If you’re new to the housing market, making the switch from renting to owning can seem like a daunting and distant dream. It’s easy to get hung up on a six-figure listing price and harder to reconcile how that cost will look on a short- and long-term scale. Renting is often thought to be a more affordable housing option, but when you compare the long-term costs of renting against those of owning, buying often proves to be the savvier option.
Figure Out What Matters Most to You
Before looking into the costs of renting versus owning, it’s important to consider which option best fits your lifestyle, goals, and long-term plans. Because mortgage payments require regular investment in the equity of your home, many people view buying as a means of forced savings. In short, every payment you make directly benefits you, rather than benefiting a landlord or renting agent. If you’re planning on staying in your home for a decade or more, buying means that your investment will compound the longer you stay. On the other hand, if you prefer the flexibility of renting and don’t plan on putting down roots long enough to reap the long-term payoffs of a fixed-rate mortgage, buying may not be the right option.
In addition to forced savings, advantages of homeownership include tax benefits, fixed-rate payments, and the freedom to settle in and customize your space to your liking (that could include making energy and efficiency updates to reduce your monthly utility expenses). But what some people view as freedom, others view as an unwanted responsibility. Being a homeowner means taking a more active role in the maintenance and longevity of your space, so it’s important weigh lifestyle and time commitments in addition to financial costs.
Understand the Costs
So, you’ve decided you want to be a homeowner. To compare the overall cost of renting versus buying, you need to account for three separate factors: initial costs, recurring costs, and net profits.
For renters, initial costs typically refer to a security deposit, but they can also include things like pet deposits, application fees, and broker's fees. Conversely, the initial costs of buying a home include a down payment, closing costs, and broker fees. At first glance, the initial costs of homeownership far outweigh those of renting. A security deposit may require payment of a few thousand dollars, while a down payment usually entails paying between 5 and 10 percent of the overall closing price up front.
While the difference in price is significant, it’s important to consider the function of the initial costs in each instance. While security deposits are intended as damage deterrents and are refunded in full upon departure, a down payment is an investment that will appreciate over time. Despite this advantage, the mere cost of a down payment can be enough to discourage potential homeowners who don’t have the funds to cover the initial cost of buying.
Down payment assistance programs have changed the way younger generations think about homeownership by making the initial costs of buying a home more affordable. Due to rising rent prices and the anticipated rise of federal interest rates, more millennials have opted to buy early and lock in a fixed-rate mortgage. In recent years, millennials (the vast majority of them first-time homebuyers) have become one of the largest home-buying populations. In addition, growing education about mortgages, personal investment, and borrowing rights have made first-time buyers more informed than their predecessors with regards to the pros and cons of home buying.
Most renters are surprised to discover that their recurring costs (regular monthly expenses, including rent and utilities) are comparable to those of buyers. In some cities, mortgage payments are even more affordable than rent prices.
Without the benefit of a fixed-rate mortgage, however, renters’ recurring costs are much more volatile than those of homeowners. Due to inflation and rising market demand, the recurring costs of renting usually inflate over time, leaving renters paying more for less (i.e., less square footage, quality, amenities, and ROI) than their buying counterparts.
To lend some context to your housing search, calculate the sum total you’ll spend on rent over the course of the next 15 to 30 years (the standard mortgage duration) at your current rate. As an example, consider that the average rent for a New York City apartment in 2018 is $3,526. That means that the average renter pays around $42,312 annually. If rent were to remain consistent, today’s renters will pay a whopping $634,680 over the course of 15 years and will surpass $1.2 million in rent payments by 2048. On top of that, the average rent in NYC increased by 11.8 percent in the last year alone and will likely continue to climb over time. The result? A grand 30-year total budget that surpasses $1.5 million.
Of course, the relative cost of renting versus owning is contingent upon the rent prices in your chosen locale and your available budget. Buying a house is an investment, but that doesn’t mean that renters can’t invest their money in other ways. If you live in an area where rent is significantly lower than buying costs and you’re willing to invest the difference into the stock market, it’s worth calculating your comparative opportunity costs before deciding when and where to purchase a home. But the logic of this depends on scrupulous and regular investment—something which many people view as being more inherently complex than making regular mortgage payments. No matter what option you choose, informed investment is key to improving your net outcome.
It’s impossible to compare the cost of renting to the cost of owning without taking net proceeds into consideration. For a rental unit, net proceeds refer to the amount of your security deposit that’s refunded upon termination of your lease. For homebuyers, net profits are calculated by taking the selling price of your home and subtracting any broker selling fees, taxes, and remaining mortgage payments, along with the initial costs of purchasing the home to determine your net outcome.
In a healthy market, buyers profit when the net gain from selling their home is enough to cover their initial purchasing cost, associated fees, and recurring cost, and still come out ahead. In short, the buyer walks away with more money than they spent over the course of the 30-year mortgage period. In contrast, even if a renter remains in the same apartment for 30 years, their net profits will never surpass the sum of their initial costs and all of their recurring costs (like the $1.5 million from our previous example) would be irretrievable.
The Bottom Line
When analyzing the costs of renting versus owning, it’s important to have all the facts. A free mortgage analysis can help you determine what lending options are available to you and how those options would fit into your short- and long-term financial goals. Schedule a free mortgage analysis to gain a more complete and personal understanding of the costs of owning versus renting.