When Renting Is Better Than Buying
Don't fall prey to rampant myths such as "If you rent, you're throwing money away." That's oversimplified. (Why doesn't anyone mention the money you might "throw away" on interest, property taxes, maintenance, closing costs, and -- heaven forbid -- that eventual foreclosure attorney?)
Instead of listening to trite cliches, make a decision within the context of your life. Your age, income, location, stability and career plans play a role in shaping the "buy vs. rent" question.
Let's look at a few scenarios in which renting is the better answer.
Scenario 1: John is a bachelor living in San Francisco, where the cost difference between renting and buying is extreme. He wants a two-bedroom, one-bath home with at least 700 square feet. In his target neighborhood, a home of that size would cost $1.1 million. Alternately, he could rent a similar property for $4,200 per month.
Should John buy or rent?
If John envisions starting a family or moving to another city in the next three to five years, he may want the flexibility of renting so he can upgrade to a bigger place or move to another location. This also allows him to pay less per month for now, helping him save for the day when homeownership would make more sense for him.
Scenario 2: Felicity is trying to repay her $12,000 credit card balance, $45,000 in student loans and her $14,000 car loan. She has some savings built up and makes a decent salary, and all of her friends are telling her what a mistake it is to "throw your money down the drain" as a renter. She's feeling the pressure to take this next step in her life and is confident that she could afford it.
Felicity has been told she qualifies for a mortgage, but should she take the leap?
While she's technically able to afford buying a home and manage all the costs that go with it, doing that would severely limit her ability to pursue her other financial goals. It would tie up money she could be using to pay down her other debts -- and while those debts linger, she'll (genuinely) be throwing away money on interest charges.
For Felicity, the best path would be to focus on clearing herself of other debt first (particularly her high-interest obligations, such as her credit card debt). Once those are settled, then she can look into homeownership without worrying about the debt burden hanging over her head.
Scenario 3: Sarah just moved to Kansas City and plans on living there for three years or less. She's found a good job with growth potential that pays her well -- well enough to purchase a home -- and she likes the idea of being a homeowner. But she's just not sure she's ready to settle down in one city yet.
Should she rent or buy?
In this case, the decision is pretty clear. Sarah's future plans are too up in the air to make buying a home a worthwhile investment. She's better off renting until she figures out her long-term goals.
Should she decide down the line that she is ready to settle down in Kansas City, she can look into homeownership. But for right now, it wouldn't be wise to tie herself down to a 30-year mortgage and a home she could just wind up needing to sell in a few years if she decides she wants to move somewhere else.
Scenario 4: Brian is planning a career change. He wants to quit his stable 9-to-5 job within the next two years and open a gourmet food truck. He has a family and would prefer to see them settled into their own home rather than a rental, but he's worried about committing himself to something as big as a mortgage when his career is about to undergo a major upheaval.
This is another case that's fairly easy to decide. Since Brian's income is about to change drastically, locking himself into a mortgage and all the associated costs of homeownership would not be smart at this time.
Should he find his new food truck business doesn't take off as fast as he'd like, it would be better to have the flexibility of a renter so he can roll with the punches. He won't be facing sudden costly repairs that he's responsible for. If he needs to rein in his budget, he can relocate to a cheaper apartment much faster than if he had to sell his home, which could linger on the market for months.
Deciding What's Right For You
How do you know if renting or buying is the best decision for your personal scenario? Here are some good indications you'd be better off renting, at least for the time being:
- You don't plan on staying in the area for the long term.
- Your income is unstable.
- Your relationship or family status could be changing soon.
- You plan on switching careers or jobs in the near future.
- You can't afford all the added expenses that come with homeownership: replacing the water heater, ripping out the carpet, calling a plumber.
- You need the money to take care of other financial goals first, such as paying down debt or building up savings.
- You prefer to let someone else handle repairs and maintenance.
Paula Pant helps people build wealth, ditch the 9-to-5 and live on their own terms. She quit her office job in 2008, traveled to 30 countries and became a real estate investor. Her blog, is the gathering point for a tribe that refuses to say "I can't afford it."