even move in, you’ll have no choice but to wait.
Even if you have the money in place, though, buying may not be a good deal if you won’t be in your home for at least a few years. If you’ll only be able to stay a year or two before putting it back on the market, you may find your home values don’t increase enough to recoup the closing costs you put into it.
While you can’t always predict the future with 100 percent certainty, you likely know whether you’re at a place in your life where things will be settled for a while. If you’re still looking for a solid position, locking yourself into a mortgage could hold you back from accepting a high-paying job that requires relocation.
If you’ve established yourself at a company with plans to stay permanently, you may still find your employment situation isn’t as solid as you’d like. As difficult as it can be to continue to pay rent after being unexpectedly unemployed, a mortgage can be even more challenging. Failure to pay for a period of time can result in foreclosure, which will bring long-term ramifications, including serious damage to your credit score. You may even find renting complicated once you have a foreclosure on your record.
In addition to being flexible, one major benefit to renting is that maintenance will likely be provided. Most landlords will arrive to repair any issues you report, in addition to routine upkeep. This is a relief compared to home ownership when each of those issues falls on your shoulders. When renting, your landlord will also have a maintenance person on staff or have a short list of people to contact who can make emergency repairs. As a home owner, you would be forced to look for a professional to help with repairs on your own, relying on reviews and recommendations.
Advantages of renting:
- You can generally move into an apartment or rental home with a smaller deposit, e.g. first and last months’ rent. To purchase a home, you’ll need at least $2,000 to cover closing costs, in addition to a 20-percent down payment.
- Landlords usually only require a six-month or one-year lease. Some will even allow you to pay month to month. This is ideal for someone who doesn't want to commit to staying in one regional area for five years or more.
- Continued employment is rarely guaranteed. If you find yourself suddenly unemployed in an apartment, you have the flexibility to downgrade your living situation or move to another area for employment.
- Maintenance is often provided as part of your lease. If you have HVAC or plumbing problems, you won’t have to try to find someone to make repairs and pay thousands of dollars for them.
- Property tax is included in the cost of rent.
- Landscaping is usually handled by a company hired by the property manager.
Disadvantages of renting:
- Tenants are given a list of rules they must follow or risk being sanctioned and possibly evicted.
- Landlords often reserve the right to evict tenants at any time, as long as they provide notice. This time frame can be as short as thirty days.
- Although your monthly rent payment gives you somewhere to live, you aren’t putting money into a property that will increase in value.
- Rent can often be more expensive than monthly mortgage costs, especially over time. Although landlords can increase rent from one year to the next, a home mortgage remains the same even as the homeowner’s income grows.
- Renting provides no tax benefits.
- Apartment and condo dwellers can be forced to deal with sharing a wall with a noisy neighbor or having no private backyard to enjoy.
Pros and Cons of Owning
Now that you’ve reviewed the pros and cons of renting, it’s time to look at a few pros and cons of owning. In the “pro” column is the fact that every payment will at least partly move you toward an eventual goal of paying your mortgage off in full and owning your home. Even if you sell before reaching that goal, you’ll have reduced the amount you owe the bank at least somewhat.
Home appreciation is perhaps the biggest benefit to buying. In the past year alone, home values have increased 7.4 percent, according to Zillow, and those values are likely to increase another 3.2 percent in the next year. If you’re renting a house for $1,000 a month, at the end of your lease term, you won’t have built equity in a home that will appreciate in value. While a great deal of your monthly mortgage amount will go toward interest, with each year, more of your payment will
One basic factor for many weighing the decision to rent versus buy is the monthly cost. Depending on your city, you may find it difficult to find an apartment or home rentals for less than $1,000 a month. On the other hand, with the right approach, you can knock your monthly payment down as low as $600-$800 a month, depending on the size, condition, and location of the house you choose. Best of all, unlike rent, which can increase from one lease renewal to the next, your mortgage amount will remain steady year after year, even as your salary increases and you make a dent in paying off your other debts.
