Rent vs Buy: How to Choose

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I recently read a post on social media about the demise of our country due to rising home prices. The author of the post referenced an article (among many) that compares the market statistics from 2021 to now as evidence that most Americans will never afford a home.

Yes, new homeowners are currently paying more per month than renters, at higher than normal rates, across the country and certainly in the Philadelphia region, but let’s pump the brakes on saying future buyers are doomed. Outside of the aftermath of major U.S. financial collapses (Remember Covid?), traditionally it’s always been cheaper to rent. The question of rent versus buy is valid for many potential homebuyers, but there are numerous factors to consider which option is best.

Owning a home is an investment. Anyone who takes their hard-earned money, in some cases most of it, and puts it into a physical structure they hope will increase in value over time is taking a chance. A homeowner has to consider income, debts, financing options, taxes, how much money they’ll need to update or maintain the property, and somehow try to balance that with living expenses, emergencies and/or hardships, and inflation. Ownership can be costly, and pushing ratios too high can lead to a less than desirable lifestyle.

Money is not the only investment in home ownership. A homeowner is also investing time. Homes need regular maintenance, everything from keeping up with the yard to fixing leaks, painting a room, changing light fixtures, or updating a bathroom. The projects that can be done in a few hours or over several weekends mean less time with family or for meaningful activities.

There’s also the stress of owning a home. Ever wake up in the middle of the night to hurricane-force rain and hope the sump pump is still working? Ever spend Christmas morning bailing out that said sump pump because of a power outage with no backup generator (another cost). Ever search lawn mower repair videos for hours on YouTube because a new one isn’t in the budget? Ever pray to your god for the heating system to make it through one more winter?

These are real homeowner stressors.

But homeownership also has its joys. Eating Thanksgiving dinner at your table. Roasting marshmallows and s’mores over a fire in your backyard. Waking up in your bed looking at your ceiling, your walls, looking out your windows at the accumulating snow on your driveway. Grabbing a beer out of your fridge and sitting down to watch a game in your living room. Ownership brings a sense of satisfaction in knowing some of the money you give to a mortgage lender is building your investment into your property, increasing your financial wealth.

These are things renters don’t get to enjoy at the same level.

I’m not making a stance one way or the other. Everyone has different situations and needs to weigh a number of factors together to form a very important financial decision. I’ve been having more of these conversations lately about renting versus buying, and laying out the pros and cons for each can help anyone find the best path.

Many potential homebuyers have been watching the market and interest rates, waiting for the return of those once-in-a-lifetime 2-3% rates. They may be waiting for a while. In fact, many of our parents and grandparents would be thrilled with the current rate. When my parents bought their first home in the late 1970s, their rate was near 18%. Most experts predict rates to remain near mid-to-upper-6% in the foreseeable future. Renters don’t need to worry about interest rates.

Renting also has a fixed cost as opposed to the rising expenses owners face for insurance, school and real estate taxes, home maintenance, and utilities. Typically, affordability allows a renter to save, eventually building enough cash for a down payment and closing costs when it’s time to buy.

Many potential renters may feel it’s easier to secure a lease agreement in a desired neighborhood or a multi-unit property, however, in recent years, throughout Bucks, Montgomery, Delaware, and Chester counties, the rental market has been as competitive or even more fierce than the residential sale side. In some areas, rent has jumped hundreds of dollars a month this year alone, forcing renters to consider properties outside of their desired areas. Frustrated buyers may dabble in the rental market for relief only to compete with close to a dozen other potential buyers for a property with a rent already near the top of their budget.

Because the market is flooded with renters who are being outbid in residential sales, many landlords can charge higher rents that more than cover their own mortgage, insurance, and taxes. Many rental agreements require the tenant to cover basic utilities and simple maintenance (lawn care, snow removal, lightbulbs, batteries), which can be hidden expenses that add up over time. Individuals going through the rent vs buy scenario should also remember that money from rent essentially pays the owner’s mortgage, so they can be the ones establishing equity and long-term wealth.

There are opportunities available without making a massive jump in monthly costs. A client of mine who was paying hundreds more a month in rent is about to close on a condo larger in square feet and with a monthly payment within $250 a month of their rent. Another client who briefly entered the rental market immediately experienced the competition of limited supply and high demand, which included close comparisons of credit scores, income ratios, and background checks for each application, adding another $40-$80 a pop. One prospective property’s rent went up $300 a month days after going on the market once the owner realized the demand. Renters have less control to compete on price and terms as in a residential sale. In addition, rentals often require a security deposit, first, and last month’s rent upfront, which can be almost a third to a half of what a buyer would need to bring to a settlement on a comparable home anyway.

Many potential renters are hesitant to jump into the real estate market because they feel they don’t have enough for a down payment or because big-name influencers preach the dangers of any borrowing whatsoever. Buyers don’t need a sizeable down payment to pursue their dream of purchasing a home. There are many financing options available. Over the past two years, more than 70% of buyers financed their homes, among them more than 90% of first-time homebuyers who used financing. I’ve written about the topic of mortgage professionals and multiple articles for buyers in previous posts.

Potential homebuyers facing the rent versus buy scenario will ultimately decide what’s best for themselves. It takes preparation and strategy that’s for sure. This is coming from a guy who had two roommates after purchasing his first home. Many of my family and friends were successful using a similar strategy. That was when the previous buyers were doomed after the mortgage collapse of 2008.

Next week, we’ll look at the market numbers of the rent vs buy discussion.