“Should I rent or should I buy?”
Since buying a home is the largest purchase most people will ever make, this is a financial dilemma almost all of us have faced at least once in our lives. Buying is not for everyone—for some, renting may be a better or more affordable choice. Compared to Generation X and baby boomers, home ownership among millennials—those born between 1981 and 1997—is down 8% from similar points in their lives. And two-thirds of millennial homeowners are already expressing some regret about buying their current homes.
It’s not just younger people who are weighing their options. We have conversations all the time with our clients about home ownership, from trading up from a first home to a second home to purchasing a vacation property or downsizing into retirement.
Whatever your stage of life, here are four financial points to consider when deciding whether to rent or buy.
- What’s your timeframe? The longer this house will be your home or vacation destination, the more financial sense it makes to buy. If you don’t see yourself keeping a new house for at least three years, it likely won’t appreciate enough to justify the transaction costs of buying and selling.
- What’s the true cost of ownership? You have to account for more than just your principal and interest payments on your mortgage; there are property taxes and insurance to consider. Plus, we recommend budgeting around 1% of the home’s total value every year for maintenance.
If you’re wondering if you can afford a house, add up the monthly payments for principal, interest, taxes and insurance (and if this is a second home, add in these costs for your first home, too), then divide by your monthly gross income. If your total housing costs are greater than 28% of your income, you may be stretched too thin—renting (or buying a less expensive home) is the safer call.
- Will you get tax savings? A mortgage interest deduction is often touted as a reason to buy. But keep in mind: Before tax laws changed in late 2017, homeowners could deduct interest on mortgages worth up to $1,000,000. Now that’s down to $750,000. What’s more, you must itemize your taxes to take advantage of any mortgage interest deductions. Because of those same 2017 tax-law changes, many owners may find they don’t see any benefit because of the increase in the standard deduction to $12,000 for single filers and to $24,000 for spouses filing jointly.
- What about opportunity costs? This question is one you may not think to ask yourself, but it’s how financial planners analyze decisions like these: If you invest your down payment in the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market instead of using it to buy a house, what rate of return could you reasonably expect? Or what if you simply deposit that money in the highest-yielding savings account you can find? Likewise, if you could rent a similar property for less per month than your total monthly costs of ownership, how much would you gain by investing the excess savings every month?
Renting and buying can each be a smart money move—your income and savings, plus your progress toward a safe and secure retirement, are important factors. Click here for a rent-versus-buy calculator you can try on your own.
Of course, whether to rent or buy isn’t just a financial decision. Some people value the flexibility that comes with renting. Others feel more connected to their community or secure when they own their home. We’ve focused on the financial side of renting vs. buying, but don’t discount the emotional aspects of this decision.
This is a conversation we’ve had many times with our clients over the years, so if you have any questions about what’s best for your specific situation, please contact your portfolio team. We are happy to help.
This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.
Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.
© 2020 Adviser Investments, LLC. All Rights Reserved.