5 reasons to rent a home instead of buying
Posted by American Homes 4 Rent Team
8m read time
Nov 2, 2021
The United States simply can’t keep up with the demand of the country’s growing number of families. Realtor.com discovered that, from January 2012 to June 2021, about 12.3 million new American households were formed. Yet there were only around seven million new single-family homes built during that same timeframe.
That scarcity is causing more potential homeowners to take pause when considering their next place to live. They must debate the pros and cons of buying a house, and may wonder why they should spend a lot of money to own a home they might not be satisfied with, which could lead to more trouble and hardship down the road.
This trend is particularly noticeable among millennials, whose home ownership rate (42 percent) continues to lag behind Gen Xers (48 percent) and baby boomers (51 percent), according to the 2021 Millennial Homeownership Report from Apartment List.
The research discovered some other interesting renting over buying statistics: 18 percent of millennial renters say they plan to rent forever, meaning about one in five millennials have no intention of ever becoming homeowners. Though a few millennials may opt for apartment life indefinitely, many will turn to the option of renting homes, especially—the Millennial Homeownership Report notes—as many are now in their peak years for buying houses.
While the COVID-19 pandemic has certainly played a role in changing views of home ownership, there are plenty of benefits of renting over buying. Here are five to consider when you’re looking at your next place to live, plus tips for renting a house.
Renting a house is more affordable than buying
The upfront costs of buying a house can be quite staggering, which is why one of the most eye-opening millennial renting over buying statistics lies around affordability: 74 percent of millennials who always plan to rent say they can’t afford home ownership.
Most sellers expect at least a three to five percent down payment of the total price. With the average American home costing about $287,000 earlier this year, that means the smallest average down payment will cost about $8,700 to $14,500, and significantly more if you live in certain cities and states.
Another element of buying a home is private mortgage insurance (PMI), which conventional mortgage lenders require as additional insurance. You’ll pay PMI until you’ve reached 20 percent equity in your home. According to the Urban Institute, PMI rates are typically between 0.86 and 1.58 percent. In other words, for every $100,000 borrowed, you can expect to add on $30 to $70 per month in PMI premiums.
In an effort to reduce those monthly costs, some homeowners may opt to fork over 20 percent of the home’s price as a down payment. They’ll avoid monthly PMI payments, but that upfront spend is now significantly higher. In the average home cost example above, the down payment would approach nearly $60,000. And that’s just for the average price of an American house.
The down payment doesn’t consider closing costs either. Buying a home means you’ll have a variety of other expenses, including application and underwriting fees, mortgage broker fees, credit reports, prepaid interest and discount points.
And if you’re buying a fixer upper? A seller may give you some leeway on certain repairs—for example, they might offer to cover some or all of the costs of an air conditioner or heater that’s due to be replaced. However, the majority of home renovations will come out of your wallet.
Renting a house won’t eliminate all of those upfront costs entirely. Like apartment dwellers, home renters will have to pay first and last month’s rent at signing, application fees and security deposits, which may also include fees from certain payment methods.
However, you’re still far more likely to save thousands to tens of thousands of dollars in down payments and closing costs if you choose renting over buying a home.
Renting over buying gives you more flexibility with location
According to Gallup, about 45% of American workers have a remote work setup, either part-time or full-time. Of those, one in four employees exclusively works remotely. As a result, several people have started considering exploring other places to live, where the cost of living is lower and rent, food and entertainment are more affordable.
Homeowners have fewer options when deciding where to buy, since the market somewhat dictates their possible locations. And, when they decide to sell, they need to jump through a lot of hoops to move to a new city or even a new neighborhood. They have to list their home, fix it up, field offers, show the house, meet potential buyers—and there are associated costs around selling a home, too.
If you’re renting your home, though, you have more flexibility. Decide after a year that you don’t particularly like your house or the surrounding area? You can quickly pack up and move elsewhere when your lease ends.
One of the best tips for renting a house: have strong, consistent communication with your landlord. Ask thoughtful questions about the rent, neighborhood and what modifications you can make to your home. While establishing rapport is nice, you’re also laying the groundwork for any potential wrinkles during your stay.
Repairs and upgrades are simpler
Unless you never leave your room, your house will undergo wear and tear simply from you living in it. Walls may start cracking, appliances may stop working and guests may accidentally damage elements of the home (the nice ones will tell you if they break something).
In a home you own, you’re responsible for all of those fixes. Leaky faucet? Clogged toilet? No hot water? Those issues are on you to repair. You’ll have to research companies, set up an appointment, be at home to let them in and pay them for their services. The same goes for any renovations you hope to do—either while you’re living in the home or if you’re looking to sell—such as upgrading a kitchen island or painting your bedroom walls.
But one of the benefits of renting over buying is that your landlord or property management company will take care of many things that go wrong within your home. Unless your lease stipulates otherwise, you can simply call up your landlord and consult with them on major fixes.
Granted, a landlord or management company probably won’t cover the cost of repairs for damage you cause. Let’s say you’re trying to hang up a painting in your living room and your hand slips while you’re using a hammer to pound nails into the wall. That now-gaping hole? You’re likely on the hook for it, since you did the damage yourself.
Your monthly costs are consistent and property taxes are nonexistent
Homeowners don’t pay rent; rather, they pay a monthly mortgage. And, though some mortgages stay the same throughout their entire lifetime, there are also adjustable rate mortgages (ARMs). These types of mortgages shift after a certain period of time to reflect the current housing market interest rate.
In essence, homeowners are taking a gamble with this type of mortgage. Let’s say they originally bought their home for a 2 percent interest rate with an ARM after five years. When that sixth year starts, if the interest rate is lower (for example, 1.5 percent), the ARM will turn out to be a good deal. But things can shift the other way, too. If the interest rate jumps up to 2.5 or 3 percent, that mortgage just got a lot more expensive.
While a mortgage can shift, your monthly rent of a house will likely stay the same for the duration of your lease. Your landlord may later increase rent due to rising market prices, but chances are, if you owned that same home, you might pay the equivalent—or more—in increased property taxes and escrow costs.
That’s another thing you avoid with renting a home: annual property taxes, which are covered by your landlord. When tax season rolls around, you only need to worry about your own income and business purchases, if you have any. Since you don’t own the home, you aren’t on the hook for paying property taxes. Depending on the state you live in, you’ll skip paying on up to more than 2 percent on the value of the home every year.
Your risk level is lower
Buying a home is a major purchase, and you’re making a big investment in your future. Most mortgages are either 15- or 30-year terms, which means you’re locked into your home for up to three decades if you choose to buy. Because any fixes are on the owner, a surprise home repair—maybe damage from a storm or a refrigerator suddenly giving out—could quickly deplete your savings or even put you in financial hardship.
And, though housing market crashes like the one we saw in 2008 are few and far between, they can still occur, diminishing the value of homes across the country. Could you imagine planning to sell your home in a year only to watch its worth plummet below what you paid for it?
Renting eliminates all of that risk. In fact, if the housing market goes down while you’re renting, it’s actually an advantage for you. You may be able to find a larger location in a better neighborhood for the same or reduced price.
Another home renting tip: if available, inspect the property before signing. Check the doors and locks, air conditioning unit, heater, plumbing, electrical outlets, appliances, water systems and anything else you plan to use regularly during your stay. Ask your landlord or the property management company about the history of the home’s maintenance and what kind of schedule they plan to keep while you’re living there.
Weighing the benefits of renting over buying your home
Before you make your next move, you should consider the pros and cons of renting a house. There are ample benefits to renting, and you just may decide it’s the right choice for you. In the long run, it can save you plenty of money and headaches.
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