Why Renting Is Sometimes Smarter Than Buying a Home

Homeownership isn't always the right option for everyone.

As a general matter, buying a home tends to help you build wealth. That's because when you make payments each month, you're gaining equity in your home and will eventually own it free and clear. If property values go up, the asset you've acquired will also become more valuable and will help you to increase your net worth.

But while many people believe homeownership is a wise financial decision, and some people even indicate they are eager to buy so they can stop "wasting" money on rent, the reality is that sometimes renting is actually the smarter choice.

Here are a few key situations where you'd likely be better off renting rather than taking the leap into getting a home and a mortgage loan.

1. When you plan to move within a few years

If you aren't going to stay put for more than two years -- and ideally closer to at least five years -- it's probably not a good idea to buy a home.

If you do, the transaction costs associated with your purchase could make it really hard to break even when it comes time to sell, even if property values do rise a bit in the short-term. You could also end up being taxed on the capital gains (the profit from your home sale) if you end up making a profit. Tax on those gains is typically limited or excluded if you've owned and lived on the property for at least two of the prior five years.

There's little sense in buying a property just to end up losing money after paying realtor fees and other associated expenses. Instead, rent and save your money to buy a home when you're ready to settle down.

2. When housing prices are really inflated

The housing market can get into a bubble, and bubbles can burst.

If housing prices are extremely high in your area and it is a seller's market, you may want to rent for a while until things calm down. Otherwise, you might end up paying a lot of money for a property, only to see it quickly lose value if the bubble bursts after you buy.

It can be hard to tell exactly when a housing bubble is occurring, but there are some key indicators to watch for that can help you make an informed choice, including considering what is driving the demand for homes that's leading to the rising prices. If you believe you're in a bubble, you may want to rent temporarily until home prices fall back down to more reasonable levels.

3. When it costs a lot more to buy a comparable home than to rent one

In some parts of the country, it is much cheaper to buy a home than to rent a comparable one. But in other places, the opposite is true.

If you'd have to pay a ton of extra money to buy a home, you may be better off paying less to rent a similar one. Instead, use your cash to purchase other investments that are likely to produce a better return on investment than real estate. You can look at rent-vs-buy indexes in your area to get an idea of whether renting or purchasing makes the most financial sense.

4. When you aren't financially ready to purchase a house

If you do not have money to put down on a home, or if your credit score or income won't allow you to qualify for a mortgage loan at a favorable rate, then you may be better off renting rather than buying. Otherwise, you could end up having trouble getting approved for a mortgage to buy a home or could get stuck paying a high interest rate.

Waiting until you are financially stable can also help protect you against foreclosure and maximize the chances that when you're finally ready to purchase a home, your house will end up improving your financial situation over the long-haul.