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There is an age old debate between buying a house and renting an apartment.
Which one is the right choice?
The reality is, it all depends on your financial situation.
This is because what is right for you probably isn’t right for someone else.
In this post, I’ll walk you through the pros and cons of buy vs. rent to help you make the best decision for your life.
In the end, you will know the better option that will put you on the path to financial success.
Table of Contents
The Pros And Cons Of Buy vs. Rent
What Is Home Ownership
When you buy a house, you are owning a home and the property is sits on.
This means that the property is yours and no one can kick you out unless you don’t pay your mortgage.
You are also responsible for all repairs and maintenance costs on the property.
You also pay real estate and property taxes to your local government on the land you own.
And since it is a sizable asset, you also pay homeowners insurance premiums to protect you from loss.
Home Buying Advantages
Here are some of the biggest pros of home ownership.
#1. Stable Housing Payments
When you buy a house, your housing payments will be stable for the life of the mortgage.
This is unlike renting where your rent can go up any time you sign a new lease.
#2. Build Equity
As you make your mortgage payments, you are also building equity in your home.
This is the percentage of the property that you actually own.
Eventually, this equity can be used as a down payment on another house or you can access it to remodel your home.
It can also help with retirement planning.
When you retire, you might decide to downsize and can use the equity to not only purchase a new home, but also use any leftover money to live off of.
#3. Tax Breaks
Another big pro of home ownership is the ability to get tax deductions on your mortgage interest and property taxes.
Depending on your tax situation and the amount you pay in interest and taxes, this could lower your income taxes a significant amount.
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For example, if you pay $10,000 in mortgage interest and $5,000 in property taxes, you could write off $3,300 on your taxes assuming you are in the 22% tax bracket.
This can save you quite a bit of money each year.
#4. Complete Control
When you own a home, you have complete control over who lives there and how it is used.
You can paint or remodel it as you like.
You can add a pool or build a shed if you want.
As long as you stay within the building codes for your municipality, you can do just about anything you want.
#5. Sense Of Stability
When you rent, you are living in an area for a year at a time.
After your lease is up, you might be able to renew it, but if the landlord doesn’t want you as a tenant, you will be forced to find another home.
When you own, you don’t have this added worry or stress in your life.
#6. Forced Savings
One final pro of home ownership is that it can act as a forced savings plan.
As you make your mortgage payments, you are slowly building equity in the property.
Even if you don’t have any other savings, over time this equity will grow and could be used for a number of financial goals.
In addition to the equity from paying down your mortgage, property values rise over time.
So in the future, your home value will be much more than your home’s purchase price.
Drawbacks Of Owning A Home
Here are the biggest drawbacks of owning a home.
#1. Additional Expenses
When you own a home, there are a number of ongoing costs that you are responsible for.
This includes repairs and maintenance, painting, landscaping, yard work, and pool cleaning.
These costs can add up quickly, making your monthly budget a lot tighter than you planned on.
If your house is part of a homeowners association, you will monthly HOA fees you need to pay.
Plus you need to make sure you follow their rules, which could increase your monthly costs.
As I mentioned earlier, you also pay real estate and property taxes on the land you own.
These taxes can be a significant amount of money, especially if your home is in a high-tax municipality.
And even worse, taxes tend to increase every year, making this bill larger and larger in the long run.
So before you buy a home, you need to consider the current taxes you pay, and understand that they will only increase from here.
#3. Saving For Down Payment
If you want to buy a home, you will need to save up for a down payment.
This can be a difficult task, especially if you are trying to do it while also paying rent and bills each month.
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While some home loans allow you to put as little as 3.5% down, in a perfect world you want to get to 20%.
This is because anything less than 20% and you need to add private mortgage insurance, or PMI to your monthly payment.
This could be $50 up to $100 or more every month. While you can eventually cancel this, it usually isn’t possible for a few years.
Just to put your down payment into perspective, 20% down on a $300,000 house is $60,000.
For many people, it will take years to save this amount of money.
