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When Does Renting Make More Sense Than Buying?

For a long time, homeownership has been the ultimate goal for a lot of Americans — and it’s true that buying a home can be a good investment if everything goes right.

However, during the past decade, more and more have been waking up to the many benefits of renting. Enticed by an increasing selection of high-quality rental properties and the prospect of carefree, zero-maintenance tenancy, a growing number of lifestyle renters are opting out of homeownership and into permanent renting.

The culture and the economy are evolving to meet their needs too, as the number of rental units under construction is nearing its highest levels in three decades, and renters can now use their rent payment history to establish credit. At this point, there are a lot of instances where renting a place makes more sense than buying. Let’s look at some of them, and explain why this is the case.

The Numbers Don’t Work

buying a home

Homeownership is such a powerful wealth builder because you’re building equity while your home value is (presumably) going steadily upwards.

But buying isn’t always the better choice when it comes to renting vs. buying. A general metric that many experts suggest using is the buy-to-rent ratio. Take the rent you’d be paying, and multiply it by 12, which is what you’d pay in rent in a year.

Next, take the purchase price of a prospective home and divide it by the annual rent number you calculated above. If the result is more than 20, renting makes more financial sense; if the result is less than 20, buying is the more prudent move.

You’re Unfamiliar with the Area

Every neighborhood has its own character, and if you’re new in town, you probably won’t know what the best fit for you is going to be.

You can ask for recommendations, and research things such as amenities, transportation, and school quality, but that’s no guarantee the area’s vibe will match what you’re looking for. Homeownership is a long-term commitment, so you don’t want to leap into a hasty decision. Make a list of potential neighborhoods to settle in, rent for a year in each of them, and only start looking to buy once you’ve found that perfect match.

You Don’t Have Time for Maintenance

home maintenance

Owning a home is a lot of work. As the owner, you’re responsible for everything from trimming your lawn and trees to small repairs and standard maintenance such as painting and cleaning the gutters. That work not only beautifies your home (and keeps your neighbors happy) but also preserves the value of your property. All in all, it takes a lot of hours and elbow grease.

If you don’t have the time or willingness to look after your home, it’s probably a good idea to rent, and leave the maintenance to the landlord and the property manager.

You Can’t Afford to Buy in Your Ideal Location

Many buyers ultimately have to choose between where they’d prefer to buy and where they can afford to buy. These buyers aren’t necessarily doomed to be unhappy; many end up thriving in a neighborhood that may not have been their first — or second, or third — choice.

But some buyers do end up dissatisfied. If your ideal location is one that’s walkable and near amenities such as nightlife and shopping but all you can afford is a home in a suburban residential neighborhood, you may be setting yourself up for unhappiness.

If your ideal location differs a lot from where you can comfortably afford to buy, you should consider renting — your lifestyle choices and happiness are too important not to.

Your Credit Isn’t Strong

renting an apartment

Your credit score is a huge factor in what kind of mortgage you’re approved for — or if you’re approved for one at all.

Lenders generally require a credit score of 620 for a conventional mortgage. That said, you could qualify for certain government-backed mortgages even if your score is in the 500s, though you’ll still need to meet certain conditions to qualify.

But even if you qualify for a conventional mortgage by meeting the minimum terms, that doesn’t necessarily make it a good idea. If you qualify for a mortgage with less-than-ideal terms, such as a higher interest rate, you’ll likely end up paying tens or even hundreds of thousands of dollars extra over the term of the loan than someone who qualified for a lower interest rate.

Make sure you crunch the numbers at your interest rate to see how much you’re paying in the long run and compare that to what you’d pay at an ideal rate. It can often be worth it to rent for a few years while you improve your credit score — especially since, as mentioned above, you can use your rent payment history to establish credit.

It’s also worth noting here that a short credit history or the absence of a credit history can often hold you back as much as a poor credit history. Sometimes it’s less a matter of fixing something that’s broken and more one of establishing something that doesn’t yet exist.

You Can’t Stay Long

renters in apartment

Even if the numbers say that buying makes more economic sense than renting, there are other factors to consider than just average rent vs. prospective mortgage payment.

Buying a home comes with a lot of fees and transaction costs. Closing fees for buyers average around 3-6% of the sale price; expenses such as mortgage origination fees, broker fees, your down payment, and title insurance will add up to thousands of dollars. And then there are costs like moving fees. When you spread those costs out over time, you’ll have to stay in your new home for quite a while before you break even.

How long is “quite a while”? Well, experts say that if you’re not going to stay for longer than three years, buying is almost never a good idea. Most buyers will want to stay for at least five years before the costs become worth it.

If there’s a chance you can’t commit to staying for a half-decade, you’re likely better off renting.

Your Heart’s Not in It

buying a home

Many people look at buying a home as an investment — but that’s not all it is. Buying a home also means opting into a community and accepting that responsibility. Are you willing to hand out candy on Halloween, take part in the neighborhood block party, and clean your gutters twice a year? A lot of homeowners who see themselves as investors are taken by surprise by how much emotional labor, not to mention literal labor, they’re on the hook for.

A general rule is to consider how you’d feel if your home’s value didn’t increase at all for the next decade. Would you consider it wasted time, or would you still be happy about buying? If you’re only doing it for the money, you might be better off renting until you’re ready to be a fully participating homeowner.

Mihaela Buzec
Mihaela Buzec
Mihaela Buzec is a senior writer and online content developer for RentCafe. She covers topics about everything related to the renting lifestyle, from decorating and interior design to finding the right apartment, frugal living, money saving advice, and more. She dives deep into topics of interest, writing well-researched comprehensive guides on subjects such as renting with pets, saving on utilities, or avoiding rental scams to help renters stay informed and live smart. Mihaela holds a BA in English and German Language and Literature, an MA in Current Linguistics, and she is currently pursuing a PhD in neurolinguistics.

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