3 questions to ask yourself as you consider renting vs buying
Should I rent or buy? This is a question you may be asking yourself as your lease is coming up for renewal. Or, maybe, you’ve been perusing homes in your area for a while. Renting offers flexibility and a relatively maintenance-free lifestyle, among other things. And, buying has clear incentives as well, especially when it comes to building wealth over time. Ultimately, the decision is yours, hinging on your desired lifestyle, financial situation, and personal goals. Below, we highlight key considerations along with questions to ask as you explore each option.
What can I afford?
Whether you choose to rent or buy, making sure you can afford the home you’re in is the first step and arguably the most important consideration to keep in mind. If you’re renting, you’ll likely pay a security deposit as well as one month’s rent up front. As a common practice, you can review your salary (after tax) and apply the 50-20-30 rule. According to this rule, 50% of your income should go toward “needs,” including rent, utilities, and groceries; 20% should be placed directly into your savings; and the last 30% can go toward “wants.”
When it comes to owning a home, you can begin by calculating your debt-to-income ratio. Your debt-to-income ratio compares how much you owe at the end of the month to what you earn. An ideal debt-to-income ratio is 36% for many mortgage companies, but that does NOT count you out of homeownership. There are several mortgage programs to help you secure your home, affordably. Other factors to note include your down payment and any other short-term expenses you’ll incur.
More on how to calculate housing affordability here.
A common misconception many people make is, “I won’t be able to afford it.” In the second edition of Your First Home, Gary Keller and Jay Papasan tackle this myth head on.
“Until you do the math, you don’t know what you can or can’t afford,” they write. “If you are currently paying rent, generally you can afford to buy. From a financial point of view, in the United States, the tax savings on mortgage interest alone usually make up most of the difference between rent and a mortgage payment – the tax write-offs you get at the end of year will generally help you save a significant amount of money.” The real question is, “Can I really afford to keep renting?”
Similar to a mortgage, rent adds up, but has no long-term financial gain.
| Rent | 10 Years | 20 Years | 30 Years |
|---|---|---|---|
| $600 | $72,000 | $144,000 | $216,000 |
| $800 | $96,000 | $192,000 | $288,000 |
| $1,000 | $120,000 | $240,000 | $360,000 |
| $1,500 | $180,000 | $360,000 | $540,000 |
Build your equity, not your landlord’s
The chart above shows how much money over the course of 10, 20, and 30 years you may spend on rent. If you chose to own a home, these costs will go directly toward building your own home equity and net worth. According to Federal Reserve data from 2019, homeowners had a median financial net worth of $255,000, while renters net worth was just $6,300. Meaning, homeowners have nearly 40 times the net worth of renters. And the great news is that historically, home values have risen over time!
Read More: A Tale of Wealth Building and Affordability.
Until you do the math, you don’t know what you can or can’t afford
How much flexibility am I seeking?
The flexibility to get into a home quickly, as well as not being locked into a long-term mortgage, can be a very appealing factor of renting, especially if you know your personal or professional life will be in a constant state of transition or flux.
That said, keep in mind that life can shift quickly regardless of whether you have planned for it or not.
When it comes to homeownership – though it’s recommended you stay in your home 3–5 years to avoid capital gains tax and break even on your investment – you are not locked down. You have several options, including renting your home out (allowing you to keep your asset and build wealth over time), working with a trusted real estate agent to sell your home for the highest price, or partnering with a cash-offer program such as Keller Offers to get your home sold quickly, conveniently, and hassle-free.
