The Rent vs Buy Dilemma… Does It Matter?

The Rent vs Buy Dilemma… Does It Matter?

One of the most debated topics in the personal finance space revolves around the question of rent vs buy.

On one side of the fence, you have the folks marching to the beat of, “You’re throwing money away when you rent… when you buy, you have something to show for it down the line.”

And on the other side of the fence are those that say, “Yeah, but renting can cost a lot less money with excess to be invested… and with fewer headaches along the way.”

Then there are the stragglers standing on top of the fence thinking, “You both have good points… does it really matter?”

I tend to relate to those folks walking the tight rope of thinking that either option is fine… if they’re executed well. There are both financial and emotional reasons revolving around the rent vs buy decision and if thought through, they both can make sense.

Let’s talk about why both choices have their pros and cons and some of the ways to ensure success with either.

Rent vs buy on the money front

When you start moving into the money side of the rent vs buy discussion, there are a lot of variables that come into play since you’re not comparing apples to apples. If you’re talking about similar houses to buy or rent, that’s somewhat easier to analyze. But once you throw apartments or shared housing like duplexes into the mix, it’s not going to be a straightforward comparison.

Typically, when you buy a house, you end up with up-front costs, recurring costs, and periodic expenses. Some of these might include:

  • Down payment
  • Closing costs
  • Mortgage principal
  • Mortgage interest
  • Property taxes
  • Home insurance
  • HOA dues or fees
  • HOA assessments
  • Repairs (oh, the repairs!)
  • Capital expenditures (ie a new roof)
  • Closing costs (if/when you sell)

When renting, most of these costs aren’t there. Your housing costs when renting might consist more of:

  • Rent payment
  • Renters insurance

Not only are there going to be a lot fewer transactions when renting, but the costs will likely be substantially less overall. So to save money along the way, renting tends to be the way to go.

“Not so fast”, you say! When buying a house, you build equity – you’re just throwing away your money when renting.

I can offer you a big fat “that depends” with that statement.

When buying a house, the assumption is going to be that your house will appreciate over time and that’s when the good money shows up. Most of the time, that’s going to be the case. However, three exceptions come to mind where that wouldn’t hold true:

  1. Your house actually depreciates because you bought in a location that’s going downhill.
  2. You decide to sell during a major housing market downturn.
  3. You move without holding onto the property long enough to make up for closing costs and real estate commissions (generally known as the 5 Year Rule).

If you fall under any of these exceptions, that equity you’re counting on could be a fantasy. Otherwise, it’s tough to pinpoint an exact number because of so many variables, but nationwide, the average appreciation lately has been around 3.5 to 3.8%. Of course, the housing market spike we’ve had over the past couple of years has led to some insane increases that throw those numbers completely out of whack.

Regardless, owning a house will usually mean that you’ll end up owning something worth a good amount of money down the line.

But what if the renter is diligent with the money he saves by deciding to rent vs buy and socks it away? Would that change anything?

Robert Farrington from The College Investor site did a nice breakdown in his article “Buy A House vs. Rent An Apartment.” In it, he uses an example of a 3-bedroom, 2-bathroom house located in a higher cost of living area. The house was purchased for $510,000. and sold 6 years later for $672,500.

I’ll let you read the article, but the gist is that renting that same place for $2,400/month over that same period would have yielded different results. If the renter had invested the $6,163 savings per year at a 9.5% average annual return, he/she would then end up with $48,966 at the end of the 6 years.

That’s a lot less than the homeowner would have brought in but still a nice stash. There are two important points to factor into this though:

1) That’s the case if and only if the renter was investing the difference every month, which is something that most renters aren’t going to do. Homeownership is almost a forced savings where renting requires more diligence – something that most people aren’t great with.

2) I’d guess that many folks, in this example, would likely opt to rent a less expensive place or would be buying (if they could) at that price per month. That provides the potential for savings and ROI much closer to what the homeowner would get.

Essentially, it’s not so cut and dry to say that renting is just throwing your money away. Depending on how conscientious a person is, the further ahead they can be. The potential for building wealth can still be had with renting.

On the other hand, when you own a home and you’re done paying for it, it’s yours… sort of. If you stop paying your property taxes on it, you’ll find out real fast who truly owns it! A homeowner can eventually be mortgage-free whereas a renter will always need to keep making payments. That can make home-owning something truly liberating!

