When Renting Makes Sense

• Article

By Mary Boone

The thought that renters are throwing away money when they could be building equity is a bit of an outdated notion. These days, many people are realizing that owning a home may not make financial sense for them.

To buy or to rent? It often boils down to how long you plan to stay in a home, your financial situation and your location.

Time is of the essence

If you’ve just gone through a major life change — gotten married or divorced, had a baby or a death in the family — homeownership may not be in your best interest right now.

Perhaps you know you’ll be retiring soon and will want to downsize. If you’re relocating for a new job or relationship, you may want to check out the neighborhoods in your new city; renting allows you to sample several areas before making a long-term housing decision.

Money really does matter

If you’re dodging bill collectors, renting is probably a better, more feasible option right now.

Yes, it may be possible to get a home loan if you have credit card debt or if you have yet to save at least 10 percent for a down payment, but most money managers warn it’s not the best financial strategy.

Pay down credit cards that have balances above 50 percent of the credit limit and grow your savings so you’ll have a 10 to 20 percent down payment when you’re ready to shop for a home.

Know your market

Look at trends in home prices and foreclosure rates within your preferred city and specific neighborhoods. Simple online searches will allow you to compare average list prices and sales prices within your ZIP code. If the sales price trends of homes in your desired neighborhood are in steady decline, it’s probably best to avoid the commitment of home ownership. Understand that these trends will vary greatly by location.

A Zillow metric called the breakeven horizon helps prospective home buyers determine the number of years after which buying a home makes more financial sense than renting one. The data indicates that, on a nationwide average, homeownership pays off in three years. Again, this rent-or-buy calculation varies widely; for example, it would take 8.3 years on average to break even in San Jose, CA, compared to 1.6 years in Tampa, FL.

Broaden your examination of local markets to include unemployment. If the county’s largest employer just announced massive layoffs, home prices will probably fall further. The last thing you want to do is buy a home and then have its value immediately decline.

Renting is easy

If you don’t want the responsibilities and risks associated with being a homeowner — then, by all means, rent.

In the past, apartments and condos were the primary rental options. These days, however, the rental market in many cities is flush with single-family homes. As a renter, you can pay your rent and not have to worry about mowing the lawn, repairing the dishwasher or replacing lost shingles.

There’s no hard-and-fast rule that says you must own a house — ever. Sometimes the decision to buy boils down to personal preferences. If you’ve always dreamed of a steam shower, a home office with built-in bookcases and a veranda with a view, then you may not find those things in a rental. Also, as a renter, you're at the mercy of a landlord for things like paint color and carpet replacement. Home ownership allows you to customize spaces to your specifications.

In reality, the decision to buy or rent comes down to what you feel most comfortable doing — as long as you can afford it.