Making a Rent vs Buy Decision: Key Factors to Consider
Deciding whether to rent or buy a home is a significant financial choice. While many people turn to rent vs buy calculators, there are deeper considerations that can impact long-term wealth. Homeownership often leads to greater financial security, and the difference in wealth between homeowners and non-homeowners in the U.S. is substantial, largely due to the value of owning property.
Why Buying May Build More Wealth Than Renting
There are several financial advantages to owning a home over renting, and these advantages become even more pronounced when you consider the long-term benefits of property appreciation and tax incentives.
For an investor who owns rental property, the decision to continue owning versus selling comes with additional factors:
Property Tax Advantages: Long-term property owners often pay significantly lower property taxes than a new buyer would, thanks to tax assessments that freeze or rise slowly over time.
Tax Deductions: Investor-owners can deduct the costs of repairs and maintenance against rental income, reducing their taxable income.
Appreciation and Capital Gains: Property appreciation isn't taxed as income until the property is sold, meaning the owner can build wealth over time without immediate tax liabilities. When the property is sold, capital gains taxes, which are typically lower than income taxes, apply.
Improving the Property: Investors can add value to their property through improvements that can also be deducted from rental income, allowing them to increase the value of their investment while reducing tax burdens.
Weathering Market Cycles: If home prices drop, homeowners looking to sell may face a loss of equity. However, an investor who owns rental property often has the ability to “ride out” market downturns, relying on rental income to cover costs until the market improves.
Calculating Rent vs Buy
While many factors are personal, using a rent vs buy calculator can help you quantify the financial impact of each option. One excellent tool is:
These tools take into account various factors like home price, rent, mortgage rates, and the length of time you plan to stay in a home.
Interest Rates and the Rent vs Buy Decision
One of the biggest variables in the rent vs buy decision is mortgage interest rates. When interest rates are low, buying a home becomes more affordable, and locking in a low rate can significantly reduce long-term housing costs. Conversely, when rates are high, the cost of borrowing increases, making renting a more attractive short-term option.
You can explore current mortgage interest rates using the Consumer Financial Protection Bureau's Explore Interest Rates tool, or view interest rate trends with Freddie Mac's Primary Mortgage Market Survey (PMMS).