Rent vs. Buy: What’s the Right Decision for You?

UPDATED: April 13, 2022
PUBLISHED: May 10, 2022
Rent vs. Buy: What's the Right Decision for You?

Whether you are a homeowner or renter, chances are you’d like to become a homeowner someday. Surveys show that most Americans want to own a home. For example, 84% of respondents in a 2020 survey from personal finance site NerdWallet said buying a home is a priority.

A decade ago, the narrative was that millennials didn’t want to own anything and would rent urban apartments forever, but today the largest cohort of homebuyers are millennials.

“There’s no meaningful difference in the aspiration for homeownership from one generation to the next,” says Mark Palim, deputy chief economist at Fannie Mae. “All our surveys show that most people want to own a home. We were surprised that there wasn’t even much of a dropoff in the desirability of homeownership after the housing crisis.”

The shift from renting to purchasing a home typically occurs in someone’s early 30s, according to Palim.

“As each cohort ages into their 30s, we see a new group of buyers,” he says. “The millennials were a little slower because they faced impediments from a weaker economy. They didn’t have the income or credit to buy and struggled with student loan and credit card debt, so it was harder to save for a down payment.”

According to the National Association of Realtors 2021 Home Buyer and Seller Generational Trends Report, millennials made up 37% of buyers; 32% of buyers were baby boomers; and 24% were Gen Xers in 2020.

From the oldest baby boomers to the youngest Gen Z cohort and the millennials and Gen Xers in between, owning a home remains preferable to renting by a large margin. Still, there are plenty of people who appreciate the flexibility of renting and the freedom from spending time and money on home maintenance. So, how do you decide what’s right for you?

The Case for Renting

Although some people assume renters are primarily younger people who can’t afford to buy a home, the Harvard Joint Center for Housing Studies report America’s Rental Housing 2022 found that higher-income households are increasingly renting. Those wealthier households drove 70% of total renter household growth between 2009 and 2019. One reason is the difficulty finding a home to buy because of high prices and low inventory. In addition, many people want to rent, especially when they can enjoy an apartment in their preferred location with onsite amenities such as a pool, a fitness center and concierge services. More opportunities have become available for apartments and single-family home rentals in suburban areas and smaller cities in recent years, too.

“An individual’s preference might tilt to renting if they know they’ll be in an area for a shorter time than five years or so,” says Jeff Tucker, a senior economist at Zillow. “A lot of people like the flexibility of renting because it’s a lot cheaper to move in and move out of a rental than to buy and sell a property. Entrepreneurs who don’t want to be tied to one spot to build their business are more likely to want to rent.”

Another motivation to rent is lack of time: “Owning a home requires maintenance, and even if you hire someone to do your painting and gardening, it takes time to find and manage contractors,” Tucker says.

Maintenance also costs money, often more than anticipated by homeowners. The biggest regret among recent homebuyers was not being prepared for maintenance and other costs of owning, according to a 2021 survey by Bankrate.

The Appeal of Homebuying

Although the aspiration to buy doesn’t change, the reasons evolve according to economic and societal conditions.

“People are responding to rising home values and low mortgage rates and see owning a home as a good investment,” says Nadia Evangelou, a senior economist and director of national forecasting for the National Association of Realtors. “Among millennials, 86% in a recent survey said it was a good investment and 44% said investing in real estate was better than investing in stocks.”

People who bought a median priced home in January 2021 accumulated more than $50,000 in equity by January 2022, Evangelou says.

“We’ve seen a key change in our surveys over the last 18 months, with people who were on the fence about when they wanted to buy choosing to buy sooner rather than later,” says AJ Barkley, a neighborhood lending and community lending executive at Bank of America. “The pandemic made it less important to live next to restaurants and made people prioritize having more space, a yard and a community they like.”

For those aged 18 to 25, a group that includes members of the Gen Z generation and the youngest millennials, Bank of America’s surveys found a majority making a conscious decision to save for a home.

