A 54-city study by Deutsche Bank concluded that renting is now less expensive than buying in about half of the markets surveyed, due to the run-up in housing prices.
For example, renting costs only 77% as much as buying in Portland, Oregon and only 76% as much as buying in Denver, Colorado.
At the other extreme, renting costs 34% more than buying in Atlanta, Georgia and 24% more than buying in Orlando, Florida.
(How does your area rank? Check out all 54 markets by following this link).
While some people might be swayed into buying (or renting) by these studies, the majority of Americans will make up their mind based on which choice makes sense for them, rather than some analysis of market metrics.
In working with clients over the past twenty five years, here’s our observation of the top factors in the buy vs. rent debate:
Top 6 reasons when RENTING is best.
#1. RENT if you think you might be in the house less than 5 years. It is very hard to recover realtor’s fees, transaction costs, moving and other expenses in less than 5 years. Plus, the real estate meltdown showed us the dangers of trying to cash out shortly after you buy in a falling market.
#2. RENT if you value your flexibility, and might want the option of relocating for a new job. Homeowners who were underwater in the Great Recession learned it’s hard to move to where the jobs are when your house is worth less than the mortgage.
#3. RENT if you aren’t flush with cash for a down payment or operating expenses. Houses don’t pay dividends. In fact, they actually require constant infusions of capital (the air conditioner broke, you need a new roof, the water heater is leaking, and so forth). If you don’t have access to that kind of cash, you’ll either watch your life’s biggest investment fall into disrepair or dig yourself into an untenable financial situation keeping up a house you can’t afford. (Rule of thumb: budget 1-2% of your home’s market value each year for repairs and maintenance, in addition to taxes, insurance, utilities and home owner’s or condo fees).
#4. RENT if you can’t find what you want in the current housing inventory or there’s a special neighborhood, school district or style of home you’re jonesing for. When the price tag is in the six or seven figures, does it really pay to settle for less?
#5. RENT if your personal life is in limbo. If you might lose that job, are preoccupied with a new business venture, or fear your current relationship is dissolving, maybe it’s best to hold off on a big investment that just adds another layer of complexity. We’ve seen many couples buy or build that new “dream home,” then suddenly split up. If your relationship is in trouble, new digs won’t magically fix the problem and may just make it worse.
#6. RENT if your financial stars aren’t quite in alignment. It could be you’re still accumulating funds for a big enough down-payment, or cleaning up some credit rating ‘dings.’ Or, you could just run afoul of mortgage underwriting rules. One of our clients, with impeccable credit and a sterling financial profile, left the corporate world to become a consultant. Guess what? As a newly self-employed worker, she’s been told she’ll now need more time and a few tax returns under her belt to qualify for a mortgage.
Top 6 reasons when BUYING is best.
#1. BUY if you have ample cash to make a 20% down payment, qualify for a mortgage, pay for closing costs and ongoing house upkeep…and still have money left over to max your retirement plan and maintain an emergency fund.
#2. BUY if you’re in a high tax bracket and need the mortgage deduction, or you think it’s a crying shame to pass up these historically rock-bottom interest rates.
#4. BUY if you want to customize your home in a way that is not possible with a rental property, which could cover anything from needing an in-law suite, to wanting special paint colors or kitchen appliances, to needing a home for your two Great Danes.
#5. BUY if you’re concerned with sheltering the maximum wealth within your own four walls. Florida, in particular, has generous homestead asset protection provisions for homeowners.
#6. BUY if you intend to stay put and want to lock in home costs as much as possible (although, of course, your real estate taxes, insurance premiums and maintenance expenses will still rise with time).
The Takeaway: Have we learned our lesson? Our homes are far more than “an ATM with a lawn.”
A home is where we raise families, spend time with friends, and build our communities. Renting or buying should not be about making bets on future home prices. It should be about making the decision best suited to our goals, timeline, and financial resources.