By Rebecca Lake for SmartAsset
Owning a home was once considered the apex of the American Dream but renting has become more practical for millions of Americans in the post-housing crisis economy. While some argue that renting a home is essentially throwing money away, there are situations where it makes good financial sense. Here are just a few questions to think about if you’re on the fence about whether to rent vs buy.
How Long Are You Planning to Stay?
Home ownership is considered an investment, since the money you pay each month goes to a tangible asset. However, what you may not realize is that it typically takes a while for you to actually start seeing any return on the money you’re putting in. Depending on how much you borrow, what your interest rate is and what property values are like in your area, it could be years before you start building any equity.
As a general rule, you’re better off renting if you only plan to stay in particular place for less than five years. If you were to buy a home and sell it five years later, you could end up paying more in terms of your mortgage payments, homeowner’s insurance, property taxes, maintenance costs and utilities than you would have for rent.
Are You Expecting Any Major Life Changes?
Another thing to consider is whether there’s the possibility of any major life changes in the near future. For example, are you planning to get married or start a family? Is there a possibility that your job situation could change drastically or you might decide to go back to school?
If you don’t expect your current situation to change any time soon and you’re planning to stay put for the long haul, then it may be a good move to buy. If not, then you’re probably better off renting, which will give you more flexibility to deal with any potential curve balls life may throw at you.
What’s the Market Like?
You also need to look at what the market’s like in your area when you’re debating renting versus buying. Specifically, you want to look at the price-to-rent ratio, which measures the cost of home ownership against the cost of renting. How high or low the ratio is serves as a good indicator of whether it’s a good time to rent or buy.
To figure out the price-to-rent ratio, divide the average listing price in your area by the average yearly rental cost. Generally, if the ratio is 16 or higher, you’re better off renting. If you’re paying substantially less for rent than you would a mortgage, you could invest the difference and potentially see a return faster than you would if you bought a home.
Another way to look at it is to figure out if you could buy a home for less than 15 times what you pay in rent each year. For example, if you’re paying $1200 a month in rent, you’re better off buying if you could snag a house for $216,000 or less. If homes in your area are selling for substantially more, then it might be a smart move to stick with renting.
What’s More Affordable?
The bottom line when it comes to renting versus buying is figuring out what’s more affordable. This means taking a full inventory of all the different costs involved. When you own a home, you’re paying for more than just the mortgage. You also have to factor in what you’re paying in terms of interest, your homeowner’s insurance, property taxes, utilities, repairs and maintenance.
When you’re renting, your costs are typically much lower, since you’re not responsible for paying for repairs and maintenance, unless you caused damage to the property. Some or all of your utilities may be included in the rent and renter’s insurance is usually much less expensive than homeowner’s insurance.
Instead of forking over a big down payment, you typically only have to pay a small security deposit and an application fee before you move in. Just keep in mind that if you’re planning to rent long-term, you may be subject to regular increases so it’s a good idea to reevaluate the rent vs buy question when it’s time to renew your lease.
Photo Credit: Mitchell J. Goldstein
Sources: Investopedia: Price to Rent Ratio
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