It’s also important to remember that rents go up over time. If you have a fixed mortgage, you don’t have that problem, which can make your payments seem smaller as time goes on and inflation does its thing. Rest assured though, property taxes will continue to grow over time for homeowners!

The non-financial side of the equation

Renting will usually be less stressful because you tend to have fewer unexpected costs than a homeowner has. And when something breaks, you don’t need to worry too much about how to fix it. You make a phone call and call it a day.

That said, what’s the turnaround going to be for the repair? Will it be replaced or fixed in a way that makes sense to you? Did they cheap out and make things more difficult or less appealing to you? You just don’t know. Unfortunately, that’s mostly out of your control.

Speaking of repairs, those can be a real headache for homeowners. Not simply because of the costs involved, but you also need to put in the legwork to make things happen. You either need to contact the right people to get it fixed or do it yourself, the latter of which cuts into your time more than your pocketbook. Either way, it’s not fun (unless you’re one of those people who love this sort of thing).

However, when you own a place, it’s yours. You have control to be able to make changes or improvements to it without a fuss (assuming you’re following zoning laws and any HOA rules). For a lot of folks, this is huge. Many people want to make the changes they want and there’s nothing wrong with that… but that’s something you can’t easily do when you’re renting.

Some might argue that when you’re renting, you can’t entertain friends and family as easily. That’s not necessarily true though because if you’re renting a house, you’re in the same position as you would be when owning. It’s going to be a little more difficult in a smaller apartment but complexes usually have some type of community room you can use if you want to bring a bunch of guests over.

Another possible flawed argument would be to compare the space you get when you rent vs buy because this can be controlled in either choice. If you want more space when renting, an apartment wouldn’t be the best choice – find a nice house for rent. If you want less space when owning a home, buy something smaller.

A big difference between a rent vs buy situation though can be found in the ability to pick up and go. When you’re renting, you tend to have more freedom to move around if needed. If you’re not happy, you move once your lease is up. If you’re really not happy, you can break the lease and pay the penalty if needed – though breaking a lease isn’t usually something I’d recommend.

If you own a home, that freedom can be a little harder to come by since you’re at the mercy of what kind of housing market you’re in. In a seller’s market, you’ll be loving life and can probably turn it around pretty quickly. But in a buyer’s market, you could find yourself hopelessly trying to sell your place for months or even years and needing to take a big haircut on the price to sell it.

Regardless of the type of real estate market going on, it’s still a pain to sell a house. Assuming you’re aiming for the most money you can get, you need to get everything fixed up or painted beforehand. Then you need to have everything in pristine order because there could be a showing at any time. And, of course, that means strangers traipsing through your house while you’re not there.

What can you do to even things up?

Here’s the deal, the rent vs buy decision doesn’t completely lock you into the fate of “spend less but live in a tiny apartment” or “own a giant house that costs too much.” You have the power to find what works for you.

If you like the flexibility of renting but want more space internally or from neighbors, an apartment isn’t your only choice. Renting a house might be more to your liking.

And if you prefer owning your home, does that mean you’re doomed to spend too much money over the long haul? Not at all. Although banks and real estate agents would prefer you to spend more than you should, that doesn’t mean you need to do that. Find a smaller house or change neighborhoods to get the price range where you’re comfortable. And don’t forget to consider property taxes in the area as well.

If you choose to rent instead of owning but “throwing away” your money is getting you down, plan accordingly. Generally, when renting, you’ll be paying considerably less money each month than a homeowner. So figure out what you would be spending on a house and sock that difference away each month. By properly investing that money, you’ll now be building up your own equity for the future.

In other words, you’ll still need to choose whether to rent vs buy. However, you have the ability to make either decision the best choice for you regardless.

Where do we stand on the rent vs buy conversation?

As you can see, contemplating the rent vs buy decision isn’t so simple. There are a lot of factors to consider with pros and cons for each.

We sold our home in 2018 before moving to Panama. It was a beautiful house in the suburbs and we had some great neighbors. We loved our time there and it was what many think of as part of the American dream.

