The Truth About Renting vs. Buying: What's Really Cheaper?

Dec 6

Is it cheaper to rent or buy a home? Depending on your financial situation, life stage, and location, the answer can vary significantly. I put together some data and practical examples to evaluate which option makes more sense—both in the short term and the long term.

Short-Term Costs: Renting vs. Buying

Renting:

Pros:
- Lower upfront costs: Renting typically requires a deposit equal to 1-2 months of rent. In competitive markets, this might be higher, but it's still considerably less than the down payment that could be required for buying (emphasis on the “could be”… more on this later).
- Flexibility: If you need to move into a new place, renting can offer more flexibility. This typically comes in the form of more options to choose from when it comes to properties (apartments/condos/homes) as well as more financial options since you don’t have to go through the process of getting a loan.
- Speed: In 99% of cases, you can get into a rental property faster than you can get into a purchased property (assuming that in both cases the property is ready for move-in at the time an agreement/purchase is completed)
Cons:
- The landlord gamble: This is really a crapshoot. Whether you’re renting from an individual or a company, there is no way to guarantee that you’re going to end up with a landlord that isn’t a dirtbag. Even if you have a good landlord today, you’re not protected from them selling the property to someone that’s less likely to give a rip about you.
- Higher monthly costs: This isn’t a blanket statement by any means, but when the rental market is hot you can end up paying more on a monthly basis than if you buy.
- No equity: Every dollar spent on rent is building your landlord’s equity position, not yours. You’re helping them build wealth in exchange for a roof over your head.
- Rising costs: Rental prices have skyrocketed since 2020 (along with literally everything else). On top of this (or underneath it all), a lot of landlords use software that leverages algorithms to automatically set and increase rental prices. There’s a whole slew of alleged scams and nefarious activity here, and the FTC and state law enforcement agencies have filed lawsuits against specific software companies, suggesting that these practices are predatory and the result of monopolization. However, with the new presidential administration coming in, it is highly likely that the current FTC chair will be replaced, and these suits will be dropped. This means that if these software companies and landlords are using aggregate data and AI to suggest profit maximizing activities that can harm renters or potential renters, they’ll likely be able to continue doing so.

Buying:

Pros:
- Equity-building: With almost any mortgage loan out there, you start making payments against your principal loan balance starting with your first payment. This means you are, essentially, putting money into a savings account with a rate of return that is tied to the housing market. As housing prices rise, the equity you’ve built in your home grows. The average rate of return for your dollar in the housing market is 4%-6%, but since 2020 it’s over 10%. This comes in second to the stock market, but homeownership is much less overwhelming to get into and your money is also providing a roof over your head, a place to call home, etc. Stocks don’t do that for you.
  * There are some exceptions to this, such as interest-only loans where you don’t pay down your principal balance at all for the first few years of the loan, but most borrowers are not using these loan products.
- Stability: Whether you’re getting a fixed rate or a variable rate mortgage, you have some real certainty over what your monthly housing cost will be for the next 15, 20, 30 years (depending on the term of your loan). Most borrowers are borrowing on a loan with a fixed rate and a 30 year term. That means you have 3 decades of knowing exactly what your monthly housing cost will be, as opposed to a rental lease where your payment could go up every 1-3 years.
- Refinance capability: If circumstances permit, it is possible to refinance your mortgage loan to secure a lower monthly payment. Even in today’s market people are taking advantage of refinancing to either pull equity out of their home, or to secure a better rate than the one they purchased with, ultimately lowering their payment.
- Tax benefits: Mortgage interest deductions and other homeowner incentives can offset costs on your annual tax returns. This could mean you’re paying less out to the IRS, or even getting more back.
Cons:
- High upfront costs: While there are loan products that can offer low down payments (sometimes as little as 0% down), there are still closing costs to consider. In most cases, a borrower on a mortgage loan will have to bring some money to the closing table. Based on a Business Insider article from 2024, for a home selling for the median price in the US, closing costs could range from 2% - 6% of the total loan amount. This is in addition to the down payment for the loan.
  * Pro tip: This is where working a mortgage broker (rather than a mortgage banker) can be really helpful, especially one like Barrett Financial. More options means more potential to get a better deal.
- Maintenance and repairs: Homeowners are responsible for ongoing expenses like roof repairs, appliance replacements, landscaping, etc., which could cost thousands annually. Insurance can help offset some of this, but at the end of the day, the money you spend here is to maintain and improve your home. In theory, if you’re renting your landlord should cover some of these costs, but I’ve heard tons of nightmare stories about landlords that won’t put in the time or money needed to keep the property in good repair.

Comparison:
In the short term, renting is generally cheaper due to significantly lower upfront costs and maintenance costs, and it offers more flexibility if you need somewhere to live fast. However, you're trading these lower short term costs and flexibility for building equity, and equity isn’t just value when you sell. Equity is opportunity in the future.

Long-Term Costs: Renting vs. Buying

Renting:

Over decades, rent payments accumulate with no financial return. If rents increase by 3-5% annually, what starts as a $1,500 monthly rent can balloon to $2,500 in 15 years. That’s nearly $360,000 paid over 15 years with nothing to show for it. You take $0 away with you.

Buying:

By contrast, purchasing a $300,000 home with a fixed 30-year mortgage could change the course of your entire life (this is what happened to me). Over time, as inflation hits and costs raise (because they always do in the long run), your mortgage payment remains relatively stable (minor adjustments may occur do to taxes or insurance). Also, if you’re not near retirement age, you’re probably going to see some increase in your income, which means your housing payments become more affordable relative to wages.

Which means:

Equity accumulation: After 15 years, you could have over $150,000 in home equity, depending on market conditions, mortgage type, whether you’re paying more than your minimum payment amount, etc.
Appreciation: Homes typically appreciate 3-5% annually (6.5% in 2023). A $300,000 home today could be worth $520,000 in 20 years. And compare that to the $0 you get from renting.

So, should you rent or buy? Which one is better?

The Reality: It Depends

Renting Is Better If:

You're unsure about your long-term location. If you see a move coming in the future, it may be best to hold off.
You don't have any upfront cash for a down payment or closing costs, whether it’s your money, or a gift from someone else.
You really don’t like the idea of paying for maintenance on a home you own.

Buying Is Better If:

You plan to stay in one place for 5+ years.
You can afford the initial costs.
You’re willing to invest time and money into home maintenance.
You want to build equity for your future, and that of your family.

Key Takeaways

Short-Term Advantage: Renting often has the edge in flexibility and lower up-front costs.
Long-Term Advantage: Buying can lead to significant financial growth through equity and appreciation.
Market Impact: Location heavily influences the rent vs. buy equation. Use tools like the Rent vs. Buy Calculator by Realtor.com or SmartAsset to evaluate your unique situation.

Ultimately, the decision between renting and buying should align with your financial goals, lifestyle, and future plans. If you're not sure which path is right for you, find a loan advisor you trust to help you evaluate your situation.

If that’s you, and you’re wondering if buying is the right option for you, use the link below to reach out to me. I’m always happy to chat with folks and evaluate what options might be on the table.

Ask me about your situation

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