Smart Money Debate: Why You Should Rent Instead of Buying a Home

Smart Money Debate BlueWelcome to the 1st ever Smart Money Debate at ReadyForZero! To see the other side of this debate, read Michelle’s post: Why You Should Buy a Home Instead of Renting. And then let us know which argument was more convincing!

This post was written by Carrie Smith, the writer behind the Careful Cents personal finance blog, a site where she helps people get out of debt and find a career they love. She’s also an accountant and social media lover who enjoys traveling. Follow her on Twitter @applecsmith.

I understand the allure of buying a home. I myself bought a home (and later sold it). But I simply think that right now it makes far more sense to rent instead of buy. Owning a home may still be the great American dream, but with the recent economic problems and foreclosures all across the country, owning a home has become a nightmare for millions.

If you’re thinking of buying a home, I challenge you to take a hard look at the advantages of renting before you decide to buy.

Renting Means No Down Payment

Renting means no down payment

Renters rarely have to put more than the first month’s rent down, as well as a security deposit (which, if all goes well, you may get back anyway). But, more often than not, a down payment on a house will be between 5-20% of the asking price. Depending on the current price of the home you’re looking to buy, this could mean tens of thousands of dollars.

In a perfect world, that down payment would become equity but, as I’ll explain below, that outcome doesn’t always happen. If you want to turn your down payment into an investment, there are many ways to do that besides buying a home. Plus, if you buy a home you’ll also need to have extra money set aside for any unexpected costs that come up during the process of moving in (such as repairs that were not identified prior to the sale of the house).

Renting Means Less Risk

Risk seems to be the most commonly overlooked factor when someone is considering buying a home. It’s something I ignored too when I purchased my first home. The risk that comes with homeownership is high for several reasons:

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  • If you’re married and base your mortgage payments on two incomes, you’re in lala land if you don’t factor in the possibility of losing one or both of your incomes.
  • Homeowners face a good possibility of being foreclosed on, while renters face zero percent chance of foreclosure.
  • You’re at the mercy of the housing market. As seen during the recent housing collapse, when you can’t pay cash for a home, you end up running the risk of owing the bank more money than the house is even worth.

Renting Means More Money in Your Pocket

Renting means more money in your pocket

Rent is often a fixed expense. Many people think that the monthly cost of owning a home is similar to the cost of renting, but often that’s not true. For one thing, the cost of renter’s insurance is significantly less than the cost of homeowner’s insurance. Unfortunately, many people don’t accurately calculate the true cost of purchasing real estate. Homeowners need to budget for expenses like property taxes, homeowner association (HOA) fees, repairs, and lawn maintenance just to name a few.

The true cost of owning a home can be surprising, especially for a single person or couple just starting out on their own. There are also the extra expenses that pop up which inexperienced homeowners are not familiar with. All of these extra costs are avoided when you choose to rent instead of buy – which means more money in your pocket.

Renting Means More Flexibility

What if you get a great job offer, get married or have a baby and need to move? If you’re currently renting, then you simply don’t renew your lease – or sublet the place until your lease is up. However, the process of selling a house (getting the house prepped, hiring a Realtor, etc) is much more involved, time consuming, and expensive.

For instance: what if you need to move before your house sells? Or you don’t find a buyer and your house sits on the market for several years? You will be paying both rent in your new location and your mortgage payments on your unsold house. Or perhaps worse, you’ll have to pass on opportunities that you are interested in because you lack the flexibility to take advantage of them.

Renting is Less of a Hassle Than Buying

Renting means fewer repairs

Buying a home is an investment. It takes work and it’s expensive. You can’t just purchase a home and then forget about it. There’s always something that needs to be fixed or updated. And unless you have money to hire a staff of people to help, you’ll most likely be doing it yourself. If the yard needs to be mowed, you have to bust out the lawn mower. If you want to repaint a room, you’ll have to buy some paint and get busy.

Maintaining and personalizing your home can be very rewarding once you’ve finished, but you’ll find that it’s a job that’s hardly ever complete. You’ll constantly want to update things and make it more your style, which means putting in a lot of sweat equity.

Too many things can go wrong when you own a home, whereas renting can provide a more stress-free and carefree lifestyle, especially for a young adult or young couple. After experiencing too many costly and time consuming projects with my own house, I said goodbye to homeownership and hello to renting. And I haven’t regretted it once.

So… do you agree or disagree?

Image 2 by stockbroker
Image 3 by arthursh
Image 4 by yellowj

Update: We’re going to link to blog posts responding to this debate (if you post one, let us know). Today we saw this great one from Greg at Club Thrifty:

Club Thrifty: Buying a House vs. Renting: What’s the Right Call?

Tackling Our Debt: Owning or Renting? Why Renting Is The Right Choice For Us

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  • I agree that renting is much easier than owning a home. I’m not a handy guy and love being able to call the apartment manger when things break.

    The lure of homeownership is strong especially with the threat of higher inflation coming. But, you can still take advantage of the rising real estate market by investing in an REIT.