Rent vs Buy - The home we owned
Our home sweet home for about a decade…

But I’m done with that. The headaches from repairs and maintenance. Having a house that was too big for us with so much stuff. The pain in the butt of getting ready to sell it.

Selling our house along with all our stuff before moving to Panama unexpectedly turned out to be the most liberating thing I’d ever done. This was a freedom I never realized I wanted.

Rent vs Buy - The condo we lived in while in Boquete, Panama
Our home sweet home for most of our time living in Boquete, Panama…

A few years later and I can honestly say that for now, I have no desire to own a home again. In fact, I don’t necessarily even care to rent a house. Even with some of the downsides of apartment living (like people living above you), I’d take that any day.

Having a limited amount of space makes it harder to buy things you don’t need. And the freedom to easily be able to just finish a lease and move on to another building, city, state, or even another country without the home headaches outweighs the cons to me.

Remember though… I’m only one part of this relationship with what probably constitutes 49% of the vote. 🙂 Lisa has enjoyed this newfound freedom we’ve had as well, but she dislikes apartment living more than I do. So time will tell what we end up doing down the line.

I think in the rent vs buy discussion, we’ll likely be renters for the time being. But whether we rent an apartment or house might be more of a topic of discussion at some point in the future.

The beautiful part about deciding on whether to rent vs buy is that there’s room enough for both decisions (though the housing shortage has made things a little messier). Just because I prefer renting doesn’t mean it’s better or worse than a decision to buy.

Considering the good and bad of each, it’s up to you to determine the right financial and emotional factors that add up to the right choice for you.

What do you think? Am I out of touch on the rent vs buy discussion? What other points would you argue on either side?

Plan well, take action, and live your best life!

Thanks for reading!!

— Jim

You know you wanna share this!!

28 thoughts on “The Rent vs Buy Dilemma… Does It Matter?”

  1. I think the underlying math supports the idea that renting the exact same property as buying will consistently cost you more money. It kind of has to for the property owner to make money and nobody is in the rental business to lose money. But I agree that renting is the best choice in many situations. We are unicorns having bought exactly one house in our whole lives and having lived in it longer than the 30 year fixed interest loan. That saved us a fortune because by the time we paid off the loan inflation had rendered that monthly payment, which never goes up on a fixed interest loan, into a tiny amount compared to rent on a similar property. But who works one job and lives in one house their entire adult lives besides me?

    1. Wow, that really is a unicorn situation and I’m sure that path paid off handsomely! You’re right, too – that’s very pretty unusual. It looks like the median duration of homeownership is just over 13 years (as of 2018). The good news is that should put folks in a spot enough to recoup their closing costs and hopefully pull in a little bit of appreciation upon selling. But that’s still a far cry from someone staying in their house for 30+ years… nice job! 🙂

  2. When we bought our first home (in 2007), we thought it was the main way to lock in wealth, and were willing to pay a little more than we wanted to “get in” to home ownership. When we had to sell in 2012 (corporate move), and take a loss (~23% loss on purchase price, not including work we had done), we decided a house was just a spot we lived in [for some reason, no one wanted to pay a premium for a 2 bed / 1 bath house (with a huge yard), when other, bigger houses were on sale]. Our 2nd purchase, we looked for: something we could sell quickly and would be desirable.

    We love our house (and neighbors), and where it is, but realize that housing has to meet your needs. We are ‘handy’ and can fix much of what goes wrong, but also realize that calling in a pro isn’t a waste (I will not replace windows / siding, like my parents did). When we finally pull the trigger (once kiddo is done with HS, we could FIRE now if I worked on re-arranged $$ better, and frankly didn’t like what I did), we want to explore (US….EU….other?) and renting will likely work better until we figure out where to land (and to be close to where kiddo lands, within a reasonable drive).

    Just like with Personal Finance (and College, and whole host of other things), this decision has to be right for each person (or family unit), and can change as your personal needs change. And that’s OK.

    1. So true, Katie, and thanks for sharing! It looks like you’ll be trying it all on the housing front, which makes sense as your situation changes. And you’re so right, it needs to be the right decision for everyone – the cost should only be part of the equation for doing it right.

  3. I think it depends on the rental. If it’s a purpose-built apartment building, you don’t have to worry about your landlord coming to you and saying he wants you to vacate because “his son is going to move in”. I believe house rentals are more likely to be in that category.

