"Renting is just throwing money out the window."
At some point or another, we’ve lived the apartment dwelling life and been lectured those very words by a home owning proponent.
The invariable message: Renting is a waste of money compared to buying your own house. You’re just handing over your money to make your landlord rich. A home in your name is an investment, while renting is not. When buying a home, you own it; it’s yours. When renting one, there’s nothing to show for your rent payments if and when you decide to move. And so on.
The thing is, most of these assertions are true. We’re not going to deny the many benefits that homeownership can bring, like stability, equity, and a chance to live that American Dream. But sometimes, it makes more financial sense to rent versus paying a mortgage.
Here are some reasons why:
Renting offers more flexibility.
Or, in other words, you can pick up and move once your lease is up. Renting is a smarter choice for people who aren’t yet ready to settle down and still deciding where they want to plant down roots. If you foresee yourself moving often over embracing stability, renting may be the better, sounder option.
Homeownership, on the other hand, comes with its share of headaches if you want to move. You’ll need to hire a real estate agent (again), pay them commission, list your house back on the market, go through the whole meet-and-greet/accept bids/dealmaking process, and wrap up the rigamarole of selling and paying escrow, moving and closing fees. And you need to look for a new house. By the time you’re done, you could have been living somewhere new for months if you rented.
Renting may eliminate big expenses.
In the long term, most mortgages are more cost effective than apartment leases -- except in the most expensive cities, where it can take years before buying pays off.
Take New York City, for instance. The median selling price for an apartment in Manhattan is $1.137 million. Take out a mortgage on a unit for this price, compared to paying the average monthly rent for a 2-bedroom apartment in the city, $4,042, and buying does become cheaper over time -- but crunch the numbers, and it’ll take you 11 years into a 30-year mortgage before you start to see savings take effect.
Renting has additional immediate benefits over home owning, like not needing to pay the recommended 20% mortgage down payment. Generally, your first and last month’s rent are due, and it’s month to month after that.
Renters also don’t need to pay other ancillary and hidden costs and expenses attached to owning a home, like property taxes, HOA fees (if applicable), or potential maintenance costs or repair bills; if something breaks or needs fixing in your apartment, your landlord is responsible for the expense.
These out-of-pocket costs can begin to add up when you’ve got an entire house to look after -- and while utilities are a standard cost in both mortgaged homes and rented apartments, it’s often cheaper in the latter, since an apartment’s size and square footage is smaller. Renting also means not having to spend time and money on other homeowner-specific tasks, like cutting the grass, shoveling snow or trimming the hedges.
Don’t discount insurance, either. The average annual premium for a homeowners insurance policy is about $952, compared to the $187 yearly cost for renters insurance.
Renting offers more potential amenities and social connections.
Getting to know one’s neighbors if you’ve bought a home in the middle of a suburban or wide open rural neighborhood can be difficult, especially if you’re a single person in a community of families.
But in the right apartment complex, there’s a chance to meet other tenants and get to know your neighbors. You’re all renters, so it’s a chance to relate to each other personally, socially, and at the least, financially. Depending on the location, opportunities to meet new neighbors can happen at your building’s pool, on-site gym or common area.
Having these apartment building features on hand can help save money, too, since it’s usually included in the rent. If a homeowner wants to add any one of these amenities to his or her house, it will come at an extra expense on top of their mortgage.
Renting may have more location options.
Taking some of the above into account, owning a home can make the highly mobile professional feel stuck. If buying a home in an area you can afford places you too far away from your job, you’ll need to factor in the cost of commuting, gas and wear and tear on your car -- which can add an extra 10% to the cost of a home. Finding an apartment close to work that also fits within your budget may be the more practical option.
You may also find more opportunities for housing by looking in downtowns, or warehouse and arts districts in cities that may be more renter friendly. If you like to be proximate to these areas, renting may also be the better option, since an affordable house may be too far away for your liking.
Even if you’re married or have a family, it’s best to rent first before buying when moving into a new area. Tying yourself down to a 30-year mortgage could be a decision you might later regret. Start by researching the areas you’ll spend time in, school districts, and if the city or community is the right fit for you.
It may take six to 12 months to become acclimated to your new surroundings; renting during this time always gives the opportunity to scout for a new home to purchase when you do decide to buy.
Renting can benefit your credit.
Paying off a long-term mortgage can benefit your credit and boost your credit score. Then there’s the myth that paying rent does nothing for your credit, since it’s essentially a debit transaction that’s not usually reported to the three credit bureaus responsible for compiling your credit report.
This is untrue -- your rental payments are counted in the VantageScore, FICO 9 and FICO XD scoring models, but it’s up to you to get them counted. Numerous credit reporting agencies exist that can help, like Rental Kharma, Rent Reporters, and RentTrack, to name a few; signing up will not only get your rent listed towards your credit, but also your rent paid on time.
If home ownership is one of your goals, but poor credit has prevented you from getting approved for a mortgage, your rent can help contribute to a better credit score.
And the last reason:
Technically, renting is not really throwing your money away.
You’re paying to have a roof over your head and a place to call home. Rent or own, home is what you make of it.
Keep in mind that home ownership may end up being more money pit than it is goldmine. The house you may buy might not build equity or increase in value just because you’ve signed a mortgage. Home buyers should expect to commit living in one area for up to a decade if they want to see a return on their investment, according to experts, and even then, there are no guarantees. Market and economic conditions change, and housing values may rise or plummet based on numerous circumstances.
On the other hand, by renting, you can instead invest the money you’d have paid towards a down payment or other mortgage fees. While these expenses may have paid themselves off over time, making wise investments as a renter can also offset the cost of not buying a home, including the average inflation rate and general increase in home prices.
Don’t follow a home buying script just because society tells you to; it could compromise your budget, your lifestyle, and your happiness. Renting may be a temporary solution or a permanent decision for you, so choose to rent or buy based on how it’ll benefit you most financially and personally.