There are great reasons to rent and there are great reasons to buy. In any transaction, you need to evaluate what you can afford, what’s best for you today, what’s likely to change in the near future, and the financial variables of your living condition. The answer to all these questions can change from season to season of life, which can sometimes be overwhelming. Below I outline some good times to rent and some good times to buy to help you frame your decision.
When Is a Good Time to Rent?
I’ve met some people who feel guilty about renting, or who feel like they’re throwing their money away, but I don’t see it that way. I think there are times when you can get more for your money renting than you could for buying, depending on your situation.
Some great times to rent include:
- Seasons of Uncertainty:
If you are in a time of transition or volatility, it may be a good idea to rent. If you’re in college, planning on moving, changing jobs, or changing schools, for example, you probably won’t have a big enough time footprint to make buying a house worthwhile or to recover all the closing costs of the transaction.
- Seasons of Maintenance Aversion:
Perhaps you are physically unable to perform maintenance on your property, or perhaps you’re in a season of life where you prefer and can afford to pay for someone else to manage the property you live in. If so, renting a property that someone else manages could be a great experience for you.
- Seasons of Downsizing:
If you’re moving out of a big or old house with a lot of upkeep expenses, it may be more worth your money to rent an efficient, two-bedroom apartment. This way, you won’t have extra associated costs from upkeep, utilities, and maintenance.
- Seasons of Limited Time:
Maybe you’re a young professional working 60-70+ hours a week, and you’re struggling to keep your nose above water. If this is the case, I would say that renting is a great option for you. If your lifestyle limits your freetime, you may find it difficult to perform upkeep on your own house, especially if it’s an older home, so renting can take some of the pressure off. After you take a few years to get established in your career, you may want to consider purchasing a home. During those busy years, you can get a head start by developing a savings plan, budget, emergency fund, and a down payment for your future home.
When you are deciding whether or not to rent, I would ask yourself this question: Am I getting a comfortable exchange in value for the money that I spend each month? Depending on your rental agreement, the check you write for your rent will oftentimes figure in your utilities, maintenance, lawn care, etc. So, when you look at the loaded expense (debt service) plus utilities, maintenance, and upkeep and then compare that amount to the cost of closing on a house you may live in for less than five years, it probably makes more financial sense to rent.
I would also argue that most rental prices I’ve seen recently are pretty fair, more or less, for what the market value of that property is. I think the free market does a relatively good job of controlling rent rates based on the overall value of properties, so it’s likely that you can find a fair deal when renting. Please note that this principle works best for Middle America and is often less true for more urban environments.
There are, of course, some downsides to renting. For example, if you choose to rent a house rather than buy it, you will miss out on the appreciation of the property. If you are going to rent somewhere for five or more years, it would likely make sense to buy the property rather than rent, especially if the market is going up more than 3-5%. In this case, I would bet that the appreciation of the property would be greater than the closing costs, so even if you don’t pay down the principal on the loan, you could essentially live somewhere for free after recuperating the closing costs from the purchase.
When Is a Good Time to Buy?
I think buying a house is something that almost everyone should eventually do. When you buy a house, you are essentially paying yourself rent. While your house is an asset in the sense that you could sell it or borrow against it, it’s technically not an asset because it doesn’t produce income. American businessman Robert Kiyosaki, in his book Rich Dad Poor Dad, defines assets as things that produce cash and liabilities as things that spend cash, which I would largely agree with. By his definition, your own house is a liability in that it takes money out of your budget each month without replenishing any funds. Because of this, some people buy a rental property (or a handful of rental properties) before they even buy their own house, and that’s okay!
When deciding whether or not to buy a house, it’s a good idea to consider the following questions:
- Are you in a stable season?
Before you’re ready to buy a house, you need to make sure that you have some stability in your family, job, and finances.
- Do you have a budget that you’re living by?
From your budget, do you have adequate cash reserves to put 20% down on a house? Most experts say that your budget for housing costs should be around 30%, including utilities. However, if your income is less than $30,000 a year, it’s likely to be a greater percentage, or, if your income is higher than $50,000 a year, it’s likely to be a smaller percentage. This is a debatable percentage based on where you get your information, see this article to learn more. Regardless of the percentage, having a budget that you feel comfortable living by is the key to success.
- Are you in a place where you can still save for the future?
You want to be cautious of buying a house that requires too large of a payment and keeps you from setting aside savings for future investments or rental properties.
- Are you buying the right size of house?
For most people, it makes sense to buy a house that fits into your budget and that you can easily afford. But if you’re early in life and looking to grow your family, it may be a good idea to buy a house that’s a little bigger than you need. If you have multiple kids in a short amount of time, it could be easy to outgrow the first property that you purchase, so it may be worthwhile to wait a little longer to buy a larger house that can suit your future family’s needs.
- Are you ready to put down roots?
Owning property is a big responsibility. If you’re not ready to put down roots, renting could be a better option for you. However, if you’re ready to settle down and become involved in a community, buying a house is probably a good option.
Another thing to think about when buying a house is the potential economic opportunity you’ll be entering into. For example, if you buy a house at today’s fixed price over a 30-year home loan and then decide to buy another house five years later, you can keep your first house as a rental property and put 20% down on your new home, especially if you’ve spent those five years saving for a down payment. This is by far the easiest way to get started in rental property. With a fixed 30-year financing period on your first home, it may take you a little longer to pay off the house (or you can make additional principal payments every year), but normally the low interest rate will allow the property to throw off more cash, making it a great rental property. If you upgrade houses every 3 to 5 years, I would recommend trying to keep your houses as rental properties and manage your savings in a way that allows you to make new down payments without having to sell your previous home. In reality, this is difficult to do if you’re busy and growing a family, and it will likely take two incomes, but you can do it!
In Summary:
Renting and buying are both great options, but depending on your circumstances, you’ll need to choose one over the other. If you’re in a season of uncertainty, maintenance aversion, downsizing, or limited time, you may want to consider the value of renting. If you find yourself in a stable situation with a durable budget, savings plan, and secure level of commitment, you may want to look into buying a house. Either way, you can make a decision that makes sense for you and your family, both financially and personally. As you look toward the future, you can always adjust your renting and buying plans accordingly.