Feel like with each passing month you’re throwing your money away by renting? But does the idea of pooling a significant amount of your savings into one big investment make you a bit nervous? The rent versus buy debate is one of the biggest, and most difficult, financial decisions you might have to make. We’ve pulled together a few online tools to help you sort through the money matters along with a few other factors to consider in your hunt for housing.
Flexibility vs. Stability
If you’re renting a property, chances are you signed a one or two-year lease. If you’re young, still trying to find your way in the labor market, or envision a job change in the near future, rentals have their advantages. Short-term commitments like these have fewer upfront and selling costs while granting you more freedom and flexibility to change positions or careers regardless of location.
By contrast, if you are settled into a steady job with predictable pay, buying a home could be worth your while in the long run. Despite the large upfront costs, and interest payments over the life of your mortgage, home ownership could actually save you money, while working to improve your credit score and help you build equity over time.
Handy or Hands-off
How capable are you when it comes to fixing things around the house? Because it’s worth noting, as a renter, the cost and responsibility of upkeep falls on your landlord. Homeowners, keep in mind the added expense of outsourcing your maintenance costs, which could vary greatly depending on the age and condition of your home.
The Numbers Game
If you’re more of a pragmatist and respond better to hard facts, there are benchmarks to help give you a more definitive answer to the rent vs. buy question. By looking at a price-to-rent ratio, you can compare the cost of renting to buying in your area with a quick search of similar properties on Realtor.com. The lower the ratio the better, and according to real estate writer David Leonhardt, a ratio greater than 20 to 1 is indicative of a renters market, regardless of your income level or employment situation.
If ratios and fractions are too much work, a simpler formula asks you to take your household income and multiply it by a factor of 2 ½. Prices within this range are seen as affordable to buy according to historical standards.
The New York Times also has a very handy online calculator to help eliminate the guesswork, taking into account such criteria as mortgage rates, property taxes and selling costs.
There is no right answer to the rental vs. buying question. The answer will vary depending upon a number of factors, some of which, like the state of the housing market and interest rates, are out of your control. As with any major purchase decision, it’s best to begin with a solid financial assessment – but remember to take into account subjective factors that matter to you. After all whether renting or buying, it’s the place you’ll call home.