It’s an age old debate: Rent or buy? And if the latter, when? Depending on who you’re talking to, where you live, and what phase of life you’re in, you’re likely to get some varying answers. In celebration of June being National Homeownership Month, we’re helping you cut through the noise by analyzing the pros and cons of renting vs. buying a home. There are plenty of factors to consider when deciding whether to rent or buy, including the financials and your personal preferences, and we’re breaking them all down for you below.
We’ll give you the 411 on renting vs. buying a home, as well as a snapshot of how buying and renting financially compare within each of our Knock markets. Our Knock Local Licensed Experts (LLEs) and other Knock employees will also provide insights on the renting vs. buying debate.
Becoming a homeowner is one of life’s major milestones; it’s an exciting time, but also a major event that has a lot of moving parts (literally). Patience, diligence, and understanding are needed throughout the process, but in the end, is being able to move into your dream home worth the wait? Let’s take a look at the pros of purchasing a home.
Owning a home means you’re investing in something that will build your overall net worth. With each mortgage payment you make, you’re building equity, instead of giving the month’s rent away to another owner and not gaining any ROI. Even when the market is in a recession, home values continue to rise year after year. This means that as you’re paying your mortgage down, the value of the home will continue to increase, which is a major positive when it comes time for you to sell. Plus, even if you don’t plan to sell for quite some time (or ever) you can use your equity in other ways, like receiving additional lines of credit for other big purchases.
Further, as long as you make mortgage payments on time, owning a home will help to improve your credit score, which is needed in many financial situations, and is important to your overall credibility.
Doyle Williams, Country Financial executive vice president told CNBC,
“Purchasing a home is much more than paying for a place to live; it’s a major investment of both time and money. Once you’ve done that, there’s a benefit to being a homeowner: You are building equity with every mortgage payment.”
Your newly purchased home is truly your oyster. It’s a space that you own, and in turn, a space that you can do whatever you want with. In an owned property, you have free rein, from customization of the layout to landscaping to major additions (in most cases, depending on local laws and permitting). Feel free to repaint, redecorate, and install a pool if you wish (of course, it’s wise to consider the overall cost and ROI of your projects). Having ownership over your space gives you a sense of pride that doesn’t usually come with renting. Plus, when it comes time to sell, these updates can help you win more profit.
We talked about the tax benefits of owning a home in an earlier blog that you can check out here. When tax season rolls around, you can write off your property taxes and the interest on your mortgage loan (in some instances). You can also save on taxes on your capital gains when you decide to sell, which leaves more money in your pocket.
When you buy a home, you’re not just moving into the four walls, but the neighborhood as well. It’s safe to say that if you made the choice to purchase a place, in most cases, you’re planning to stay for a while. Having this sense of ownership allows you to become immersed in your community, make long term friends, and establish yourself as part of something bigger. Often times your neighborhood may have a homeowners association (HOA) through which you can get to know people, or even community amenities like a pool where you can meet your neighbors. Renters tend to stay for shorter periods of time than owners do, so they don’t stick around long enough to form that bond with their neighbors and other people in town.
Knockstar and Transaction Manager Shay Frazier said,
"Even though we have seen a slight increase in interest rates, it is still more beneficial and cost effective to buy vs. renting if you are planning on putting down roots somewhere long term. Purchasing a home is an investment in you!"
Buying a home will take a big chunk of change out of your pocket, especially if you’re a first-time homebuyer. There are many upfront costs associated with buying a home, including not only the down payment but closing costs and real estate commission. It’s suggested that you make a 20% down payment, which depending on the price of the home, can be much more than you already have saved up. First-time buyers have the option to put a lower percentage down, but you’ll need to pay additional private mortgage insurance (PMI) each month in order to make it work. Buying a second home is typically much easier, since you can utilize the equity you have in your starter home to buy the next one.