    1. Great point, Brenda! I’ve never lived in a rental house (though I was a landlord of both a single-family and a duplex), but I can see how that kind of situation would be less likely in a complex. Not something I would have done, but I’ve heard stories from friends like what you’re talking about… not fun!

  4. Yes, definitely agree the answer to this question is dependent upon the current phase of life, personality and goals of the individual. From a pure financial point of view, there are websites that have rent vs own calculators that will give you an idea of how long you would need to own a house to realize a cost savings compared to renting. But the answer is very simple if you can’t qualify for a mortgage right? Lol nice job on the article Jim!

    1. Funny you mention the rent vs own calculators. The best one I know of is the NY Times’ Is It Better to Rent or Buy? calculator. It’s really good in that it lets you adjust more variables than most others out there. I was getting ready to put it in this post when I was writing it, but it’s behind their paywall so didn’t want readers who’ve used up their “allotted articles” for the month to not be able to see it as part of the conversation. Thanks, Daniel!

  5. At this point I don’t think the choice is really financial. Do you want to put down roots again? Start accumulating things again? Taking care of things again? If you want to keep flexible there are townhomes and condos that would be better than an apartment as far as rent. As someone who owns a big box like you had, it is still ok for now. But I can tell you it gives me anxiety to think about what to do with all the stuff we accumulated. We try not to add to the pile and get rid of things here and there but it is an overwhelming task. If you do buy I would make it small. House prices in Ohio are increasing but nothing like other areas out west and south.

    1. Ugh, I get it on the accumulated stuff, Scott. Moving to Panama was a great thing for us because it forced us to deal with all the crap… maybe you need to get ready to move to a foreign country for a while! 😂

      That’s good to hear about Ohio prices. I knew prices were up (for both buying and renting) but I haven’t dug into the different parts of the country yet. I don’t think we could afford to move out west right now!

  6. Financial leverage can be another aspect of the homeownership equation. Meaning you put $50,000 down on a $500,000 house and instead of having $50,000 growing at 3.5%, you have $500,000 growing at 3.5% per annum. When you enter retirement it’s great to have your house paid off, which eliminates the unknown of future rental rate increases and the necessity to create cashflow that would otherwise go toward rent payments. In conventional retirement/not FIRE, cashflow is king. For me, I love owning a house and the security and freedom that it brings. I don’t want to deal with a landlord telling what I can/or must do; or the call from the management company informing me that they will be visiting on Saturday to do their 6 month inspection, or the letter informing me that the rent is being increased. To sum it up, every situation is different, so it boils down to what will be best for your family.

    1. Great comment David. Leverage is definitely a fantastic help for the average person to buy a home (as long as they don’t over-leverage!). And that can help with the appreciation for sure. But I think the most important point is the possibility of having a paid-off house in retirement. Even if it’s not always the most logical decision to do in some cases, having that burden off your shoulders in retirement can be well worth it psychologically. If we continue to rent, we’ll always have a monthly payment hanging over our head, which ain’t so fun! 🙂

  7. This is such a fun topic! I love that you considered emotions because they matter! I’ve bought 3 houses and sold 2 since 2009. We bought our first in the perfect neighborhood that was too much cost and so tiny. It was heck with our eventual 3 kids. I was so happy to sell it in 2019 and travel. We were sure we’d rent a furnished apartment in Puerto Rico but ended up buying a home in San Antonio. After the pandemic, we realized our neighborhood had no young children so we moved to a better neighborhood and made a ridiculous amount of money bc of, well, the pandemic. I was able to support our travel, my small business, and even private school for a year for the kiddos through equity in our homes. I know it doesn’t always work out this way, but homeownership has given us the flexibility and savings we need to do the things in our life that we want. Renting is actually more expensive in San Antonio, which is why we ended up buying back in 2019. Even figuring closing costs, HOA and taxes, when you look at square footage, it’s cheaper to buy here (although that’s changing, as more people continue to move to Austin and surrounding areas).

