This post is by our regular contributor, Kristi.
I’m sure you’ve heard it before, from both family and well-meaning friends alike. “Why are you renting? You’re just throwing your money away! Why not get a starter house and use your monthly housing payments as an investment in your future, instead.”
Are they right, though? Is rent really throwing money away? It depends.
Renting doesn’t always throw your money away, and buying isn’t always a good investment. Before you can decide whether renting or buying is a better money solution, you need to take a hard look at your personal situation and finances. Never buy a house just because you (falsely) believe that rent is a waste of money.
Ask yourself these seven questions before deciding that rent is just throwing money away.
1) What is your personal situation?
The decision to rent or buy a home is personal and should always and only be based on your personal situation.
Are you 21 and fresh out of college with the world at your fingertips? If you like to travel and have the flexibility in lifestyle afforded to renters, then why would you tie yourself down to a mortgage?
Are you gainfully employed, with both business and family roots tying you to a certain zip code? If so, owning a home may be a better investment.
2) What is the rent/buy ratio for your area?
Is rent throwing money away? To figure that out you need to crunch some numbers. To get as accurate an answer as possible, you need to look at the rent/buy ratio for your area.
If you decided to buy, what are the average property taxes? How much will you pay in interest on your mortgage each year? What about homeowners’ and mortgage insurance and home repair costs? Are home values in your area projected to rise or are you in a foreseeable housing slump? These facts and figures all need to be taken into account.
Use a mortgage calculator to help you figure out if you would be saving any money by buying instead of renting. If you’d only save $150 on your monthly housing costs by buying a comparable property instead of renting, the money saved probably isn’t worth it. Especially since homeowners end up paying far greater annual sums than the $150 saved each month.
3) Where do you see yourself in five years?
Do you consider your current job as just a stepping stone to a different job in the future? Or, do you have business and family roots tying you down?
If you see yourself moving to a new city or part of the country in the next five years, it’s probably a better idea to hold off on buying a house. You can always sell a home or turn it into a rental property, but making a big move is a lot easier when you aren’t tied down to a mortgage on a house that may or may not sell in an ever-swinging housing market. (And speaking from experience, it’s a lot easier to be a landlord when you live in the same town).
If you’re always on the move or looking to the future for bigger and better things, don’t put financial shackles on your lifestyle because “renting is throwing money away.”
4) What is your financial situation?
Do you have considerable student loans left to pay off or are you struggling to pay off credit card debt? If so, you might want to hold off on buying a house. When lenders look at your debt to income ratio, if you’re already swimming in debt you won’t get the best interest rate. Waiting a few years to pay down your debt as much as possible could save you thousands of dollars in interest in the long run.
Also, look at that stability of your job and whether you have a comfortable amount saved into your emergency savings account. You don’t want to lock yourself into a mortgage if you are living paycheck to paycheck or relying on overtime checks to make ends meet. Having an emergency savings account will help you stay on your feet and meet those mortgage payments if suddenly find yourself laid off or out of work due to disability or medical emergencies.
5) Have you saved for a considerable down payment?
The general rule of thumb for home-buying is not even to consider buying a home unless you have at least a 20% down payment ready to deposit, especially if you want to avoid paying for private mortgage insurance (PMI). You can buy a home with less (or if you qualify for a down-payment free loan like a VA loan), but it’s in your best interest to wait until you have a larger down payment available.
6) Do you foresee any changes in your family status?
Are you dating and ready to pop the question (or expect the question any time now)? If you see yourself getting married in the next few years, you might want to hold off on buying a home. Don’t buy a home now that may not work well for you and your spouse down the road. Especially if you decide that you want to have kids in future, you won’t want to be stuck in a home that’s too small for your growing family’s needs.
7) Are you good at DIY?
There are a lot of upkeep costs as a homeowner. You have to be able and willing to deal with the plumbing leaks, replacing or repairing the roof, and all of the other maintenance problems that pop up. Having basic DIY skills will save you thousands of dollars as home-owner. You don’t have to have DIY skills as a homeowner, but it definitely helps.
One of the biggest perks of being a renter is that all of those home repair costs fall on the landlord. If you aren’t great at do it yourself maintenance, or don’t want the fuss and bother of contracting out to repair men, then renting is probably the better option.