#4. Hard To Move
If you want to move, selling your home can be a difficult process.
Especially if the housing market is slow, it could take months or even years to find a buyer who is willing to pay your asking price.
So before you buy a home, make sure your future plans include staying in the location and you are comfortable with the idea of being locked in for a while.
#5. Could Lose Money
While historically real estate prices increase, this doesn’t mean they can’t decrease.
For example, if you live in a small town and the main employer shuts down or moves, there won’t be a lot of demand for housing.
As a result, your home value might fall.
And if you need to sell your home quickly, you might have to accept a lower offer than you were hoping for.
In addition to this, when you sell, you are responsible for paying the realtors fees too.
So while most of the time you don’t have to worry about losing money on a house, you have to know that it is possible in the short term.
What Is Renting?
When you rent an apartment, you are not owning the property.
The landlord owns it and you are paying them rent to live there.
You are also responsible for paying most or all utilities for the apartment.
When it comes to repairs and maintenance, the landlord is responsible for these.
Advantages Of Renting
Here are the biggest advantages to renting an apartment.
If you want to move, finding a new rental property is a lot easier than selling your home.
You just have to wait until your lease is up and you are free to move anywhere you desire.
This is a huge advantage for people who are always on the go or like to change their surroundings often.
#2. Lower Payments
Your monthly rent payment is usually lower than your mortgage payment.
Plus, you don’t have to deal with any other costs during the month, like maintenance or costly repairs.
So if you have a lower income, it might make more sense to rent and take advantage of the lower payments as you build up your savings and work to increase your salary.
#3. Lower Upfront Costs
When you sign a lease, you are usually required to pay first month’s rent and a security deposit.
In some cases you may have to pay the last month’s rent as well.
If you have a pet, there might be an additional security deposit.
But these payments are much less than what you pay when buying a house.
First you have the down payment, which alone is probably more than the upfront rental costs.
And you have to pay closing costs.
These average around 3% of the price of the home.
Finally, you have to pre-pay insurance and property taxes too.
All told, you are looking at tens of thousands of dollars in upfront costs to buy a house.
#4. Additional Amenities
If you rent in an apartment complex, there is a good chance there will be amenities you get access to as part of your rent.
This can include a swimming pool, gym, or even a clubhouse.
Some complexes even have their own shuttle service.
So if you are looking for all the amenities and don’t want to deal with maintaining them yourself, renting is a good option.
Drawbacks Of Renting
Here are some of the biggest cons of renting an apartment.
#1. Never Build Equity
The biggest con of renting is you have nothing to show for the monthly payments you make.
In reality, you are building equity for the landlord, not yourself.
With your own home, the monthly payment you make has a portion that goes towards the principal.
Over time, you build equity that gives you financial stability.
You can tap into this equity if you want to remodel or need money for something else.
#2. Unknown Monthly Payments
Another important factor with renting is your monthly payment is never stable for the long term.
Your rent is usually set for the term of the lease but that is it.
So if you sign a one year lease agreement, chances are the following year, your rent will increase.
And if you move to another rental, you could pay an entirely different amount than what you are paying now.
With a house, you are locked into a payment for the entire term, be it 15 years or 30 years as an example.
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#3. No Stability
Since more leases are for one year, you never have any real stability.
You might live in an apartment for a few years and then move.
Rent for a year or two at the new location and move again.
While this is fine for some people, for others, the lack of stability is not something they are interested in.
#4. No Tax Benefits
Renters also do not get to enjoy any tax benefits.
They cannot write off their monthly rent on their income taxes.
And since they don’t pay property taxes, they cannot write these off either.
#5. No Control
This could be a big issue for some renters.
You might be renting a house and get a letter informing you the landlord is selling the property and you need to move out.
Another example that you have no control is you cannot paint or remodel your apartment.
Exterior landscaping is also not an option.
Important Steps To Help You Make The Right Decision
Now that you know some of the pros and cons of buy vs. rent, you might have more questions than answers.
The good news is asking yourself the following questions can help guide you with this big decision for your financial situation.
