Homeownership. A monumental milestone. A major piece of the American Dream for generations. And a potential equity-building financial strategy.
Conventional wisdom has long been that it’s better to own than rent, but this may not be true for everyone — especially members of Gen Z who are out on their own for the first time in their lives. If you’re just getting started on your professional journey, an apartment or other type of rental may be a better choice for your personal and financial situation.
How do you make such a major decision? Start by asking a few basic questions.
What Are the Long-Term Costs and Benefits?
Comparing the financial costs and benefits of buying a home versus renting will help you determine which option is better for you in the long run. Be sure to calculate these numbers over a similar period of years (such as 7-10).
You should also think beyond simply monthly rent and mortgage payments. For example, your rental analysis should include the costs for renters insurance, average annual rent increases, and additional expenses such as pet and parking fees and utilities, if they are not already included in your base rent.
Homeownership expense calculations should include closing costs, homeowners insurance and annual maintenance costs. The benefit side of the homeownership calculation should consider how much your annual tax bill might be reduced because of deductions as well as how much the house might appreciate in value per year. This last analysis will give you an idea of how much you may be able to sell your house for at the end of the time period you’ve chosen.
What’s the Biggest Difference Between Renting and Owning?
At the end of a rental period, you don’t get anything back, except perhaps your security deposit. But when you sell your home, you will likely recoup some percentage of your initial investment in the property. The longer you stay in your home, the larger that return on investment is likely to be.
Additionally, owning a place may provide you with different financing options in the future. That’s because your home will build equity — the difference between what your home is worth and how much you own on your mortgage. For example, a $250,000 house with a $175,000 mortgage has home equity of $75,000. You may be able to leverage that equity to qualify for a home equity loan or a home equity line of credit, which you can use for everything from making home improvements to paying for college to starting a business.
What Are You Able and Willing to Spend?
This cost-benefit analysis is important, but it won’t matter much if your budget can’t accommodate what appears to be the better long-term financial investment.
Do you have enough money for a down payment on a house? In most cases, you need to make a down payment worth at least 20% of a home’s purchase price. Otherwise, you’ll also need to pay private mortgage insurance (PMI), which lenders require to protect themselves from loan default. On average, PMI costs about 0.5% to 1.85% of your total mortgage. (Note that service members that qualify for a VA loan do not have to pay PMI. Additionally, you can get a lender-paid PMI loan, but that comes with a higher interest rate.)
Alternatively, you’ll need 10% for a down payment, plus a second mortgage — also known as a “piggyback mortgage” — to make up the other 10%. So, to buy a home for $250,000, you’ll need a down payment of $25,000 to $50,000.
By comparison, the average renter pays a security deposit equal to one month’s rent, plus the first month’s rent, before moving into an apartment. If you assume a monthly rent of $1,500 for a one-bedroom apartment, that’s $3,000.
The difference between $3,000 and $50,000 is huge, and that’s before you add in the other expenses mentioned previously. You need to think about not only what you can comfortably afford, but also what you are willing to spend. If you spend all of your savings or use most of your budget to buy a house, you could be shortchanging retirement and other financial needs, or foregoing wants like travel and entertainment. It could also create tremendous stress for the wage earners in your household.
What Part of You Can You Invest?
Outside of these significant financial considerations, a key question in the rent-or-own debate is how much of your own time and energy you’re willing to invest in your home. One benefit of renting is that you have a property owner or a property manager who’s responsible for maintenance and upkeep. Refrigerator stops working? Call the property manager. Shower drain clogs? Call the property manager.
When you own a home, you are the property manager. Are you willing to mow the lawn? Clean the gutters? Handle dozens of other routine maintenance tasks? If not, you’ll need to hire people to take care of these essential tasks for you, which adds to the overall expense of home ownership. You’ll also need to find dependable people who can do this work for you, which can be a time-consuming process in itself.
It’s worth mentioning here that not all rentals are apartments. Depending on where you live, you may be able to rent condos, townhouses, duplexes or single-family detached homes. The considerations that go into whether to rent or own are the same for these types of rental properties — just keep in mind that your monthly rent will likely be higher.
The Bottom Line for Gen Z
Buying a home can be an excellent investment, but homeownership involves considerable time, money and stress. Think carefully about what you really want (and can afford) before you commit to buying a home, and be sure to talk to a CFP® professional to help you figure out whether renting or owning is best for you.