Of course, it can be a challenge to buy a new home in today's competitive market if your new mortgage is contingent on the sale of your current home. If you’re one of those people who’ve outgrown your starter home and are looking to make your next move, Knock can help! With our Home Trade-In program, you’ll know how much new home you can afford before you shop, and you’ll move in before the old one sells. Then, we’ll list and sell your old home for you while you’re busy making your dream home your reality.
When you own a home, the majority of your net worth is tied up in that home, rather than as cash in your bank account. Having your equity tied up can pose an issue when you need money for other things, since you don’t have liquid funds available in an emergency or other situations. In order to access that money, you’ll have to wait for your home to sell, which could take months in a slower real estate market.
When considering buying a house, the monthly mortgage payments aren’t the only costs to take into consideration. Being a homeowner means you’ll need to pay annual property taxes, homeowners insurance fees, monthly bills (think water, gas, electric), and HOA dues in some situations. Tallying up the monthly numbers ahead of your purchase will help you understand how much you can afford to spend on being a homeowner each month.
If you are a homeowner or know someone that is, you know it comes with a heavy responsibility. When you’re the owner, that means you’re in charge, whether there’s a leak in the roof, a broken appliance, or extensive cleanup after a major storm. You have to be prepared to take on the costs and sweat equity that are associated with these unforeseen factors. When considering purchasing a house, don’t just think about the down payment and monthly bills we mentioned above, consider the outlying factors that are beyond your control. You never know when you’re going to need to buy a new stove or replace the sink!
Renting is a great option for individuals who like to move around a lot and don’t want to be tied down to one place; it’s also a solid choice for people who don’t have the funds necessary to purchase a home. But, is living in a place that’s not yours ideal?
When you rent, the upfront costs are much less than when purchasing a home. You typically need a security deposit and first month’s rent at signing, which is significantly less than a 20% down payment. This is attractive to young individuals just starting out who haven’t saved up enough yet, or for those not looking to put all of their savings into one basket. Your monthly rent will most likely be cheaper than a mortgage payment and other homeownership expenses, but keep in mind that you’ll never own the place with your monthly rent payments.
Daren Blomquist, former ATTOM Data Solutions vice president told MarketWatch,
“The buy-versus-rent calculus is shifting toward renting being more affordable.”
As a renter, you also have the opportunity to keep your savings as cash or invest it elsewhere, since you’re not putting a large lump sum toward purchasing a home. Having liquid money saved comes in handy when purchasing other things like a car or paying off a student loan. Investing your money outside of real estate also gives you another path to building your wealth.
Are you someone with wanderlust or have a job that requires you to move often? Renting is the perfect solution for someone in need of a short-term living situation. Although most leases require you to stay for one year, you can choose shorter terms, like three and six months, giving you the freedom to pack your bags and go whenever you need to. When owning a house, you have to worry about subletting or selling before you can move, which adds responsibility and stress to the mix.
Unlike the added responsibility of maintaining a home that homeownership requires, renting is as stress-free as it gets when it comes to upkeep. You don’t need to worry about landscaping the grounds, taking out the trash, or keeping the common areas outside of your apartment clean. Relying on a landlord to keep the space in shape is an attractive perk of being a renter. Plus, many rental complexes come with amenities at no additional fee, like fitness centers, pools, and recreational areas.
Of course, renting a property that isn’t yours means you’re not investing in something that you own. Some people argue that renting is a waste of money, because your monthly payments aren’t going to result in ownership or an ROI later on. Once you’ve paid off your mortgage, you’ll have an owned home to show for it; after renting for a year, you still won’t be any more of an owner than you were a year ago.
Further, if you’re making monthly rental payments, you’re technically giving away money that you could have saved to use towards a home purchase. Not to mention, the rent price you're paying might be more than what you'd owe if you owned the place.
Knockstar and Licensed Local Expert Victoria Hurd notes,
"Renters typically pay a premium per month vs. if they owned the property themselves."
