Renting versus buying a home in 2024. This is a surprisingly controversial topic. There are so many personal finance gurus who tell you not to buy, and for a majority of Americans, apparently, it is their biggest mistake, or so they say.
Renting versus Buying | For many people, it may seem like their biggest financial mistake ever, but for others, buying a home is a huge wealth builder. So how do you know which is the best decision for you? So I’ve watched a lot of YouTube videos and read a lot of articles about renting versus buying a home and there are so many inaccuracies, it actually drives me crazy.
So I feel like there’s a lot of people who bought homes who wish they hadn’t, but there’s also a lot of people who are still renting and want to buy homes.
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Budgeting for Homeownership
In one video, a creator said that you need to replace your roof every ten years and that it costs $15,000. That’s simply not true. So I’m going to share, from my research and my own experience as a renter and a homeowner, what you need to budget.
Factors to Consider
And we’re going to look at an example to get to the bottom of this, whether renting is better than buying. Generally, people say that if looking at month-to-month buying a home and paying your mortgage is less than the cost of an equivalent rent, then you should buy. But it’s really not as simple and straightforward as that.
There are a lot of factors and variables. Some get into who you are as an individual and your personal financial situation, but some I’m going to share. They may be just things that you haven’t considered yet, benefits to renting or buying.
So without further ado, let’s jump into it. And by the way, if you’re new here, hello, I’m Gabby Wallace from Gabbywallis.com. We’re talking about personal finance, money hacks, real estate, and building your Abundant life.
I don’t really have a name for this show yet, so maybe you can help me in the comments to think of what to even call this. And also on this topic of renting versus buying, I may miss a few points. I’m going to try to be really thorough, but if you think of something that I missed, then scroll down to the comments let me know, and then scroll back up.
And like this video, it takes me a while to research, record, edit, and publish. And any support that you can give really helps. Most people think that if your mortgage is less than your rent, you should buy.
But then why is it that so many personal finance gurus, Ramit Sethi, Grant Cardone Dave Ramsey all say not to buy a home? But then why is it that they own their own homes? At least Grant Cardone, and Dave Ramsey. They both do. I’m not sure about Ramit, Sethi.
I know he rented for a long time in New York City, so could it be that it depends on where you live? And perhaps if you’re living in New York City, then yes, it definitely makes more sense to rent an apartment versus buying a condo in the heart of Manhattan. So I feel like a lot of this depends on your location.
Location Matters
Whether you’re living in a high-cost-of-living area like New York City, or a lower-cost-of-living area like Cincinnati or Little Rock, Arkansas. It also depends on your financial situation. There really is no one-size-fits-all answer for all of humanity.
Example: Renting vs. Buying in Austin, Texas
Let’s be real. But let’s look at an example to break it down, and then you can apply the numbers for your city, your financial situation, and the type of housing, like how many bedrooms are you looking for. You can apply that to this breakdown. First of all, we’re going to compare apples to apples and not look at, for example, renting a mansion and buying a studio apartment or condo or vice versa, renting a studio apartment and buying a mansion.
We’re going to look at similar size homes. So one is to buy a three-bedroom, two-bath and one is to rent a three-bedroom, two-bath with similar square footage in the same city, Austin, Texas, and in the same neighborhood, South Austin. We all know that even within the same city, if you go from one neighborhood to another, certainly the rent is going to be different based on desirability.
First, let’s take a look at our rental. It’s 27 50 a month, and we’re going to assume that you are getting renters insurance, the responsible thing to do for about $20 a month. And then let’s say you have a dog.
Many people in Austin do. So let’s say there’s a pet fee of $30 a month and just round this up to 2800. We’re going to assume that you stay in the rental for ten years, which granted is a pretty long time, but that’ll give us an idea about over time if it’s better to rent versus buy.
So over ten years, your rent is probably going to go up at least a little bit, we’ll assume 2% per year. And that means that by the end of the ten years, your rent will be significantly higher. And just for simplicity’s sake, we’re going to take the average of the rent ten years from now and the rent today and just use that across the board.
That amount averages to $3,083 per month. Let’s compare that to a mortgage on a similar property, $3,378 a month. But that doesn’t really include all the responsibilities and variables of owning a home.
So we’re going to look more closely at that in a moment. But just off the bat, we can see that renting is cheaper than owning a home in this example, and it’s not always the case, but this is a pretty standard example, mid-cost of living city and middle-of-the-road kind of rental. Not super luxurious, but not horrible by any means.
Upfront Costs
So let’s look at the cost, the upfront cost of getting in the door into this rental. Certainly getting into a rental is going to be cheaper than getting into a home to buy, right? So we have the deposit of 28 95, an application fee probably of about $45 for one person. It could be more if you’re a couple.
And your first month’s rent of 27 50, that’s 56 90 upfront. Compare that to the cost of putting a down payment on a home, plus closing costs. We can’t forget those.
