When You Should and Shouldn't Rent

Photo: turkeychik

Two years ago, right around the time the housing market had begun to fall and prices declined, I decided that buying a home would be a good financial move. Yet two years later, I'm still a renter.

Living in an expensive city in the United States has probably affected the way I view home ownership. I've crunched the numbers many times and compared renting versus buying in my area over the past two years. Since I strongly believe in the three-times-your-income formula for buying a house, meaning you take your income and multiply it by three to find the price of home you can afford, homes in my area are out of my price range. For obvious reasons, renting is more affordable for me. However, there can be benefits to renting even in cities where the prices of homes are affordable. (See also: Renting Is Cheaper)

Renting Is Better When...

For all the hullabaloo around the benefits of buying, I beg to differ and say that renting can sometimes be beneficial, as there are some things you might not know about renting that could save you money.

You Don't Want to Worry About Maintenance

One benefit of renting is the lack of responsibility when it comes to maintenance or repair. If the roof needs replacing, you are not responsible for covering these costs. If your water heater breaks down, your landlord must repair it within 24 hours. When it comes to major repairs, or any repair that affects your level of comfort, you may be able to deduct the number of days it took your landlord to repair it off of your rent.

You Want to Pay Less for Utilities

Units that share a wall or walls are better at retaining heat, which means your gas or electric bill will be less than in a stand-alone house. Many rental buildings also cover a portion of your utilities (often the cost of water), a savings you can pocket instead.

You Want Mobility

Though you may be locked into a 6-month or 12-month lease, if an opportunity to move presented itself, it is much easier to move from a rental house or apartment than it would be to sell or rent a home you own. Mobility also means that if your finances changed, you can move to reduce your expenses, especially considering that housing consumes an average of 34% of a person's income.

One way to gauge if renting is a better financial option is to take your monthly rent and multiply it by 240 (this formula comes from Michael Bluejay's website). If you can purchase a home for that amount, then buying a house will be a better option. However, if you aren't able to purchase a house for that amount, then renting is more financially sound. Of course the key to making renting a better alternative is to invest the difference!

Renting Is a Bust When...

When I research home prices throughout the rest of the nation, I'm always shocked at how affordable homes are in other states. In some cities, monthly rent is the same as a mortgage payment. If people know they won't be moving out of the area for many years (upwards of five), buying may be the better option.

Rent Is Overinflated

During the housing boom, rent stabilized and many buildings were offering rental incentives such as one or two months free. Many people were moving out of rentals and into homes, so the rental market had to make adjustments. However, current rent prices seems to be creeping up as people are reversing their role from home owner to renter.

Housing Prices Are Decreasing

As the housing market corrects itself from the skyrocketing affect of the housing bubble, homes are much more affordable today than they were six or seven years ago. If home prices in your area are pre-2003 prices, now might be the time to buy.

Mortgage Rates Are Low

Mortgage rates have remained low over the past seven years. A combination of low mortgage rates with affordable home prices is a good indication it might be better to purchase a house than to continue renting.

I've lived within a five-mile radius for the past 32 years of my life. It would have made financial sense to purchase a home 12 years ago, when prices were still affordable. I want to kick myself for not jumping on a $110,000 starter home back in 1999. At the time my monthly rent was $925, and the mortgage on such an affordable home would have been about the same, if not less. During the housing boom that same house soared to over $500,000! Of course, I can't do anything about that decision now. I can only learn from it and realize when it makes more sense to buy.

Renting has a negative stigma associated with it that isn't justified. If you can rent for an affordable price and save more of your income towards building wealth than if you were to purchase a similar place, then renting is by all means the better of the two options. Obviously your personal finances, location, and preferences will affect your decision to own a home or to rent. Just remember to weigh the benefits and disadvantages of both.

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Guest's picture

We bought a duplex when we moved for my DF to go to grad school. We had a 20% down payment and could pay closing costs. We also happened to get the home buyer tax credit. We were able to get the seller to pay closing so we were able to continue saving for our next rental. We found tenants in less than 3 month. They pay our entire mortgage/insurance/property tax. We only pay utilities and repairs. It is the best deal we have even had. We can afford the payments if they are not there but with them we are making back our down payment. Even if we sold after 3.5 years we would break even, counting selling cost. However, we hope to keep the duplex as a rental for quite a few years after we move.

