It’s no fun giving money to a landlord every month. That’s probably at least part of why 72% of renters would prefer to own a home. At the same time, the costs of owning a home are high, which is probably why 73% of people have regrets about buying a home. To make sense of something apparently so fraught with FOMO and regret, in this article we pit rent vs buy and go over the most important considerations for deciding whether to buy a home. And all along the way, we will give you concrete steps for making the decision that’s best for you.
Rent vs Buy: Affordability
Surely, the biggest factor that prevents renters from becoming buyers is affordability, which basically comes down to three sub-factors:
- Your finance limits
- Your home requirements
- Your financing options
Finance Limits
You can define your finance limits by answering two straightforward questions: How much money do you have saved that you can use for homebuying? And what is your monthly home expense budget?
Cash Saved for Homebuying
For this, start by adding up the money in all of your accounts that you are willing and able to withdraw from, skipping any that are inaccessible (like trust funds) or that would be too penalizing to withdraw from right now (like retirement accounts).
Tip: if you have investment accounts, you may be able to withdraw from them without penalty given the money will be put towards buying a home. Of course, you should verify if that’s the case for your particular accounts.
After you’ve added up all of your accessible funds, all you need to do is decide how much of it you’d be willing to spend on buying a home. Here’s a rule of thumb that financial experts often defer to: save enough money to cover three to six months of expenses to use in case of emergencies. For that, just add up your monthly expenses and multiply the sum by anywhere from three to six. Then just subtract that from the amount you can readily access, and voila! You have your homebuying budget.
Monthly Home Expense Budget
To calculate your monthly home expense budget, first you just need to figure out what your household’s monthly income is—so whip out those paystubs, add up those tips, and so on and so forth. Then, similar to determining your saved cash for homebuying, you just need to decide what portion of your income you’d be willing to spend on housing costs.
Here’s another common rule of thumb: keep your housing costs at or below 30% of your gross income (your income before taxes are deducted from it). But of course, your particular situation may warrant a different rule—maybe an aspect of your lifestyle gives you good reason to spend over 30% on home costs, or maybe pre-existing financial obligations make 30% untenable. Use your judgement.
Home Requirements
Once you’ve identified your finance limits, the next step to determining homebuying affordability is to define the type of home you’d be willing to settle for.
As elaborated in our guide on comparing costs between homes, an average $348,126 US home with 2,338 square feet may cost about $3,598 per month to own and maintain, while a $243,000 starter home with 1,100 square feet may only cost around $2316 per month—almost $1,300 less per month. And if you’re willing to buy a duplex and rent out the other side, your effective costs (i.e., costs minus rental income) may reduce drastically still.
You might also decide to settle for somewhere in need of some repairs. This can be a good way to trade greater upfront costs for lower monthly costs via a lower purchase price that translates to lower mortgage payments. And this can be a particularly good option for people who are able to make some repairs themselves. On this topic, feel free to check out the capital expenses section of another article we wrote for a list showing how much it costs on average to replace each major component of a home.
Financing Options
Finally, there’s your financing options, which for the purpose of determining homebuying affordability is really just about making tradeoffs between upfront costs and monthly costs in whichever way best helps your finance limits meet your home preferences.
Here are some financing tips if you’d like lower upfront costs in exchange for higher monthly costs:
- Use a smaller down payment. The smallest that most people can hope for is 3%-5%. If your household has a veteran, you might go as low as 0% with a VA loan.
- Negotiate for the seller to cover your closing costs or make upfront repairs, such as by agreeing to a higher purchase price.
- See if your lender will let you wrap your closing costs or repair costs into your loan.
Conversely, here are tips for lower monthly costs in exchange for higher upfront costs:
- Use a larger down payment. A 20% often provides good bang-for-buck in this regard, as it lets you avoid private mortgage insurance.
- Negotiate for the lowest purchase price possible in lieu of the seller covering costs.
- Don’t wrap anything into the loan that you don’t need to.
Affordability Final Thoughts
Once you’ve identified your homebuying finance limits, settled on your housing preferences, and explored your financing options, you should have a pretty good idea of whether buying a home is affordable. And though this is probably the main factor in the minds of most potential homebuyers, there are still other important factors to consider when thinking about whether buying or renting is right for you.
Rent vs Buy: Financial Benefit
Being able to afford a home doesn’t automatically mean that buying one is in your best financial interest. Indeed, after adding up all the costs, you may find that owning a home would result in throwing away more money than you otherwise would throw at a landlord for a similar property. Or you may find that a home’s long-term return on investment would likely be significantly lower than that of a diversified stock portfolio.
For a full rundown of whether buying a home is a good investment, check out the article we wrote dedicated to that topic. But to sum it up briefly: with the way interest rates are right now for 30 year mortgages (7%+), it’s not at all guaranteed that buying a home is financially better in the long-term than simply renting and then investing excess housing budget funds in the stock market.
If you’re looking to buy a multi-family property like a duplex, on the other hand, things are a bit different. Assuming you manage it effectively, that can still be a great way to buy a home while getting a great long-term financial return. But as ever, you’ll want to crunch the numbers for your particular area and potential properties (which our app happens to be great at).
Rent vs Buy: Lifestyle and Other Factors
There are other reasons for and against buying a home that go beyond the financial realm, and it’s absolutely important to take them into account if your life is about more than just finances.
Autonomy
Perhaps you have a vision for your living space that you just couldn’t achieve through renting: a sprawling garden, state of the art kitchen, or candy cane paint job. Whatever it is, consider assigning a dollar value to it and factoring it into your rent vs buy assessment. You may find that it’s worth parting with, at least for the time being.
Time and Energy
Oftentimes renting is less work than owning. When a toilet breaks, you don’t have to find a plumber—your landlord does. When tax season rolls around, things are more simple. Instead of having to make repairs or call around for contractors, you just call your landlord and keep doing whatever you do best. If this appeals to you, consider assigning a dollar value to it and factor it in with everything else.
Status/FOMO
If we’re being honest, status is often somewhere between the back and forefront of people’s minds when considering buying a home. “My friends bought homes, so I should, too!” Our two cents is that this consideration shouldn’t matter—there is no shame in renting instead of owning, particularly if it just makes sense to rent given the rest of the context of your life. That is to say, if you go the way of renting, know that we fully support you ❤️.
Rent vs Buy: The Winner
As with most important questions, the answer boils down to a highly unsatisfying: it depends. Everyone’s life and circumstances are different. For some, buying a home isn’t affordable. For other’s, it isn’t ideal for meeting financial goals. For others still, it’s a suboptimal lifestyle choice. And for many other people, it’s a great idea given the right timing and the right property.
For help with figuring out whether renting or buying is right for you, feel free to check out our HomeEstimator app, designed to help take into account many of the factors discussed in this article.
