Rent Your Home or Buy? Here's How to Decide

By Dan Rafter on 22 November 2016 0 comments

There are plenty of advantages to renting an apartment, and just as many to buying a home, instead. But what about financially? Is renting or buying the smarter money move?

Not surprisingly, the answer is complicated, and depends on where you live, what kind of home you want to buy or apartment you want to rent, and how long you plan on staying in one place. Here's a look at the numbers that might help you solve the rent-vs.-buy puzzle.

Prices Are Rising for Buyers and Renters

Renting an apartment is more expensive today than it was even a year ago. But the same is true of buying a home.

Consider the cost of buying a home. The National Association of Realtors reported that in September of this year, the median price of existing homes stood at $234,200.

You won't necessarily have to pay $234,200 or more, depending on where you buy. But the median sales price continues to increase, meaning that home prices overall are on the rise. The median price in September was up 5.6% from the same month one year earlier, when it was $221,700. And don't expect median prices to fall anytime soon. The association says that September's price increase represents the 55th consecutive month of year-over-year gains.

And what about renting? Apartment rents continue to rise, too. ApartmentList reported that in November of this year, the median national rent for one-bedroom apartments was $1,110 a month. For two-bedroom apartments that figure was $1,270. The good news is that median rents actually fell in 55 out of the country's 100 biggest cities from October to November, according to ApartmentList.

The bad news? Rents are still higher today than they were one, two, or three years ago. According to ApartmentList, the median national rent was 2% higher in November of this year compared with the same month one year earlier.

So no matter if you rent or buy, know that prices are generally rising.

Which Is More Affordable?

That leads to the big question: Given that both buying a home and renting an apartment are getting more expensive, which option is most affordable?

The answer to this question includes plenty of variables. For instance, owning a home provides a tax benefit: You can deduct the interest you pay on your mortgage loan each year up to $1 million, resulting in a lower tax bill. But even this isn't a crystal-clear financial plus for all owners. You can only claim your mortgage interest deduction if you itemize your taxes. And if that interest deduction isn't higher than the IRS' standard deduction — which stood at $12,600 for married couples filing jointly and $6,300 for singles in 2016 — there is no real reason for you to itemize your taxes and claim the deduction.

Then consider the variables of going the apartment route: You might be able to find an apartment with low rent. But that apartment might not be located where you actually want to live, especially if you want to live in the center of a large city. Apartments in urban areas tend to come with higher rents today.

And if you do find a cheaper apartment, it will almost certainly not be a newer one. RENTCafe found that in 2015, 75% of all large new apartment properties built across the country were high-end luxury properties, buildings that charge far higher monthly rents. Most of these new apartments are being built in the center of big cities, too, according to RENTCafe.

So if you want to rent an apartment in San Francisco? ApartmentList says that a two-bedroom apartment here had a median price of $4,700 a month in November, while a one-bedroom had a median monthly rent of $3,440. In Boston, two-bedrooms rented for a median price of $2,350 a month, while in Seattle it cost a median of $1,720 for a one-bedroom unit and $2,300 for two bedrooms.

Given this jumble of numbers, is it cheaper to rent or buy? According to real estate website Trulia, buying a home is cheaper on a national basis. Though, not surprisingly, there are some caveats.

Nationally, Buying Is Cheaper

Trulia reported in October that buying a home was 37.7% cheaper than renting on a national basis. But that 37.7% figure only holds true for those who live in their homes for at least seven years and can afford to come up with a down payment of 20% on their homes.

Given that standard, Trulia reports that buying is cheaper than renting in each of the 100 largest metropolitan areas of the country. According to Trulia, for example, it is 50% cheaper to buy in Miami and just under 20% cheaper to buy in San Francisco and Honolulu.

Part of the reason that buying is more affordable comes down to mortgage interest rates. Rates are still at historically low levels, with the Freddie Mac Primary Mortgage Market Survey reporting that as of Nov. 10, the average interest rate on a 30-year fixed-rate mortgage loan stood at 3.57%. This makes borrowing money for a mortgage loan more affordable.

Want to see what Trulia thinks of the rent-vs.-buy decision in your community? Visit the site’s rent-vs.-buy calculator, punch in your metropolitan area and wait for the results.

What Should You Do?

These numbers, and Trulia’s rent-vs.-buy calculator, should serve as a general guide. But they alone can't tell you whether you should rent or buy. That's because everyone's situation is unique.

Say you only plan to live in an area for three or four years before moving. Renting is almost always the better financial move. Say you hate the thought of mowing a lawn for 15 years. Again, renting might be the better choice, even if it is more expensive than owning a home. If you dream of gardening in your own backyard? Then buying might make you happier.

Your best bet is to carefully analyze what you want out of a home, whether it's the stability of owning and building equity or the freedom that comes with renting. Then make your decision based on what type of home will best meet your needs.

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Guest

If we are all getting fleeced on rent and mortgage payments... where is all that money going?