Buy vs. Rent: Which is Right for You?
Do you dream about playing fetch with your dog on the green grass of your own back yard? Or do you love the ease of walking down the hall to your apartment’s gym after a long day of work? When considering the question of buying versus renting, many millennials assume they are on the side of renting… in fact, many don’t even consider “renting vs. buying” to be a valid question. The college hangover of large student debt, watching their parents deal with the crash of 2008, and the seemingly insurmountable dollar amounts needed for house purchase down payments have many questioning if they will ever own, or if they even want to own.
When looking strictly at the numbers, however, buying almost always makes more financial sense than renting, especially when considering currently skyrocketing rents and low mortgage rates. According to an in-depth study by online real estate giant Trulia late last year, 98 of the top 100 metro areas, on average, come out to be about 23% cheaper in favor of owning vs renting (http://www.trulia.com/blog/trends/millennials-rent-or-buy/).
Trulia even tailored their study based on some of the specific challenges faced by younger prospective buyers, namely job stability and cash savings. They adjusted their study to account for a projected 5 year ownership period and a 10% down payment, compared to most online studies that use a projected 7 years of ownership and a 20% down payment when comparing rent vs. own.
The projected 23% savings Trulia uncovered takes into consideration both monthly costs of owning vs. renting (such as mortgage payments vs. rents, and extra monthly costs such as taxes, insurance and maintenance) and one-time costs such as down-payments, closing costs and security deposits. This means that if a renter is paying the national average rent of $1709/month ($20,508/year), their expected costs of buying would average only $1316/month ($15,792/year) for a savings of $393/month ($4,716/year). This makes a very good financial case for buying over renting, especially when you consider that the monthly savings could be put to better use, such as paying off student debt.
If it makes more sense to buy based on these results, why aren’t more 20-somethings buying homes? Do they not understand the finances behind owning? Or is it that, despite the hard data, home ownership just seems too far out of reach? The answer turns out to be more complicated than just dollars and cents - for many prospective buyers, there are the intangibles of home ownership to consider as well as the financial.
Check out some of the most cited pros and cons of owning a home, and then decide for yourself where you might fall on the rent vs. buy spectrum:
Pros & Cons of Home Ownership
Pros
Pride of Ownership: Freedom to install any feature or décor you want, making your house a home
Building Equity: Part of each monthly payment is basically going into a forced savings plan
Space: Think yard, patio, garage, master suite and other spacious features out in the suburbs
Certainty: Once you lock in a house payment, most fixed costs are very stable – no annual rent hikes
Community: Neighborhood of other long-term residents with similar outlooks on ownership
Cons
Maintenance: Can’t just call the landlord when something breaks
Commitment: Signing a mortgage may feel like signing a 30-year cell phone contract
Proximity: Possible longer drive to culture, nightlife, transit and other urban perks
Amenities: Extra cost for apartment-perks like gyms, electric car charging, concierge service
Inflexible: Harder to move when you need to sell vs. just letting a lease expire
For all buyers, young and old, buying a home can be a great financial decision – indeed, the data shows a savings of about 23% for the average millennial who decides to buy instead of rent. However, those interested in buying should first run the numbers for their particular financial situation, as well as consider the lifestyle choice involved. When looking at the numbers, young buyers especially need to consider their ability to save for a down payment as well as their ability to pay the monthly payment. When considering the ownership lifestyle, buyers need to think seriously about their ability to stay in the home for at least 5 years (the longer the better) in order to make the investment worthwhile, as well as consider the intangible pros and cons of home ownership in order to decide. Then, if the financials make sense and the pros of owning are exciting, millennials should strongly consider breaking from the pack and purchasing a home!
Dave Miller is an experienced real estate investor who loves talking real estate and educating people on the pros and cons of real estate investing. You can connect with Dave on Twitter @askdavemiller with any real estate related questions.