Little House's picture

It sounds like you made a good financial move; you had 20% down and you received a tax credit. Using it as a rental property is a good investment especially since you can afford the mortgage with or without tenants.

Andrea Karim's picture

I miss renting. Home ownership has been nothing but a bust for me. I suppose I enjoy being able to paint my walls whenever the desire strikes me, but I loathe the repairs and upkeep that are required. I'm just not built for home ownership.

Little House's picture

It's funny you should say that. I was renting a house for a while and the landlord wouldn't fix anything, so my husband did. After a while, he got tired of the repairs (especially since it wasn't our house). Now we are living in an apartment complex and they fix everything! It's a huge relief not to worry about repairs, and it saves us money - the best part.

Guest's picture

I much, much, much prefer the concept of renting. I love the mobility, and it costs less. However, there are two reasons I would buy a house: kids and pets. Kids - I don't have any kids and am completely undecided on if I ever will, but if I were to have kids, I refuse to raise them in an apartment. Just my personal preference. Pets - I have a cat but want so many more pets. Pet fees and deposits are ridiculous, and I'm limited in what I can have. If I'm ever going to have a dog, I want a house so that I can have a backyard for him.

Little House's picture

I'm a cat lover myself and they don't need a yard. But I agree that a dog needs a yard and kids probably prefer a yard too. Although, as long as parents take their kids to the park on weekends, maybe they could go without. Just look at how many children live in New York City, they seem to do alright in apartments. ;)

Guest's picture

I agree with almost everything you said, just want to throw a small comment in here:

When utilities are included, typically the added cost more that covers the average use of the tenants, so no real savings here. If you all of a sudden use a ridiculous amount of utilities the land lord can and will charge you extra. I

Little House's picture

I guess that's a good point. I once lived in a building that included water, but my rent was fairly low so I didn't ever think of the landlord adding utility costs to my rent. Thanks for sharing.

Guest's picture

Thanks Little House, we made a lot of sacrifices and after moving (during my fiance's post doc), we will still will rent. People need to make choices based on finances not wants.

Little House's picture

That's an excellent point. Just because you want to own doesn't necessarily mean it's the best financial decision. Renting is sometimes the better financial option.

Guest's picture

Sounds like most folks here are happy to rent. My husband and I rented for 12 years, and last year, we bought our place when we realized we would pay LESS in mortgage, pmi and taxes combined than what we were paying in rent. Just made sense to us to buy in this 'buyers' market. It's a very personal decision to buy or rent - one size does not fit all.

Little House's picture

I would definitely buy something if the total monthly cost would be lower than our rent. It makes more sense at that point. Congratulations on your home purchase.

Guest's picture
Aphonso Bedoya

Renting is also a good option if you if you add in the other costs associated with home ownership and DEDUCT them from the rent. For example: Insurance costs, repairs, taxes, etc. These are fixed costs of ownership, and they really add up. Think about the cost of a roof, or a water heater, etc. divide that by 12, deduct that from your rent, and you realize that you can think of it as lower rent. R (rent) - F (fixed costs of owning not including mortgage) = MC (monthly cost). If you put that money (F) in savings every month, presto, you can compare that total to the potential appreciation value of a house. More of an apples to apples thing. A bit simplistic but a very intering comparasion. I have owned and rented, and it is all about wether you save the money.

Little House's picture

You're very right. In order for renting to actually be a better financial decision, you do have to put the additional money away for savings. Most calculators I've found that compare renting and buying make this point - save the difference and you will end up ahead. If not, you actually end up behind.

Guest's picture

I had been renting for the previous 7 years, either with one roommate or two... being the metro Detroit area, I figured it was time to take advantage of the cheap housing, low rates, and the 8k tax credit last year, so I purchased a home.

One of the big factors was that I was losing my previous roommates, so it would have been more expensive to live on my own and rent anyways!


Guest's picture

We've rented for many years. The trade-off to simpler, cheaper living is having to live in such close proximity to inconsiderate fellow tenants. We're currently looking for a house to rent in order to get some peace and quiet and privacy!