    1. Thanks for the backstory, Nicole! I’m so glad you brought up how things don’t always go the way you think they will (either good or bad) and you make your decisions accordingly like you did when you bought a house in Puerto Rico. I don’t anticipate buying again… but you never know! Life tends to change so quickly that who knows – maybe we’ll find ourselves as homeowners just because it makes a lot of sense to do so at some point.

      Texas is so interesting to me. My brother lives just outside of Austin and keeps me in the loop on how crazy the growth is in that area… along with the real estate prices. The value of his house has more than doubled over the last decade… unbelievable.

  8. Rich Engelhardt

    Rent vs buy has become a much muddier subject.
    Along with the obvious – “at the end, I own it if I buy” – you had the key that unlocked many of the tax deductions you could itemize due to being able to deduct the interest on the loan. That was then and now is now and a lot of the deductions a working person can take advantage of aren’t available to a retiree. Since we are getting near the end of our new house build, it’s easy to see where I stand on the subject. Living in a single house is my preference. And – that’s just what it really is – a preference.

    1. Yeah, those deductions are no longer the big selling point. I think I read that 90% of households now take the standard deduction on their taxes… that eliminates the benefit for most folks!

      I’m sure you’re looking forward to your house being done. It’s been a long time – we’ll have to grab a beer once we’re back!

  9. In general, I think I’m done with renting on a longer-term basis. For one, our family size has now grown enough that we need to consume more real estate for life to be comfortable.

    I suppose we could still squeeze into a two bedroom or something, but we’d be at each other’s throats in a few days. 😉 Not worth it IMHO.

    That kind of sums up my feelings on real estate — If you want to consume less real estate, renting is a good way to do that (there’s a lot more small apartments than small homes). All things being equal, a landlord has all the same costs you do as a home owner, except he builds in a profit. Local markets can distort this equation for awhile, but in general I don’t view renting or owning as being fundamentally different. It’s just two sides of the same “housing consumption” coin.

    I suppose there’s something to be said for increased capex/maintenance efficiency in large apartment complexes, but that’s a conversation needs to be had in front of a fire pit, with drinks in-hand.

  10. Jim,
    One thing that owning, I’m talking mortgage free here, have over renting is that it lowers your withdrawal rate and you are not less susceptible to sequence of return risks. Another advantage is if you plan to take advantage of ACA subsidies, then the lower annual income will help with that as well as other income based programs. Just something you probably already know, and it’s very relavant to early retirees. Wondering what’s your take on that since it wasn’t mentioned in the list.

    1. Very true on lowering your withdrawal rate by not having a mortgage, Kevin! That said, we have a bucket strategy in place to help mitigate the sequence of returns risk. I wrote about that recently in the post, Is This Down Stock Market Problematic as an Early Retiree?

      I’m not sure I understand about the lower annual income for the ACA subsidies though. With the exception of a small amount I make from this blog, really the only thing we have that’s counted as income are the Roth IRA conversions we’re doing annually. But we do have flexibility in the amount we convert so we can mold that to ensure we stay in the bracket we want and to be able to take advantage of ACA subsidies. I talk about that a little more in my post Health Insurance in the U.S. – How We’ll Keep Costs Low.

  11. I prefer to buy. Renting never truly feels like home. I guess that’s just psychological. If I plan to live somewhere for more than 5 years, I’d buy.
    From what I heard, we’ll have a housing shortage in the US for many more years. It’s probably pretty safe to assume buying a house would be a better use of your money.
    Good luck!

    1. I can sort of see that to a point. When we rented an apartment before moving to Panama, the place didn’t feel like home. But after being in a place for so long, I think that can change. I did feel like the condo we lived in for almost 2 years in Boquete was home. But this place we’re in now for the past 4 months doesn’t. So maybe it just depends on the place and like you said – a psychological perception.

      Welcome back to the States, Joe!

  12. I have been renting too long to even begin to comprehend maintaining a home, though a backyard and a dog sounds nice, too. Of course, it would help to have bought said home a couple years ago and have some nice home equity to sit on. I’ll just see where life takes me, but renting works for now!

  13. One thing I don’t think you’ve mentioned is that while owning a house can build capital, you can’t access it easily and it basically all goes to waste when you die, especially if you don’t have kids or anyone meaningful to pass it on to. So sure, a home owner might end life with $1M in equity, but a renter could have used that same $1M to live out the last 10 years of their life.

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