To rent or own? It’s a question as old as the modern real estate market. The right answer for you and your family will depend on a multitude of factors — including your monthly finances, debt and interest in remaining in one place for an extended period of time. You’ll also need to look at the current market in your area or the area you plan on moving to and assess whether homeownership is a realistic possibility for you.
In this quick guide, we break it all down for you:
In many ways, renting is unquestionably the safe choice. You’ll put far less capital on the line initially and get the added flexibility of being able to leave at the end of your lease, whether that’s just a few months, a year or something longer. However, you’ll also have to adhere to the rules put in place by your property manager (something that can make it hard for a home to feel like “yours”) and lose out on the benefits of home equity and homeownership in general.
Some pros of being a renter include:
- Fewer costs upfront: Buying a house takes a lot of cash upfront. Renting doesn’t. With a rental agreement, you’ll get to sidestep the down payment process as well as the myriad of additional fees it takes to transfer a property title from one owner to another. You’re also a lot less likely to take out extensive loans to pay for your housing, unlike with a mortgage agreement.
That being said, many leases still come with additional upfront costs, such as a security deposit and, in some cases, a broker’s fee. Security deposits are paid to the landlord at the beginning of a lease and typically returned to you at the end of your stay, assuming you leave the unit in good condition. A single month’s rent is a fairly common amount for this payment. Broker’s fees are paid to the realtor who helped you find the place (if there was one).
- Additional flexibility: While not every house you buy will be your “forever” home, it still makes sense to stay in one place for a few years if you’re going to jump through the hoops of homeownership. Not so with renting. While longer-term leases are certainly out there, most leases are around 12 months, with some as short as one month. If you think there’s a good chance you’ll need to move in the years ahead to pursue a dream job or new adventure, a shorter-term rental agreement will probably make both logistical and financial sense.
- No added maintenance costs: Have a problem with your dishwasher? Loose doorknob? Just call your property manager! This differs greatly from a homeownership situation, where the impetus is on you to keep up the maintenance of your home — whether that means regular DIY projects or calling in a contractor.
Disadvantages of a rental property, meanwhile, include:
- No renovations / home improvement projects: Since there’s no guarantee you’ll be staying in your current location on a more permanent basis, it doesn’t make sense to invest a large chunk of cash into new countertops or a bigger bathtub. In addition, many leases will limit the kinds of alterations you can make to a property. After all, it’s not really yours to renovate.
- Adherence to property manager rules: In addition to committing to the renovations your property manager decides to perform, you may also need to adhere to some additional rules. This could be anything from policies that limit indoor smoking to quiet hours (especially in an apartment building where you’ll have neighbors) to a ban on certain pets. That’s a lot less autonomy than you may want for your new place.
- No equity: When you pay a mortgage you’re paying yourself. When you send a rent check to your landlord, you’re not. For the most part, the value of a home increases over time, barring factors like a property in disrepair, a decrease in livability in the area or a housing crisis. That means when you do choose to put your home back on the market, whether it’s a few years or a few decades down the road, you stand to make an extensive windfall. By renting, you lose out on this potential for equity.
If staying in a rental is the safe way to maintain the status quo, homeownership is your big jump into the unknown. Everything is a little bigger in the homeownership process: A bigger time commitment, larger upfront costs but also higher potential financial dividends. Are you ready to take the leap?
When you own your own home you get advantages like:
- Ongoing equity: Few investments pay such consistent dividends as homeownership, especially if you plan on remaining in your new abode for many years to come. According to a 2020 report from the Federal Reserve, the net worth of homeowners is a staggering 40 times higher than that of renters. While some of this is self-selecting (wealthier people can more easily afford to own a home) it also says a whole lot about the way properties tend to increase in value over time.
While the market is certainly hot right now, making the mortgage rate on the home of your dreams a little more expensive than it might have been a few years ago, the potential long-term financial benefits of homeownership remain the same.
