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Rent vs. Buy: Which Type of Home Is Right for You?

Mar 29, 2021 4 min read Daniel Kurt

Key takeaways

  • Buying means higher upfront costs, so decide if you'll be in the home long enough to justify them.
  • Renting won't let you build equity, but you won't be responsibile for costly repairs and upkeep.
  • Consider nonfinancial factors like pride of ownership and freedom to renovate before you choose.


In both subtle and not-so-subtle ways, young adults are often left to feel that owning a home is a prerequisite for the “American Dream” and financial success. The reality, however, is more complicated.



While putting your name on a deed has certain advantages, it also creates added responsibilities. To make the best “rent vs. buy” decision for you, it's important to weigh the pros and cons of both sides.


The financial impact

When making a housing decision, it's tempting to simply look at the monthly cost of a mortgage versus rent. While that's certainly important, you'll also need to factor in how long you plan to stay at the property. Why? Because homeowners face significantly higher transaction costs than renters.

For example, you'll have to make a down payment (at least 20%, or else pay for private mortgage insurance [PMI] to cover the difference), which contributes to your equity in the home. But diligent buyers also face an array of other expenses—inspection costs, loan origination fees and more—that you don't get back. All told, closing costs can total 2%–5% of the purchase price.1

Once you move in, you may find yourself paying for renovations or repairs, which can range from very little to thousands of dollars a year. And once you sell, you often have to pay a sizable fee to your real estate agent.

What's more, reaching your “break-even” point—when your total monthly savings make up for all those transaction costs—can take longer than you might think. In 2019, Chris Herbert of Harvard's Joint Center for Housing Studies estimated that the average homebuyer would need to stay put for five to seven years to make the investment worthwhile.2


Rent vs. buy: A practical example

Let's say you're interested in buying a home for $300,000 and that your monthly cost (including your mortgage payment, property taxes, homeowners insurance and homeowner association [HOA] fees) is $1,600 a month. In this example, you'd pay $12,000 in upfront closing costs, so your grand total for the first three years of ownership would be $69,600. If you sold the place after that period, you'd also pay an agent around $18,000 in commission to help you do so. This means your transaction costs to live in and leave the home over three years total $87,600. And that doesn't include the potential costs of moving in—or out.

Now imagine that the owner is willing to rent you the same property for $2,000 a month, with a security deposit equaling one month's rent. On a monthly basis, that's considerably more than owning. But without those one-time transactions, and no move-out fees (other than what you might pay a moving company), living there for that same three-year period will cost just $74,000.

In this example, it will take a little more than six years to hit your break-even point—when the total savings on those lower monthly payments are enough to offset all the transaction costs associated with buying and selling. If you stay in the home for more than six years, it makes more financial sense to own than rent. But if your stay is shorter, the opposite holds true.


Other important factors

Finances aside, there are other compelling reasons to own a home. For example, real estate can appreciate in value, making it a potential wealth-building tool. Some people enjoy the pride of ownership or the freedom to make renovations and put their personal stamp on the place. Others may seek a yard, more square footage or a place to keep pets, all of which might be harder to find in a rental.

All of those can be valid reasons to jump into the real estate market. But because buying a home is likely one of the biggest financial decisions of your life, you should consider the downsides as well. For one, you could take a financial hit if you decide to move before you've reached the break-even point, especially if you have to pay brokers' fees to sell. That makes some homeowners feel more restricted than renters in where they can live.

On top of that, owners are responsible for upkeep and appliances. If the roof leaks, the air conditioning goes out, or the driveway cracks, there's no landlord to coordinate repairs or foot the bill.

Regardless of whether you choose to own or rent, experts recommend that you limit your monthly housing costs to around 30% of your monthly gross income. In the end, finding an arrangement that fits your budget may be the most important step of all.


What you can do next

Choosing whether to buy a home is a huge financial decision, so it's critical to first determine what you can pay in monthly fees and upfront costs. If you're not confident that you'll stay in the home for at least a few years, consider renting for greater flexibility.


  1. 1FreddieMac, “Budgeting for Upfront Costs: the Homebuyers’ Guide,” Sept. 17, 2020
  3. 2Meghna Chakrabarti, Where We Call Home (audio podcast), “Part 3: Renting vs. Buying: How Important is Owning a Home?” WBUR, March 18, 2019


Daniel Kurt is a freelance writer with over 10 years of experience covering topics in personal finance, retirement planning, insurance and more. His work has appeared on Investopedia, RothIRA.com, AARP Bulletin, Fatherly and Exceptional magazine.


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