Reasons Renting is Better Than Buying

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Millennials, are you wondering if you should rent or buy? Here are six instances when renting makes better financial sense than buying a home.

There’s a good reason why home ownership is one of the most common goals in people’s lives. It’s a way to build real wealth as you pay down your mortgage over time. It means you’ve finally arrived in the world when you sign on the dotted line and take possession of a place of your own.

Your home is your castle, a place where you hang your hat and memories are made. Also, no one ever dreams of being a renter.

As great as ownership is, it doesn’t always make financial sense to purchase a home. As hard as it is to believe, there are some times when renting is the better option.

Which best describes the benefits of renting a home? Here are six instances when renting makes better financial sense than buying:

1. You Don’t Plan on Living in an Area Very Long

There are a lot of expenses involved in buying and selling a home: closing costs, inspections, repairs, realtor fees, and others. The realtor fee alone is usually six percent when selling. This can end up being a lot of money. The realtor fee on a $200,000 home, for example, is $12,000. Ouch!

If you know you will only be living in a certain place for a short period of time – like two years or less – then buying doesn’t make financial sense. Just remember that it sometimes takes months for a home to sell, and you don’t want to keep your money tied up in a place when you’re not going to be there for very long.

2. You Need a Lot of Flexibility

If you move to an unfamiliar place and make a quick decision to buy, you might end up with some regrets. For example, if you move from your parent’s house in Denver, Colorado to Austin, Texas, then renting an affordable Austin apartment gives you the ability to scope your new city out without making any long-term commitments.

Let’s say you get a job transfer to a new city you’ve never even been to, and you need a place to live ASAP. If you’re not familiar with a new location, it might make sense to rent – at least for the first year – so you can get a feel for the place and figure out which neighborhood you really want to live in.

3. You Don’t Want to Fix Toilets

Things break in homes. The plumbing occasionally needs repairing, shingles may need to be replaced after a bad storm, foundations crack, and appliances don’t last forever. Taking care of these things requires money, time, skill, and patience – and it may require a lot more money if you prefer to hire people to take care of the repairs for you.

Landlords typically take care of all maintenance issues – unless specifically mentioned in the rental contract. As a renter, you have the luxury of making a phone call to your landlord to set the repair process in motion. This is something that most homeowners could only dream of.

4. You Haven’t Saved for a Down Payment

It’s hard to secure a loan these days without a down payment. And it can sometimes take a while to build up your savings. What do you do in the meantime? You rent.

If you shop around, you should be able to find a decent place to rent that will allow you to save some money each month. It may even be worth it to live an extra 20 or 30 minutes from your job if it allows you to save for a down payment on a home.

5. You Lack Job Security

Purchasing a home and putting down roots in a particular area may not be the best idea if you are unsure of your current work situation. Maybe the company you work for recently laid off a bunch of people – that’s never a good sign. Or perhaps your boss is a jerk and you’re not sure how much longer you can take it.  

Losing a major source of income when you have a mortgage payment to make can be devastating. It means you’re stuck in a particular area until you can either sell your home or land a new job. As a renter, however, you have the freedom to pick up and move to a new location in a pinch.  

6. You Live in a Big City

Home prices in the best cities for millennials are often very high. In some cities, home prices are simply out of the reach of most people – like in San Francisco or Silicon Valley.

If you don’t have a spare $500k lying around to buy a home in an expensive city but you need to live there for work, you may still be able to afford to rent a place, even if it’s a simple studio or loft apartment.

More Reasons To Not Be a First Time Home Buyer

There are dozens of economic advantages and a warranted feeling of security with being a first time home buyer. Currently, it’s a purchaser’s market as interest rates are still low, hitting 2.88% for a 30-year fixed mortgage this month. It seems like a good time to buy, right, millennials?

However, being a first time home buyer may not be suitable for all. For all of the optimistic reasons for being a home owner, there are some very compelling justifications to not buy a home. What are these reasons you may be asking yourself?

Here are some reasons to be hesitant to purchase your first home:

Loss of Flexibility

Owning a home and being a first time home buyer provides a sense of stability and very likely will feel a sense of security even though this may not be a good thing for you.

Millennials are in their career-building years. Let’s say you are currently underpaid and the only way to climb the career ladder is to seek new employment in a new city. 

Or, you may want to switch fields you might have to relocate to get to that next stage. You need to have the capability to relocate on short notice, maybe even as fast as 2 to 3 months.

Having to sell your home rapidly would force you to offer it up at a loss in order to get rid of it quickly, in addition to incurring 1000’s of dollars of closing costs.

No Room For Youngsters

Millennials are within the prime years for starting a family and thus being a first time home buyer makes sense, right? You may not have a family now, but the probabilities are you may in the near future.

So, buying that cozy dwelling or condo perfect for the 2 of you is probably not a good idea when a little one makes three. Having to sell your house to buy a larger one with a due date looming can also be unbearably worrying, expensive, and may even cost you a large amount of money.

Fives Years In

If for any reason you think you may not be able to stay in your home for five to seven years, you should not buy. It will be cheaper to rent. The rule of thumb used to be seven years, but now that the housing market is stabilizing, that timeline has shifted slightly.

With only moderate market appreciation, it will generally take five years for you to recoup the costs of buying, selling, and carrying costs. Unfortunately, in the first years of your mortgage, you won’t be building up too much equity. Banks charge a hefty portion of your interest upfront, with very little going to your principal in the first few years.

No Money Down, No House

If you don’t have enough money saved for a down payment, don’t be a first time home buyer. I am a big proponent of 20% down. That is not always feasible for most Millennials starting out, and it is lot of money to have saved up. But, unfortunately, it is the safest, most conservative approach to home ownership. If you can’t bank on Mom and Dad for a leg up on the down payment, then you need to keep saving

Too Much Debt

Student loans, car loans, and any other debt you have accumulated are all reasons not to buy a house just yet. You will need to pay down your debt first. Not only will a being a first time home buyer put a dent in you debt reduction plan, banks will not be willing to approve you for a loan with a high debt-to-income ratio.

Shaky Job Security

First, purchasing a home with today’s new qualified loan standards requires some consistent job history. When you’re in the early stages of your career, there may be jumps and gaps in your history, so getting the loan is going to be a challenge.

Once you own a home, be aware that job situations can change overnight. Losing a job, periods of unemployment and changes in income are not as easily weathered when you own a home. Your income may change, but your housing costs will remain the same. You won’t be able to quickly downsize, leaving you to sell your home out of financial desperation.

Cash Poor

Being a first time home buyer often leaves buyers cash poor. After you dip into your savings to come up with the down payment, the closing costs, and any renovation that you need to make prior to moving in could leave your bank account in the double digits. That is not the way you want to start living the ‘American Dream.’ Make sure you will have enough cash leftover to weather a job loss, an unexpected emergency, or even a health issue that could impact your earning power. Don’t end up house rich, cash poor and emergency fund-less.

Before You Buy

Always take the time to make sure buying makes sense before you sign on the dotted line and commit to a lengthy mortgage. Depending on your situation, you may actually come out ahead by renting instead.

If you want to save money on housing (typically your biggest expense), check out how to live rent free and the fundamentals of house hacking.

About the author

Cyrus Vanoverhttps://www.frugalbudgeter.com/
Cyrus Vanover is a freelance business writer who helps marketing managers position their companies for success. Based in Virginia, he enjoys hiking the local trails, exploring new restaurants, and live theater when not writing.

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