- Be your own property manager: Having a property manager is a double-edged sword. On one hand, responsibility for the upkeep of the building falls to them. On the other hand, not every property manager is great about fulfilling this responsibility. Rather than wait for repairs or ask permission to make the changes you want to a home, why not take charge yourself? Homeownership means not having to answer to anyone when you repaint your kitchen or hire a contractor to build a deck in the backyard. It also allows you an extra level of privacy from random visits. There’s just something about a home truly being your home.
- Be someone else’s property manager: Depending on the size and kind of home that you buy, you may be able to turn a part of your property into an extra unit for rent. Ideal homes for this kind of setup include duplexes, triplexes and properties with a detached unit, like a pool house. You can also decide between offering long-term leases for your space or short-term options through websites like Airbnb. Of course, properties with more space may also cost more initially.
However, there are some drawbacks, including:
- A high barrier of entry: Buying has a far higher upfront cost than renting. Of course, if you have the money to handle these payments and still have enough left over for other monthly expenses and savings, then you get to take advantage of the additional equity of homeownership mentioned above.
- Limited flexibility: The flip side of the flexibility of renting is the inflexibility of homeownership. Owning property ties you to one place at a time — ideally for multiple years so you can build up equity before resale.
- Property taxes: In many parts of the country property taxes are no joke. According to nonprofit organization Tax Foundation, the median property tax in places like the New York City metro area, New Jersey, Chicago and much of coastal California top more than $4,000. If you don’t live in as hot of a housing market, you may have far lower rates. While property taxes are important, as one of the primary ways that states and municipalities get funds for education and many other important services, it may be a financial burden that you’d rather not deal with at this time.
Ultimately, the decision to either rent or buy a home should come down to your financial position and where you see yourself in the years ahead.
Of course, even if you’re feeling ready to settle down or need the extra space, you’ll still need to remember the obvious: Houses are expensive. In addition to the cost of a down payment and monthly mortgage payments, you’ll also need to calculate a slew of additional fees and payments, both upfront and down the road (called “hidden” costs). Some common examples of upfront costs include transfer taxes, a recording fee for your state and a whole variety of closing costs. Hidden costs of homeownership include property taxes, any renovations you’ll need to undertake and homeowners association (HOA) or condominium association fees.
Overall, a good rule of thumb is that your monthly mortgage should fall between two and two and half times your gross income. If you can’t purchase a home that meets your needs within those limitations, it’s probably best to stick in the renters market for now.
Not only should your finances be in good shape now, but also be set up positively for the future. While the upfront costs of buying a home are substantial, you’ll also need to be able to consistently make each monthly mortgage payment for years, perhaps even decades. Even if you have plenty of money saved up now, be sure you’re also in a career or financial position that you think will stand the test of time — otherwise, your savings may not go quite as far as you had imagined.
If your path forward will include buying a new home, then you should buy through Bungalo. Our innovative approach takes as much of the hassles, haggles and guesswork out of the home buying process as possible. In addition, our rigorous inspection and certification process means that you won’t have to worry about major surprises and maintenance costs down the road.
Here’s how it works:
- Work with the mortgage lender of your choice: Get preapproved with the lender of your choice. Whoever offers the best deal for you, we’re happy to work with them.
- Make a paperless offer: You can submit your offer online in minutes. No guesswork needed.
- “No Hassle” purchase price: Bungalo homes accept the list price on a first-come, first-served basis. That means every willing and able homebuyer has an equal opportunity to own one of our homes.
- Closing assistance: We offer an easy-to-use closing checklist that ensures you’ve done everything you need to hit your move-in-day target.
Home buying has become unnecessarily complicated. With Bungalo, it’s easy. Reach out today to learn more about who we are, and how we help potential buyers find the homes of their dreams.
Bungalo. Your clear path home™. *This article is meant for informational purposes only and is not intended to be construed as financial, tax, legal, real estate, insurance, or investment advice. Bungalo always encourages you to reach out to an advisor regarding your own situation.