Rent vs Buy: Deciding on your Future Home

the millennial money woman blog post "rent vs buy"

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There are many factors that could influence whether to rent vs buy, and one option isn't necessarily better than the other. Find out which is best for you here.

In this article

Key Takeaways

  • Don’t push homeownership – it will come when it’s meant to be
  • Mathematically speaking, the breakeven to justify homeownership is typically around 5 years
  • One of the largest pros of renting is the flexibility you afford yourself
  • One of the largest pros of homeownership is the equity you afford yourself
  • Conduct your due diligence as you consider whether homeownership is the right next step for you

Rent vs Buy: Introduction

To rent vs buy a house is likely going to be one of the most complex – and expensive – decisions in your life (apart from maybe having a child). 

Considering whether to rent vs buy could severely impact your financial picture for many years – decades potentially – to come. 

Now, I want to debunk a common millennial money myth right here, right now: 

"Homeownership is not synonymous with financial success."

In fact, only 37% of millennials between 25 and 34 are homeowners.

Shockingly, of the 37% millennial homeowners, 63% actually regret their purchase because they didn’t expect the high home maintenance costs to creep into their budget.

Surprisingly, in 59% of U.S. housing market, it’s surprisingly more affordable to rent vs. buy.

Now, if you continue paying your monthly mortgage, you’ll very likely start building equity in your home – and building equity is one of the top reasons why so many people resort to homeownership. 

For those of us not fully versed in what the term “home equity” truly means, check out my simple definition below.

In other words, your home equity essentially is your net worth as it relates to your home.

Home Equity = Your home value – Your mortgage(s) 

In the end – there are so many factors that go into the rent vs buy decision-making process. 

Make sure to contemplate all of your options thoroughly.

Before I actually put pen to paper and signed my mortgage documents, I carefully thought through my options as well – and whether I truly thought that a house was the right choice for me at the time – at age 23.

And some might argue that purchasing a home at 23 might have been a bit too early to take on the heavy and long-term financial commitment that I did at that age. 

However, at that point in my life, I knew what I wanted and I had worked extremely hard, long hours to save enough money for a down payment on my home. 

It was the right match. 

Take this blog post as a guide to help you better understand how to navigate the waters of making the decision to rent vs buy a house. 

I’ll help you decide which questions to ask and give you some pointers that can help make the answer much clearer.

the millennial money woman blog post "when does it make sense to buy a house"

When does it make Sense to Buy a House?

Before we actually go through the step by step guide to determine whether it makes sense to rent vs buy, it’s time to determine whether you are ready in 3 specific stages:

Are you…

  • Financially ready?
  • Emotionally ready?
  • Proficient in homeownership skills?

Keep in mind that to be financially and emotionally ready is extremely important as you start your journey toward homeownership. 

"However – one aspect that I don’t think is discussed enough in-depth is determining whether you have the skills to be a homeowner."

Although you’ll certainly have the option of calling up a handyman to help you fix your home – over time, those bills will rack up and become quite expensive. 

Below are some homeownership skills that you should learn so that you save a considerable amount of money in the long run:

  • Painting (exteriors and interiors)
  • Locating studs to mount a TV
  • Changing fire alarm batteries
  • Unclogging the toilet
  • Turning off the main water valve
  • Maintaining the air conditioner filter

A simple method to improving your homeownership skills is just by watching YouTube videos, for example. 

They provide excellent information and typically help walk you through the home maintenance or repair process.

Of course, if you have a partner who is handy and well-learned in some of the homeownership skills I listed above, it could certainly be worth just calling on your partner to help.

Rent vs Buy: Step-by-Step Guide to Making your Decision

When it’s time to decide whether to rent vs buy a house, a lot of questions should be popping into your mind. 

You might also encounter the case (as with me) that you have simply too many question marks – and don’t know how (or where) to start asking questions to help you determine which next step is the best for your personal situation.

Some of the questions that could help lead you into the right decision when deciding whether to rent vs buy include:

  • How long do I intend to stay at my new place?
  • How much would it cost me to pay for rent each month?
  • How much would it cost me to pay for my mortgage each month in addition to my down payment?
  • Am I at the point where I am ready to settle or do I want to remain mobile?
  • Am I financially and emotionally ready to make a home purchase?
the millennial money woman blog post "rent vs buy a house questions to ask yourself"

As you can see, these questions address a plethora of different areas that should be considered before purchasing a home.

Now, let’s actually get into the nitty-gritty of the rent vs buy step-by-step guide to making the right decision. 

  • Review your finances
  • Consider your 5 to 10 year plan
  • Consider the location 
  • Determine the purpose for your home purchase 
  • How hungry are you to own something you can call “yours”?
Rent vs Buy Step by Step guide to help make the right decision

Let’s explore these 5 deciding factors in more detail.

