Is It Better To Rent or Buy A House?

When it comes to choosing a single-family home, you can buy the home or rent it from someone else. Both options have advantages and disadvantages. Because of this, families need to do their research and think about what they want out of the money they spend on where they live. Those who aren’t sure if buying vs renting a home is best for them should first evaluate the advantages and disadvantages. Here are some of the most critical aspects to consider when choosing between buying or renting a home.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

Home Buying Advantages

Owning a home can give homeowners a sense of freedom they wouldn’t get from renting. Homeowners can make the renovations and DIY projects they want without receiving approval from a landlord or being willing to “change it back” when they move out.

Owning a home also creates equity, which builds naturally as the homeowner makes their monthly mortgage payments. Equity also happens through real estate appreciation–when the home gains value over time. The longer you stay in the home, the more likely you are to grow wealth through appreciation. This equity over time increases the homeowner’s overall financial wealth and health. Real estate usually performs better than the stock market in terms of long-term gains.

Homeowners also receive tax benefits because the interest on a home mortgage is tax deductible. Property taxes and other home maintenance expenses may also be eligible for tax deductions.

Being a homeowner also adds stability to your life. There are no worries about the landlord deciding to raise the rent or possibly selling the home. The home is yours as long as you continue making timely payments on the mortgage until it is paid off. With a fixed-rate mortgage, your monthly payment is locked in for the life of the loan. Property taxes and homeowners insurance costs do increase over time, but there’s advance notice. For insurance, you can shop around.

If you get into a financial pickle, it’s possible to use a home equity loan and tap into the home’s value. This can help fund home renovations, start a small business, or cover other unexpected expenses.

Home Buying Disadvantages

For someone trying to decide between buying and renting, one of the most significant disadvantages is the home’s upkeep. When someone purchases a home, they don’t have a landlord to go to when something stops working and needs to be replaced. The cost of maintenance falls directly on the homeowner’s shoulders. The cost of an HVAC system or a new roof can be a significant financial responsibility. Then there are the common home maintenance tasks, like mowing the lawn and cleaning the  gutters. The constant upkeep is one of the biggest reasons people prefer renting or owning a condo.

Additionally, purchasing a home has more initial purchase costs than renting. A home buyer needs to have a down payment, the first two or three months of their mortgage payment, and the closing costs payment, all before the sale is finalized. Factor in a down payment of up to 20% of the purchase price plus 2-3% for closing costs, and this adds up to a lot of money out of pocket upfront. It can make buying a home inaccessible to people who haven’t been able to save the funds.

Financing comes with its own costs, and not just the mortgage rate. Depending on the type of mortgage and your loan terms, you could pay extra for private mortgage insurance or for having a bad credit score. Having anything negative on your credit report, like a history of late payments or bankruptcy, could make loan approval even more challenging.

For the actual home loan, adjustable-rate mortgages may be more affordable initially, but your monthly costs can change more frequently. There are also the upfront costs of origination fees.

You’ll also be responsible for property taxes every year. These taxes increase over time and cover the cost of local government services and schools. Tax rates vary between counties, municipalities, and taxing districts.

If you do need to move, the process takes much longer than ending a rental contract. Each housing market is different, but selling a home involves finding a real estate agent, preparing it for sale, then marketing and waiting for the right buyer. How long that takes depends on multiple variables, from the price point, local buyer pool, and local real estate market. Then, the actual closing can take three weeks or longer if the buyer requires financing. For perspective, the national median days on the market in December 2023 was 61, or about two months.

When you do sell the home, you’ll pay closing costs, including commission, to the real estate agent. That cuts into any profit you make on the home sale. To make back what you paid in closing costs, both buying and selling the home, you’ll need to keep the home in good condition and hope it appreciates enough during the time you owned it. Every real estate market is different, but the general rule of thumb is 3-5 years to earn back closing costs.

Even if you sell the home, you may owe capital gains tax. This can be avoided if you buy another home within the IRS window. Otherwise, it could cost thousands of dollars.

Finally, if you fail to make the house payments on time, the mortgage company can put a lien on the home. If you continue to have financial hardship and can’t make the payments, you are at risk of foreclosure. That will negatively impact your credit score and financial health.

Advantages of Renting a Home

Renting a home can be a great first step to eventually buying one. When someone isn’t sure if they want to purchase a home, renting one can be a much safer way to get a feel for what owning one is like. Plus, it’s much easier to wait for the rent contract to end and move out than it is to buy and sell a home. Usually, you only have to give one month’s notice before you move out once you’ve met your lease terms.

Another benefit of renting is less upkeep falls on the tenant. The landlord maintains responsibility for the main capital expenses and maintenance costs. So if the water heater dies or there’s a slab leak, it’s on the landlord’s tab. They take care of house painting or pest control services.

You won’t need to worry about paying the property taxes, as that becomes the landlord’s responsibility. Any increases here or to homeowner’s insurance are their concern, although they may pass on the increases in the rent.

In high-demand real estate markets, renting a home can be a way of moving into an area and getting to know it better. That gives you some time to see if it’s a neighborhood you want to live in.

Disadvantages of Renting a Home

Renting a home may not be a good idea for someone wanting to customize their living space. Many landlords don’t allow their tenants to paint walls or make any considerable changes to the home, including things like gardening. If someone’s enjoyment of their home hinges on how much control they have over the space, they should consider buying their next home over renting.

Renters also have upfront costs. You’ll put down deposits, like first and/or last months’ rent, pet deposits, or security deposits. There’s no guarantee the renter will get these expenses back when they end the lease and move out.

All of your housing expenses will be paid to the landlord. You won’t receive any benefits like tax deductions. And you’ll likely still be responsible for paying utilities, renter’s insurance, or making some basic repairs resulting from your property use.

Rental agreements come with a long-term commitment, usually around a year. Month-to-month rent may cost more due to the privilege of being flexible. If you need to move before your lease term expires, breaking the lease could cost additional money. Additionally, the landlord can up the cost of rent each time the lease nears its expiration date. You’ll have to move if you can’t afford the new monthly rent.

Renting Vs Purchasing a Home

All in all, there is no definitive answer to “is it better to rent or buy a house?” It depends on the person in question and their unique situation. Economic factors may be in the way, like being in a market with expensive homes or a higher cost of housing. Otherwise, looking at the advantages and disadvantages of buying vs renting is an excellent way to make a decision about homeownership.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

Updated July 2024