Money Girl

How to Decide If You Should Rent or Buy a Home

Episode Summary

While getting a mortgage to buy a home can be a great financial move, there's no guarantee that it will make you richer than renting a home.

Episode Notes

Buying a home can be a wise money move, but it's not the right decision for everyone. Laura covers the pros of renting and owning, especially in a challenging real estate market, so you know which option is best for you and your finances.

Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.

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Episode Transcription

Hey, friends! My name is Laura Adams, and I really appreciate you joining me for this weekly episode. If you're new here, I'm an award-winning personal finance author who's been hosting Money Girl since 2008.

I'm also the author of several books, including Money-Smart Solopreneur–A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers. And I work with select brands as an on-camera PR spokesperson, consumer advocate, and multimedia content creator.

Here on Money Girl, my mission is to help you get the knowledge and motivation to prioritize your finances, build wealth, and have more security and less stress. If you like what you hear, please take a second to subscribe—and even better, leave a five-star rating or review. That's an easy way to give back to the show if you're getting value from the free content I love giving you here!

As always, you can leave a comment or money question by calling 302-364-0308 to leave a voice message. Or send an email using my contact page at

You've probably heard that homeownership is a big part of the American dream. While getting a mortgage to buy a home can be a great financial move, there's no guarantee that it will make you richer than renting a home.

Renting can also be a smart way to build wealth if you follow some guidelines. In fact, after owning several homes since our 20s, my husband and I have chosen to rent for almost a decade. A big part of that decision was relocating several times to big cities including the San Francisco Bay area and Austin, Texas. And even though I now live on the beach in a relatively small town in Florida, we're still renting, and I'll talk more about why in this show.

So, no matter if you're already a homeowner or are trying to decide if you should buy a home in this challenging real estate market, this show will explain the pros of each decision. Understanding the benefits of each side of the rent-versus-buy debate is essential for knowing what's best for you and how it can help you build wealth.

How Buying a Home Makes You Richer

Let's start by covering five ways financing a home helps your finances.

The first way homeownership can make you richer is by building equity.

The first major attraction of buying a home that renters typically hear is that homeowners get to build equity. Equity is the difference between a property's market value and what you owe on it. For instance, if your home gets appraised for $350,000 and your mortgage balance is $250,000, you have $100,000 in equity. You could sell the property, pay the mortgage, and walk away from the deal with about $100,000 in your bank account.

One way to build equity is simply paying off your mortgage. When you have a fixed-rate mortgage, each monthly payment gets made up of principal and interest in amounts that change over time. Each monthly payment helps you grow a little richer because you reduce the outstanding loan balance by a slightly larger amount, known as amortization.

In other words, you own more of your home and owe less with every amortizing mortgage payment. However, there are home loans that don't amortize, such as an interest-only mortgage. So be aware that you only build equity when you pay the principal amount borrowed to buy a home.

The benefit of having home equity is that you can tap a portion of it by refinancing your mortgage or getting a home equity line of credit or home equity loan. Or, as I mentioned, you can cash it out by selling your home or using the equity to buy another property.

RELATED: 7 Strategies for Paying Off Your Mortgage Early

The second way buying a home helps your finances is through appreciation.

For instance, if you buy a home for $300,000 and the market value increases to $375,000 over time, you have $75,000 additional equity. That's the case, no matter what type of mortgage you have.

Historically, real estate has been an excellent long-term investment. But there's no guarantee that a home's value will go up or appreciate as quickly as you'd like. For instance, If you bought a home in 2007 and had to sell it in the 2010 recession, you probably took an upsetting loss.

However, according to the Case-Shiller U.S. National Home Price index, home prices in September 2022 were up 18.6% over the prior year, which is the most robust year-long growth in the index's history. So, if you bought a home around the beginning of the pandemic or into 2021, you've seen terrific appreciation.

When your home value goes up while you pay down your mortgage balance, it's a powerful way to build wealth. So, owning real estate allows you to grow richer from price appreciation, amortizing your mortgage, or both. In contrast, paying rent is a pure out-of-pocket expense.

