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Rent Vs Buy?

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What is your annual
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What is your total pre-tax income per year?

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Do you know how much money you
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How much money will you initially put down on your home?


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Rent vs Buy: Analyzing the Best Option

Is it better to rent or buy? This is a question that we will all most likely face at some point in our lives. It is also a question that comes with no straight forward or easy answer. This is because a lot comes into play and this is a decision that will have a major impact in our lives.

Usually, most people associate buying a house as a step toward financial freedom however, this is not always the case. Though owning a home gives some form of stability such as no more having to deal with a landlord, it is not always the best financial decision you can make!

More often than not, the annual costs that come with owning a home can be greater than what you would have paid on rent. Some of these costs include: taxes, maintenance and insurance interest just to mention a few. However, this does not mean that owning a home is not a great financial move, and in some cases, this could be the best financial decision.

Rent vs Buy: Things to Consider

For most, the decision to buy a home is one that requires a lot of consultation and financial re-evaluation. If you are thinking of making that big financial step, below are some questions you should answer.

  • How much is your steady income?
  • Is this a long term investment?
  • Where are you getting the money to buy the home?
  • What are your other options?

For those who are in stable employment, the amount of income earned plays a major role in this decision. This is because you do not want to add extra strain on your financial. If you are considering buying a home without steady income, you need to analyze your estimated annual income and the costs associated with owning a home to figure out if this is really a smart financial move. The amount of time you plan on residing in the home also plays a major role in the rent vs buy decision.

If you only intend to stay in the home for a few years, you may not realize returns from the investment. Usually, a home becomes profitable after about 8 years. It is therefore important to understand that this is not an investment that brings about quick returns. Another question that a potential home owner needs to think about is the source of the money. Are you planning to buy the house from an inheritance, recent winnings, income or will you sell off an asset?

This an important point to address because you need to first identify if you have enough funds to smoothly manage to buy a new home. You must also think about whether the ends justify the means especially when you are selling off property or another investment to buy your home. Last but not least explore all other options to ensure that your decision is not one you will regret in the future.

Pros and Cons of Buy vs Rent

As mentioned earlier, the question should I rent or buy is not one that has clear cut answers. It therefore best to weigh in on the pros and cons of both and these are:

  • Home owners have pride of ownership while renters don’t
  • Home owners enjoy home equity while renters don’t
  • Rent have no maintenance costs, home owners do
  • The risk of owning a home is greater than renting

When it comes to owning a home, there are many pros. Some of these include that the home owner has pride of ownership and this is something that the renter does not enjoy. The home owner also can build equity from his home, which is also something that a renter will not benefit from. However, owning a home also comes with its fair share of disadvantages.

Owning a home comes with more expenses in terms of maintenance not forgetting to mention the buying cost. Another disadvantage to home ownership is that there are more risks involved.

For example, the housing prices may decline over time. This is something that a renter will in fact benefit from. When it comes to renting, the first major disadvantage is that it is very difficult to modify the home to your liking. The home also does not generate any financial gain for the renter, and in fact only drains finances with monthly rent. However, you do not have to worry about house maintenance because this is something that the landlord takes care of.

Using Interactive Calculators

A rent vs buy calculator is one that comes in handy to help you decide which the best option for you is.

Some of the features found in these calculators are:

  • Buying assumptions
  • Rent assumptions
  • Expenses
  • Home value
  • Taxes

Interactive calculator’s help you make the right choice by analyzing your financial status. You can easily find a rent or buy calculator online. One of the things the calculator will analyze is the cost of ownership versus the cost of renting. Using the buying or purchase assumptions, you will key in information such as the price of the home, its annual rate of appreciation, the loan and interest amount, number of years it will take you complete payment, property taxes, maintenance costs and more.

When it comes to the rent assumptions, information on your monthly rent payment, insurance, annual increment rate and other costs is required. Other information that you will be required to include is the annual appreciation rate of the home you intend to buy and taxes associated with owning the home.

This information is all calculated and you get financial advice on what is the best move to make given your financial situation. These calculations are usually accurate; however, you also need sound financial advice from a respectable analyst to give you the best counsel.

When Is It Better to Rent vs Buy?

Most people assume that buying a home is always the best way forward. Even when you can afford it, it is not always recommended that you buy a home.

It is better to rent when:

  • Your rent is lower than the market average
  • You don’t intend to live in the house for long
  • You reside in a high end residential area
  • You can gain better returns on another investment

There is absolutely no viable reason to buy a home, especially when you only have a few years to live in the area. If you are not one to reside in a particular area for more than three years, buying a home is only going to tie up your funds.

If you live in a house whose rent is lower than the average market rate, then you are getting a deal and renting is perhaps a better option to buying. Residing in a high end market means that the prices of homes are higher than other areas. Buying a home in such an area may not be a very good decision. Last but not least, if you can earn better returns on another investment, it is better not to buy the house.

Important Considerations

Buying a home is not just a financial decision but an emotional one. You are therefore not just meant to look at the financial considerations but also the personal impact of home ownership.

Below are some of the important things to consider on a personal level:

  • Residential area
  • Lifestyle
  • Amenities
  • Security

Even with your financial aspect of home ownership in check, you need to think about the personal and emotional facet. The first thing you need to think about is the residential area. Is this an area that you would like to live in for about ten years or are there things that do not appeal to you? Most of us settle with the residential area when renting because we are not in it for the long term.

However, buying a home is different and you should not make a purchase simply because it is affordable. Another important factor to consider is your lifestyle. Are you the kind of person whose job requires frequent travel and you do spend very little time at home? If so, owning a home may be more expensive than renting. You will also not have the time to maintain the home as you should. However, this situation changes if you have a family.

The amenities in the home also come into play. It is better to buy a home that comes with all the amenities you need than one that will need major modifications. The areas amenities should also be considered, especially if you have a family. Finally, think about the security of the area. As mentioned before, you do not just own a home for the sake of it but a place you will possibly call home for the rest of your life.

Implications of Rent vs Buy

The financial implications of owning a home are one of the major factors people consider when thinking about whether to buy or rent. However, this is not a decision that should be made without thinking about the personal implications this decision will have in your life. When thinking of buying a home, you must not get into it for a short term basis but for the long run, in order to realize a gain from the investment.

This is because homes appreciate in value over time and as mentioned above, the average number of years you have before you can realize a return on your investment is 8 years. One of best way to calculate whether or not you are ready to buy a home is multiply the amount of rent you pay each month by 20 years.

To simplify this, multiply your rental fee by 240 which is the number of months present in the 20 year period. Should the price of the home be much less than this, buying a home is a good long term decision! Besides using this technique, you should also look into other factors such as your personal situation and your current financial situation as well.

Making such a decision is not something people do every other day and may require a lot of research and advice. The reason why it is important to have sound financial advice is because professionals are in a position to analyze market trends and predict the future inclination as this is their forte. This helps you eliminate chances of making an investment that will depreciate value over time.

You need to ask yourself if you are ready for this big step. Home ownership comes with a lot of responsibility. You will have to deal with the home repairs, improvements and other costs. You therefore need to be brutally sincere with yourself-- regardless of whether you are using a buy vs rent calculator or consulting with experts.

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