To Rent or Buy, That is the Question

A challenge for first time home buyers is often the choice between renting or buying. The flexibility, relative cheapness, and ease of renting can often seem more appealing than plunking down hard earned cash for a down payment and taking on the role of homeowner. Below we’ll lay out the cases for buying and selling.

The Case for Renting

Flexibility

Renting provides you the ability to change your mind where you want to live with comparative ease. Need more space or not loving your neighborhood? No problem, when your lease is up (or if you can sublease) head out and find a new place! In Chicago especially, there are so many neighborhoods from which to choose, you can experience so much variety by moving just a few minutes away.

Renting works well for those who require extensive travel for work or are not yet committed to living in a city, let alone a neighborhood. Buying, on the other hand, limits your flexibility in packing up and moving, so if you’re not yet ready to commit, keep renting.

Keep Your Cash

In most cases, renting can be cheaper month-to-month than owning (especially when you consider taxes and insurance and maintenance costs) and does not require a down payment. While some mortgage options require little to no down payment, buyers are best suited putting as much down as they can reasonably afford, meaning dipping into your savings that would otherwise be untouched as a renter.

Don’t forget about furnishing your new place, especially if you’re moving from a one bedroom apartment to a three bedroom home! Buyers need to consider all costs when they buy, and many of those occur after the purchase, but down payment and closing costs are not cheap.

Peace of Maintenance Mind

See a leak or heat go out? If you’re renting, that’s no problem as you are not responsible for common maintenance. Homeowners, on the other hand, are responsible (except for common areas for Townhome and condo owners of course). This helps keep not only your costs down, but your stress levels. While both can require coordinating schedules to get maintenance persons in, renters do not have to go out of pocket for those expenses.

Keep in mind, however, that renters also do not see value when landlords make upgrades, and it’s likely true that those upgrades will end up costing you more in the form of higher rent the next year!


The Case for Buying

Equity Building

The most obvious financial benefit from owning a home is the opportunity to watch the value of the home rise. As your home appreciates in value and you pay down your mortgage, you are building equity, or the value of what you own in the home (the value of the home less the outstanding mortgage amount). This is often the primary wealth builder for folks.

When you sell your home, you walk away with the difference between the sale price and the outstanding mortgage value, less taxes, fees, and commissions to the agents, and even steady price appreciation of 2-4% annually can compound into a nice return on your investment. Critically, the proceeds from selling your home also help with your down payment on the next place, putting less of a burden on buyers saving money (which with the amount of student loans floating around can be a challenge to many potential buyers these days), so buying a home sooner rather than later can make a big difference down the road.

For those who do not feel like plunking down a serious amount of cash as a down payment, keep in mind that this money isn’t being thrown away like rent, it’s more or less being transferred from sitting in your bank account into your home as your initial equity. The risk of course is that the value of your home declines, wiping out your equity. Historically speaking, however, home values have appreciated and have represented a good investment for responsible buyers.

You, Well, Own It

An obvious difference between renting and owning, is well, ownership. That means you have the flexibility to make changes and upgrades in your home to better suit your taste and increase the value of your home. No need to consult your landlord if you want to paint the walls or redo the kitchen (city permits and neighbors aside!).

Tax Incentives

A lesser discussed but very real advantage of owning a home comes in the form of tax deductions. Homeowners can often deduct from their income the property taxes paid (in addition to the interest portion of their mortgage payments, among others), reducing your effective income and therefore the amount of taxes you pay annually. For homeowners in high tax states, this can be a real boost.


Rent vs Buy Calculator

So how can you put some numbers to this decision? Look no further than rent vs buy calculators. Assuming you’re mentally prepared for home ownership and have an adequate down payment and emergency fund, a rent vs buy calculator uses some basic assumptions - such as your current rent, expected housing payment, down payment amount, and how long you plan to live in the home - to tell you how long you need to live in the house for it to become cheaper to own a home vs renting.

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Note: These calculators make basic assumptions about average rent increases, home appreciation, property taxes, and investment earned on what would have been your downpayment (assuming you invested that money in the stock market instead of into your home’s equity). The mechanics of this is beyond the scope of this guide.

SmartAsset.com’s Rent Vs Buy Calculator Output

We prefer SmartAsset’s rent vs buy calculator, as it is easy to use and understand. In the above example, the calculator uses your city, income and current rent to estimate your affordability and for how long you need to live in the home to ‘break-even’ (i.e. reach the point where buying becomes cheaper).

You can adjust the target home price, your down payment amount, and more details to dial it in. Effectively, what this calculator does is take the cost of renting annually, adjusting for an annual increase in rent, and compare it to the cost of housing, inclusive of mortgage payment, insurance, etc and also include the benefits of home ownership (price appreciation and tax benefits).

Of course, these are basic assumptions, and should not be followed as exact science. These tools help you understand if it at all makes sense to entertain buying a home. Generally, people live in a home for an average of 5-7 years, and the fewer years it takes you to ‘break-even’, the more it makes sense to buy.