4 Reasons to Rent Instead of Buying
For decades, the conventional wisdom has been that buying a house makes much better financial sense than renting one. After all, you'll have to spend a large chunk of your income on housing either way, so doesn't it make more sense to invest that money in something you'll eventually own, rather than simply forking cash over to someone else?
And conventional wisdom may be right about that -- in some situations. However, a number of factors can make renting a much wiser financial decision than buying. Here are four good reasons why it may be smarter for you to rent instead of buy.
1. You're not staying in the home very long
The sooner you intend to move, the less sense it makes to buy.
If you plan to stay put for less than two years, then buying a house would be a poor investment. In such a sort amount of time, the home likely wouldn't gain enough value to make up for the costs of buying and selling it, like realtor commissions, closing fees, moving expenses, and so on. And don't forget that buying or selling a house is a huge hassle compared to switching from one rental to another, so doingboth within a couple of years will add a lot of work and stress to your life.
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And then there's the tax issue. The home sale tax exclusionmakes up to $500,000 of the gain on the sale of your house exempt from taxation. But one of the requirements for this exclusion is that you must have lived in the house for at least two out of the last five years, and if you're moving within two years of buying, you obviously won't meet that requirement. So if you're lucky enough to sell your house for a profit, you'd be stuck paying taxes on that gain -- potentially costing you thousands of dollars.
2. You're in an inflated housing market
Some parts of the country are prohibitively expensive to live in. Los Angeles, San Francisco, and New York City are notorious for high housing costs for renters and homeowners alike, but they're hardly the only expensive cities in the U.S. Coming up with a down payment for a $500,000 house is considerably harder than coming up with a down payment for a $150,000 house. But what makes certain highly desirable urban areas really problematic is that home prices in these areas can be driven steeply upward by the high demand (i.e., a housing bubble). Not only would you have to pay an inflated price for the house, which makes it harder for you to turn around and sell it for a gain in a few years, but you'd also have to pay far more each month as a homeowner than you would as a renter for the same amount of house.
For example, SmartAsset calculates that in San Francisco, it costs on average over $550,000 to buy a house that would cost $1,000 a month to rent. Even if you forked over a 20% down payment on such a house, your monthly payments on a 30-year, 4.5% interest mortgage would be over $2,200 -- more than double the cost of renting. If you live and work in such an area and are determined to buy a house, you might consider looking just outside the area for more affordable options -- for example, shopping for a home in San Francisco's surrounding communities instead of trying to buy a house in the city itself.
3. Your income isn't secure
If you're not confident in your job security, then now is not the time to make a huge purchase like a new house.
If you suddenly lose a major source of income, then you may need to cut your housing costs in order to get by. That's a relatively quick and painless process if you're renting; you might pay a fee to end your lease early, but you could move to a cheaper home in a matter of days. If you own your home, then a career crisis could force you to sell your house at a bad time; it may take months to find a buyer, or you might end up selling the house for less than you paid for it.
4. You have no savings
If an emergency savings account is important for a renter, it's absolutely crucial for a homeowner. As a renter, if something goes wrong with the house, you can simply call the landlord, who will have to pay to fix the problem. As a homeowner, all the expense lands squarely on your shoulders. Even if nothing expensive breaks down on you, homeowners have ongoing additional costs such as homeowner's insurance (depending on your state, average annual premiums range from $534 to $1991) and property taxes (the average annual property tax in the U.S. is $2,127 but itcan be much more depending on your state and county).
If you don't budget for such expenses or run short one month, you may end up having to tap into savings to pay for them. And if you don't have a well-funded savings account,you may be forced to turn to credit cards -- and that repair bill will be made even more expensive by interest and possibly fees. Before you even start looking for a house, make sure you set aside at least enough money to cover three to six months' worth of expenses.
Also don't forget that ponying up a down payment will take a big bite out of your savings. You'll need to make sure you still have a solid emergency fund after you've paid out the down payment and the cost of moving. After all, what's the point of buying home if you'll be too busy fretting about expenses to enjoy it?
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