In many instances, choosing to rent a home rather than buy one—or vice versa—is a no-brainer. Maybe you have zero in savings and you know you want to move to a new city next year. You should rent. Or you’ve found your dream home at a price you can afford in a great school district, and your oldest is about to start kindergarten. Make a bid! But for anyone who’s unsure how the options compare, this guide will help you think it through.
Average Monthly Housing Costs Whether You Rent or Buy
One common—but overly simplistic—assessment of renting vs. buying suggests that renters are “throwing money down the drain,” while homeowners are “building equity.” Let’s examine these ideas more closely.
Every household pays something for housing. As shown in the table below, renters and homeowners pay almost the exact same average amount each month in non-recoupable housing costs, according to the U.S. Bureau of Labor Statistics' Consumer Expenditure Study. We'll refer to these as the household's throwaway housing costs, since you never get them back.
Renters' Throwaway Costs (when incurred)
|Homeowners' Throwaway Costs(when incurred)|
|Total National Average||$9,477||Total National Average||$9,552|
Maintenance, Insurance, Repairs, Other Expenses
|$808||Maintenance, Insurance, Repairs, Other Expenses||$3,481|
You might notice that the different components do not add up to the total average amount. This is because the total average includes all renters and homeowners, while the component costs only includes those who actually have those expenses. For example, just 38% of homeowners reported paying mortgage interest in a recent survey year, an average of $8,067. But when you average the interest-payers with owners who don't have interest costs, you get a much lower average cost for all homeowners, about $3,000, which folds into the total average. The component costs give you an idea of what you might pay for housing in a given year, while the total gives you an idea of how the costs would spread out over a lifetime.
For renters, the throwaway costs are mainly the rent payment, with a little extra going towards maintenance they do themselves and renters insurance for those who opt to protect themselves and their belongings that way.
For homeowners, the throwaway amount includes interest on a mortgage or home equity loan, property taxes, maintenance and insurance—including homeowners insurance —and private mortgage insurance. Essentially, it includes every housing cost that doesn’t come back dressed up as home equity, with the exception of some of the closing costs buyers pay when they purchase the home.
Closing costs can be significant—typically between 2 and 5% of the purchase price of the home. You might think of them as a cost that is amortized over the length of time you stay in the home, or a cost that is recouped through the tax breaks you might qualify for as a homeowner (more on that below).
That renters’ and homeowners’ annual throwaway costs are so very similar on the whole implies that the housing market is very competitive. Landlords are just able to cover their ongoing costs if they rent the property out, and hope to earn a return on the capital invested in the property if its value increases over time.What kind of return are homeowners and residential landlords earning on their real estate investments? Long-term data shows it’s not very much at all. Housing prices have historically just kept up with inflation.
For another way to compare renting and buying, you might check out an online rent vs. buy calculator. These tools ask you to input all sorts of variables and then tell you whether you’ll come out ahead financially if you purchase a home, or if you should continue to rent. The main problem with most of these calculators is that they ask for a handful of unknowns. For example: what return will you get on your cash in the future if you don’t use it for a down payment? How much will housing prices rise each year? How much will rents go up?Since no one knows the true answers to these questions, these calculators’ utility is limited. Still, a rent vs. buy calculator can offer you another way to think about the two choices.
Buying Instead of Renting
Since you’re unlikely to make out like a bandit by buying a home, you should probably do so for non-financial reasons. Perhaps you know you want to live in a particular neighborhood and you’d like to stay there for a long time while your kids get through school or while you live out your retirement years. While you might be able to rent in that neighborhood, you can avoid the possibility of a landlord elbowing you out by refusing to renew your lease, or raising the rent beyond your means by purchasing a home instead. You’ll get the added benefit of being able to customize the place however you like.
When you stay in a home for a good long time, you avoid additional transaction costs such as closing costs and moving costs, and you’ll also enjoy an unchanging mortgage payment year after year after year (as long as you don’t refinance, of course). You will, however, probably face increasing costs for property taxes and maintenance over time.
Home ownership may also give some people certain tax benefits that renters do not get. You might be able to deduct your mortgage interest, your private mortgage insurance payments, and your property taxes. Give your tax situation a cold-eyed assessment to see if, and by how much, those deductions actually exceed what you’d be able to deduct even if you didn’t own a home (your standard deduction). And consider how many years that situation will persist. That’s the true tax benefit over renting.
Owning a home also offers the advantage of forcing people to save. Most mortgages incorporate principal payoff, which grows over the life of the loan. Over time, an ever-growing portion of your mortgage payment becomes home equity, which you can pocket when you sell the house. If you’re the kind of person who is not very good at saving otherwise, buying a home can help you grow your assets.
Renting Instead of Buying
For many people, renting is a fine approach to the housing conundrum. If you’re new to an area and you aren’t certain you’ll be staying very long, you should rent first to suss things out. Make sure you like the town, and your job works out for you.
Even in that case, a few variables might make ongoing renting a better match for your temperament. Do you loathe dealing with home maintenance issues or lawn work? Or are you someone who might decide next year she wants to move to Thailand to teach English? If you value flexibility, and making the broken hot water heater someone else’s problem, consider continuing to rent (here are some strategies on saving on your rent).
Rental stock is often different from homes for sale—in size, location, age, and amenities. Consider the actual options available to you, and what trade-offs you’re willing to make. You might be happy to give up some square footage to get access to a pool, gym or other community benefits whose costs are spread among all other renters.
If any of the above scenarios make renting more appealing to you, and you can find a place with throwaway costs comparable to what you’d have to pay as a homeowner, go ahead and sign that lease. You can always change your mind next year!
Just one word of caution: make sure that you deliberately save money in other non-home assets, like savings, retirement or investment accounts, for as long as you rent.
Of course, individual renters or buyers might find an advantage in a particular market at a particular time or with a particular property. But on average, whether you’re a lifelong renter vs. always a homeowner, your choice won’t leave you much better or worse off financially compared to everyone else. Either way, you’ll have a roof over your head, and that’s what matters most.