    • I tend to agree with you, Brent. (Although I don’t know about REITs – I’ll have to do some research to learn about them!)

  • I’ve done both, owned 3 homes and have rented many times. Right now we are renting a nice home and I so prefer it over home ownership for all the reasons you have listed Carrie, and more.

    • Glad you enjoyed this post! Did you check out Michelle’s post? If so, did any of her points ring true based on your experience with homeownership?

  • AverageJoe

    I absolutely agree. You don’t have to worry about what expenses like to do when things break down (call your landlord) or property taxes (landlord). While you should make a great investment decision on buying a house, I think a house is a rotten investment if you’re going to live in it.

  • I’m a renter and I couldn’t agree more! I’m young, I have a ton of debt, and I really don’t know where I want to settle down. So when parents tell me that I should get busy buying a house it’s all I can do to stifle a laugh.

    • Haha, yeah I agree with you – and I’ve found myself in similar conversations too. Way to stick to your instincts!

  • thethriftyspendthrift

    So I agree that this is true for most people but I know most of these things do not hold true to me so here it goes:

    1. The down payment for the property we are currently attempting to purchase would be about 30%—leaving us with plenty of money leftover. Yes, we are purchasing this particular place as an investment. It costs far less than most places of a comparable size because it needs some work.
    2. Our mortgage is going to be far lower than our rent but coupled with a large maintenance payment. (We are purchasing a co-op.) However, the mortgage and the maintenance is less than our current rent (and yes, our rent definitely goes up every 1-2 years.) Our mortgage is something we could continue to pay if one of us lost our jobs. Additionally, our maintenance payments are about 50% tax deductible (almost $4,000/year) in addition to the tax deduction received via the mortgage.
    3. Our down payment is something we know we will definitely get back when we sell our property down the line. We are buying in a good area that has not really been impacted by the housing market. We are buying a much cheaper property because it needs work and based on reviewing sale after sale, we would not be underwater.
    4. Insurance for a co-op is less than homeowner’s insurance. Purchasing a co-op means I pay monthly maintenance fees that go toward my heat, water, taxes and the underlying mortgage in the building. I am not responsible for maintenance to the building itself—just my unit.
    5. The co-op we are purchasing allows for subleasing after two years, which is important since may co-ops do not allow you to sublease. After fixing up the unit, we would be able to rent it out for more than our monthly payments.
    6. Lastly, I am tired of renting. I have been in this place for nearly four years. I can’t make anything the way I want it in terms of paint or fixtures. There are things I cannot stand that I obviously cannot change or repair—lots of special work done courtesy of whoever owns this place.

    Obviously, nothing is definite. There is always a chance that I will not make money off of the property, even though I am almost certain that I will. But part of investing is taking a risk—which, if this is the only monetary risk I take in my life, so be it.

    • It sounds like you have thought this through very carefully, and that is exactly the right way to approach a decision of this magnitude. In your case it will probably be a great investment!

  • William_Drop_Dead_Money

    There is another argument Carrie left out: if you take the same dollar outlay as owning (i.e. maintenance, taxes, etc.) and save that difference, you might actually end up with more equity.

    My wife, though, has a hard argument to overcome: you just can’t make a rented property “your own.” In the end, I think owning costs more than renting, and that is what you pay for.

    • That is a great point, William. If you can save up that extra money and get some return on it, that might work out quite well in the future. But I also can understand your wife’s argument!

  • Carolyn Yu

    When all cash flows are considered, renting costs less, which means you’ll have more money to save & invest. Over the long run, the stock market averages +10%/yr.

    So the 20% downpayment, 3-5% closing costs, 5-6% selling costs every time you move (average US home borrower moves every 7 years), property taxes, maintenance, insurance, is all money that could have been invested.

    If you look at everything (all cash flows considered), you spend less money when you rent! Between property tax, insurance, maintenance, mowing the lawn, fixing the roof, etc. etc. plus the extra utility costs you’re spending a lot of money that could be invested instead. What’s wrong with renting??

    Learn from the past people! (Of course they look at me like I’m crazy when I suggest they cut a $100+ a month cable bill. Or drive a car that is 3 years old. Or only fill up their tank from the cheapest place according to GasBuddy. Or get $25/month budget car insurance from Insurance Panda. Or cook their own food instead of spending a hundred a week on restaurant food (or far more if they like the bar).)

    Nobel Prize winning economist Robert Shiller was one of the few people who accurately called both the stock market crash of 2000, AND the real estate crash of the late 2000s.

    And he says that owning a home is a terrible investment.

    • Very interesting! I agree with a lot of what you’ve said here. But I do think in certain cases, it can be a good investment to buy a home, depending on the price to rent ratio in the area and other factors.

  • Andrew

    I agree. Renting gives you flexibility whereas owning can often be a burden. Everyone I know thinks I am throwing money down the drain by renting but I don’t feel that way. Plus, as the article says, there are many costs involved with owning. And I love my apartment — it is right on the woods.

    • Agreed! If renting works well for a person’s lifestyle (and allows them to accomplish their financial goals) then I think it’s a great option! Glad to hear that’s the case for you.