5 Things to Consider When Deciding to Rent or Buy

Is it better to rent or buy? At some point, this question comes up in everyone’s life. The answer is…. it depends.

rent vs buy

It depends on a lot of factors. What lifestyle do you want to live? Are you looking at moving across the country in the next few years? Getting married? Have kids or want to have some in the near future? All of this needs to be considered when deciding if either owning or renting is right for you.

Let’s look at some things to consider when deciding whether buying or renting is right for you.

5 Things to Consider

  1. Financial Position

The 1st thing you need to consider is your financial position. If fresh out of college, you might be buried in student loan and credit card debt. If buying a home overstretches your finances, you will be a lot less likely to cope with a financial emergency or save for other important things like retirement.

Also, an inadequate down payment or subpar credit rating would leave you at a disadvantage when putting an offer in on a home. Even if you get the house you want, you may not get approved for a mortgage. Also the mortgage rate could probably be a lot lower if your finances were in order.

Another thing to consider is your current income level. If current income is not stable or not at a sufficient level for the area you live in, the odds of being able to even afford a house is not likely.

If wanting a buy a house, ensure your financial ducks are in a row before even considering this option.

For example, I learned this lesson the hard way. From a previous post, I talked about how I accrued over $60,000 in debt while in college. Coming out of college I was only making $40,000 / year (though not bad for an engineer back then).

About a year out of college, I decided I wanted to buy a house, so I inquired about qualifying for a mortgage. I had a monthly payment amount I knew I could afford and asked the mortgage broker what I could afford for a house using that amount as my total mortgage (principal, PMI, taxes, etc.). When I saw the meager amount I could buy, I was stunned! Clearly, I had to re-think my strategy.

Over the next 2 years, I worked ALOT of overtime and then moved to a new company (with a BIG pay raise). I used this extra money to pay down the majority of the $60,000+ in debt I accrued in college. When I went back to the same mortgage broker to find out how much house I could afford, let’s just say I was pleasantly surprised! 😊

  1. Job Security

Job security is a BIG factor when deciding to buy a house or rent. Why? Because if your job is not stable with growth opportunities, it would suck to save up a down payment, buy a house, fix it up, and lose it due to foreclosure caused by a job layoff.

Also, if your employer is considering moving you in the next year or two to a different corporate office across the country, renting may be the ideal solution for you.

The reason it matters is that when buying a home, you’ll have a ton of 1-time upfront expenses. Expenses could include but not limited to broker fees, mortgage origination fees, title insurance, homeowner’s insurance, and other closing costs.

Plus, if the house needs some TLC and updates prior to moving in, you’ll need to front these costs as well. TLC and updating expenses could include paint, drywall, mud, new hot water heater, lawnmower, weed whacker, basic tool set, TV, furniture, kitchen table / chairs, pots and pans, etc.

I know from experience.  I remember I was working with a realtor at the time who advised me on how much cash I should have set aside for a down payment and closing costs. Luckily, I had just enough money saved up. However, when it came time to close the sale, my mortgage broker said I needed an additional $1,500 to close the sale due to “unforeseen expenses”. I was pissed! Luckily, I had a little extra stashed away for something else I wanted and was forced to use that to pay the closing costs. Let’s just say I never went back to that mortgage broker again……

On top of that the house needed a paint job and the wood floors needed a lot of love. The previous owners had dogs who tore it up and it wasn’t noticeable with all the rugs they had on the floor! Luckily, my family is pretty handy (benefits of growing up on a farm! Lol😊) and helped to chip in not only with the work to be done, but also gave me a ton of hand-me-down tools to start me off in life. None of it was pretty, but it worked great nonetheless.

Now imagine what this would have cost me if I didn’t have the skills or resources to fix up the house on my own. I easily would have had to pay several thousand dollars in unforeseen expenses.

Therefore, it takes a few years of home ownership to recoup some of the costs initially spent and having a steady job is paramount to that. The longer you stay in a house, the more time you’ll have to spread out those costs while watching your house appreciate.

  1. Ties to Current Area

Are you from the area you live in? Is your family and support system there? See yourself moving to a different area? These are all questions that need to be answered before deciding if buying or renting is right for you.

