Is it better to rent or buy a house?
As we close out 2023, the decision to rent a home or buy a home has become more intricate than ever due to evolving factors such as fluctuating mortgage rates, remote work and shifting lifestyles. If you’re on the fence about whether to rent a home or buy one, here are some key points to consider:
— Financial considerations.
— Lifestyle considerations.
— Personalization and customization.
[READ: What Does It Cost to Own a Home?]
Financial Considerations
When buying a home, there are significantly higher upfront costs than renting a home. The obvious one is the down payment, but that payment isn’t the only check you are bringing to the closing table. Don’t forget about all the additional closing costs such as application fees, inspection fees, appraisal fees, and attorney fees in certain states.
Mortgage rates will also have an impact on your ability to buy and what your monthly outlay will be. The good news is that the national inflation rate is easing and the Federal Reserve is holding interest rates steady. The Fed has signaled there will be multiple interest rate cuts to come in 2024. Therefore, buying a home might become more of a reality for some buyers in the coming year.
In addition to your overall mortgage payments and local or state taxes, you are responsible for all maintenance to the house. Is there a large lawn to be maintained? Is there a pool that needs regular servicing? Do you need to pay for garbage removal? Will you need to pay for snow or leaf removal? Will the roof need replacement in the coming years? There are also costs you cannot plan for: a falling tree, a malfunctioning septic system, storm damage and more. Evaluate the complete range of ongoing and one-time fees involved in owning the home.
While all of this might sound like a lot of money and work, homeownership can be a long-term investment, potentially building equity over time. Home equity represents the amount of your home that you own free and clear, as opposed to the amount you financed (and still owe). As you pay down your mortgage, the amount of equity you have in your home grows over time, allowing your home to become a more valuable asset, and your net worth to increase.
When you rent a home, the initial financial outlay is typically a small application fee, your first month’s rent, and one month’s security deposit. The security deposit is returned at the end of the lease if you return the home in good condition. The rent usually includes maintenance expenses such as appliances breaking down, leaks and garbage removal. There is also predictability when renting a home as your monthly rent is fixed for the lease term of one or two years. You know what you are spending for that term. Also, moving is much easier without the financial and logistical complexities of selling a property.
However, you should consider that your landlord could significantly increase your rent. This is often dependent on the market conditions. Also, when your lease is up for renewal, your landlord might decide not to renew your lease. You are beholden to the owner each time your lease is up for renewal, as well as reliant on them to handle any required repairs. While it might not cost you anything if the plumbing leaks, you may end up waiting weeks for the landlord to send someone for repairs. You don’t get to control the situation.
[A Home Maintenance Checklist for Every Season]
Lifestyle Considerations
Working from home is still very much a reality in many industries, so people now have more flexibility than ever regarding where they live. If you are no longer required to commute to a job, renting a home might make more sense. You can try a location and still have the ability to consider a move if you want to try another location when your lease ends. Renting a home provides much more flexibility.
However, if you have returned to the office, either full time or partially, and assume you’ll remain in your current job for a few years, then buying a home might be wiser. A common rule of thumb is if you plan to stay in the home for five to seven years, buying is a good option. Anything shorter than that may make it a less optimal investment.
Stage of life is another significant lifestyle factor to consider. For those with young children, buying a home and putting down roots is a major driver. Once you find a city or town you like and a desirable school district, becoming a part of the community is important. You don’t want the upheaval of a massive rent increase or a nonrenewed lease to impact your sense of stability. Of course, you can consider renting a home for a year to be sure you like the town or city, and then look to buy.
On the flip side, empty-nesters who sell their homes and decide to downsize or move to a new location should consider renting a house first. Despite having the financial resources of a home sale, renting provides the necessary flexibility this stage of life might require.
Before investing in a new home, renting one allows you time to ensure the new location is the right fit, realize you’ve downsized too significantly or decide you would rather split time in two or more locations. It provides some breathing room before making another decision.
[Read: The Rise of Built-for-Rent]
Personalization and Customization
One of the biggest differences to consider between renting a home and owning one is the ability to make the place your own. When you own real estate, you can do anything from upgrading appliances to a complete gut renovation. If you purchase in an apartment building, inquire about any building construction or renovation restrictions, which may limit what you are able to do.
Renters, in most cases, have limited customization options. Most rental agreements allow only minor changes like painting, and you’re often required to restore the home to its original condition and color scheme when moving out. If you have a strong design sense or a desire to customize your home to your distinct needs, renting a home might not be right for you.
No one-size-fits-all solution
There is no one-size-fits-all solution when deciding whether to rent a home or buy a home. It is important to consult a real estate professional about what makes the most sense for you. They will help you reflect on all the different factors and ultimately make the right decision for you.
While there are hefty upfront costs and maintenance when buying a home, you should keep in mind that buying is not solely a financial decision. If this is the place where you want to settle down or set down roots, a community you want to join, and a property you can customize and make your own, then you should not worry about timing the market perfectly.
Renting a home is a great option if you are unsure about the location, want more flexibility based on where you are in your life or simply do not have the time or money to invest in homeownership and all the upkeep it involves.
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Is It Better to Rent or Buy a House? originally appeared on usnews.com
Update 01/02/24: This story was previously published at an earlier date and has been updated with new information.