Financial Tips

2 Reasons Renting May Be Better Than Buying, Depending on Where You See Yourself in 5 Years

Photo: Getty Images/ monkeybusinessimages
Buying a home is pretty high on the bucket list for most adults, since it’s a huge asset. Plus, it often means you’ve reached a certain point of financial wellness and wealth. However, right now, prices are being driven up by historically low inventory, says Lauren Darrah, a licensed real-estate agent in New York City. (As of last month, the national housing inventory was down over 28 percent compared to last year, and the average listing price was up 10 percent, according to Realtor.com’s latest market trends report.) So if you live in a location where owning a home isn’t realistic at the moment—either because there aren’t properties available or it’s cost prohibitive—there benefits of renting worth knowing about.

Even if you can afford to own a home (and find to invest in), it may not be the right time to buy…and not just because we aren’t currently in a buyer’s market, according to Darrah. “Unless you're interested in staying put in the same place for the next five years, renting really is the better of the two options,” she says. That’s because you need to hold on to a property for about that long, on average, in order to see a return on your investment she explains. As a result, figuring out where you see yourself half a decade from now is a great first step toward determining whether or not you should rent or buy. Not sure? No worries, you’ll enjoy a couple perks of renting while in the meantime while you make up your mind or save money toward your own home.

1. You can test the waters where you live (or want to live)

“If you'd like the option to explore other neighborhoods or see yourself settling down somewhere else in the future, renting now is the right choice for you,” Darrah says. Renting is also the perfect way to test out a new city before making a long-term commitment, too. “Try out a few of those options for a year or two to get a sense of where you really want to end up,” she suggests.

2. Your overhead is more easily adjusted

Given that 30 years is the most-common mortgage term in America, and refinancing to receive a lower interest rate isn’t always feasible, when you buy a home, you’re basically committing to a specific monthly payment for an extended period of time. That may not be practical if you’re not sure you can sustain that type of long-term payment schedule—hey, life is nothing if not unpredictable, especially if you’re still getting financially established—in which case, renting could be a better way to go. “You have the ability to scale your cost of living up and down as needed over the years by renting,” Darrah says.

5. It’s Impossible to Make a Profit Right Away on a Home

After buying and modeling, you’re likely going to be able to sell it for higher than what you paid, especially after any renovations that made the property more modern and up-to-date. And that’s probably already on your mind, too, maybe even from the start, if you’re looking to buy and sell as an investment property as opposed to living there yourself.

Unfortunately, you’re going to have to be patient before seeing any return. “The average time you need to hold an apartment to see any kind of return is 5 years,” she says. So, that five year mark withstands and locks you in for the commitment, regardless.

Tips for navigating the rental market

  1. Be prepared and apply early: Have your application docs in hand so you can put in an application on the spot and increase your chances of getting the rental you’ve set your eyes on.
  1. Work with an agent: While you can browse homes for rent on your own and schedule appointments with leasing offices in rental buildings on your own, if you can afford to hire one, an agent will make the process easier and can help you find rental opportunities you may normally miss. “They will help guide you through the process and have tips to help your application stand out above the rest,” Darrah says. “I recently wrote a 'love letter to the apartment' from my tenants that we shared with the owner—it ended up sealing the deal immediately.”
  1. Be open to exploring bordering neighborhoods: If you have your heart set on a specific, buzzy location but the prices are too high, consider looking in an adjacent area, as it may have homes priced lower than it’s popular cousin that are still right in the area you desire.
  1. Sign multi-year leases if possible: “This is where you will get the most bang for your buck,” Darrah says. Locking in a lease for more than a year at the same rental price will save you the annual rental increase due to inflation that you typically see on renewals.

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