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Buying vs renting, which is better? It depends on who you ask. We all have that one homeownership evangelist friend who can’t believe we’re still “throwing money away” by paying rent and has the real estate portfolio to back it up. On the other hand, we also have that friend who moves whenever they feel like it, has lived in a dozen different cities and countries and has the envy-inducing Instagram feed to prove it.
So which is better, renting or buying? The truth is, there’s no easy, one-size-fits-all answer to that question. The better option is going to depend on the financial circumstances and goals of each individual. That being said, there are definitely benefits to both, and looking at the benefits of both can probably clarify which is the better choice for you.
The Many Benefits of Buying
Fans of homeownership aren’t wrong. There are a ton of benefits to buying property.
Home Values Generally Appreciate Over Time
This is one of the most fundamental benefits of buying a home. As time passes, your home becomes worth more than you paid for it, and depending on the market, it can only take a few scant years before you’re in line to make serious profit.
Let’s look at an example to see exactly how much appreciation can help you, even in the short term. Let’s say you buy a $200,000 house, putting 20%, or $40,000 down. If that house appreciates at a very realistic rate of 4% over the next year, that means the house is now worth $208,000. The initial $40,000 you put down has made you $8,000, for a 20% return on investment.
What Is the Best Time to Buy a House? Let’s find out!
But while home appreciation is a fairly dependable way to build wealth, it’s not necessarily a fast one. According to a study using data from the Bureau of Labor Statistics, residential home price appreciation in the U.S. averaged 1.89% between 1997 and 2017. This number is a little deceptive, as there were wild fluctuations in that period, including a one year gain of 12.6% and a one year drop of 18.1%. But the fact is, buying a home will make you rich, but it won’t make you rich quick.
You’ll Build Equity
As you pay down your mortgage, you’re also racking up equity. Equity equals the home’s current market value, minus the amount of your outstanding mortgage. As home values go up, and your outstanding mortgage balance goes down, the gap between the two, which represents your equity, increases exponentially. That’s the power of equity. Real estate is unique in this respect; most investments, such as cars, lose value as you pay them down.
So how do you use equity? You don’t necessarily have to sell your home to benefit from your accumulated equity. You can borrow against it with a home equity loan, which comes as a lump sum, or a home equity line of credit (HELOC), which is a credit line you can draw on as you wish.
Some numbers from the fourth quarter of 2018 illustrate just how common it is to build wealth through home equity. As of late 2018, over 14.5 million U.S. properties were “equity rich,” which is defined as homes with outstanding mortgage balances that are 50% or less of the market value. That’s over a quarter of all properties with a mortgage, which is a testament to the safety of investing in real estate.
On the other hand, 5 million properties, or 8.8% of all mortgaged properties, were underwater, which is defined as a property with an outstanding mortgage balance at least 25% higher than the property’s market value. The lesson? Real estate is an extremely solid investment, but there’s no such thing as a sure bet.
Homeowners Are Eligible for Significant Tax Credits
One of the biggest ways the government incentivizes people to buy homes is the mortgage interest tax deduction. Although it was recently changed slightly, the mortgage interest deduction allows a homeowner to deduct the mortgage interest on the first $750,000 (if you bought your home after December 15, 2017), or on the first $1 million if you bought before that date.
So let’s say you bought a $500,000 home last year. If you paid $15,000 in mortgage interest over the course of 2019, you can deduct that on your tax return. For obvious reasons, this massive tax credit is one of the most popular deductions in the U.S.
Let’s review the Steps to Buying a House.
More Space and Autonomy
If you’ve ever lived in an apartment, you probably know the aggravation of being woken up by a neighbor’s music. Or maybe you were the neighbor playing the music, and you had to deal with the fallout the next time you bumped into your cranky neighbor in the hallway.
The point is, living in an apartment requires a lot of compromises. Not only do you have to limit your noise and presence out of courtesy to your neighbors, but you also have to limit how much you change your living space since it’s not actually yours. Hate the pea-green wall-to-wall carpeting in your apartment? If the landlord doesn’t give you permission to strip it out and refinish the floors, you’re stuck with it.
Apartment living also limits the amount of space you have. Even the largest apartment is going to be smaller than the average house. If you plan on starting a family, you’re going to need all the space you can get.
The Upside of Renting
While homeownership may seem like a no-brainer, at least from a financial perspective, renting has its own unique benefits.
Constant movement and job reshuffling are the new normal. According to the latest data, the average American worker has 10.5 jobs before the age of 35; what are the odds that all of those jobs are going to be in the same city? The only way for early-career professionals to fully explore their potential is to maintain a high level of mobility. And that kind of mobility is a lot harder to achieve if you own a home.
Sure, you can rent it if you have to take a job in another city, but what about when you have a month between jobs with no paychecks, and you still have to pay the mortgage? Or when a tenant calls you at 4AM about a clogged toilet, and you’re in a totally different city? Renting often makes more sense for young people, early in their careers.
Then there’s the actual cost of selling your house. Between the agent commission fees, preparing and staging your house, making repairs, and appeasing sellers, it can be a real headache trying to get rid of your home. Make sure you’re ready to commit to the long haul because you can actually lose money when selling!
No Need for a Down Payment
According to Zillow, the median U.S. home value is just over $244,000. If you were buying that home, and putting the standard 20% down, that means you’d have to come up with almost fifty grand in cash. That can be a tall order, considering that 40% of Americans don’t even have $1,000 in savings.
Although renting usually requires a security deposit, as well as first and maybe last month’s rent, that’s still a lot less money you have to come up with upfront.
Have you heard of corporate homes? Let’s dive into the concept!
No Worries About Repairs or Maintenance
Owning a home means preserving that home if you really want to maximize your profits. That takes time and, more importantly, money. One general rule is that you should set aside 1% of your home’s value, each year, for maintenance. So for a median U.S. home of $244,000, that’s $2,440 a year. On top of that, one in three homeowners has to make an emergency repair in any given year, at an average cost of $1,200. Any way you slice it, you’re going to be spending the equivalent of two or three extra mortgage payments a year on maintenance.
If you rent, however, your landlord will be responsible for all of that. That’s money and, just as important, time and effort that you won’t have to spend on fixing up your living space.
Renting Makes More Sense in Expensive Markets
If you’re thinking of moving to an expensive major city like Manhattan, where the median home value is a hair-raising $1,017,000, then it’s almost definitely going to be cheaper to rent than to buy. Your $200,000 down payment alone would pay your rent for several years, even if you lived in a pricey apartment, and you probably won’t know if you want to stay in the city until you’ve got a few years under your belt. Why pay such a steep price of admission if you might want to exit the market in a handful of years?
Read more: 4 Important Tips for First Time Home Buyers
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