Last updated on August 9, 2023
To rent, or not to rent. That’s the question. One of the biggest decisions you’ll have to make — when working towards achieving financial independence — is whether to rent or buy a home.
Now, I know what you might be thinking: “Isn’t buying a home everyone’s dream? Why would I want to rent instead of owning my own place?” And I get it. I really do.
But (the truth is) there are pros and cons to both renting and buying. And it’s important to weigh them carefully before making a decision.
In today’s article, I’ll be taking a look at the:
- Financial
- Lifestyle
- And investment considerations of each option
- And showing you how to use math calculations to compare the costs
But before we dive in, let me just say this. I’m not here to tell you what to do. Everyone’s situation is different. And what works for you might not work for someone else.
My goal is simply to provide you with the information you need to make an informed decision — that works for you.
So, grab a cup of coffee (or something stronger), and let’s get started.
What you'll learn:
⓵ Financial considerations
❖ Initial Costs
For renting, the initial costs are typically first and last month’s rent, and possibly a security deposit.
For buying, the initial costs include a down payment, closing costs, and any necessary home inspections or repairs.
In almost all cases, buying a home requires a much larger initial investment than renting.
❖ Ongoing Costs
Renters typically only have to pay for their monthly rent. While homeowners have to pay for mortgage payments, property taxes, insurance, and any necessary repairs or maintenance.
In most cases, the ongoing costs of owning a home are significantly higher than the costs of renting.
❖ Long-term Costs
Renters do not accumulate equity in a property, which can be a significant source of wealth over time. On the other hand, homeowners have the potential for appreciation and equity buildup in their home.
Additionally, paying off a mortgage can also result in a sense of accomplishment and financial stability.
Interest rates, property taxes, and maintenance costs can also have a significant impact on the overall costs of renting vs buying. For example, a higher interest rate on a mortgage can increase the monthly payments, making buying less affordable.
Similarly, a higher property tax rate can increase the ongoing costs of owning a home. It’s important to note that there are tax implications for owning a home.
However, homeowners can take advantage of tax deductions for mortgage interest and property taxes. This can reduce the overall cost of owning a home.
Nevertheless, it’s important to consult a tax professional to understand the tax implications of owning a home. And how it can affect your overall financial plan.
Always take into account the financial benefits and drawbacks of each option and how they impact your ability to reach your goals. Do the math calculations (more on this later on) and consider the long-term cost before you reach a decision.
And don’t forget to consider the non-financial aspects of renting vs buying. “What are those?” You ask. Keep reading to find out.
⓶ Lifestyle considerations
❖ Flexibility and mobility
Renting a home offers more flexibility and mobility than buying. If your job or personal circumstances change, it’s much easier to pick up and move without the hassle of selling a home.
This can be especially beneficial for those who are still in the early stages of their career (and may need to move frequently). On the other hand, buying a home can limit your ability to move, especially if you’re unable to sell your home for a reasonable price.
❖ Freedom and autonomy
Owning a home can provide a sense of freedom and autonomy (that renting does not). You can make changes to your living space and personalize it to your liking. You can also take pride in the ownership of your home and the sense of accomplishment it brings.
❖ Location, lifestyle, and community
The location of the rental (or home) can greatly affect the costs and benefits of renting vs buying. For example, living in a high-cost city can make renting more expensive than buying.
It’s also important to consider the lifestyle and community you want to be a part of. Living in a tight-knit community with a strong sense of belonging can be an important factor in your overall well-being and happiness.
❖ Impact of home ownership on well-being
Homeownership can have a positive impact on your overall well-being. Owning a home can provide a sense of stability and belonging. It can also have a positive impact on mental and physical health. As it can provide a sense of accomplishment and pride.
However, it’s important to note that the impact of home ownership on well-being can vary depending on you and your specific circumstances.
⓷ Investment considerations
❖ Equity buildup
One of the biggest benefits of buying a home is the potential for equity buildup. As you pay down your mortgage, you’ll be building equity in the property. Which can be a significant source of wealth over time. On the other hand, renting doesn’t provide the opportunity for equity buildup.
❖ Appreciation
Owning a home also provides the potential for appreciation. The value of the home may increase over time — providing an additional source of wealth — especially if the home is sold for a higher price than the original purchase price.
But be careful, appreciation is not guaranteed. And the value of the home may decrease over time.
