This will be a two-post series on the top 10 reasons to rent vs buy a home. The topic of homeownership is fiercely defended and opinions on the rent vs buy debate are strong, but here’s my take on the reasons that renting beats buying. I plan to follow up in the near future with another two-post series outlining the situations when buying a home may be better than renting.
Today I’ll cover reasons 1 through 5 of rent vs buy:
- Rental deposit is much lower than a mortgage down payment
- More financial liquidity and investment options
- No risk of decreasing property value
- No need to mow the lawn, shovel snow, or fix/replace broken items
- Flexibility in relocation
1. Rental deposit is much lower than a mortgage down payment
One of the largest financial differences between owning and renting is the down payment. Traditionally, a home or condo buyer would need to cover a 20% down payment on the purchase. For the median priced home in the United States, a down payment of about $60,000 would be required. For a renter, the only down payment required is typically a security deposit and maybe the first and last month’s rent paid up front. The median rent in 2019 was $1,100. Assuming a security deposit of one-month’s rent and the prepayment of the last month’s rent, a typical renter will need to pony up $2,200. I’m not including the first month’s rent in this calculation because a down payment for a home buyer does not include the first mortgage payment either. This means a median home buyer is going to require $60,000 up front versus $2,200 for a median renter. Obviously, using a median value means that half will pay more and half will pay less so these figures may not be practical in San Francisco, California, but the premise still holds that the up-front cash needs for renting is significantly lower than buying.
Considering that the median household income in 2019 was nearly $69,000, a typical down payment will equal almost an entire year of gross household income! Now, think of how many years it would take to save that year’s worth of income if you’re able to save 15% of your gross pay and dedicate it solely to a home down payment. Assuming you invest it in the stock market and earn average returns, it would take you about 5.5 years to save up one year of income at a 15% savings rate. In the meantime, if you want to be saving for retirement, children’s college fund, or vacations, that would all need to be done in addition to this home down payment savings rate.
2. More financial liquidity and investment options
One of the financial benefits of not having to transfer a significant sum of savings into a home down payment is that you can keep those funds more liquid and accessible. These funds could be held in investment accounts or emergency funds that can be more easily utilized. By tying up those funds in home equity, you cannot utilize them to generate a higher investment return or in case of an emergency. While a home equity loan or line of credit is a possibility to access your down payment funds, it will cause you to pay Private Mortgage Insurance premiums if your equity dips below 20%. Don’t forget to factor in the cost of PMI in your monthly housing cost if you choose not to put 20% down on your home purchase. I recently saw a PMI quote at almost 10% of the monthly cost of the mortgage payment and that adds up over time. It is also possible that equity investments may earn a higher rate of return than a primary residence. Over the long term, equity market returns vastly outperform residential real estate. On the flip side, real estate is a highly leveraged purchase since you may only have put down 20%, but can realize the gains on the entire purchase price. Putting 20% down on a $350,000 home means your equity is $70,000, but you’ll see gains based on the $350,000 price – that’s 5 to 1 leverage. This helps to defray the difference between equity and real estate returns for a residential home buyer.
3. No risk of decreasing property values
As a renter, you are not on the hook for a decrease in the value of the property you are occupying. While residential real estate has seen rather stable growth over the long term, there are still short term periods of significant declines. If these short term declines are combined with a job loss or forced relocation, you could end up having to sell into the declining market and realizing those losses on your home. A renter would have no such concerns.
I recently relocated to a much lower cost of living area, while being able to work from home, because my lease ended. I didn’t have to worry about selling, commissions, agents, taxes, etc. I just moved my stuff out, swept and wiped down the apartment, and moved on. Even though rent prices had collapsed in my building, management refused to lower my rent to keep me as a tenant. This means I would have been moving to another building anyway to take advantage of falling rents and incentives available for new tenants.
4. No need to mow the lawn, shovel snow, or fix/replace broken items
Not having to fix, replace, or maintain the property is one of the best benefits to renting vs. home buying. As a single person with a demanding career, I don’t have the time to mow lawns, shovel snow, or run to the store to buy various replacement materials. If I owned a home, I would likely outsource all this work as an additional cost of homeownership. However, for renters, this is almost always included in the rent you pay.
Sometimes, significant and expensive issues arise and being a renter is a great way to insure against having to spend a ton of money on a major repair. In early 2019, I discovered a leak in the ceiling. After reporting it to management, it turns out it was a sewer line leaking and required multiple days and thousands of dollars of repairs in order to drill into concrete and replace a bunch of faulty plumbing. I was very glad that I didn’t have to deal with paying for the repairs, and the property management company even put me up in a hotel during the repairs so I could continue working remotely.
5. Flexibility in Relocation
One of my favorite aspects of renting vs. buying is the ability to relocate quickly and easily. Not everyone has an employer who is willing to pay for relocation expenses. I do not have that luxury and would need to pay out of pocket for any costs (of time and money) if I were to be relocated by my current employer. In fact, I would argue that people who own a home are much less likely to relocate for work or search for new jobs outside of their current location due to the stress and cost associated with such a move and the risk that the new employer may not be willing to pay for relocation. Now you may disagree with me about the difficulty of selling a home, especially during the very hot housing market we are experiencing in 2021, but it’s not always a sellers market and when the boss says it’s time to move, you may not have a choice to wait it out for a better real estate market and sell for much less than you expect.
I have moved, from one state to another, five times in the past six years and it would have been much more expensive to do if I were a homeowner. During the Covid-19 pandemic, I took advantage of the lengthy work from home period and relocated to a much lower cost area, while maintaining the same salary (at least for the time being). Moving as a renter could be as simple as loading up a moving truck at the end of your lease and driving to the new location. Usually the worst case for a renter is paying a penalty of one or two months rent in order to end a lease early. Now that may seem like a lot at the time, but imagine if you were having to pay a 6% real estate agent commission every time you sell a home and you do that once every couple of years? A 6% selling commission on a median priced home is over $20,000… significantly more than one or two months rent of a couple thousand dollars if you aren’t able to stay until the end of the lease.
The labor market has changed significantly over the past 30 years and it no longer appears to reward loyalty to a single employer over an entire career. People are switching jobs more often these days and studies have even shown that frequent job chargers have the fastest growing salaries Check out this startling statistic: Employees Who Stay In Companies Longer Than Two Years Get Paid 50% Less.
This post is quickly turning into a short novel, so let’s take a break and pick it up next time with numbers 6 through 10 of the top 10 reasons to rent vs buy!
6. Lower insurance costs
7. Lower utility costs
8. Access to amenities
9. No property tax bills (indirectly included in rent)
10. Ability to afford to live in the city