Rent vs. Buy: Which Is Right for You?
You may be facing the rent vs. buy dilemma if you're planning to relocate for a new job or move before retirement. Homeownership offers financial advantages, from income tax deductions to equity — not to mention the freedom to stamp your place with your own style. But, according to AARP, a recent study from the Harvard University Joint Center for Housing Studies found that since 2005, Americans in their 50s and 60s have accounted for the largest portion of the country's increase in renters.
As more empty nesters and retirees seek convenience — choosing to free up their time in favor of a more vibrant, carefree lifestyle — the question of renting vs. buying is getting more consideration than ever before.
Here are some key factors to weigh in the rent vs. buy debate.
One of the advantages of renting is that the landlord is responsible for keeping the lawn mowed and all home systems (furnace, AC, water heater, appliances, etc.) working. On the other hand, due to inflation, your rent may also rise, while monthly mortgage costs are generally more predictable with a fixed-rate mortgage.
Try using a mortgage calculator for a more comprehensive tally of the costs of homeownership. It also lets you plug in some of your own finance metrics, like income and debt, to see how much you can afford.
When asked what issues matter most in deciding where their next home would be, 60 percent of respondents in a Freddie Mac study of boomers chose affordability. But more than 40 percent put lifestyle issues at the top of the list. Forty-seven percent wanted amenities for retirement living, 44 percent wanted to avoid responsibility for property maintenance and 43 percent wanted to live in a walkable community.
However, none of those features are exclusive to either owning or renting. For example, a condo or homeowners association might take care of yard maintenance and provide recreational facilities. But some areas may offer more affordable access to those amenities in one type of home or the other. Plus, condo and HOA fees are another cost consideration.
Owning your home has financial benefits as well. According to the Federal Housing Finance Agency's (FHFA) House Price Index (HPI), the average housing values rose 6.5 percent between 2016 and 2017. Additionally, home value has risen about 34.6 percent over the last five years, which has actually outpaced inflation. There are also lifestyle benefits to keep in mind. Consider having the freedom to make custom updates that match your style preferences, increased privacy, and the overall comfort of knowing that this is your home and someone else can't tell you what you can and cannot do there.
In a study of 33 major metropolitan statistical areas (MSAs), Urban Institute found that in 17 MSAs it's less expensive to own a home than to rent. Chicago, Cleveland, Pittsburgh and Tampa are among the locations where homeownership is actually more affordable than renting.
Of the 16 MSAs where renting is more affordable, San Francisco ranks as the most expensive for homeownership. And renting is less expensive than owning in Las Vegas, Nevada and Portland, Oregon.
Taxes and Equity
Two more issues to consider are the tax implications and how long you plan to stay in your new home.
Some aspects of the new Tax Cuts and Jobs Act lower the financial incentives for homeownership, as this analysis by the nonprofit Tax Foundation shows. For example, the new law doubles the standard deduction to $12,000 for individuals and $24,000 for couples. That reduces the tax-saving advantage for itemizing the mortgage interest deduction.
At the same time, the breakeven rent — the level at which it makes more financial sense to buy a home than rent one — increases by 25 percent for households earning $150,000 a year and 32 percent for those earning $300,000, according to Urban Institute.
Of course, a key advantage of buying a home is equity — an asset that will grow over time as you pay down the mortgage, especially if the property value goes up. You'll be able to tap into your home equity as collateral for installment or line of credit loans to pay for home repairs or upgrades, including adaptations for aging in place.
The right answer to the rent vs. buy question is a calculation only you can make. Once you've weighed all of the financial and lifestyle considerations, it comes down to which option makes the most sense for you.