Homeownership is one of the holy grails of adult life. Or is it? These days, you may find yourself choosing to rent a home instead of buying. Laying down roots in one place, taking on a 30-year mortgage and teeing up for the maintenance and expenses involved in owning property may not fit into your lifestyle the way it did for past generations.
“Almost all the housing demand in recent years has been filled by rental units,” says Sara Strochak, a research assistant with the Urban Institute. Single-family rentals of standalone homes or semi-attached townhouses, in particular, have seen a 30% growth rate in recent years.
Why do people rent?
Many people rent instead of buying homes because of individual circumstances and generational trends. Some millennials are burdened with high student loan debt and face stagnant incomes, making it harder to save a down payment or satisfy the income-to-debt ratio needed to qualify for a mortgage. Others may want the flexibility renting offers and the freedom to move on from a job or city without the burden of having to sell a home.
Some people may choose to rent simply because it’s easier than going through the home-ownership process. Then again, having witnessed the bottom falling out of the housing market within the last decade, others may no longer buy into the notion that you need to own a house to live life as a successful adult. If you have a family, you may choose to rent because you feel just as safe financially renting a home as owning it.
Challenges Qualifying for a Mortgage
A person’s choice to rent instead of buy a home may be based on traditional factors that have always restricted access to homeownership. Qualifying for a mortgage can be tricky. You need solid employment, good credit, a substantial down payment and proof that your income can adequately cover your debts.
Checking every box before applying for a home loan can be more difficult than it has been in the past. Today’s prospective buyers may have changed jobs frequently and not have the luxury of working for one company for 35 years as their parents may have. A college education has become a near-requirement for many careers, and the costs associated have skyrocketed, leaving graduates burdened with loan debt that takes decades to pay off. Ironically, obtaining a mortgage for the highly educated may be almost impossible under traditional standards until they can manage to pay off their student loans.
Rising rents may also create an infinite loop in the housing market. Rents have risen rapidly and outpaced income in many areas of the country. This makes it harder for people to save up a down payment to buy a home, which leads to more people renting.
Higher Expenses Associated With Ownership
A house can be a time and money sink. If you own it, you’re stuck paying for every expense, from upkeep to property taxes. And you’re the one who has to find time to manage ongoing maintenance.
Renters can typically rely on the landlord for general maintenance of the property, and most of the big expenses are built into the rental fee. Even if you’re renting a single-family home where you’re responsible for general upkeep of the property, you probably won’t need to worry about major expenses such as when the roof needs replaced.
Renting is also cheaper upfront than buying a home. With good credit, a renter can typically obtain housing with as little as the first month’s payment and a month’s deposit upfront. Even people with bad credit can often find a place to rent by paying an amount upfront that’s a lot less than the up to 20% of the purchase price needed as a deposit to buy a house.
Keep in mind that property values have skyrocketed in many popular cities in recent years. Buying a home in New York, Seattle or Los Angeles, for example, may require a steep down payment. This is true even if you don’t have to raise the traditional 20% of the purchase price and can qualify for a mortgage with just 5% or 10%. Such a high lump-sum payment may be out of reach for many families looking for a place to live.
People move around a lot more these days, and that’s not a bad thing. Millennials aren’t afraid to change jobs, and they prefer to spend their extra money on travel and eating out instead of building equity in a house. Renting keeps your options open, letting you take that new job with the pay bump in another city without worrying about whether you can sell your house in the current market.
Don’t forget the opportunity cost of putting your money into a house rather than other investments that may earn more. Building equity in a house has traditionally been considered a safe investment, but the recent housing bubble collapse and recession exploded that notion. People choosing to save and grow their money in different ways may also drive the choice to rent.
Tax Code Changes
Savvy families may look at the changes to the tax code under the Tax Cuts and Jobs Act for 2018-2025 and figure the decreases in tax breaks for homeowners make renting a home more economical comparatively—at least until the tax code is changed again. Decreases in tax deductions for things like state and local property taxes mean the benefits of owning a home in a high-tax state like New York, for example, took a big hit.
Without the big tax advantages to owning a home, renting becomes more attractive. Fewer upfront requirements, lower ongoing expenses and more flexibility may continue to drive an increase in the number of people who choose to rent over the long term.
Renting as a goal and a lifestyle may have been brought about by millennials, but it has quickly become a standard choice for all age groups. According to RENTCafé, the over-55 population has seen a 28% increase in renting over homeownership between 2009 and 2015. Whether you choose to rent or buy your next home, budgeting tools can help you estimate and track changing expenses such as utilities to ensure your expenses don’t exceed your income.
People who choose to rent can also enjoy the same level of protection against damage and theft for their belongings as homeowners. Renter’s insurance makes sure you can replace or repair your valuables, even if you don’t own the house or apartment you live in.
Keep in mind that renting is easier for people with good credit. Credit.com’s Personal Finance Learning Center provides resources on how to stay financially fit or repair your credit before your next move.