The Difference Between Owning and Renting
Before we dig deeper into the topic, you should ask yourself: Why am I reading into the difference between owning and renting? It is because you are looking primarily for whichever is cheaper but also which one benefits you more in the long run.
In this blog, we will talk about the differences between owning and renting,and we will dissect which one is the perfect choice for you. We will have you ask a series of questions and provide data for you so you can properly have a basis for a better decision.
Key Takeaways
Renting is ideal if you need short-term flexibility and lower upfront costs.
Owning is better for building equity and securing a long-term investment.
Pros and Cons
We will directly proceed with the advantages and disadvantages between the two.
Renting (Pros)
- Flexibility - renting allows you to movefrom one location to another in just a short amount of time.
- Lower upfront costs - downpayments for rents are a lot lesser than owning.
- No tax liabilities - you n'tneed to worry about paying taxes for it since the landlord will take care of it for you.
- Fixed payment - the term period as agreed between you and the landlord offers a fixed amount of payment every month.
Renting (Cons)
- No equity - your payment will not contribute to equity,which is not preferable if you are planning to rent long-term.
- No tax benefits - renting will not reduceyour federal tax income because the payment is not deductible.
- No control - landlords have the final say for the property you reside
- Eviction - even if you pay regularly, once you break the terms as agreed (i.e., no pets allowed), then you will most likely get evicted.
Owning (Pros)
- Stability - the monthly payment does not change for the agreed rate and term. (i.e., 5.74% for a 15-year fixed rate).
- Tax benefits - mortgage interest and property taxes are some examples that will reduce your tax liabilities.
- No landlord - since you own the property, you have the freedom to do whatever you want with your property— is,of course, if it follows the local laws of your state.
- Equity - the monthly payment will add up as equity to your home as time passes which will turn into an asset later on.
- Pride of ownership - having the sense of owning a house will give you pride, which is something worth priceless.
- Freedom to customize - you can build a pool, a tree house, a garden in your backyard, or even extend your home however you like it.
Owning (Cons)
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Higher upfront costs - the median down payment for home buyers is around 18%, according to National Association of Realtors (NAR)
- Maintenance - for a newly built house, there won’t be maintenance costs for the next few years,but for an existing one,themaintenance will be done annually. Allow a 1% to 4% allocation based off your home price for annual maintenance.
- Property taxes - since you are the owner then property taxes are also included in your expenses for the property you own. This will range from 0.27% (Hawaii) to 2.23% (New Jersey).
- Insurance - paying insurance is also another expense that is typically required by the mortgage lenders andacts as a condition in order to avail the loan.
- No flexibility - this is ideal if only you are decided to stay at a place for a long time.
- Market fluctuations - as the market fluctuates, the valuation of your home may count as a loss or profit depending on market conditions.
Your Budget
If you are on a tight budget, then renting is for you, especially if you move a lot because of your job or if you need to be close to the city where your work is currently located.
But, if you are starting a family, then consider having your own place where you and your family can settle down. Make sure that the house you pick is close to schools, hospitals, churches, etc.
The cost breakdown below shows average numbers across the 50 states. For a more specific breakdown of costs, you may copy the table below and replace the numbers based onwhat state you are planning to relocate.
Cost Breakdown (Average US):
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Total Renting Monthly Costs:
2,072+(20 to 350)+(25 to 100)
=$2,117 to $2,522
Total Owning Monthly Costs:
2,209+(349 to 1,397)+187+314+(200 to 300)−538
=$2,721 to $3,869
The values presented in the table above are national averages and serve as a general comparison. Actual expenses can vary significantly depending on factors like your location, property type, lender, and even your financial situation.
If you’re looking for more precise estimates or want to explore specific costs in your state, check out the following resources:
- Mortgage Rates: mortgagenewsdaily
- Property Tax Rates: taxfoundation
- HOA Fees: thisoldhouse
- Insurance Costs: bankrate
- Maintenance Estimates: porch
Your Choice Depends On Your Lifestyle
Renting offers a lot more flexibility and fewer responsibilities. It also offers lesser costs compared to Owning which has a bigger upfront cost, and other expenses needed to maintain your property.
Although, in the long run,these costs will turn into assets over time, unlike renting, where only the landlords are given the most control and equity, especially when the property you are renting is mortgaged.
So if you are someone who isrequired to change locations every once in a while or you need some place near your workplace,then renting is for you.
If you have a family or you are a couple or even a single person who knows you are going to stay insome place for a longtime, then owning is for you. Especially if you want something to be passed on to the next generation.
Kevin L. Matthews II a financial professional and homeowner, says: “I still see renting as a more conducive and efficient option for investing and building wealth.”
He argues that while renting, some people are able to invest more on other things such as stocks.
“My wife and I spent a total of $41,000 between closing costs and the down payment. If we invested $41,000 in the S&P 500 in the first year and added what would have been an annual maintenance cost of $4,000 a year, we could have $2,045,485 in 30 years with $1,844,485 in total profit.” He says.
Source: businessinsider
Decision Making Checklist
Here’s a checklist for you to narrow down which of the two is a better option for you:
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Bottom Line
Your choice will depend on your lifestyle, financial goals, and future plans. If you don’t like to commit yourself to paying mortgages for 15-30 years,then chooserent, especially when you need to be close to the city where you work or don’t want to travel long distances,as major cities usually have very expensive houses for sales or simply do have enough houses to choose from.
If you plan to settle down, whether you are married or single, there is equity for you to turn it into an asset over time, and this is especially ideal when the time comes to sell.
Look for a good real estate agent to help you with your decisions, as they usually handle most things for you, and you’ll just have to choose.