5 Situations When Renting is Better Than Buying

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housing by woodleywonderworks via Flickr

In real estate, the age old question is whether it’s better to rent or buy. Ten years ago, the answer likely would have been to buy if you had the option, but since the Great Recession and the crash of the housing market in 2008, Millennials and other buyers have been increasingly cautious and more likely to stick with renting for longer than previous generations.

So the question becomes, how do you know when it’s time to move from renter to buyer, and which will be most advantageous? While there’s not one definitive answer to that question, there are some situations where it’s probably best to remain a renter.

These include:

If You’re Planning a Move in The Next Few Years

Buying can be a better option than renting if you’re planning on staying in the home you purchase for at least five years. If not, consider remaining a renter. The reason is because you’re going to pay fees including a realtor’s commission, capital gains taxes, moving fees and more when you buy a home. If you’re going to move in a year or two,  it’s difficult to justify paying these costs.

If a Down Payment Would Be a Burden For You

One of the biggest reasons many people remain renters for longer as opposed to buying a home is because they either don’t have enough money to make a down payment or putting down an adequate amount of money would create a difficult financial situation. Most professionals recommend at least a 20% down payment, because if you put down any less, you’re going to have a higher interest rate. If you’re  nervous about that amount, you might consider waiting a while to buy.

If Housing Prices Are Very High

A lot of markets, such as New York and San Francisco, are wildly overpriced right now. The housing market in cities around the country is incredibly hot, which is good for builders, sellers and realtors, but not so much for buyers. Don’t buy when the market is at a high, because not only will you be paying more, but you’re also not as likely to be able to get a good return on your investment when you sell. If you live in a city like San Francisco where real estate is currently at record-breaking levels, and you’ve managed to snag an affordable rental, you might want to hold onto it for a bit longer.

If Your Credit Score Could Use Improvement

Even if your credit score isn’t great, you might still be able to obtain a home loan, but that’s probably not the best option. When you get a loan with a less-than-ideal credit score, you’re going to be paying higher interest rates, which can actually make a good home buying deal into a not so good one. If your credit score could benefit from some cleaning up, you’re probably better off waiting a while to buy. You’ll be able to get a lower interest rate down the road if your score goes up in the meantime.

Making the Decision

In addition to the above recommendations, you can also consult a professional rent vs. buy calculator to determine which financial situation will be best suited to you. Historically the advice was always to buy, but real estate is changing, as is that advice, which is why more and more would-be buyers are holding off on their decision for a bit longer.