Renting vs buying a house : make a better decision

You should consider multiple factors in order to make a better decision about renting vs buying a house. According to research, the global real estate and stock market increased on average 1.3% and 5.2% respectively from 1900 to 2017. In the United States, over the last 10 years, real estate properties have appreciated by over 40%. On the other hand, according to data from the Federal Reserve’s consumer survey, the US stock market has returned an average of 10% every year, over the last 200 years.   .

No matter if the economy goes up or down, we always need a place to stay. Some may need a temporary place to stay for a short period of time. Some may not only want a place to stay, but they also want to own that place. Owning real estate has always been part of the American dream. However, some express that they prefer to rent than to buy a house because they do not want to be stuck in a huge mortgage loan which may take 30 years to pay off.  

This article will help to answer questions about renting vs buying a house such as: Is it better to rent or buy a house?  Why should you rent when you can buy a house? Why should you buy when you think you should rent?

Consider the advantages and disadvantages of renting vs buying a house

When you compare the advantages and disadvantages of renting vs buying a house, you need to consider multiple factors. It is not an apple to apple comparison when you only compare rent payment vs mortgage payment to make a decision about renting or buying a home. 

It would be wiser to consider the economic opportunity of unrecoverable costs and recovery cost of renting and buying a house. For renting, the unrecoverable cost is the rent payment which you pay. The rental payments will be gone forever. For buying, unrecoverable cost is mortgage interest, property tax, maintenance and fixing cost from big projects such as roof replacement to small projects like filling, caulking for a bathroom and so on. These costs will be gone forever also. 

You need to do some calculations to have a general idea of whether renting or buying a house will be a better option for you. Experts suggest that It may be cheaper to rent if you do not plan to stay at a place for at least 3 years even though you are able to buy it. As a homeowner, you may lose the economic opportunity of unrecoverable cost, as well as a portion of recoverable cost such as the down payment.  If you put the payment for these costs in stock investments, you can gain some return from the investment growth. 

In case, you plan to stay at a place for more than 3 years. But, you are not really financially ready to buy a house. It may still not be a better option to buy a house. You should consider the expected costs as well as  unexpected costs. It may turn out to be a disaster if you are not able to manage all those costs.  Especially, when the economy is down or when you lose your job. You want to own a house and enjoy it. But, you definitely do not want to own a house and get into a foreclosure or bankruptcy later. 

Let’s get into the pros and cons of renting and buying a house, so you can get a better idea and make a better decision. 

Pros and cons of renting vs buying a house 

Pros of renting a house

1. Stay for a short term:  When you are renting, you need to stay at the place only as long as your lease duration, which could be as short as 1 month. This may be convenient if you need to move often for your job. This also offers flexibility to move if you find a cheaper place, a nicer neighbor, a nicer landlord, etc. Of course, you need to wait until the rental contract ends to be able to move out of one place.  

2. Do not need to get ready for a down payment:  Of course you have to put a deposit for renting a house when you rent it. However, you don’t have to get ready for a 5% down payment for purchasing a residential property. Note that mortgage loans usually offer only up to $750,000. So if the price of your home is above that, you will need to use your own funds. 

3. Avoid legal: of course, you have to sign and abide by the lease’s rules when you rent a house. However, you should consider more legal issues when you purchase a house such as mortgage loan applications, mortgage loan contracts, City and HOA rules and regulations and so on. 

4. Not liable to pay mortgages over 30 years as well property taxes and other fees:  Of course you have a responsibility to pay for rent, however, you are free to move out of a place when the lease contract ends. 

On the other hand, when you own a house, you are liable to pay a mortgage loan over 30 years. You can pay your mortgage loan sooner than 30 years. But, you still have to pay for property tax as long as you own the property. Also, you have to be liable for other fees such as HOAs if your property is in HOAs management. You can always sell the house. But, it may take a long time from the point you put your property on the sale to closing it. In some bad scenarios, buyers can back out of buying contracts for some reasons and you will have to restart the process. 

5. Maintenance and fixings cost: When you rent a house, you enjoy the house. Your landlord is responsible to pay for maintenance and fixing costs which is approximately 1% of the property value. Those can be small projects such as a leaking sink to big projects such as roof replacements. You are not responsible for those costs. 

6. Save some money from renting: If you can find a place where rent payment is less than the mortgage payment, you can save that money to invest in stocks. You can have a high return in stock investments  if you are comfortable to invest in the stock market. If you invest $100 monthly in S&P 500, with a return rate of 10% per year, you can become a millionaire after 45 – 50 years. 

Cons of renting a house

1. Rent payment: When you rent a house, you are responsible for monthly rent payment until the lease contract ends. Those rent payments that you pay will be gone. 

2. Will not own the property: You rent the house and pay for its rent, but you will not own the house. Your rent payment will help to pay for the houses’ expenses and help to build the house equity for your landlord. 

3. Cannot remodel. You rent a house. If you wish to do some remodel such as painting the color you want, you will need your landlord’s approval to do so. If not, you have to repaint it when you leave. As a renter, you do not have freedom to do whatever you wish to the house. 

Pros and cons of buying vs renting a house

According to the U.S Census Bureau, homeownership was approximately 70% in 2004 – 2007 in the United States. This rate significantly dropped after the 2008 Real Estate Bubble. U.S homeownership also tanks due to Covid 19 pandemic effects. 

