real estate

How to Decide Whether to Rent or Buy Your Home

Homeownership is commonly considered a sign of success, but in some cases, it can actually work against your financial goals.

While buying and renting can both be good options under the right circumstances, I tend to believe people underestimate the hassle of owning and the benefits of renting because they are hardwired to do so.

Let's face it: most of us have a deep-rooted feeling that homeownership equals success and buying equals progress. Renting, on the other hand, is often seen as a form of failure—or even "settling." If you can't afford to buy, you just rent because you need a place to live, right?

I think this line of thinking is dangerous, and I share this opinion with my clients often. I also share my own story as a cautionary tale:

When I bought my first condo in 2007, the purchase seemed like the best idea ever. I had the money for a down payment and found the perfect condo in the perfect neighborhood. Under those circumstances, renting no longer made sense. I mean, real estate values would always go up and up, right?

We all know what happened next. When the Great Recession hit in 2008, my condo lost half its value in a short amount of time. I held onto the condo regardless and continued living there until I found a reason not to.

When my then girlfriend (now wife) and I talked about moving in together several years later, I desperately needed a bigger place. Unfortunately, the condo building itself became embroiled in litigation, which made selling my condo an impossible feat.

So, what did I do? I became the world's most reluctant landlord. After two terrible tenants, I was finally able to sell the place in 2013 and move on with my life. Finally.

While I did eventually break even on the condo, the amount of time and stress I poured into the process cost me plenty. Not only did I pay for maintenance and upkeep all those years, but I endured years of hassle and many sleepless nights, too. In the end, owning a home wasn't even close to worth it.

Before you commit to buying, it's important to note why you're doing it in the first place. If you're considering a home purchase to appear successful, you're setting yourself up for failure. If you're shopping for a home because you feel like it's a natural next step, you're making a mistake. It's also important to look at the pros and cons of renting and buying for what they really are—not what you wish they were.

The Case for Renting

Renting may not feel like progress, but that doesn't mean it's not the right move for you. The fact is, renting comes with a ton of huge benefits, including:

1. Flexibility.

Maybe you prefer to move around, seeing new neighborhoods and cities. No matter what, it's hard to put a dollar value on that experience and enjoyment. In addition, if you anticipate a career or job change, renting might suit you better, as buying a home can hinder your flexibility to pick up and move.

2. Avoiding homeownership costs.

Homeowners are painfully familiar with unforeseen and often hefty costs such as furnishing, decorating, leaky pipes, landscaping, general maintenance—you name it. As a tenant, you enjoy the perks of your home without the worrisome financial burden.

3. Liquidity.

Generally, you can't turn a house into cash overnight. Many people invest their life savings into a home, putting the bulk of their net worth into an illiquid asset. Risk comes with tying up a large portion of your wealth in such an asset. Renting allows you flexibility and other investment options.

4. Building credit.

As consumers, we need a healthy credit score for pretty much everything we do, from getting a new cell phone plan to buying a car. While renting doesn't boost your credit rating like owning a home might, creating a history of on-time rental payments can, in some cases, help build your credit to qualify for a mortgage down the road. This history begins when (and if) your landlord reports your payment data to credit agencies. Third-party services can help you report this information on your behalf.

The Benefits of Buying

Still thinking of buying? Here are some good reasons to buy:

1. No surprises.

While a leaky roof or broken water heater might catch you off guard, your monthly payment won't change or fluctuate much at all over the years. This helps with budgeting, cash flow and other aspects of a comprehensive financial plan.

2. Tax benefits.

As a homeowner, you can deduct many related expenses. And unless you owe more than $1 million, all the interest in your mortgage payment is deductible.

3. Diversification. 

Just as you commonly invest in stocks, bonds, cash, certificates of deposit and the like through brokerage and retirement accounts, you can use real estate as another asset class that can help diversify your portfolio. Plus, as a tangible asset, real estate appeals to many other potential buyers and investors.

4. Equity building and retirement planning.

Along with a rise in real estate prices, you can also build equity by paying down your mortgage over the years. If successful, you will likely enjoy a lower cost of living in retirement.

It seems like everyone has an opinion as to whether you should rent or buy these days, but you have to decide for yourself. Just remember, renting can make a lot of sense depending on where you are in life, what kind of lifestyle you expect to have in five or ten years and your long-term financial goals.

Just because you can buy, doesn't always mean you should. Trust me, it's much better to rent while you decide what you really want in life than to buy and learn the hard way.

Taylor Schulte, CFP® is founder and CEO of Define Financial, a San Diego-based fee-only firm. He is passionate about helping clients accumulate wealth and plan for retirement.

About the Author

Taylor Schulte, CFP

Founder and CEO, Define Financial

Taylor Schulte, CFP®, is founder and CEO of Define Financial, a fee-only wealth management firm in San Diego. In addition, Schulte hosts The Stay Wealthy Retirement Podcast, teaching people how to reduce taxes, invest smarter, and make work optional. He has been recognized as a top 40 Under 40 adviser by InvestmentNews and one of the top 100 most influential advisers by Investopedia.

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