❖ Tax benefits
Owning a home also provides tax benefits. Homeowners can take advantage of tax deductions for mortgage interest and property taxes, which can reduce the overall cost of owning a home.
Additionally, capital gains tax is typically not applied on the sale of a primary residence if you’ve lived in it for at least 2 of the past 5 years.
❖ Cash flow
Renting a home can provide cash flow as the landlord is responsible for the maintenance and repairs. On the other hand, owning a home requires cash flow for maintenance and repairs.
Let’s proceed to a comparison of the pros and cons for both (owning and renting) to better understand the differences.
⓸ Pros and cons of owning a home
❖ Pros of owning a home
◆ Building equity
As you make mortgage payments, you are building equity in the home. Which can be a significant source of wealth over time.
◆ Tax benefits
Homeowners can take advantage of tax deductions for mortgage interest and property taxes.
◆ Sense of stability
Owning a home can provide a sense of stability and security, as you are not subject to the whims of landlords or the rental market.
◆ Freedom to make changes
When you own a home, you have the freedom to make changes to the property, such as renovating or remodeling, to suit your needs and preferences.
◆ Investment potential
Owning a home can be a good investment, as property values tend to appreciate over time.
❖ Cons of owning a home
◆ High upfront costs
Buying a home can be expensive. Costs include a down payment, closing costs, and ongoing maintenance expenses.
◆ Lack of mobility
Owning a home can make it more difficult to move when circumstances change. Such as a job loss or a desire to relocate.
◆ Maintenance responsibilities
As a homeowner, you are responsible for all maintenance and repairs on the property. Which can be time-consuming and costly.
◆ Risk of negative equity
If the value of your home decreases, you may be left with a mortgage that is worth more than the home itself (this is how people can lose their homes and be left with nothing if they can’t afford the mortgage payment).
◆ Limited liquidity
It can be harder to access the equity in your home (as compared to liquid assets). And can also be a long process to sell your home.
⓹ Pros and cons of renting
❖ Pros of renting
◆ Flexibility
One of the biggest benefits of renting is the flexibility it provides. If your job or personal circumstances change, you can easily pick up and move without the hassle of selling a home.
◆ Low upfront costs
Renting requires much less money upfront compared to buying. You typically only need the first and last month’s rent. And possibly a security deposit.
◆ No maintenance responsibilities
As a renter, you don’t have to worry about the costs or time associated with maintaining and repairing a home. That’s the responsibility of the landlord.
◆ Lower carrying costs
Renting typically has lower carrying costs than owning a home. You don’t have to pay for property taxes, insurance, or repairs.
❖ Cons of renting
◆ No equity
As a renter, you’re not building equity in a property, which can be a significant source of wealth over time.
◆ Lack of control
As a renter, you may be subject to the whims of landlords and the rental market, which can be frustrating if you want to make changes to your living space.
◆ Limited ability to personalize your space
Renters typically have a limited ability to personalize their living space compared to homeowners.
◆ No tax benefits
Renters don’t get the tax benefits that homeowners get. Such as deductions for mortgage interest and property taxes.
Bear in mind that these are general pros and cons. And your specific circumstances may vary. So adjust accordingly when doing your calculations. Let’s do one example together to get the idea.
⓺ Example and math calculations
Let’s say you’re considering renting a 2-bedroom apartment for $1,500 per month and buying a similar 2-bedroom home for $300,000.
To compare the costs of renting vs. buying, you’ll need to take into account the following factors:
- Monthly rent or mortgage payment
- Upfront costs (such as a down payment, closing costs, etc.)
- Ongoing costs (such as property taxes, insurance, maintenance, etc.)
❖ Monthly rent vs mortgage payment
- Rent: $1,500 per month
- Mortgage Payment (assuming a 30-year fixed-rate mortgage at 3% interest with a 20% down payment): $1,264 per month
❖ Upfront costs
- Rent: None
- Buying: $60,000 (20% down payment on a $300,000 home)
❖ Ongoing costs
- Rent: None (landlord is responsible for maintenance and repairs)
- Buying: Property taxes (estimated at 1.25% of the home’s value per year) — $3,750 per year, homeowners insurance (estimated at $1,200 per year), and maintenance and repairs (estimated at 1% of the home’s value per year) — $3,000 per year
After calculating these costs, you can compare the total costs of renting and buying over a period of time. For example, over a period of 5 years, the total costs of renting would be $90,000 ($1,500 per month x 12 months x 5 years).
