To Rent or to Buy – What Makes Sense for the Millennial Investor

As you settle into your career and begin investing in your future, you will inevitably start thinking about whether or not you should buy a home. For decades, owning a home has been the ultimate symbol of success- the “American Dream.” But is owning a home the right move financially? The answer is, it depends.

The Cost of Renting and Buying

One common mistake people often make when comparing the cost of renting and buying is simply comparing the monthly rent and the monthly mortgage payments. There are other factors to consider, such as property taxes, maintenance fees, a down payment, interest on principal, household repairs and emergency expenses. In general, millennials have more student loan debt than previous generations, which means many of us may have trouble saving for a down payment and may be hesitant to take on more debt. Renting can give you more liquidity and flexibility to respond to changes in circumstances, such as starting a family, or taking a new career opportunity.

On the flip side, I understand the frustration many people feel when it comes to renting and the notion that renting is essentially “throwing money away.” When you rent a home or apartment, that money leaves your pocket and has no benefit to you, other than keeping the roof over your head. And despite the amount of money you pay in rent, you never truly have control over your home- the landlord can decide to sell the property and you may be forced to move out sooner than you would have liked. When you make your monthly mortgage payment, on the other hand, you are building equity in your home.

The Investing Potential

Buying a home is often thought of as an investment and homes do have the potential to significantly increase in value and provide high returns for buyers. However, as we saw in 2008, this is not a guarantee. There’s a significant possibility that your home may depreciate in value, so if return on investment is your highest priority, buying a home may not be the best choice for you.

If building equity and working toward achieving full ownership in your home is your main focus, then buying may be a good alternative to you. One of the pluses of buying a home is that, if you manage to pay down your mortgage by the time you retire, you will have extra money to put towards travel, medical, and other expenses. In addition, you will have the financial security of owning your home outright.

When you rent as opposed to buy, you have the opportunity to invest the money you would have spent on a down payment. You can diversify your assets and invest in smaller amounts over time, rather than pouring a large sum of money into one asset class. However, just as your house can decrease in value, the market can take a turn for the worse as well. That’s why it is important to consider diversification and asset allocation when you make any investment.

Ongoing Expenses

If you rent, you may be feeling like there is no end to how much the prices will rise, and they always seem to rise more quickly than salaries do. For instance, I pay over $3,000 for a two bedroom apartment in the New York Metro area, which is considered very reasonable. If you buy a home, your mortgage rate could be locked in and, unless you restructure, it won’t change. This may allow you to more easily budget and set savings and investing goals. That being said, even though you may know exactly what your monthly mortgage payment will be for years into the future, when you buy, there could be unexpected one-time expenses that you will need to pay for out of pocket. Once you become a homeowner, you can no longer call your landlord for a leak in the ceiling or a broken refrigerator, you will have to cover those expenses on your own.

Lifestyle Considerations

If you’re still struggling to figure out what makes sense for you, renting or buying, you aren’t alone. When thinking about housing, it’s important to consider what lifestyle you want to lead and what your future needs are.

Try not to think of buying a home as an investment. Think of it as a lifestyle choice. If you are looking to set down roots in one neighborhood, have a firm career path, and have already made decisions around marriage and family, you may seriously consider buying a home. If you value flexibility in your life, or may consider a new career path in the future, renting may be the better choice.