So take your time with these questions.
Write down your immediate thoughts and then think more about them in the coming days.
Then compare your initial thoughts with your additional thoughts to see which one makes more sense for you.
#1. How Long Do You Plan On Living There?
If you plan on living in the same place for less than five years, renting is probably a better option.
This is because you might not come out ahead financially.
For example, in the first years of paying your mortgage, you are paying mostly interest.
This means you aren’t building a lot of equity.
If you didn’t put a lot of money down, you could lose it when you sell since the seller pays closing costs.
Here is an example to drive this idea home.
You take out a loan of $200,000 at 3.5% for 30 years.
You put $5,000 as a down payment.
After 2 years you decide to sell.
Your mortgage is $192,187 and the value of the house is $210,000.
You sell the house for this amount and pay the 6% realtor fees, or $12,600.
You get $210,000 for the sale, minus the $12,600 in fees and the $192,187 you had to pay to the bank to settle your mortgage and walk away with $5,213.
Since you put $5,000 down, you only made $213 on the sale.
But you may have to pay movers to help you move into your new house or apartment and have other expenses, which brings this number closer to zero.
And while this example has you making a little money on the sale, this isn’t always the case.
The bottom line is, if you plan or even think you might move in less than 5 years, you are better off renting, financially speaking.
#2. How Much Location Freedom Do You Want?
As mentioned above, you need to stay in a home at least 5 years for it to make sense.
With an apartment, you can sign a one year lease and move every 12 months if you like.
Maybe you just moved to a new city.
Do you really want to own a home when you don’t know much about the city?
It would be better to rent for a year and get a feel of the city to see exactly where you want to live.
You might even realize you don’t even like the city and want to go somewhere else.
Or maybe you love to travel.
If this is the case, maybe you rent for a while until you find a location that you absolutely love and know for certain you want to live there.
#3. How Much Personal Freedom Do You Want?
On the other hand, buying a house gives you a lot of personal freedom.
You can paint the walls any color you want.
You can demo and change the layout.
Even the landscaping is completely yours.
With an apartment, you don’t have any of these freedoms.
You might get lucky and have a landlord that will allow you to paint the walls, but this is it.
#4. How Much House Can You Afford?
This question is one that can easily determine if buying or renting makes the most sense for you.
While banks and credit unions use a debt to income ratio of 28% to 36%, this could be too high to allow you to live comfortably.
You are better off using 2 times or 2.5 times your gross income to know the maximum loan amount you can afford.
So if you make $18 an hour, you can take out a loan for between $75,000 and $94,000.
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Note that this number doesn’t include your down payment, so depending on the amount you have saved for this, you could find a nice home.
Or you might find that it makes more sense to rent until you earn more or save more money.
#5. Review Your Overall Financial Situation
In addition to looking at how much house you can afford, you should look at your overall finances.
Do you have a lot of high interest debt?
If so, it might make sense to rent until you pay this off.
Maybe you don’t have any savings.
If all your savings is going towards a down payment, you might want to wait until you can fully fund an emergency fund so that if something breaks at your house, you have the money to pay for it.
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#6. Compare The Costs
Finally, you want to compare the costs.
In most cases, it will be cheaper to rent than own a house.
But you can’t just look at the monthly rent vs. the monthly mortgage payment.
You have to take into account the additional costs of owning a home.
This includes property taxes, exterior maintenance, utilities, insurance, etc.
If you aren’t comfortable taking ownership of all these additional expenses, it could be smarter for you to rent.
There are both pros and cons of buy vs. rent.
At the end of the day, this is a big financial decision and you have to decide what is the best choice for your life and financial goals.
While you will get tax breaks and build equity by owning a home, it doesn’t mean it is right for everyone.
And you shouldn’t feel wrong if you decide to rent.
Determine if home ownership or renting makes sense for you now and in the foreseeable future.
You can always reassess in a few years and make changes if needed.
The most important thing to not do is do what others tell you. This will only lead to financial disaster in most cases.
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I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.