While the total costs of buying would be $96,250 ($1,264 per month x 12 months x 5 years) + $60,000 upfront costs + $15,750 (5 years of property taxes, insurance, and repairs).
This is just a simplified example. And all these costs can vary greatly (depending on factors such as interest rates, location, and home values).
Also, the above example doesn’t take into account the potential for appreciation and equity buildup when owning a home. The value of the home may increase over time. And this can provide an additional source of wealth.
⓻ Top 5 books on “Buy or Rent”
“The Rent vs. Buy Debate” by Eric Tyson and Ray Brown
This book provides a comprehensive guide to the pros and cons of renting and buying. And helps readers make informed decisions based on their personal circumstances.
“The Simple Path to Wealth: Your road map to financial independence and a rich, free life” by JL Collins
This book focuses on the financial independence and retire early (FIRE) movement. And provides a detailed explanation of how to achieve financial independence through saving, investing, and living a frugal lifestyle.
“Buy vs. Rent: The Best Places to Own a Home” by Chris Mayer
This book provides a comprehensive guide to the pros and cons of renting and buying in different markets.
“Renting is Throwing Money Away, or Is It?” by Mark Babbitt
This book provides an in-depth look at the pros and cons of renting and buying. It covers all the major aspects of renting vs buying (including examples).
“The Homeowner’s Guide to Renting: How to Rent Your House For Top Dollar” by Paula Serrano
This book provides a step-by-step guide to renting a property. Including tips on how to find tenants, how to price a rental, and how to handle legal and financial issues.
⓼ Top 5 quotes on “Buy or Rent”
“Buying a home is a rite of passage. Renting is like being in college. You’re not tied down. You can pick up and move if you want to.”
— Tina Fey
“It is not the most financially advantageous thing to buy a house, it is the most advantageous in terms of how you feel, how you live.”
— Suze Orman
“Renting is like throwing money down a rat hole. You’re paying for something you’ll never own.”
— Dave Ramsey
“Renting is like driving a rental car. You’re not going to take care of it like it’s your own.”
— Robert Kiyosaki
“When you rent, you’re just throwing money away. But when you own a home, you’ll be earning equity while you sleep.”
— Grant Cardone
⓽ Popular “Rent or Buy” FAQ
❖ What are the main benefits of renting a home?
Renting a home can provide flexibility and freedom. From maintenance responsibilities, as well as the ability to easily move to a different location.
❖ What are the main benefits of buying a home?
Buying a home can provide a sense of stability and ownership. The opportunity to build equity, and the potential for appreciation in value.
❖ Are there any tax benefits to owning a home?
Yes, homeowners may be eligible for certain tax deductions. Such as mortgage interest and property tax deductions.
❖ What are the costs associated with buying a home?
Some costs associated with buying a home include a down payment, closing costs, home inspection fees, and property taxes.
❖ How does the cost of renting compare to the cost of owning a home over the long term?
The cost of renting can be less expensive than owning a home in the short term. But over the long term, owning a home can be more cost-effective. Because the costs associated with buying a home (down payment and closing costs) are typically paid upfront. While the costs of renting (the monthly rent) are spread out over time.
Final thoughts
As you’ve seen, there are many pros and cons to both. Some might choose to rent so they can invest the capital saved from not having to pay an upfront cost. Others might prefer the peace of mind of not having to worry about inflation and being kicked out of their homes because of rising rents.
There is no right answer. But only the right answer for you. So consider all things. And make a decision based on your own needs and preference.
If you want to rent, then rent. And don’t listen to those who say you’re throwing money away. We all need a place to live, right?
If you prefer owning, then by all means buy. And don’t look back. At the end of the day, it’s you who’s gonna pay for it (no matter what). So be responsible for your own decisions. And take necessary actions to reach your goals. Even if this means saving more or earning more.
And remember: you can never know exactly the right time to buy or sell any asset (not even your home). So don’t beat yourself if you just bought a home and prices went down. Or if you signed a rental agreement and the rental prices went down.
Just make sure that before you jump in you have the facts right. And that you are mindful of your decision. And don’t forget to enjoy the process along the way.
