Renting vs. Buying a House: Pros and Cons

Part of the American dream is owning a house. You know, white picket fence, a couple of kids playing on a swing in the front yard, and a dog on the front porch. But with how much the housing marketing fluctuates given the year, is it a viable dream? Home ownership used to be considered a measure of financial success, but that’s not necessarily true anymore.

Both renting and buying a house come with their pros and cons that can be dependent on a variety of factors–there’s no hard and fast rule as to what’s most financially successful for you.

At WizeFi, we’re all about doing what’s most effective for wealth-building–and sometimes, that means renting a home even when you have enough income to afford purchasing one. These are some helpful crucial factors to keep in mind when thinking about whether you should rent or buy a house:

Pros of renting a house

• You can save money, then invest it. Provided you live in an area with an affordable rental housing market, renting for a lengthy period of time can allow you to save money and reallocate it to your investment accounts to build them up as much as possible.
• You won’t have to pay real estate tax. One of the best benefits renters have over homeowners is that they don’t have to deal with real estate taxes, which can be a significant financial burden.
• Renter’s insurance is cheaper. Insurance costs tend to be lower when renting because renters only need to insure the contents of the rental property rather than the property itself.
• You’re free from maintenance and repair costs. You’re not legally responsible for paying to fix any issues with the property–that’s your landlord’s job. So, if your roof suddenly starts leaking or a pipe bursts on a Sunday afternoon, you won’t be on the hook for that unexpected expense.
• You don’t need as good of credit. Typically, rent applications are approved or denied based on credit score and credit history, but it can be fairly lenient. As long as you don’t have a credit report littered with bankruptcies, you’ll likely find a landlord willing to rent to you.
• You’re able to relocate easier. If your living or working circumstances tend to change frequently, short-term rental leases can be the way to go. Relocating can be easier when renting, since leases are usually a period of 12 months or less. Even if you have to break a lease, there can be arrangements with the landlord that range from subleasing to paying a fine.
• You might have better amenities. Renting a house can allow you to have access to luxury amenities such as swimming pools with no installation or maintenance costs, or on-site gyms included in your rent.

Cons of renting a house

• It’s expensive up-front. Most rental leases require the first month’s rent, last month’s rent, and a security deposit equivalent to at least one month’s rent in advance. For example, for a house that costs $3,000 per month, you might need to pay at least $9,000 up-front.
• You’re not gaining equity. You can’t gain home equity or claim housing-related tax breaks when you rent.
• Leases can be tricky. Rental leases are legally binding when it comes to living arrangements and tenant’s rights, so it’s important that you always know the specifics of what you’re agreeing to. Local laws do not always cover the conditions covered by those documents.
• (Un)security deposit. It’s important that you vigilantly protect your security deposit by making sure that all pre-existing damage has been documented. While it may be an extra step such as doing a walk-through prior to signing a lease, it’s a crucial one to make sure you get your full security deposit back.
• What the landlord says, goes. You’re under the landlord’s rules and might not have a lot of say when it comes to home decorations, noise, etc. There’s also no guarantee that you’ll automatically get to renew your lease and/or you could be forced to move if owner sells the property.

Pros of buying a house

• You own your equity. If the property value in your neighborhood is rising, buying a home can ensure that you don’t get priced out of it in a few years. In cases where renting is extremely costly in your area, it might be even more affordable to buy a home. And, the expense of housing is eliminated once you’ve paid it off with the added bonus of building equity over time. It’s crucial to remember, however, that you need to have a net worth that is at least equal to your annual net income before you purchase your first home.
• You can flip it. With fixer-uppers, it can allow homeowners to buy a more affordable house in order to raise its value over time with various home improvements.
• You can join the house side-hustle. You have the ability to make extra money on the side by renting out part of your home through a third-party company such as Airbnb.
• You’ll get some tax deductions. Tax credits can help offset some of the cost of home ownership such as federal tax deductions where, if you itemize your federal income taxes, you can deduct your property taxes and the interest paid on your mortgage.
• You can rent it as a passive income stream. It’s completely feasible to buy a rental investment property before owning your own property with one important caveat in mind: investments should be productive assets. Real estate can easily fulfill this role as long as the proper precautions and steps are taken.
• You can decorate to your heart’s content. You can have a significant amount of creative freedom to decorate and make a mark on your home according to your personal preferences. As long as they don’t break local building codes or violate homeowners’ association rules, of course!
• You get a spot in the block party. You can have the opportunity to put down roots and truly become a part of the neighborhood. This can especially make a difference in residential areas known for involved community activities such as block parties or food socials.

Cons of buying a house

• Mortgages are expensive. Most mortgage lenders require a down payment between 5% and 20% of the home’s price. Say you’re looking into a house that’s selling for $100,000; your mortgage down payment can easily be anywhere between $5,000 and $20,000. And, once your mortgage is secured, there are monthly payments for it as well as other expenses to consider such as property taxes and homeowners insurance.
• Maintenance is unpredictable and expensive. As a homeowner, you’re responsible for covering the cost of all uninsured maintenance and repair work on your home. Organizations like homeowners’ associations can also have requirements for neighborhood houses that can be fairly pricey also.
• Relocating becomes difficult. Selling a house, by default, an abundance of time and effort. If you need to sell your house quickly, you may be forced to accept a lower price and potentially take a loss on your investment.
• Your home might lose its value. There is a potential for financial loss if the home values in your area decrease or remain flat during your time as a homeowner. If the appraised value of your home decreases, you risk a financial loss when you sell and you suddenly have a depreciating asset on your hands.
• Your credit impacts your interest rate a lot. Mortgage lenders will usually have high credit standards where even small changes to your credit score can have a significant effect on mortgage rates. In many cases, scores below 680 or 700 can be considered subprime which can potentially add thousands of dollars in interest over your loan term.
• You might have the home improvement dilemma. When people are homeowners, they tend to continually invest more effort and money into improving it. While this may not seem like a problem per se, it can quickly spiral into homeowners spending a lot more money than they initially budgeted for.

Whether you choose to rent or purchase your home, it’s a significant financial decision that shouldn’t be taken lightly. In addition to considering the pros and cons above, it’s important to make sure that your financial situation is stable enough for such an expense.

When you sign up for WizeFi, you can use its budget guideline to make sure that your rent or mortgage payment is an amount that is most strategic for building wealth. And if you’re curious to see the effect purchasing a home has on your future net worth, you can use WizeFi’s planning tool to figure that out. You might be surprised–sometimes, taking on a mortgage isn’t as financially successful as it seems!