Renting vs Buying
For decades, homeownership was central to the American dream. It was simple, really: you’d go to school and find a job, get married, then buy a home. In your home you’d start a family and grow old, enjoying the comfortable lifestyle that Americans are supposed to have. A home was an American’s source of pride, the final product of years of hard work.
But then something changed.
The housing market crashed in 2008, sparking the Great Recession. The 2008 crisis rocked the United States, and although the economy has recovered, this recovery has been gradual. But, while the economy may have recovered, homeownership didn’t. Renting is now considered a viable— and respectable— alternative to owning a home. The percentage of Americans who rent a home has risen from 30% pre-recession to 37% post-recession. Millennials aren’t buying homes at the same rate as their predecessors. It’s not that Americans no longer want to own a home— they’re just uncertain whether or not owning a home is the correct financial decision for them. So when should you buy a home and when should you rent?
Truthfully, the answer all comes down to personal preferences— neither owning a home nor renting is inherently good or bad, and it’s up to you to decide which one works best for you, given your financial limitations. Nevertheless, there are a number of things one has to consider when choosing whether to rent or buy a home.
People very often look at their home as the main investment in their life. Young homeowners especially tend to look at their home as an instrument for building wealth. Yet, homeowners have a tendency to overestimate the return on investment they’ll see from their home. Oftentimes, a home’s value appreciates only enough to keep pace with inflation— perhaps just a little more. Owning a home is normally a safe investment, but it shouldn’t be the main one in your life. A home should be looked at as your residence first, investment second. If you truly want to own a home, you need to make sure that you want the house for itself— its location, its size, its charm, etc.— and not because you think it’ll help you build your net worth.
If you’re looking to build your net worth, then the money you would have tied up in owning a home might be better spent somewhere else. Barring economic strife, your typical stock profile will earn a greater return than you can expect from your home’s value appreciating. So if you want to build wealth, odds are you’re better off renting a home and investing the excess money that would otherwise be going to your mortgage payment, insurance, and taxes, among other things (if you want to know this for sure, several calculators can be found with a simple Google search that will measure the exact opportunity costs of owning versus renting, and equate monthly mortgage expenses to monthly rent).
This doesn’t mean that renting is a better or even a smarter choice. Renting comes with opportunity costs of its own.
Again, neither renting nor owning property is inherently good or bad, but either can certainly be right (or wrong) for you. There are a number of other factors you have to weigh before deciding whether you should rent or own a home, but these considerations are a good place to start.