If you’ve ever rented, you know that living under someone else’s roof comes with its fair share of rules. Many landlords don’t want you making major changes to the living space, including paint, wall hangings, or major renovations. A rental isn’t truly your own, which means you usually need to abide by strict rules and policies. When it comes to rentals, even if you are allowed to make cosmetic edits, you typically have to return the living space to its original state, which is time consuming and inconvenient when you’re trying to move; plus, this requirement can make the temporary changes you made feel like a wasted investment.
And it’s not just the cosmetics you need to worry about. Some rental properties don’t allow you to have pets and even ban some household items like outdoor grills (say goodbye to summer barbecues). You’ll have to commit to a lease that states all of these dos and don’ts, so make sure to read it thoroughly before signing on the dotted line.
When you’re renting, there will always be a payment waiting for you at the beginning of each month. Conversely, when you’re paying a mortgage, you’re working toward a goal of paying it off for good. In a rental situation, you’re always paying for a place you’ll most likely never own, which is discouraging to some. Plus, rent prices rise often, due to inflation and the increased cost of living. As a renter, you need to be prepared to face higher rent costs as the years go on.
When choosing between becoming a homeowner or being a renter, there are clearly plenty of pros and cons to consider. Homeownership gives you the opportunity to invest in your property and the freedom to do what you want to your home, among other things; at the same time, down payments and monthly expenses can be costly, and you have less freedom to move around as you wish. Renting is great for individuals who like to move often, who don’t mind landlord’s rules, and who don’t want to (or can’t afford) to put a lump sum down to purchase a home. At the same time, a rental is not a personal investment and comes with a fair share of restrictions.
Determining whether to rent or buy a home is heavily dependent on your own personal and financial situation. Think about the short-term, like the amount of money you have saved, and the long-term, like where you picture yourself living for the next few years. Owning a home is a long-term commitment, whereas renting can be a short-term or extended solution.
When it comes to the financials, home ownership will most likely cost more than renting, so consider whether the cost is worth the outcome. According to the U.S. Census Bureau’s 2013-2017 American Community Survey five-year estimates, because of added expenses, like maintenance, property taxes, and insurance, owning a home is more expensive than renting, but the difference in the amount varies by state.
The New York Times has a comprehensive calculator that can help you determine what’s best for you based on mortgage costs, rental prices, and other additional fees.
Knock currently operates in six markets throughout the U.S., where we’ve helped thousands of customers make their dream of owning a new home a reality. Below, based on information provided by CNBC, is a comparison of renting vs. buying a home when it comes to overall cost in each Knock-occupied state.
Median Rental Cost Per Month: $972
Median Homeownership Cost Per Month: $1,354
Difference between renting and buying: $382
Median Rental Cost Per Month: $927
Median Homeownership Cost Per Month: $1,351
Difference between renting and buying: $424
Median Rental Cost Per Month: $844
Median Homeownership Cost Per Month: $1,261
Difference between renting and buying: $417
Median Rental Cost Per Month: $952
Median Homeownership Cost Per Month: $1,484
Difference between renting and buying: $532
Clearly, becoming a homeowner will cost you more than being a renter, but is owning your own place worth the extra cash?
The decision between renting vs. buying a home is entirely up to you. There are pros and cons to each, so before you make a decision, consider all the factors that go into both situations. A major consideration will be your personal finances, but also keep in mind your living preferences and long-term plans for the future.
Do thorough research before making a commitment to either buying a home or renting one; having all the facts and considerations in mind will help you make the right decision for your family’s needs. Victoria Hurd adds,
"No one size fits all when it comes to renting vs. buying. Each person will have different goals, but the common denominators that buyers and renters share are location, budget, and lifestyle needs. At the end of the day, if you are contemplating whether to buy or rent, it is best to consult a licensed local expert/agent and lender."
At Knock, we believe in the value of owning a home, which is why take pride in helping our customers reach their homeownership goals everyday. If you’ve made your decision and are interested in purchasing a new home and selling your old one, get in touch with us!