1. Rent vs Buy: Review your Finances

One of the most important things when considering a home purchase should be whether you are able to actually afford a home.

the millennial money woman blog post "Costs Added into a Home Purchase"

Keep in mind that a home purchase has many different financial factors that go into the decision:

  • Down payment (typically 20% of the purchase price)
  • Appraisal fees
  • Inspector fees
  • Closing costs
  • Property Taxes
  • Home Owner’s Insurance

This is the point where you have to decide whether you have an adequate emergency savings fund – in addition to the amount of money you’ll have to use for the down payment of the house.

It’s typically recommended for homebuyers to pay 20% toward their down payment (so they eliminate private mortgage insurance – PMI – which can become really expensive down the road).

However, prospective homeowners can make a down payment for as little as 3% of the home’s total purchase price. 

If this is the case, then chances are that the PMI costs that will come along with a down payment of less than 20% will cost you more, over the many years of paying your mortgage, than if you had simply made a 20% upfront payment.

financial factors that could go into the decision of renting vs buying a home

Some other financial factors to keep in mind if you are deciding whether to rent vs buy include:

  • Emergency savings fund
  • Down payment cost
  • Debt to income ratio
  • Credit score

As it relates to your debt-to-income ratio: You want to make sure you have a front-end debt-to-income ratio of less than 28%, while maintaining a back-end debt-to-income ratio of just below 33%.

Monthly mortgage costs include:

  • Principal
  • Interest 
  • Taxes
  • Insurance

Monthly housing expenses include:

  • Principal
  • Interest
  • Taxes
  • Insurance
  • Credit card bills
  • Other loans

Learn more about these budgeting rules of thumb to give you a better understanding of how much you should spend on your house.

As it relates to your credit score, you want to have the highest credit score possible. 

The higher the credit score, the lower the cost of the mortgage interest rate.

2. Rent vs Buy: Consider your 5 to 10-Year Plan

Let’s say that your finances give you the green light – if you wanted to purchase a home, you could do so and without issue. 

That’s great!

But what about the part where we don’t analyze your finances? 

Where, instead, we analyze your emotions and your life plan?

the millennial money woman blog post "things to consider before buying a home"

This is the point where you should consider several things – in your 5 to 10-year plan:

  • Where do I plan to live in 5 to 10 years?
  • Do I see myself having a family in 5 to 10 years?
  • Will I need a bigger home?
  • How sure or unsure am I of wanting to purchase a home?
  • Is my home located in a place where it could appreciate?

As you can see, a lot of thought should go into a home purchase – before you commit to making the purchase.

There is a lot to think about here – and I recommend you take some time, perhaps strolling the beach or talking to a trusted person to discuss your options.

3. Rent vs Buy: Consider the Location

One of the most important things you can do for yourself – and your wallet – is researching the potential appreciation for the region and location of your potential home. 

If you are a millennial and considering a home purchase, statistically speaking, there is a very high likelihood that the house you purchase now will not be your “forever home.”

That means that you probably want to walk away from this home purchase a few years (assuming you plan to sell) with a profit in your hand. 

One of the easiest ways to make a profit – without actually making home updates – is to allow the home to appreciate. 

My go-to real estate pricing tool?

That’s called Zillow.

Here’s a legit warning for the first-time Zillow user: This link you’re about to enter can be extremely addicting… you can find yourself spending hours and hours on Zillow. 

Click at your own risk.

4. Rent vs Buy: Determine the Purpose for your Home Purchase

Consider why you are buying this home. 

Are you purchasing a home as…

  • An investment property?
  • An actual home?
  • A place you plan to raise your family?
  • A place where you are OK investing your time and money for repairs?

Think long and hard about these questions.

If you are planning to purchase a home simply for the sake of investing in rental real estate… please think again.

Just make sure you really consider your options and think carefully before making that emotional and financial commitment to purchasing a home.

5. Rent vs Buy: How Hungry are you to Own Something you can Call “Yours”?

I think the last question that you need to ask yourself as you decide whether to rent vs buy a house is really about how badly you want a home – and to be called a homeowner.

"This is the point where you have to ask yourself if you are emotionally ready for a home purchase."

A home purchase is not just an investment – it’s going to be your home.

A place where you spend a considerable amount of time and a place that will reflect your unique personality.

Should I Rent or Buy a House?

After going through this decision checklist, I think now it’s time to mathematically consider whether to rent vs buy is the better option – financially speaking – for you.