At tax time, you'll learn an additional benefit of home ownership: deducting the interest you pay on your mortgage. Each year, your mortgage holder will send you a tax document showing how much interest you paid over the course of the year. As you prepare your taxes, this interest will help reduce your tax burden. When renting a house or apartment, you’ll have nothing to apply toward your taxes when April comes around.
Unfortunately, there is a negative to owning a home when it comes to taxes. Homeowners pay property taxes that go toward local infrastructure, including schools and roads. The amount depends on the area of the country where you live but often cost in the low thousands per year. However, when weighing the pros and cons of renting versus buying, it’s important to note that the homeowners and property owners who rent to you pay property taxes, as well. The cost they pay toward these taxes is included in the rent you pay every month.
If you’re weighing the benefits of renting an apartment against buying a house, privacy is an essential deciding factor. In an apartment, condo, or townhouse, you’re sharing a wall with someone else, which means sound insulation could be a problem. With the right home, you can enjoy a spacious backyard that you and your family can enjoy. You may even have substantial space between your house and the one next to you, affording you privacy as you arrive and depart from your home each day. However, you can sometimes get this same type of privacy in a rental home, so consider that, as well, when deciding whether to rent versus buy.
Rental properties often come with a long list of rules that you must follow or risk eviction. This can include whether or not you can have pets, what type of pets you can have, where you can park, whether you can own items like a boat or motorcycle, and what type of get-togethers you can have in your personal space. You may also find with a rental property, your landlord has the right to evict you at any time with minimal notice. In a home, the only restrictions come in the form of homeowners association (HOA) bylaws, assuming you move into a neighborhood with an HOA in place.
Another disadvantage to home ownership is landscaping. As a homeowner, you'll be responsible for the outside upkeep, including mowing your lawn and maintaining any shrubs and bushes you have in place. You can pay someone to handle these things, but that will come at an extra expense. A renter is free from these responsibilities because owners typically manage landscaping for the properties they oversee.
Advantages of owning:
- You will gradually build equity in a home that will likely increase in value, putting you in better economic standing.
- Home mortgage payments remain the same year after year, even as your personal income grows.
- The interest you pay each month is deductible at tax time.
- In a home, you will have more privacy than in an apartment.
Disadvantages of owning:
- You will need to have at least $2,000 to cover closing costs, as well as a 20-percent down payment.
- A home purchase is a commitment. It will often take several years to earn enough equity in a home to recoup closing costs, so moving early often means losing money.
- The commitment of home ownership makes it difficult if you find yourself suddenly unemployed. If you can’t continue to pay your mortgage, your home could go into foreclosure, bringing long-lasting damage to your credit.
- All maintenance is the responsibility of the homeowner. A major repair could cost thousands of dollars.
- Homeowners are responsible for paying property tax to cover local infrastructure costs, like schools and roads.
- Homeowners are responsible for yard upkeep, including shrubbery and tree maintenance and lawn mowing.
Whether you’ve chosen to rent or it’s a temporary measure until you can afford to buy, there are things you can do to avoid problems. The first is to carefully research any property before contacting its owner to discuss renting. Apartment complexes often have numerous reviews, with current and previous tenants all too willing to warn others about any problems they’ve experienced. Pay close attention to issues like regular rent increases and failure to maintain the property or respond to resident complaints.
During your rental search, take the same approach you would take if you were searching for a house. Even though you’re renting, you’ll be living in this space for at least a year, so it’s important you find a place you find comfortable. Ask for a tour and feel free to question the landlord on issues like security, the frequency of upgrades, and the policy on having staff or maintenance workers enter your apartment.
Before you sign your lease, read each line carefully. Make sure the landlord has put in writing the condition of the apartment on the day you’ll be occupying it. If you don’t, you could be held liable for stains or damage you didn’t cause on the day you move out. If they aren’t detailed on the lease, ask whether or not pest control, repairs, and lawn maintenance are provided by the landlord. Outlining these responsibilities from the start can help prevent any unpleasant surprises after you’ve moved in.