There are pros and cons of buying a house. 

Pros of buying a house

1. Enjoy your own house: When you own a house, you can remodel it the way you want your home should be. Note that you have to follow HOAs regulations if your house is part of a HOA. Different HOAs have different rules and homeowners have to abide those rules. You may have more freedom if your house is not part of a HOA.

2. Build equity: Monthly payments for your house will pay for mortgage principal and interest, home insurance, property taxes if included and so on. A portion of payment to the mortgage principal will help to build up an equity which increases over years of payments. In addition, as a homeowner, you will get the benefit of property appreciation. Property appreciation depends on multiple factors such as location, economic situation, property type, etc. You will get a good return when you sell the house. 

3. Take advantage of refinance with a low interest rate: as a homeowner, you can refinance your home with a lower interest rate when you get a chance. The mortgage payment will be reduced with a lower interest rate. Plus, you can withdraw some equity from your house when you need funds for investment or other expenses. Some may opt to withdraw their home equity for investment if they can generate a better return from the investment. However, you should always be careful to consider the good and bad when withdrawing your home equity.

4. Take benefits of tax deduction: The U.S government gives tax breaks to homeowners. As a homeowner, you can have the benefit of tax deduction for mortgage interest and property tax that you pay. If you own rental property, you can deduct most of the expenses incurred in order to earn the rental income. 

5. Take advantages of leverage: You do not pay for the entire amount to purchase a house. But, you pay a portion, 5% for residential properties and 20% for rental property. You use leverage  by taking a mortgage loan from lenders. You can take advantage of leverage to buy a property. Then, you will take benefit of the property appreciation. Potentially, you can own rental properties by taking advantage of leverage.  

Cons of buying a house 

It seems that cons of buying a house are the pros of renting a house. 

1. Put a down payment: You have to pay a 5% down payment for purchasing a residential property, 20% for rental property. Note that mortgage loans usually offer up to $750,000. So you may have to put your own money if the home price is above $750,000. Since you have to put the down payment for buying a house, you may lose the economic opportunity of investment return. In case you do not have to use the down payment on buying the house, you can invest the down payment in stocks.  

For instance,  you plan to buy a $400,000 home. You have to pay $20,000 (5% of the house value) for the down payment. If you invest $20,000 in stocks such as S&P 500 with a 10% rate return, you can generate more than a half of million dollars after 35 years. 

2.  Liable to mortgage and property tax:  As long as you own a house, you are liable for up to 30 years of mortgage payments . Again, you can pay off your mortgage loan sooner than 30 year, but you are still liable to property tax and other fees such as HOAs as long as you own the property.

3. Pay for the costs of maintenance and fixings: As a homeowner, you have to take care of  maintenance and fixings. The cost is approximately 1% of the property value. Those can be small to big costs. In bad cases, you may lose your home due to natural disasters such as flood, mud slides, earthquake and so on. In addition, you also lose the economic opportunity of investment return by paying for maintenance and fixing costs.

4. Do not have freedom to move to a new place: If you own your own home, it maybe difficult if you need to move for any reason such as job changes. As a homeowner, you are liable for mortgage payments, property tax and other fees. You can rent it out to cover those payments, but you need to find renters. During the time you rent your house to your tenants you may face legal issues, property damages, vacancy and so on. 

5. May face a threat of foreclosure:  When you own a house, you are liable for mortgage payment and property tax. However, if you lose your job and don’t have an emergency fund, you may not be able to make those payments, and the bank may foreclose on your home.

6. Endure a hardship of market crash: Many homeowners lost their homes in the 2008 real estate market crash and went bankrupt. Many houses were under foreclosures. As a homeowner, you may need to be prepared for situations such as market crashes.

Rent vs buy calculator

You should do some calculation to compare renting vs buying a house. There are many aspects which you need to bring into the calculation. Note that this calculation below is not accurate to predict the true result. However, it may help you to get a general idea before you make a decision about renting vs buying a house.  

(Total value of the house you consider to buy      X   5%) / 12

If the result is less than the rent amount that you will pay to rent it, then you should buy that house instead of renting it. 

Or you simply can use the Rent vs Buy calculator. Note that this calculator is based on many complicated assumptions such as location, economic situation, property type and so on. You will need to put in information, then it will tell if you should rent or buy a home for a certain period of time. You may need to adjust the numbers in order to have a better result. 

In conclusion, there are many factors that you need to consider in making a decision to buy or rent a home. Generally, if you are planning to stay in your home for the long term, you should buy instead of renting. However, before you buy, make sure that you are financially ready and capable of making the needed payments. If you are planning to stay in the home for only a short period of time, and you also have a higher risk tolerance, it may be prudent to rent and invest your spare money in the stock market to earn a higher return on investment.

Questions and Answers : Renting vs buying a house

1. Is it better to buy or rent a house?

Answer : You should rent if you plan to stay for a short term. If you plan to stay for more than 3 years. Plus, you are financially ready to buy a house, you should buy a house. Over the long term, you can build equity and benefit from house appreciation when you own a house.

2. Why should you rent when you can afford to buy a house?

Answer: You should rent a house if you plan to stay for less than 3 years. Instead of spending money on down payment, property tax and other fees, you can just pay the rent and invest the money in the stock market to get a higher return on investment.