If you have no ties and plan to move onto a different part of the country, renting is probably right for you currently.

However, if your entire support system is here and you could never see yourself moving on then buying may be the right option for you.

I decided to stay in my areas of the country because I had a lot of my relatives fairly close to my home along with the majority of my college friends living literally minutes from me. I had a good crew and didn’t see myself moving on, so I decide to plant roots here. Personally, I have not regretted it one bit.

In the future, my wife and I have considered moving to another state and for me it will depend on where the kids land and settle down. Family is important to me and I couldn’t see myself living more than 6 hours away from them.

That’s me though. You might be different. Take this into account when deciding whether to rent or to buy.

  1. Value Proposition

Buying a home may seem like a good deal because it allows equity to be built up over time. However, in some places, renting is cheaper than buying.

Prime example: San Francisco Bay area

The average home price in this area is in excess of $1M! If you follow the rule of thumb to put 20% down on a house before buying, that down payment would be equal to $200,000! For that much money, a person could buy a house in ALOT of other parts of the country.

Even in a high-priced market like California, this is ALOT of money to save up. In fact, I have read several articles about families buying rental properties through online platforms like Roofstock. They will buy in lower-priced areas of the country such as the Midwest or Sunbelt states while renting in their home state of California.

Imagine taking that $200,000 down payment and buying 2-3 rental properties in other parts of the country. Then using the rental income earned from those properties to pay for your rent in California! Sounds weird but it happens more that you think.

In fact, this strategy is becoming more common in high-priced markets like LA, New York, San Francisco, etc. than people realize.

When performing your rent vs buy analysis, ensure to factor in the full cost of ownership vs renting when determining what’s right for you. This includes looking at but not limited to:

Price-to-Rent Ratio

Take the monthly rent figure and multiply it by 12(turns it into an annual number). Divide the purchase price of a similar property by that annual rent number. A ratio greater than 20 weighs in favor of renting. On the flip side, a ratio less than 20 favors buying.

Full Cost of Ownership

As I touched on above, factor in not only the mortgage payments buy also property taxes, homeowner’s insurance, PMI (if putting less than 20% down), maintenance (rule of thumb is 1% of home price per year), and upgrades needed.

Other Money Uses

Remember that owning a home isn’t the only way to build up equity over time (think 401K, IRA, owning a business, etc.). If renting turns out to be cheaper, you could invest the money saved by renting into a diversified portfolio that builds wealth over time. The possibilities are endless! 😊

  1. Lifestyle

Enjoy traveling?  Enjoy a large social life? Have a significant other you plan to marry soon? Deciding to rent or buy is more than just a financial decision. It is also a matter of the lifestyle being chosen. It says as much about the person as it does the situation the person is in.

Rent vs Buy

Owning a home is an entirely different level of commitment than renting. A person needs to ask themselves if they feel ready for the level of commitment that owning a home entails.

Here’s a great example for you. I have a really good work friend who I’ve known since college and owned a home literally 5 minutes from my house. At first, she loved owning her own place. After awhile though, she grew disenchanted with it. The maintenance and upkeep needed took a toll on her. She is a free spirit and loves to travel. Owning a house felt like a tether for her.

A few years ago, she decided to simplify her life and align her living accommodations to her lifestyle. She sold her house and decided to rent an apartment instead. Her landlord takes care of the maintenance, upkeep, and garbage. She just comes and goes as she pleases. Since then, her joy for life has come back! By matching her housing to her lifestyle, she felt uninhibited and free to do what she wants when she wants to.

What Should I Do?

To buy or not to buy? Good question. If your life is in flux or if looking for a house is not at the top of your mind, there’s nothing wrong with renting. Renting provide flexibility and options. You may have to pay a penalty to break a lease but otherwise, it’s easy peezy! 😊

Buying a home also has its advantages that we’ll cover in a future article. Owning a home can be a source of pride, achievement, as well as a feeling of stability. All good reasons to buy a house.

What to do? Only you can decide what’s best for you….. after figuring out what you want and what you are truly looking for.

Live the Life You Love, Want, and Deserve! 😊