Renting is often seen as a waste of money, but owning a home is not the best choice for everyone. Though you can build equity through your home and renovate at your own desire, buying a house comes with a big upfront cost. While renting the same place for years may cost more than buying a home, you can also use renting as a way to save up for a new home.
According to the U.S. Census Bureau, the median gross rent as of 2020 was $1,096, with more than 35% of households living in rental properties. In the past decade, rental rates have increased by 55%, causing some renters to find other living situations.
While the American Dream dictates that we all buy a house (white picket fence optional), it’s not always possible. If you’re renting, does that mean that you’re just throwing money away? Is renting a waste of money? Buying a house is not always the smartest move, but there are benefits. Which option makes more sense? In this article, we’ll take a closer look at the expenses of renting and buying, why buying is ultimately a smart choice, and why renting is not a waste of money.
Leases usually last for a year or two, giving you the flexibility to stay until the rental contract expires. This is a great option if you don’t plan to spend a long time in the area, or just aren’t ready for a long-term commitment. Even terminating the lease is possible with an early move-out penalty. You could decide to move every time the lease is up, or settle in and renew the lease.
There is less flexibility with home ownership. If you decide to sell your house, it’s quite a process. Not only do you have to get your house ready to sell, but you also must hire a good real estate agent, pay for inspections, appraisals, closing, and ultimately find a new place to live. If you don’t live in the house long enough, your equity will likely go toward realtor commissions and the closing costs for a new home.
Overall, it’s easier to get out of a lease than a mortgage, and it’s easier to travel and relocate if you’re renting. This may be a good investment overall, even if it doesn’t build wealth. However, if flexibility is not an issue in your circumstances, it may be better to buy a house.
Amenities can be a great feature for both homes and apartment buildings. You might rent in a complex that has a pool, gym, community center, etc. Or you might look at a home that comes with a pool or space for a home gym.
Unfortunately, these amenities come with costs. For renters, this cost is usually figured into the rent already. While it’s nice to not worry about spending time and money on maintenance, you also may be paying for something that you don’t use.
Homeowners have a bit more flexibility. You can decide whether you want the additional cost of maintaining the amenities yourself, or you can look for a house in a homeowners’ association community. Of course, you’ll have to pay monthly HOA fees to enjoy these amenities. However, you may see a home with access to amenities appreciate faster, which can help you build equity in your home.
Maintenance and repairs
When you own your home, if anything breaks, you’re the one that has to fix it or pay someone else to do the repairs. This could include replacing expensive appliances, general maintenance, plumbing issues, flooding, exterior painting, landscaping, and roof repairs.
If you enjoy projects or are handy with a tool kit, this may be no issue at all. You also have the option of remodeling or refurbishing anything broken or worn. And despite these downsides, improvements will build equity in the house, which will ultimately benefit you once the loan is paid off.
Renting, generally, means less worry about surprise repair costs. When you’re renting, it should be as simple as a call to the landlord. Ideally, they’ll get someone to fix or replace whatever is broken in a timely fashion. And, unless it’s your fault, you don’t have to pay for it. That being said, some landlords are more timely than others, and you may have to wait for a repair.
While neither living situation is a “waste of money,” both owning and renting are expensive. When comparing the two, you also have to look at more than just mortgage versus rent.
Buying a house costs more upfront than renting. Unfortunately, this will most likely always be the case. To avoid paying for private mortgage insurance (PMI), you’ll need to make a down payment of 20%. Some federally-backed loan programs don’t need as much (with FHA loans requiring only 3.5%). You’ll also have to consider any closing costs (which can range from 2% to 5% of the purchase price) and fees that come with initially purchasing a home.
Over time, homeownership will require you to pay for home repairs, landscaping, property taxes, homeowner’s insurance, and higher utility bills. You may also be responsible for homeowners’ association fees.
Another consideration is whether you can afford to buy in an overinflated real estate market. Home prices were up nearly 19% since the first quarter of 2021 to Q1 of 2022. In of June 2022, mortgage rates were at 5.3%, the highest since 2008. Unfortunately, considering the costs an average family pays due to inflation, there’s no guarantee these interest rates will decrease. That being said, the best way to know what your mortgage terms may be is to compare the mortgage lenders below.
The upfront cost of renting is lower than buying a home. Before you move in, you’ll need to provide the landlord with the first and last month’s rent, plus a security deposit. Though it’s still not a cheap decision, two months’ rent is considerably less (in most areas) than a down payment.
What utilities you pay will depend on your landlord. Some landlords include all utilities in your rent payment, while others cover some (like trash and sewage) but require you to cover others (like gas and electricity). You may also pay a fraction of the entire building’s utilities.
In addition to utilities, renters insurance is almost always a good idea. Some apartment complexes require you to have renters insurance when you move in. Whether your building requires it or not, comparing renters insurance rates can help you find the best protection.
Real estate investing can help you build wealth over time. You can invest in your own property by making timely mortgage payments and improving your property, increasing your home equity. Unfortunately, at the end of the same number of years of renting, you won’t own anything or have any wealth built into your property.
It’s no secret that a mortgage is a very large debt — essentially a loan with interest and commitment. Defaulting on your payment incurs penalties and, in the end, could lead to foreclosure and loss of the house.
Unfortunately, there’s also no guarantee that the property will appreciate in value. The returns will depend on a variety of factors, which the homeowner doesn’t necessarily control. Home equity isn’t liquid. If you need cash, you’ll have to sell the home or refinance — in other words: more debt.
Fortunately, you have quite a few options when it comes to refinancing. If you’ve built up enough equity in your house, you can opt for a home equity loan, a home equity line of credit, or a cash-out refinance. For simple mortgage refinance options, consider one of the refinancing lenders below.
