Upon graduating college, numerous young adults look to begin a new chapter in their lives by moving out of their parents’ house and living on their own. Without having substantial savings for a down payment to purchase a home, many are forced to rent for the first few years of their post college life. While renting an apartment gives you more flexibility when it comes to the ability to move to a different location every year, in the end, you do not own an asset, and it can be seen as a waste of money. Some feel pressured to move out in order to disassociate from the social stigma of living at home after college. The easiest way to do this is to rent. DebtMD connected with a couple of real estate experts to give our readers some insights into when it makes sense to rent or buy, and the pros and cons of each.
Lauren Shaw is a real estate broker in the Wayne, NJ office for Realty Executives. She is ranked in the top 1% of Real estate agents in New Jersey and has earned the honors of Top Producer, Circle of Excellence, and Five Star Real Estate Agent.
“When it comes to the benefits of buying a home”, says Shaw, “You are paying your OWN mortgage. When you rent, you are putting money in someone else's pocket to pay THEIR mortgage. Take for example, after renting for 2 years at $1,400 a month you have already paid $33,600 towards someone else's bills and after 5 years, that is $84,000 that could have gone into your own home. Another benefit according to Shaw is that a home is a safe, sensible investment. “The big "I" word...investment. You are investing in yourself. When you own a home you are putting your hard earned money into something that has the potential to appreciate over the years. When you own a home you are building equity.”
We then asked her about when it makes sense to rent. Her answers may make you rethink renewing your apartment lease once it is up. “Financially, there are no real pros to renting a home. These days, the up front costs between security deposits, first month's rent, and realtor fees are just as high as a potential down payment on a house. The only benefit is maintenance and repairs are usually the responsibility of the landlord whereas when you own your own home you run the risk of a disaster that will be solely your responsibility. Sometimes, a landlord will cover utility expenses as well, however I find more and more that tenants are responsible for not only these expenses but also snow removal, lawn care and other responsibilities a homeowner would have.”
Shaw’s best piece of advice when deciding whether to rent or buy a home is to simply talk to people. “Talk to a lender.”, she says. “A mortgage lender can go over with you the pros and cons of buying versus renting. They can explain that based on one’s income and credit if they will or will not have buying power and where they will fall price-wise based on their comfort zone."
While Shaw painted a somewhat bleak picture of the benefits of renting, we also had the opportunity to speak with Ryan Durr, a mortgage banker at Citizen’s Bank with over 10 years of experience in the industry, who gave us a different perspective. “If you don’t have the savings for a purchase”, he says, “renting makes sense. It’s also a lifestyle choice, maybe to be closer to work or to live in a desirable area. Buying is a big investment of money, and time. There are advantages to the “simplicity” of renting.”
Durr also gave his rule of thumb for when you should buy versus rent. “If you’re going to be somewhere for over 5 years; purchasing with a mortgage 99% of the time is a no-brainer. You’ll save money buying over renting, there are tax benefits to having a mortgage, and it often has a cheaper monthly payment.”
His best piece of advice if you aren't sure whether to rent or buy is to simply understand your options. This occurs through educating yourself on the renting and home-buying processes. “When I tell people they can buy a home with 3% or 5% down, things become a bit more clear to them. Educating is a big part of my job. Sure I’m here for transaction, but I spend a lot of time building plans with people who aren’t ready just yet.”
While renting and buying a home can make sense for different people with different lifestyles, in the end, a home is an asset that can appreciate while renting is a sunk cost. Before making your decision, be sure to weigh the pros and cons of each, as well as your financial goals. Lastly, talk to people who have done both. The more you educate yourself on home ownership and renting, the better off you will be when it comes time to make the decision to buy or rent.