Whether you rent a home or apartment, renter’s insurance is a must. It covers all your personal property in the event of a disaster or break-in. Your landlord will likely state in the lease that he or she is not responsible for any of your items but even if it isn’t in writing, you’re still responsible for your possessions. In fact, many landlords will have you sign or initial to state you've purchased renter's insurance, and in some cases, you may be required to show proof before you can move in. On average, renter’s insurance costs approximately $15 a month, making it a minimal drain on your budget.
Before you agree to a rent amount, realize that many landlords are willing to negotiate on the cost or amenities. If you’ve looked at other rentals in the area and found lower prices, use that to get a lower rate. The best leverage you'll have in negotiating the amount you pay each month will be before you sign the lease. If you’re bringing something other renters aren’t, such as using only one parking space or handling your landscaping, use this as a negotiating tactic.
As you rent, make sure you’re working toward something. If your goal is to own a house eventually, build your credit and set money aside for a down payment. If you have no dreams of owning a home, invest your money in a way that will ensure you have funds in place for your future. You may choose to start your own business and grow it rather than investing in a house. There is no right or wrong in the renting versus buying debate; there is only what you’re doing to prepare for your future.
How to Make Home Ownership a Reality
For many, the pros and cons of buying a home are inconsequential. They merely rent until they can qualify for a home. If you're one of the many people who plan to own your own home, here are a few things you should start doing as soon as possible.
- Improve your debt-to-income ratio—Even with stellar credit, people are denied every day due to a poor debt-to-income ratio. It is important to do what you can to improve your income situation and pay down as many debts as possible, even if it means working a second job or sacrificing vacations for a few years. Ideally, your debt will account for less than 43 percent of your monthly income. In addition to getting approved for a home loan, lowering your debt will also ensure you’ll be able to make your monthly mortgage payments once you’ve moved in.
- Get settled—The years before you commit to a mortgage are crucial for deciding where you want to live. This means settling into a part of town where you’ll work and, if you either have or plan to have children, considering which school zone works best for them. Also consider access to amenities like shops, restaurants, grocery stores, and financial institutions. If possible, rent in the area for a small amount of time before buying a home there to ensure you like the area.
- Avoid spending—In the months leading up to buying a house, keep your budget in check. Try to put as much money as possible aside for your down payment. It’s especially important to avoid any purchases that will hurt your income-to-debt ratio, especially if it involves opening a new credit card or taking an additional loan.
- Determine what you can afford—Before you start looking for a home, calculate the amount of house you can reasonably afford, based on what your monthly mortgage payments will be. Online calculators take into account the amount you’re putting down, whether you’ve chosen a 15- or 30-year term, interest rate, property taxes, and insurance. If you know up front how much of a home you can afford, you can narrow your search to only those homes that fit within that criteria. As you search, pay close attention for HOA fees, since that monthly cost can add hundreds of dollars to your mortgage payment.
- Get pre-qualified—Before you approach an agent to begin to look for a house, research financial institutions and find one that offers a good interest rate for mortgage loans. Once you’ve narrowed it down to one or two, visit your top choice and initiate the process of getting pre-qualified. If you’re denied at your first choice, check with at least one other financial institution.
- Begin your search—You may prefer to do your own house hunting, rather than commissioning the expertise of a real estate agent. This can be done, especially if you buy a house from a seller who has an agent. But you won’t have anyone representing your interests and negotiating on your behalf. If you’re in an area where housing supply is low, you’ll also likely find that by the time you see a home posted for sale online, it’s already under contract. Often real estate agents are well worth the three percent of the sale price they take on commission.
There are pros and cons of renting, just as there are pros and cons of owning a home. You’re more aware of your special circumstances than anyone else, but a good plan can help you achieve whatever goals you have. As long as you have an investment plan in place, no money is “wasted.” Renters can simply choose to invest in other ways.