A third way homeownership improves your finances is by cutting taxes.

To encourage homeownership, the government created tax breaks to reduce your tax liability. Here are common expenses that are tax-deductible for homeowners when you itemize deductions on your tax return:

In addition to these home-related tax deductions, tax credits vary from year to year on expenses, such as energy-saving equipment and home improvements. For example, you can save 30% on new systems that use solar, wind, geothermal, biomass, or fuel cell power in your home.

You also get hundreds or thousands off your taxes for installing energy-efficient heating and cooling systems, doors, windows, water heaters, insulation, and electric vehicle recharging equipment. However, eco-friendly tax credits change frequently, so research what's available in future years.

In addition to those annual tax benefits, there's an even bigger deduction when you sell a home, which is the capital gains tax exclusion. It allows you to avoid paying tax on up to $250,000 of profit or up to $500,000 if you're married and file taxes jointly. But you must have lived in the home for at least two of the previous five years before the sale to qualify.

All these tax incentives I've covered are fantastic; however, many costs of homeownership—such as homeowners insurance, flood insurance, homeowners association dues, maintenance, and repairs—are not deductible.

Also, for 2022, the standard tax deduction increased to $12,950 for singles and $25,900 for married couples filing jointly. It will rise again in 2023 to $13,850 and $27,700.

That means fewer Americans benefit from itemizing deductions and will opt for the flat "standard" deduction. According to Tax Foundation data, only 13.7% of taxpayers itemized in 2019. In other words, having home-related tax deductions is no benefit when you're better off claiming the standard deduction.

While renters don't get any housing-related tax breaks, they don't have any home-related expenses, except rent and perhaps springing for renters insurance–which I recommend because it only costs $188 per year on average.

RELATED: 7 Ways Buying a Home Cuts Taxes and Improves Your Finances

The fourth way buying a home can make you richer is by paying less per month (in some areas).

While the cost of buying a home skyrocketed due to a housing shortage during the pandemic, supply chain hang-ups for building materials, and interest rate hikes to fight inflation, it can still be cheaper than renting in many areas of the country.

For example, buying a $300,000 home with a $250,000, 30-year fixed-rate mortgage charging 7% APR would make your monthly payment just over $1,650. Even with additional costs such as homeowner's insurance and property taxes, it can be less than renting a comparable home. Of course, that isn't true in large cities, such as New York or San Francisco where home prices are notoriously high.

The fifth way homeownership helps your finances is by hedging against inflation. 

Being an inflation hedge is an often-overlooked benefit of owning a home when you have a fixed-rate mortgage. That's because your payment gets locked in for the term of your loan, such as 15 or 30 years, no matter what happens to interest rates or the economy.

Rents may increase during periods of inflation like we've recently seen happen. But a fixed mortgage can't go up. So, owning a home becomes more affordable when prices rise.

How Renting a Home Makes You Richer

Now, let's switch gears and talk about five ways renting can improve your finances more than owning a home.

The first way renters may come out ahead is by having flexibility.

Places to rent come in all shapes and sizes, from single-family country houses to high-rise studio apartments in the city. Landlords and management companies offer rentals no matter where you want to live. Having the flexibility to relocate for work or family needs is an often-overlooked benefit of renting.

Yes, landlords typically require a 12-month lease, but you may also have the option to get a shorter term or to pay month to month. And if you must break a lease, the cost is typically limited to several months of rent—however, always check your agreement first.

Being able to pick up and go for a promotion with your company, a higher-paying job, or to start a company could go a long way toward making you richer in the long run.

However, if you want to pull stakes as a homeowner, you're usually stuck until you sell the property or find a reliable tenant to help you pay the mortgage. During a seller's market, homes sell fast, but when the market slows, it can take months or even years to sell a property for a fair price.

The second way renting can improve your finances is by paying less upfront.

A massive pro for renting is not having many upfront expenses. You typically must pay a security deposit for potential damages, which could equal a month or two of rent. That's much less than having to fork over a down payment for a home, which could range from 3% to 10% of the purchase price, at a minimum, depending on your financial situation, credit, loan type, and loan amount.