To do so, check out this rent vs buy calculator

This calculator takes the following scenarios in consideration:

Considerations: Regarding Purchasing Considerations: Regarding Renting
Your Location
Your Location
Home Price
Average Rental Rate
Down Payment
Rent Security Deposit
Mortgage Interest Rate
Rent Appreciation
Mortgage Term
Renter’s Insurance
How Long you want to Live in your Home
General Inflation
Home Value Appreciation
General Inflation

Largely, the answer to what you should do – rent vs buy – is related to the location you have decided to move to. 

The location oftentimes determines the cost of living, the cost of a home price – or rental price – etc.

The rent vs buy calculator provides a fantastic overview of your cost breakdown for monthly housing cost – if you were to rent or buy – along with your breakeven.

Here’s an example of someone looking to stay in Los Altos, California for 3 years, and they’re considering whether to rent vs buy.

Where do you Plan to Live?
Los Altos, CA
Home Price
Down Payment (17%)
Mortgage Interest Rate
Loan Term
30 Years
Comfortable Monthly Rent

In this situation, it makes more sense to rent for 3 years – but the breakeven (because monthly rent can be very high) is actually 4 years. 

So, if this person were to rent and live in Los Altos for 6 years, it would have made more sense for them to buy a place (assuming they had the financial means).

the millennial money woman blog post "rent vs buy break even"

Take a look at the chart below:

The chart below refers to the break even point, which is year 4, per the chart above. As you can see, in the long run it makes more sense to buy than to rent.

rent vs buy

Keep in mind that since March 2020, the average house purchase price hovered around $320,000.

As I am sure you could assume, the average cost of a house is much more expensive in the west than any other location in the United States. 

Below is a short breakdown of the average housing prices in the U.S., based on location:

U.S. Location Average 2020 Housing Price

Image: The Millennial Money Woman | Source: Dave Ramsey

To be honest, I have dabbled around, using this rent vs buy calculator on many occasions to help clients or mentees from my non-profit better understand which option would be best for them and their situation.

Should I pay off my mortgage early?

One common question I often receive is whether you should pay off your mortgage early. 

In other words, should you add more money to your minimum required monthly payment.

Here is my answer: If your mortgage interest hovers around 3% to 4% – then I think you’ll have better luck in leveraging your money in the stock market (where returns typically average around 7% over time) than pay off a 3% or 4% interest rate. 

That being said: If you are a very conservative investor and cannot stomach the market fluctuations, then perhaps investing in your house and simply paying off your mortgage at an accelerated rate could be the right answer. 

However, in general, I typically tend to stay away from paying off my mortgage early. 

The lower the interest rate, the less incentive there is for me to pay down my mortgage payment.

the millennial money woman blog post "Tax Advantages for 2020 Home Ownership"

Tax Advantages to Buying a House

Although there certainly are some tax advantages that come with the interest payment of a home – the recent tax law changes have been more in favor of the renting population versus the homeownership population. 

Here are the basics for the 2020 Homeownership tax advantages:

  • Mortgage interest rate deduction
  • Home equity and home equity line of credit interest deduction
  • Mortgage points deduction
  • State and local income tax deduction
  • Home office deduction
  • Tax-free profits for a home sale

Let’s go into more depth, below.

the millennial money woman blog post "Mortgage Interest Deduction"

Mortgage Interest Deduction Notes:

  • If you file as an individual or married filing jointly: You can deduct any interest paid on your mortgage on up to a $750,000 mortgage 
  • If you bought a home before December 15, 2017 – you can deduct any interest up to $1 million for a mortgage

Keep in mind that with the recent tax law changes (an increased standard deduction), it’s not as easy to deduct mortgage interest rates, because you’ll have to itemize. 

Contact your CPA or accountant to help you determine the tax specifics.

the millennial money woman blog post "Home Equity Loan & Home Equity Line of Credit (HELOC) Deduction"

Home Equity Loan & Home Equity Line of Credit (HELOC) Deduction Notes:

  • If you took out a home equity loan or a HELOC and this loan PLUS your first mortgage is less than $750,000 – you can deduct any interest paid on both loans
  • Loans would have to be used toward building, maintaining, or improving your home in order to be deductible

Although you can certainly qualify for some tax benefits with a HELOC – I would suggest that unless you need a HELOC, stay away from them. 

The interest rates are typically higher than your regular mortgage rate and a HELOC rate could be variable.

the millennial money woman blog post "Mortgage Points Deduction"

Mortgage Points Deduction Notes:

  • 1 mortgage point = 1% of your loan
  • Typically, you can deduct mortgage points over the duration of your loan
  • Mortgage points are also known as discount points

Although the mortgage points tax deduction is an added benefit to homeownership, I would suggest to commit to a mortgage charging 0 points up-front. 