“The youngest people we surveyed were willing to put off vacations and weddings so they could buy a home faster,” Barkley says. “They understand the wealth-building impact of homeownership.”

According to the Federal Reserve, the median net worth of homeowners is approximately 40 times the median net worth of renters. In 2019, the median net worth of homeowners was $255,000, compared with a median net worth of $6,300 for renters.

“A big driver for every generation to buy is increasing rent,” Barkley says. “You can lock in a fixed-rate mortgage and pay the same principal and interest for your housing for as long as 30 years and not worry about a rent increase.”

Average rents rose 16% in 2021, according to Zillow. Although that’s an unusually large jump, rent increases are common. But money isn’t the only motivation for buying.

“People wanted to buy homes in 2004 to 2008 because of their unrealistic expectations about price appreciation,” says Palim. “For the past decade, people are more likely to cite non-financial reasons to buy such as having control over their own space so they can personalize it and developing roots in a community.”

Factors to Consider

Some of the dynamics to consider that could influence your buy or rent choice include:

1. Life Plans

Although no one knows with certainty where they’ll be in five years, the cost of buying and selling a home means that in normal markets, experts recommend owning a home for at least five years to build equity. If you think you may want to move to another city, a different neighborhood or change your family size within a short amount of time, renting may be the better choice. One caveat: You could buy a home and then keep it as an investment property if you choose to move.

2. Affordability

Although mortgage rates are predicted to rise to 4% by the end of 2022 by the Mortgage Bankers Association, buying is still more affordable than renting in most housing markets, Evangelou says. The monthly mortgage for a median-priced home in January was $1,260, compared with the median rent of $1,540.

However, in high-cost housing markets such as New York City, Seattle and San Francisco, it can be more affordable to rent than to buy, Tucker says.

More than 35% of renters can currently afford to buy the typical home, estimates Evangelou. The difficulty in most markets is finding a home to buy in your price range, especially for entry-level buyers.

3. Inflation

Owning a home can be a hedge against inflation, Tucker says.

“We recently saw the highest level of inflation since 1982, so people may want to think about locking in a fixed payment for 30 years with a mortgage,” Tucker says. “There are very few financial instruments that offer that promise, which looks extra appealing in a high-inflation economy.”

4. Cash Flow

You’ll need funds for a down payment of 3% or more plus closing costs, which range from 2–5% of the purchase price. You’ll also need cash reserves for emergencies and home repairs. Many home experts suggest setting aside 1% of your home value annually for maintenance. You may choose to rent to save more money for a future purchase or to invest in something other than real estate.

5. Cost

Renters pay their rent and sometimes their utilities and parking. Homeowners have more costs beyond principal and interest on their mortgage, such as property taxes, homeowners’ insurance and sometimes homeowner association dues.

6. Taxes

Homeowners can deduct mortgage interest and property taxes on their home up to certain limits that are subject to changes in tax laws. In addition, current tax laws provide an exemption from some capital gains taxes when you sell if you meet the residence rules. Renters are not eligible for similar tax breaks.

7. Your Risk Tolerance

Both renting and buying carry some financial risk. As a renter, you’re subject to rent increases and the possibility that your landlord could decide not to rent it anymore. However, if you live in a city with rent control, you can at least know the maximum your rent can be increased.

As a homeowner, it’s important to remember that home values don’t always go up, Palim says.

“Buying a home isn’t a one-way bet,” he says. “While home prices are not anticipated to decline, they are not expected to accelerate quite as quickly in 2022 as they did in 2021.”

Although real estate generally appreciates over the long term, homeowners take the risk of potentially owning a property that loses value.

Ultimately, your choice to rent or buy depends on where you want to live and for how long, local market conditions, personal lifestyle preferences, and your financial circumstances and plans. A consultation with a mortgage lender and a financial adviser can clarify the monetary aspects of your decision.

This article originally appeared in the May/June 2022 Issue of SUCCESS magazine. Photo by @hellomikee/Twenty20