What do you think the American dream is? Watching a bald eagle sing the national anthem while Tom Cruise salutes an explosion? Sounds good to me.

For most, however, homeownership is the American dream. But is it the best option for everyone? Whether you choose to rent or buy really depends on your finances, lifestyle, and personal goals. Let’s break it down.

Key Points to Consider

1. Financial Situation & Lifestyle: With both renting and owning you need a steady income. However, renting offers more flexibility and predictable monthly expenses, while homeownership provides stability, potential tax deductions, and the chance to build equity - owning your home as a financial asset.
   

2. Myth-Busting: Renting isn’t throwing money away. You need a place to live, and renting covers that cost without the burden of property taxes or maintenance fees. Also, owning doesn’t always mean you’ll build wealth, especially with maintenance costs and market fluctuations.

Renting: The Flexible Choice

• Predictable Costs: Rent is fixed for the lease term, sometimes including utilities and other fees.

• Mobility: Move easily once your lease ends, although you could face unexpected relocations if your landlord decides to sell or increase the rent.

• Less Responsibility: Landlords handle most repairs, and renters’ insurance is often cheaper than homeowners’ insurance.

Owning: The Stable Investment

• Personalization & Stability: Make the space your own and enjoy the pride of ownership. However, selling can be costly and time-consuming.

• Additional Costs: Property taxes, insurance, maintenance, and repairs add up. Interest on mortgages can be a significant expense, though you may recoup some via tax deductions.

• Long-Term Commitment: Real estate is an illiquid asset. Unexpected expenses, like a new roof, can hit hard.

Real example - Rent vs Buy

Let’s look how this plays out in real life, with our pal Jessica.

Jessica is 31 and making $180,000 per year as a Marketing Account Manager at a big company. She has $400,000 in savings from having made some smart investments when she was younger.

Jessica is deciding between renting a new place for $3,500/month or buying an effectively identical place for $1,100,000

Option A: Buy - upfront costs

There are a few up-front costs you have to pay when buying a house:
Downpayment of 20% would be $220,000
Closing costs are usually 3.5% of property value, which is about $38,500

Total up-front costs would be $258,500

Option B: Rent - upfront costs

With renting, the only upfront cost is first and last months’ rent, which in this case would be:

$3,500+$3,500

Total up-front costs = $7,000

Obviously, a big difference in upfront costs!

Now, how much will each option cost on a recurring basis?

Option A: Buy - recurring costs

Let’s say the mortgage interest rate is 5.5%. 

Jessica’s monthly mortgage payment would be about $5,000
But! There’s also…

Property taxes: $1,010/month (1.1% of the property value per year)
Property Insurance: $420/month ($5,040/year on a property of this value)

Maintenance costs: $920/month (1% of the property value per year)

Total monthly costs: $7,350

Option B: Rent - recurring costs

In the case of renting, it’s pretty straightforward.

Rent: $3,500

Renter’s insurance: $50

Total monthly costs: $3,550

After the first year, your total costs would be:

Buying: $346,700
Renting: $46,100

On the face of it, this looks like a no-brainer. Why would I want to spend $300,600 more to live in the same place?

Easy answer is that if you buy you are working to own the place you’re paying for vs. not getting anything financial in return for paying renting. But are you better off financially owning in this case?

The long-term average annual house price increase in the U.S. has been 5.5%, while the stock market has returned about 9%.

SO WHAT DOES ALL THIS MEAN???

The decision to buy or rent depends on a ton of factors, but how long you plan to spend living in this house is the biggest question. 

With this example, buying is cheaper if you stay in that house for 17.8 years or longer. Otherwise, renting is cheaper. 

Want to know how to calculate this for yourself? Try playing around with the Rent vs. Buy Calculator - it’s free!