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Renting vs Buying: Which One is Right for You?

As a Realtor, I have dissuaded potential homebuyers from buying more than once. Yes, it is not good for my pocketbook, but it is the right thing to do. If you’re in the position to buy a house, buying may not be the right thing for you (see why below). For the most part, I feel that owning a house is a great thing, and a fantastic way to build long-term wealth. So, when the conditions are right, you should definitely buy instead of rent.

When Renting is Better Than Buying

Here are a few scenarios where I feel renting is a better choice

  • You need flexibility. For example, if you just started your career and you’re still aggressively looking to advance, your new position or your new job may take you away from the area you are living in now. In this case, you want to maximize your flexibility and not lock yourself down to an area.
  • You know you have to move in less than 5 years. If you know for sure that you will be moving in less than 5 years, consider renting instead. The cost of buying and selling a house is rather high, and you might not be able to break even if the home value has not appreciated enough.
  • The cost of renting is cheaper than buying. Renting for less than owning a property is possible in the short-term, but very unusual in the long-term. When you consider the costs, be sure to compare apple to apple (see The Math of Renting vs. Buying below).
  • You need to improve your credit. Although you qualify for a loan now, it might be better to wait if you don’t have the best credit score (note: you can check your credit score here). With a higher score, you could be eligible for a lower interest rate and save yourself a lot of money over the life of the loan.
  • You need more money. Yes, you can buy a house with as little as 0% down, but that might not be a good idea. At the minimum, I recommend using a 3% down loan, and ideally a 20% down to avoid paying private mortgage insurance (PMI) altogether.

The Math of Renting vs. Buying

If everything above checked out, the math usually favors buying.

Net Worth: Renting vs. Owning

The Federal Reserve publishes a report every three years on consumer finances — part of this report compares the net worth of homeowners vs. renters. The numbers is very revealing:

  • In 2013, the average renters’ net worth is $5,500 vs. $201,500 for homeowners (a 1 to 36.6 times difference).
  • In 2016, the average renters’ net worth is $5,200 vs. $231,400 for homeowners (a 1 to 45.5 times difference).

The gap is getting wider and homeowners are winning big!

Here is a real scenario in my market (Northern Virginia), so your local market may be different.

Scenario 1: $2,000 rent vs $345,000 sales price at 20% down

  Renting Buying
Monthly Rent  $  2,000  
     
Home Price    $345,000
Down Payment    $69,000
Mortgage Payment    
Principal and Interest    $1,300
Taxes    $300
Insurance    $75
HOA    $90
     $1,765

As you can see, it is less expensive to buy even if we take into account that homeowners have to pay for maintenance and more for insurance.

Here is how the numbers compare over ten years (this doesn’t take into account the rent increase for the renter or slight increase in taxes and insurance for the buyer). As you can see, being a homeowner is clearly better than being a renter.

Year Renting Buying Principal Paid Net Expense Buy > Rent
1  $24,000  $21,180  $4,967  $16,213  $7,787
2  $48,000  $42,360  $10,130  $32,230  $15,770
3  $72,000  $63,540  $15,496  $ 48,044  $23,956
4  $96,000  $ 84,720  $21,074  $63,646  $32,354
5  $120,000  $105,900  $26,872  $79,028  $40,972
6  $144,000  $127,080  $32,899  $94,181  $49,819
7  $168,000  $148,260  $39,163  $109,097  $58,903
8  $192,000  $169,440  $45,675  $123,765  $68,235
9  $216,000  $190,620  $52,443  $138,177  $77,823
10  $240,000  $211,800  $59,479  $152,321  $87,679

Scenario 2: $2,000 rent vs $345,000 sales price at 5% down

Ok, so what happens if you put less money down? Well, you’re going to pay private mortgage insurance (PMI), and your interest payments will be higher.

  Renting Buying
Monthly Rent  $  2,000  
     
Home Price    $345,000
Down Payment    $17,250
Mortgage Payment    
Principal and Interest    $1,541
Taxes    $300
Insurance    $75
HOA    $90
PMI    $161
     $2,167

Okay, so now it costs more to own than it is to rent…but wait…if we take into account the principal paid, it is cheaper to own — buying is better than renting!

Year Renting Buying Principal Paid Net Expense Buy > Rent
1  $24,000  $26,004  $5,898  $20,106  $3,894
2  $48,000  $52,008  $12,029  $39,979  $8,021
3  $72,000  $78,012  $18,401  $59,611  $12,389
4  $96,000  $ 104,016  $25,025  $78,911  $17,009
5  $120,000  $130,020  $31,911  $98,109  $21,891
6  $144,000  $156,024  $39,068  $116,965  $27,044
7  $168,000  $182,028  $46,507  $135,521  $32,479
8  $192,000  $208,032  $54,239  $153,793  $38,207
9  $216,000  $234,036  $62,277  $171,759  $44,241
10  $240,000  $260,040  $70,632  $189,408  $50,592

As you can see, it is hard for renters to get financially ahead of homeowners.

But there are more advantages for homeowners:

  1. Tax Savings – Homeowners can deduct their interest payments and use that to reduce their taxes — renters, on the other hand, are out of luck!
  2. Home Value Appreciation – Homes appreciate in value over time. The pace is about the same as inflation. Over the course of 30 years, my $345,000 house appreciating at 3% will be worth about $837,000 (Inflation data from InflationData.com and calculation using Investment Calculator at Calculator.net)
  3. Rent Increases – Let’s assume rent also increases at the same rate of 3% a year, $2,000 rent today would be $4,850…wow.

Rent vs. Buy Calculator

If you are not inclined to do the math manually, here is a handy dandy Calculator from NerdWallet. The numbers do not match up exactly, but they are close enough for you to see.

Renting vs Buying Calculation Graph

Bottom Line

Before making this important “Renting vs. Buying” decision, think carefully about which option is best for you. You don’t want to buy a house if you have to sell in less than five years. At the same time, the longer you wait to buy the less time you have to let the wealth-building machine works for you.

Let me know what you think about renting vs buying below.

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