Deciding what’s right for you
Where you are in life and what you want to accomplish should be your biggest motivator behind the decision to buy a home or not. Don’t listen to the naysayers who say renting is wasting money.
Look at your family and financial situation, crunch the numbers, and assess your priorities before deciding that rent is throwing money away. Rent can be a much better option, depending on your personal situation and your finances.
Are you a homeowner or do you enjoy renting? What factors played into your decision to rent or buy?
theYachtless says
I’m so happy when I read articles that say it’s okay to rent. :) I have a great situation right now — I get to live in a city but pay an unusually low amount of rent for the area I’m in, plus my landlord is a really nice guy who lets my housemates and me use his internet for free, plus we never have to worry about fixing anything because he takes care of it! I’m planning to stick with this for as long as possible. :)
eepdawe says
Great points. I rent and I have no intention of being a homeowner… ever! The most comprehensive article I’ve read on this subject is:
http://affordanything.com/2015/11/24/is-renting-better-than-buying-should-i-rent-or-buy/
Beachbudget says
I rent partly because I live in LA, and partly because I’m happy doing so now. I think people try to sell you on the “American Dream,” but whose dream is that really? I like not having to go to Home Depot every Saturday.
Hannah UnplannedFinance says
The other day, my husband commented, we could literally throw away our house at the end of living in Raleigh, and still come out ahead. He’s right. It’s super cheap to own here, and unreasonably expensive to rent.
However, our next stop is unlikely to be as favorable to ownership, so we’ll probably rent again soon enough.
brian_robben says
When I read this title I said, “Yes!” The stereotype is if you rent you’re foolish and wasting money, but as you laid out in this article it’s not a black and white call. Context is key, and for most adults who don’t want to be tied down to one location for at least five years, renting is most likely the better option in my opinion.
Eyesonthedollar says
There are pros cons to both. I’d say if you don’t plan to stay somewhere for at least 10 years, then think really hard before buying. You never know when circumstances might make it nearly impossible to sell, and it costs a ton of money to move, no matter how frugal you are. However, if rents are about the same as a mortgage and you have stable income, buying makes sense. I like knowing that my mortgage payment is going toward an investment that will increase in value over time.
mycareercrusade says
Hey Kristi,
Great question and one that people really don’t ask themselves enough.. I’m renting or paying rent to my parents at home, while I’ve moved out before it makes sense to help the parents out with some extra $$ and it gives me flexibility to as you say invest in property and not have a large amount of my extra income tied up in home loan repayments.. plus the ability to travel too! :)
I’ll keep evaluating as my situation changes as you mention! Personally I’m likely to keep renting & investing unless a girlfriend ends up really wanting to buy a place to live in
MakintheBacon says
Prior to buying the house, I was renting an apartment in a not so great neighbourhood. The noise, slow elevators and people leaving their garbage outside the garbage chute were just some of the many factors that drove me to want to move out and get a house. Despite the repairs, bills and constant upkeep, I do enjoy living in a home. I love our neighbourhood because it’s quiet. I’m not sure I could ever go back to living in an apartment.
moderatemuse says
theYachtless If renting is working out well for you financially then definitely don’t stress over it!
moderatemuse says
eepdawe Paula Pant is actually my mentor! She’s a fantastic go-to for information about the pros and cons of renting versus buying.
moderatemuse says
Beachbudget Haha, I actually love Home Depot, but I wish I didn’t have to go there quite as much sometimes. If homeownership isn’t your dream, don’t pursue it. Do what makes you happy and makes the most sense for your situation, for sure.
moderatemuse says
Hannah UnplannedFinance It’s incredible how the housing market fluctuates from one town to the next.
moderatemuse says
Jaime Donovan A starter house can be a great investment is you buy in the right place at the right time for the right price. It can also be a big PITA if you don’t enjoy being a landlord.
moderatemuse says
brian_robben Yes! Context is key. It’s not a black and white answer. You have to look at the numbers to find out which is best for you.
moderatemuse says
Eyesonthedollar There are definitely pros and cons to both. Everyone needs to take a hard look at their finances and their local housing market before deciding.
moderatemuse says
mycareercrusade Living at home is a win-win in my opinion. It helps both you and your parents out financially. Take advantage as long as it’s a mutually profitable experience.
moderatemuse says
MakintheBacon I personally could never go back to apartment living for some of those exact reasons. I don’t blame you one bit.