renting vs owning a home

Renting vs Owning a Home: The Pros and Cons of Each

When it comes to making a decision about whether it’s time to buy a home, there are several factors to consider. A common myth is that everyone should buy a home and that it’s ALWAYS a safe investment. Yet, that notion typically only rings true when you look at homeownership over long periods of time. We only need to look back to 2008 as an example. What if you simply wanted the flexibility or, perhaps, needed the flexibility to move with your job? What if you have to take on a massive amount of debt just to afford the home? There are several other factors to consider that people oftentimes overlook when it comes to making the decision of whether it’s time to buy. This article will break down the pros and cons of renting vs owning a home so you can make an educated decision and know when the time is right to make a purchase.

Pros of Owning a Home

  1. Being a homeowner is a dream of many people. By actually owning real estate, you truly have a place to call home and build a life with your family. The sentimental value of homeownership can’t be overstated and should be the primary reason someone decides they want to own, whether that be stability for your family or a place to raise your kids. You can make improvements, remodel, or do whatever you like to your home since you own it. Crafting it in your image helps build on that sentimental value that doesn’t have a price tag associated with it.
  2. The costs of owning a home as it pertains to your mortgage are predictable if you have a fixed-rate mortgage. You’ll always know what you owe every month and even if interest rates rise, your fixed-rate mortgage will remain the same. That’s not to say all costs associated with owning a home are predictable, far from it. We’ll discuss that more in the cons portion.
  3. If you have a mortgage you might itemize your deductions when it comes time to pay taxes. The mortgage interest is deductible on your tax return and in some cases will allow you to itemize all your deductions since they’ll be greater than the standard deduction. This can be beneficial in reducing your overall tax liability.

Cons of Owning a Home

  1. Expect to have many more expenses above and beyond the initial downpayment and mortgage payments. Your home will need repairs and maintenance over the years. They can range from something as inexpensive as fixing a toilet to something as expensive as having to completely repair the entire plumbing system. These expenses represent the notion of the certainty of uncertainty. We know for a fact the home will need repairs and maintenance, we just don’t know exactly what those will be, when, or for how much.
  2. Your home is NOT an investment. I know, this is contrary to common belief, but hear me out. Sure, you may end up spending less when buying a home vs renting over the long haul, but that doesn’t mean it’s necessarily a GOOD investment. The chart below shows the average value of American housing dating back to 1890 adjusted for inflation. The average American household when adjusted for inflation, has only appreciated in value by roughly 100%. There are pockets of rapidly increasing and decreasing prices, as there are with the stock market, yet it’s miles from what the stock market has achieved in returns over the same time period (roughly 2,600% when also adjusted for inflation).renting vs owning a home
  3. Other reasons you shouldn’t view your home as an investment include;
    • When you add all expenses such as insurance, property taxes, maintenance and repairs, mortgage interest, closing and selling costs, furniture, inflation, etc to the equation, your actual return on your “investment” is quantifiably lower.
    • Your home is an illiquid asset. In order to access the equity in your home, you either have to sell it or take out more debt using a home equity line of credit or HELOC. Selling your home can take months and isn’t something that happens overnight.

Pros of Renting a Home

  1. The flexibility that renting provides is one of the main reasons we rent in the first place, aside from actually not yet being able to afford to buy a home. If you’re unsure where you or your family wants to live, renting is probably the most practical choice. I’ve been renting in Seattle going on 5 years now. I’ve lived in Capitol Hill, Upper Queen Anne, and Lower Queen Anne. By renting I’ve been able to spend time in various communities to see which ideally I might be willing to buy a place in someday. Not to mention, I somewhat enjoy trying out a new location. Having the flexibility to move and not be tied down to a specific location is one of the main benefits of renting.
  2. Renting tends to be cheaper than owning a home. I know it may not seem like it, especially if you live in the Seattle area where rental prices along with home prices have skyrocketed. However, renting is one fixed cost for the term of your rental agreement. Even if your monthly rent is greater than or equal to what you would potentially pay per month with a mortgage, remember there are several more costs associated with homeownership, and the mortgage payment isn’t the only expense it should be compared to.
  3. Your landlord is responsible for repairs and maintenance. If you have an issue with your dishwasher or washing machine, you don’t have to worry about fixing it. Hopefully, you have a good landlord who will take care of it for you promptly.
  4. Use cash flow towards other investments. By renting and foregoing a home downpayment, you can use your cash towards other financial goals or long-term investments. As I mentioned above, the stock market has historically greatly outperformed the average American household home appreciation.

Cons of Renting a Home

  1. You’re making payments towards an asset that you aren’t building equity in. In return for the flexibility and lower cost of renting when compared to homeownership, you lose the ability to develop equity in an asset. While homeownership shouldn’t necessarily be viewed as an investment, equity in your home can be accessed at a later date if needed.
  2. You don’t receive any tax breaks for renting as you do with paying mortgage interest.
  3. In most cases, rental payments aren’t fixed for several years at a time. They’ll likely increase over the years as opposed to holding a fixed-rate mortgage.
  4. No place to truly call “home” yet. Renting a home is temporary, and that sentimental value of kicking your legs up after a long day of work and cracking open a Coors Light on your own property can’t be achieved through renting.

Key Takeaway

The renting vs owning a home decision is one of the biggest financial decisions we’ll face in our lives. Renting and buying each has their place and understanding when it makes sense to buy is key to ensuring you make a smart financial decision for you and your family. Don’t buy for the sake of buying because everyone HAS to own a home. That’s nonsense. Wait until the time is right and make an educated decision based on you and/or your family’s goals.

For more insights, sign up for our monthly newsletter, we’ll deliver actionable personal finance and financial planning expertise once per month.

Levi Sanchez, CFP®, CPWA®, CEPA®, BFA™
Levi Sanchez, CFP®, CPWA®, CEPA®, BFA™
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, CERTIFIED PRIVATE WEALTH ADVISOR®, CERTIFIED EXIT PLANNING ADVISOR®, BEHAVIORAL FINANCIAL ADVISOR™ designee and Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. Levi’s been quoted in the New York Times, Business Insider, Forbes, and is a frequent contributor to Investopedia. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!

Subscribe To Out Monthly Newsletter

Subscribe to our Monthly Newsletter and receive our FREE eBook, A Tech Employees Guide to RSUs, Stock Options, and ESPP’s.

Book Your Session