Now, the average amount that a buyer puts down on a home is 12%. So this is kind of an OD number because it’s an average. Most people would either choose to put down the minimum, like three to 5%, or 20% to avoid private mortgage insurance.
But the average of those is about 12%. So we’re going to go with that, which would be $50,000 down, plus about 1.5% in general for closing costs.
So that’s another 62 80. So that’s $56,285 to get yourself into that home. So that gives us a difference of just over $50,000 to invest, assuming that we have this money sitting in our savings account if we’re going for the rental.
Investing the Difference
So that’s kind of a big leap here. The obvious reality is that many people who rent do so because we need to. That’s our financial situation.
But let’s just pretend now that we’re going to put that 50,000 in the market and get the average rate of return of 8%. That’s going to give us over $100,000 $109,230 over ten years if we invest that money instead of buying. So that is not nothing.
Tax Deductions
Now let’s pause for a second because while rent is cheaper per month and we’re going to make a significant amount of money in the market, the downside is also that we can’t control how much the landlord is going to raise rents. Especially in some cities like Austin, rent has gone up significantly in the past few years. Also, you can’t typically sublet if you’re traveling for an extended amount of time.
You can’t rent out your place to anyone else, but you could do that if you bought your own home. You also can’t really paint or change your home as much as you could as if you owned it. But the obvious pros, at least they’re obvious in my mind, is that you don’t have the responsibilities of home ownership.
Control vs. Responsibility
So let’s take a look at those. Because we do have to maintain our home ourselves if we buy it, right? So we don’t only just have that cost of mortgage, which was $3,378 a month.
We also have to budget about $3,000 a year. Let’s just average that out for maintenance. So this is not even counting a big renovation.
If you want to totally redo your kitchen or bathroom, that would be in addition, this is breaking down the average cost of replacing big things like the roof, water heater, furnace, air conditioner, or other little maintenance needs along the way. There’s always something. When you own a home, $3,000 a year is going to give us an average of $250 a month.
Now, when you buy, clearly you have more control because there’s no landlord who’s going to just suddenly increase your rent by a significant amount. However, you do have the government, which can and does increase your property taxes, often by a significant amount. You also have to pay insurance, homeowners insurance, and maybe private mortgage insurance too.
If you don’t put 20% down, those costs can go up over time. Just to be fair, I’m going to assume that these rates are also increasing by 2% year over year, which gives us an average monthly payment of $3,451 to own our own home. Add in the $250 per month for maintenance and we have $3,701.
That means that renting will save you $618 a month. So it seems pretty clear that renting is better. And the personal finance gurus are right, right? Wrong.
Because we haven’t added in appreciation over ten years. Assuming we sell the home after ten years, assuming 3% appreciation, you will make $144,101. By selling your home, you are gaining appreciation, and you’re also gaining equity because paying your mortgage means that every month you’re putting money against the principal, which is like a forced savings account, which for many people is a blessing.
If it’s difficult for you to put money away in a savings account, this is a great way to make sure that you are putting money away. Also, we have tax deductions. So this part means that depending on your tax bracket, let’s say it’s 22% you can deduct your property tax payment and your mortgage interest.
And if you take that $729 each month that you’re ahead by buying your home and put it into the stock market at that 8% return, after ten years, you will have $126,902 higher than the scenario we had with renting.
Appreciation and Equity
Certainly, it does look like buying a home is the better option financially. We’re looking at the numbers. But let’s be real. It’s also an emotional decision. When you buy your home well, you have ownership, you have control.
No one can tell you that they’re ending your lease early or they’re selling and you have to move. It’s your home. In fact, if you want to move and then rent it out, you have the power to do that, and you can set the rent.
Now you’re a landlord, now you’re an investor. And you can do this over and over, building your wealth over time. Okay? Conversely, if you are starting a business, if you want to focus your time and energy on something other than maintaining your home, it could be a much better option, emotionally and mentally speaking, to simply rent a nice apartment.
Rent the apartment. You don’t have to deal with the maintenance. All you have to do is call your landlord and let them know, hey, I need a plumber, or, hey, can you fix this? So it is really dependent on where you’re at in life, what you want to focus on and your risk tolerance, to be honest, because there are no certainties we don’t know if the market’s going to go up or down.
Conclusion: Personal Preferences
We don’t know if you bought in a bubble and you’re going to sell when the market’s down. I mean, typically the housing market does go up over time, but there are so many variables. Okay, so I know that everyone wants that concrete answer, and this example showed that it’s better to buy.
For me, personally, I think it’s been amazing to buy. It’s helped me build my wealth so many times over. But I encourage you to look at your own situation and share in the comments.
What do you think? Is it better to rent or buy? Saying, as one of my close friends said, it’s just expensive to be alive, period. Whichever you choose. So it comes down to your personal preference.
Renting versus buying
Renting versus buying
Renting versus buying
buying a home in 2024
