3 reasons why it can be smarter to rent, even if you can afford to buy

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1. You are unsure about the long term

Potential homebuyers need to have a belief about where they want to live, said Kamila Elliott, an Atlanta-based CFP and member of CNBC’s Advisory Board.

For example, would they like to live in a certain city or neighborhood for several years, or in a certain neighbourhood? If they moved for a job, would they still want to live there if they lost that job?

If the answer to any of these questions is no, renting is probably best, says Elliott, co-founder and CEO of Collective Wealth Partners.

“If you can’t commit to staying there (at least) three years, don’t buy,” Elliott said.

Flexibility is a big plus for tenants, says Boudreaux.

For example, if you’re moving to an unfamiliar place, “renting can be a nice way out,” he noted, to avoid buying and then finding out you don’t like the location.

The benefits can be both psychological and financial.

Home prices can be volatile, making it more likely that a buyer won’t make a profit if they sell after only a short period of ownership, Elliott said.

Upfront transaction costs, such as brokerage fees, are also “very expensive” in general, making it more difficult to buy a home in the short term, Boudreaux said.

2. You don’t like the nuisance factor

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There’s also a certain lifestyle benefit to renting instead of buying, advisers said.

Renters don’t have to deal with the “inconvenient factor” of scheduling appointments with landscapers and exterminators or paying for home repairs, Elliott said. That is typically the responsibility of a landlord.

“You don’t have to worry about fixing the dishwasher, garage door or HVAC unit,” Elliott said.

Depending on the building, tenants may feel more secure if there are additional security cameras or a doorman, or gain convenience and social benefits if there are amenities such as a gym or swimming pool, she added.

Conversely, a home may be the right lifestyle choice for someone who wants a large yard with a nice yard and room for a dog to run around, Boudreaux said.

3. Benefits of ownership are ‘vastly exaggerated’

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The financial benefits of homeownership have been “vastly exaggerated,” Boudreaux said.

“Buying a house because you think it’s what you should do can be (financially) dangerous” and lead to regret, he added.

For example, a financial assessment of affordability is incomplete if consumers compare only monthly rent and mortgage payments. The true cost of homeownership also includes utility costs, home improvements and maintenance, property taxes and homeowners insurance, advisers said.

According to Clever Real Estate, the average homeowner will pay more than $15,000 a year in addition to their mortgage to cover these costs in 2022.

Second, a tax deduction for mortgage interest is no longer as valuable as it once was, Boudreaux added.

A 2017 tax law passed during the Trump administration lowered the mortgage rate threshold; married couples can claim a tax deduction on the first $750,000 of their mortgage, down $1 million.

I don’t think it has to be an automatic for everyone. You can rent your entire financial life and be very happy.

Jude Boudreaux

senior financial planner at The Planning Center

In a general sense, it is also more difficult to get the financial benefits of a tax deduction. The law doubled the standard deduction (it’s $27,700 in 2023 for married couples) and capped a deduction for state and local taxes at $10,000.

All things considered, a mortgage interest tax break “isn’t the benefit it used to be,” Boudreaux said.

Of course, owning a home is often viewed as an investment, as is securing a place to live.

Homeownership “allows families to build wealth and serves as a measure of financial security,” according to a 2018 paper by Laurie Goodman of the Urban Institute and Christopher Mayer of Columbia University. Equity can play an important role in retirement savings, for example, if retirees can tap into that wealth, they wrote.

But there are “substantial variations” in homeowners’ experience based on factors such as purchase timing, holding period and location, they said.

For example, building wealth depends on one’s ability to hold on to a house during recessions; lower-income borrowers and minority borrowers are less likely to do so and thus benefit less from homeownership, Goodman and Mayer wrote. In addition, homeowner returns have “been less favorable” in areas such as Cleveland and Chicago compared to other metropolitan areas such as Los Angeles, Dallas and New York.

Historically, returns from residential real estate and stocks are “very similar and high,” according to a paper published by the Federal Reserve Bank of San Francisco, which examined global investment from 1870 to 2015.

But in the US, investors have earned better net returns on stocks than on homes over that period: an average of 8.3% versus 6% per year, taking inflation into account, the newspaper said.

3 reasons why it can be smarter to rent, even if you can afford to buy

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