With renting, the monthly money due on a rental can lead to financial peace of mind. If you don’t have enough money for the rent, you can simply move to a cheaper apartment. Your money can be more flexible with renting. To grow your net worth, you can invest the difference between rent money and a mortgage payment in a high-yield savings account or another liquid investment account.
The money you save paying rent could be used for multiple reasons. This could include an emergency fund, a travel fund, paying down debt, or funding a retirement account, none of which could be considered a waste of money. Take a look at the savings accounts below to ensure you get the most from the money you put aside.
Pros and cons of renting
While renting may be a great option for some people, it’s not the perfect solution for everyone. Before deciding to rent in favor of purchasing a house, it’s important to weigh the benefits as well as the negatives.
Here is a list of the benefits and drawbacks to consider.
- Flexibility. You can decide whether you move at the end of your lease, in the middle of it (with a price), or if you’d like to stay in your apartment.
- Save money. Because renting is so much cheaper than buying a house (in most cases), you have more potential to save money for a down payment on a future permanent home.
- Possible amenities. Depending on your apartment and landlord, you may have access to a gym, pool, or other features without having to maintain them.
- Repairs are the responsibility of the owner. If something breaks, you simply call your landlord at no extra cost (unless you caused the damage yourself).
- Rent rates will increase. You’ll see your rent increase each year, often by only a few percentage points. Unfortunately, a 1% or 2% raise in rent can add up over time.
- No or limited renovations. Your landlord probably won’t let you renovate (no knocking out a wall for an “open concept” space), and some won’t even let you paint. Deviate from these guidelines and you’re likely waving goodbye to your security deposit.
- No tax deductions. You won’t get the same tax benefits homeowners see when making their monthly payments.
- No equity. While your monthly payments will help you stay in your apartment, they won’t build wealth in your property.
- No benefit from increased property value. If the property value rises, there isn’t a direct benefit to you. In fact, it will likely lead to increased monthly rent.
Pros and cons of buying
Just as you should with renting, it’s important to carefully weigh the advantages and disadvantages before proceeding to purchase your dream home.
Here is a list of the benefits and drawbacks to consider.
- Build equity. Each mortgage payment goes toward building equity in your home — once it’s paid off, it’s yours.
- Tax breaks. Many owner costs are tax-deductible, such as when you pay property taxes or mortgage interest. You may even be entitled to an exclusion from capital gains taxes up to a certain amount on your tax return.
- No sudden rent raise. Unless you have an adjustable-rate mortgage, your monthly payments won’t change. This can be especially helpful when budgeting.
- Additional privacy. You’ll likely have more privacy in a house than in renting an apartment, especially if you don’t share walls.
- Freedom to renovate. Want to paint every room fuchsia? Move some walls around? Destroy that horrible backsplash? Homeownership is your opportunity.
- Limited monthly payments. When you’re finished paying off a mortgage, you’re free from monthly mortgage payments. Renters will always need to pay rent to keep a roof over their heads.
- Not as flexible. Unlike canceling a lease, moving from one house to another is a long process. Not only do you have to find another home, but you also have to fix yours up, have it appraised, and likely hire a real estate agent.
- Mortgages are expensive. Though you won’t have to make mortgage payments forever (provided you stay in the same house), a mortgage is still a large debt to repay. This is especially true during an inflated housing market.
- Expense of added amenities for private use. Even if the home comes with a pool, you’re still paying to use that benefit and maintain it.
- Repair costs. Unfortunately, you’ll have to pay for and (unless you hire a professional) do all of the repairs yourself.
Are you ready to buy?
Before you buy, be sure you do your research. There’s no need to rush to buy a house before you’re ready or financially able. That being said, if you rent the same place for decades, you could end up paying more money than if you’d just bought a house.
If you think you’re ready to buy, consider some of the questions below.
- What is your financial situation?
- Can you spend money on a primary residence?
- Do you already have consumer debt like student or car loans, medical bills, or credit card payments?
- If you were laid off from your job, do you have enough money to pay your monthly expenses for three to six months?
- Could renting help you to save cash, maintain a secure job, and build strong credit?
It’s rare to see the monthly cost of the mortgage, taxes, maintenance, and homeowners insurance lower than the monthly cost of rent. But that doesn’t mean you should ignore buying altogether. However, make sure you the savings and financial stability to afford homeownership before you invest in your future house.
- Renting is not a waste of money. It can be beneficial for those that desire flexibility and want less stress, risk, and responsibility.
- Renting can also be the smart choice when trying to pay off debt or expand into other investments.
- Sometimes renting involves lower upfront costs than the money required to buy a house. On the other hand, if you rent the same place long-term, you’ll pay more money in rent and have no equity.
- In the long run, owning a home often costs less than renting but has many upfront costs and responsibilities. These may not be feasible costs for all potential buyers.
View Article Sources
- Coping With Construction — Colorado Department of Transportation
- Decks — Loudoun County Government
- What is House Hacking? How You Can Get Started — SuperMoney
- How to Save for a House While Renting — SuperMoney
- Security Deposit Loans: Do They Make Renting Easier? — SuperMoney
- How to Tap Into Your Home Equity Without Getting Into Debt — SuperMoney
- How To Get Equity Out Of Your Home — SuperMoney
- How to Invest in Airbnb Rental Properties — SuperMoney
- How to Get Out of Your Apartment Lease in 5 Steps — SuperMoney
- How To Rent a Home With Bad Credit Score? — SuperMoney
- 2021 Mortgage Industry Study — SuperMoney
Lauren Hughes is a personal finance writer who enjoys helping people understand complex financial topics in an easy-to-understand style that empowers her readers to take action. Lauren has over a decade of experience as a paralegal and a background in technical writing for procedure and customer service manuals.