6 Questions that Determine Whether You Should Rent or Buy

Should you rent or buy? It’s a pressing question facing adults of all ages and locations. Renting and buying both have their pros and cons—consider these five questions when evaluating whether sending in monthly rent or mortgage payments are better for your situation. 

Rent or Buy: How Long do You Foresee Living in the Surrounding Area?

When choosing whether to rent or buy a home, buying is the more optimal choice if you see yourself living in the same area for five years or longer. Interest rates are in the homebuyer’s favor, as they remain close to record-low rates since the financial crisis of 2008. But if your job, family, or other interests will cause a move in less than five years, it may not be worth the headache of buying a home, putting it back on the market, and paying for closing costs on both ends. Renting is a great option for short-term moves—the ability to pack up and move without try to sell your home at a fair price is liberating.

Compare Rent or Buy Options—How do Monthly Rent vs. Mortgage Payment Compare?

When comparing monthly rent and mortgage payments in the decision to rent or buy, you may be inclined to think equal rent and mortgage payments are actually equal. And if the numbers equal, why not pay towards ownership in a home? However, an equal comparison goes beyond the monthly mortgage payment. Home ownership expenses also include property taxes, homeowner’s insurance, and paying for repairs and maintenance. Additionally, purchasing a home requires having 20% cash for a down payment, which is much larger than security deposit for renting. But if you can see yourself in the home for an extended number of years, you have the cash for a down payment, and the mortgage payments and annual costs are accounted for, purchasing a home is a great opportunity to build equity. Be sure to read these tips on applying for a mortgage.

What is the Tax Deductibility of Mortgage Payments vs. Rent Payments?

Many states allow for some type of tax deductibility of rent that is paid on your primary residence. However, if you buy instead of rent, the IRS recognizes home mortgage interest on your primary residence as a fully-deductible expense. In addition, the IRS also permits homeowners to deduct any mortgage insurance that they pay in connection to their mortgage for their primary residence. The difference between any possible state deduction from renting vs. IRS deduction for buying a home is quite significant. A typical homeowner should see about a 25% return on their mortgage interest and mortgage insurance when they file their federal income tax returns (see more on getting the best mortgage interest rate!). For this reason, when choosing to rent or buy, buying a home makes more sense.

Are You (Or Someone Else in the Home) Good at Handiwork?

In the rent or buy question, ask yourself if you’re ready to take on all of the maintenance and repair costs involved with home ownership. It’s recommended to set aside one to three percent of the cost of the home for maintenance costs. If you’re handy around the house and able to repair problems as they arise, that’s a better reason to buy a home instead of rent. On the other hand, if you will be calling a repairman every time an home repair is necessary, and budgeting for home repairs isn’t possible, consider renting until you can buy a home that’s move-in ready.

How Stable is Your Income for Buying a Home?

Is your job in a stable industry? If you have long-term prospects of working at the job you’re currently in, purchasing a home could be a great decision. But if your job or industry seem unstable, choose to rent instead of buy in case you find yourself relocating in the next couple years.

Rent or Buy Financials—Where are Your Other Financial Investments?

When deciding whether to rent or buy, evaluate where all of your financial assets are located. Purchasing a home will give you ownership towards something that could eventually give you a financial return, but keep liquidity available in other accounts in case unexpected events occur that need large amounts of cash. A home will probably be the largest asset in your ownership portfolio, and if its value does increase down the road, it could allow you to retire sooner if you choose to sell and downsize to a smaller home. The biggest takeaway though, is to not count on your home being your sole investment—purchase a home at a price that allows you to still make contributions towards other investments that offer better liquidity.

The decision between signing a lease, and putting a down payment on a home is one of the most important financial decisions you’ll make in your life. Be thoughtful and patient as you choose whether to rent or buy your next space. The extra effort is worth making the right decision.