Owning versus renting is an age-old question -- but there are three distinct cases when renting a home makes sense both financially and practically.
The Motley Fool's editorial director, Anand Chokkavelu, outlaid the reasons why you should consider buying before renting in a great article titled "Rent vs. Buy: Why Buying a House Generally Wins," and generally, I agree with his stance. However, there are still some circumstances when renting makes more financial sense than buying.
Young and mobile
Upon graduating college, many Americans want to fully inaugurate their status as adults by buying a home. The reality of a salaried occupation with benefits yields financial freedom and flexibility that was entirely unknown just years -- or perhaps even months -- prior. Dinners of ramen noodles become supplanted by those of Bertolli pasta.
While the allure of buying a home, potentially even with prospect of being able to rent to friends is an appealing one in many ways, it should also be approached with a great deal of caution. Many have estimated that the financial case for buying over renting often only is realized after you've been in a house between three and five years.
Ask many of those considered to be Millennials or Generation Y about the prospect of them being in the same place three years, much less three months, from now, and you'll likely hear something like, "It's possible, but I've always wanted to live in [insert cool urban area], and I'm considering moving there."
And it isn't simply social or societal whims that dictate that decision, but the reality that career opportunities are seemingly always in flux. Consider that a study by Harris Interactive reports that 3 out of every 4 people would consider finding a new job, and a study by Mercer reports that one third of Americans are "actively looking."
While the Census Bureau reports that"U.S. mobility for young adults has fallen to the lowest level in more than 50 years," this is largely because of external economic circumstances more than anything else. It remains true that the lures of new places and new things are strongest for younger generations, and there could be an opportunity cost, like not being able to take a higher-paying job in a new city, and a real cost, like realizing the significant closing costs over a short period of time, if you own a home and sell it just a year or two later.
Fair credit, bad credit or no credit
Depending on current credit circumstances, renting a home may also make a ton of sense. Renting over a period of two or three years could allow someone to build or repair their credit score through a documented history of on-time rent and other payments. The old phrase "time heals all wounds" is certainly true when it comes to credit scores, too.
The reality is a higher credit score will mean a lower interest rate, which can yield monumental financial benefits. The difference in interest payments of a $160,000 mortgage financed at 6% or 4.5% results in a difference of more than $50,000 in total payments over the course of the loan. An even greater impact is realized if those two years allow someone to move to a 15-year mortgage, as shown in the chart below:
If those two additional years allow someone to build up their credit score and secure a lower interest rate, the financial impact can be monumental.
People who love convenience and flexibility
While it cannot be calculated using an Excel model, some people -- whether young or old -- place a premium value on flexibility and convenience.
Whether it's a result of personal or work circumstances, depending on the stage of life that a person finds themselves in, the nuanced realities of owning a home can be daunting. When a pipe breaks, or a window leaks, or the A/C unit stops working, there's only one person (and one wallet) that is responsible for the repairs.
However, when a person rents, that responsibility falls almost exclusively on the landlord. And if you're someone who does not have the ability or desire to ensure that maintenance issues are resolved in a timely and proper manner, then owning a home may not make sense.
Home ownership can be a wildly rewarding endeavor both personally, socially, and financially, yet like anything, it is not without its fair share of work and efforts. For some, those have a cost (that may not necessarily be tangible) and mitigate the recognized financial benefit of owning a home in the long run.
As with most things, there are both reasons when it does, and does not make sense to rent a home, but these are three scenarios when it pays to be a renter.
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