You also must make an earnest money deposit with your purchase offer and pay various closing costs, such as lender fees, attorney fees, appraisal, survey, inspections, title insurance, homeowners insurance, and anything else customary in your area. Plus, the cost to furnish a rental can be less expensive than a home if the square footage is smaller.

But the trick is what you do with the savings. Keeping more of your cash may allow you to invest aggressively and start growing a nest egg much earlier than you could as a homeowner. The compounding effects of early investing could give you millions more in retirement, depending on how much you sock away and your average investment return.

The third way renting may be better for your finances is having insulation from market downturns.

Renters stay protected from potential market downturns, such as recessions and real estate bubbles that pop. In fact, renters may come out ahead if rents go down when the economy struggles.

The fourth pro for renting is paying less per month (in some areas).

As I previously mentioned, where you live is a significant factor in whether renting or owning a home is cheaper. When my husband and I relocated to Florida a few years ago, we wanted to live on the beach. While we could have purchased a pricey condo, we found the perfect unit to rent for less than half the cost of owning one. And we skip the high association fees that cover ongoing maintenance, high property insurance, and taxes.

That's not to say we won't ever buy a home if there's a great deal. But no matter what, renters get to skip many expenses that homeowners can't because the landlord is generally responsible for repairs and upkeep. Renters don't have to worry if the air conditioner stops working or water is dripping from the ceiling. Since we've lived in our condo, both have happened, and several appliances have also had to be replaced.

In addition to saving money, renters save time by not having to manage repairs and home projects. In contrast, homeowners must find the right professional, request bids, ensure the company or person is insured, decide whether to make a homeowner's insurance claim, and take time off work to deal with repairs and maintenance.

The fifth way renting can improve your finances is by getting amenities.

Living in an apartment with an exercise room, pool, clubhouse, walking trails, rooftop lounge, clothes cleaning delivery, 24/7 concierge, theater, or other desirable built-in amenities, could be less expensive than owning a comparable home or paying for amenities separately. So, if you regularly use your rental's amenities, consider what they'd cost if you didn't rent.

Even renting a home with lots of square footage, a garage, a pool, and a large yard could cost less than buying it. So, the extras you get as a renter can significantly contribute to a lifestyle you enjoy that wouldn't be available to you as a homeowner.

Should You Buy or Rent a Home?

Like many issues in personal finance, the answer to whether you should be a homeowner is "it depends." Your financial situation, goals, and lifestyle are unique, and there's no right or wrong answer.

Plus, there isn't a way to fairly compare the cost of renting to the cost of owning a home. And non-financial considerations, such as your desired lifestyle and proximity to family and friends may tip the scales for you in either direction.

On the one hand, the pride of owning a home is something many people want to experience. You may yearn to have your own patch of land and space to spread out. The sky's the limit if you want to decorate, remodel, or plant a garden.

Just because you qualify for a mortgage doesn't mean homeownership is the right money move for you. Getting a mortgage is a big commitment that must fit your long-term financial goals, such as investing for retirement and paying down debt. First, do some careful budgeting, be realistic about what you can genuinely afford, and find an experienced real estate agent to guide your home search.

READ ALSO: How Much Debt Is Too Much? 8 Warning Signs

A good rule of thumb is never to buy a home unless you're confident that you'll live there for at least five years. You never know how long it could take to sell. So, if buying a home has more advantages, and you're willing to put down some roots, then owning an affordable home is a terrific goal.

On the other hand, renting means avoiding many hassles and expenses. It may be the way to go if saving money allows you to achieve your financial objectives. But, as I mentioned, investing the savings you would have spent on a home is critical. You won't be better off if you live paycheck to paycheck as a renter and never save for emergencies or retirement.

I'd love you to connect with me on Twitter @lauraadams or Instagram @lauradadams. And is my personal site where you can use my contact page and learn more about my work, books, and money courses.

That's all for now. I'll talk to you next week. Until then, here's to living a richer life.