I do not recommend obtaining a mortgage with points (points basically mean less money in your wallet).

the millennial money woman blog post "State and Local Tax (SALT) Deduction"

State and Local Tax (SALT) Deduction Notes:

  • Deductible SALT amount is limited to $10,000 for single and married tax payers

Now, if you live in the following states, you may be at a disadvantage:

  • California
  • Connecticut
  • Illinois
  • New Jersey

You’ll be at a disadvantage because these states have fairly high property taxes and you may not be able to take full advantage of the SALT deductions.

the millennial money woman blog post "Home Office Deduction"

Home Office Deduction Notes:

  • If you work from a house – or an apartment building – you must use a portion of your living space for work exclusively & regularly
  • One way to lower your tax bill is to deduct $5 per square foot – up to 300 square feet – for business usage

If you are considering working from home – like I am with my blogging business – then you may be able to take advantage of the home office tax deduction!

the millennial money woman blog post "Tax-Free Profits for a Home Sale Notes"

Tax-Free Profits for a Home Sale Notes:

  • Must label home as your primary residence
  • Must live in home for at minimum 2 out of 5 years before sale date
  • If the above are satisfied, and you are an individual tax filer: Capital gains are tax free on up to a $250,000 gain
  • If the above are satisfied, and you are married filing jointly: Capital gains are tax free on up to a $500,000 gain

As you can see, some of the tax-free appreciation – given you have followed the requirements – provide value for home buyers.

Pros and Cons of Owning a Home

Purchasing a home, as I’m sure you’ve realized by now, is a very important decision. 

However, with each decision, there are benefits and drawbacks – and I look to examine those pros and cons of owning a home here.

Homeownership Pros Homeownership Cons
Increased privacy
Less flexibility – more hassle moving to a new location
Potential for appreciation
Increased unplanned costs (stemming from repairs, taxes, insurance, etc.)
High up-front costs (down payment, appraisal, etc.)
Ability to modify and customize home
Lawn maintenance bills
Potential tax advantages
It does not make sense to sell your home within the first 5 years
Could be as much as a monthly rental payment – depending on your location
Home prices may depreciate
You build up your home’s equity
Increased responsibility
Ability to have pets
Increased liability
Assuming you have a fixed mortgage, there is no risk of increasing monthly payments
Could cost more than renting

You definitely want to take the pros and cons of owning a home into consideration before making the commitment.

Pros and Cons of Renting a Home

As with all decisions in life, there are pros and cons for each choice – and it’s up to us to decide whether the pros outweigh the cons of the decision.

In this case, let’s discuss the benefits and drawbacks of renting a home. 

Renting Pros Renting Cons
Increased flexibility and freedom (especially with a month to month agreement)
Your rent could increase at any moment (your landlord has control)
No responsibility for maintenance and repairs (it’s the landlord’s job)
You can’t build equity
Renting could be cheaper than owning a home (in 59% of the US housing market, it’s cheaper to rent)
No associated tax benefits
No taxes
You are unable to customize your rental space to match your unique personality (you’ll need your landlord’s permission)
Low up-front costs (need for a down payment is not required)
Typically, rental properties don’t allow for pets (or there is a pet charge)
You could be evicted at any time

Remember, it’s like having a scale to weigh the pros and cons. 

If some of the cons listed in this chart don’t matter to you – and you feel that renting a place has so many more benefits for your personal situation, then I think it’s time to rent.

Consider your options carefully.

Rent vs Buy: Closing Thoughts 

The decision whether to rent vs buy certainly is not an easy one. 

In fact, deciding what the right choice is for you can take months – if not years, depending on your situation.

The point of the matter is this: Don’t let peer pressure or the media push you to purchase a home. You should be ready to purchase a home on your own terms.

When I bought my first home, I did not feel pushed, hurried, or threatened to buy my house. 

The timing was just perfect:

  • I love the Miami area
  • I knew I had a stable career and income
  • I did not want to move – because I knew my home was in Florida
  • I had saved enough money to make the financial commitment

Everything just meshed. It was the right fit.

“Buying a house is like getting into a relationship: To make it work, you have to be focused on the long-term, be financially stable, want to settle, and be emotionally ready.”

If you think about it, a home purchase could easily be one of the largest financial commitments you make in your life – aside from a child, possibly.

That’s why I want to make sure I engrain that a home purchase decision is very important to contemplate before actually committing to it. 

Hopefully this blog post will act as a guide to help you better understand some of the thought processes that should go into the decision-making process of whether a home purchase is a right fit for your situation.

Trust, me your bank accounts will thank me (a whole lot) later!

Related: Budgeting Tips and Tricks For Renters

What has your experience been with a home purchase or apartment rental? Were you happy with your decision?

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