Is There an Upside to Renting?

Dear Carrie,

We’re in our mid-30s and have been content so far to be renters. With housing prices going crazy—and several friends jumping into the market—we’re feeling the pressure to buy now even though it would be a real stretch. Does it ever make sense to keep renting?

—A Reader

Dear Reader, 

It’s no surprise you’re feeling pressured. There’s a lot in the news about rising home prices outpacing wage growth and plenty of personal stories of homes selling for over asking price in a matter of days. Plus, the National Association of Realtors reported last March that house prices rose a record-breaking 17% year-over-year, putting that first home even farther out of reach for many would-be buyers.  

But a hot real estate market doesn’t mean you should get in no matter what. To me, fear of missing out is never a good reason to make a big financial decision. Even if you have the money, there are a lot of personal and emotional things to consider when buying a home. In fact, depending on your individual circumstances and preferences, there may very well be a good case for renting. Here are some situations where continuing to rent could be the best choice.

You’re just not that into ownership

There’s often a lot of emotion around owning a home. To some people, it’s a sign of security and stability. It can also represent a lifestyle choice—urban or suburban, long or short commute, space for kids, the ability to paint your own walls and create your own environment. Similarly, renters can have non-financial reasons for avoiding home ownership, like freedom of movement, aversion to debt, and lifestyle flexibility.

You value flexibility and freedom of movement

While owning and caring for a home can be highly satisfying, it can also be a burden—and not only financially. Consider your job stability, your desire to remain in a particular location, and your willingness to spend the time, money, and energy it takes to maintain a home. 

Maybe you can’t see yourself staying in one place long-term (five years is generally considered the minimum for buying to make financial sense). Or you’re contemplating a career change. Or you really don’t want to be responsible for that leaking roof. In any of these cases, renting might very well be the better choice. 

You don’t want the ongoing financial obligations

Being emotionally ready to buy is one thing; being financially ready is another. There are the initial costs—down payment, closing costs, fees, and assessments—but it doesn’t stop there. Next comes your mortgage. Will the monthly payments stretch you to the limit? 

Then there are property taxes, insurance, maintenance, landscaping, and possible renovations. Factoring all this in from the start could give you a greater appreciation for your landlord—or at least a greater willingness to keep making those rent payments.

Your other goals are more important to you

Owning your own home can be a worthy goal, but it shouldn’t be your only one. You should also have an emergency fund to cover at least three to six months’ essential expenses (including a mortgage and ongoing home maintenance and unexpected repairs). Then there’s retirement. Are you currently on track with retirement saving? Would you be able to continue to save enough once you’re a homeowner? 

Look at all your goals, both short and long term. If a down payment will blow a huge hole in your emergency fund, or a mortgage plus the ongoing costs means you’ll have to put saving for all your other goals on hold (and you’re uncomfortable doing that), renting may be even more appealing.

You’re debt averse

Buying a home is the biggest investment most people ever make. It can also be the biggest debt you’ll ever take on. If you have other debts like credit cards, car payments, or student loans, would a mortgage push you beyond your comfort zone? For reference, an industry standard that still holds is that total housing costs shouldn’t exceed 28% of your gross monthly income. All your debt payments combined shouldn’t exceed 36% of gross monthly income. 

You live in an area where it’s cheaper to rent than buy

The old real estate adage about location may be more relevant than ever. While housing prices have risen nationwide, the actual costs vary widely coast-to-coast. One measure of whether it makes more sense to rent or buy is the price-to-rent ratio in your area. You calculate this by dividing the median home price by the median annual rent. A ratio of 15 or under favors buying; 16 and over favors renting. Here’s a comparison: in New York, the ratio is 38.6; in Milwaukee it’s 12.8. Big difference.

Plus, costs can vary significantly not only from city to city but in different parts of the same city. Make sure to look at specific neighborhoods and figure out the overall cost of buying a particular property in a specific location vs. renting. If you’re in a high-cost metropolitan area, renting may actually be cheaper than buying on a monthly basis. 

The upside—and the downside

There are a lot of pluses to renting—more flexibility, less responsibility, and the freedom to save and use your money for other things. And with current limits on the deductibility of state and local taxes as well as mortgage interest, the tax benefits of homeownership aren’t as strong an argument as in the past.

On the downside, rents have been rising along with home prices. June 2021 data from show the median rent in the 50 largest metro areas rose 8.1% year over year. So unless you’re protected by a rent-control ordinance, there’s no guarantee your rent won’t go up beyond what you can handle. 

Another often-mentioned downside is that by not building equity, you’re missing out on an opportunity to create long-term wealth. There’s some truth to that. But to me, a house should never be considered just as an investment. While its value may increase over time, you can’t count on it. If you’re looking at buying a home just as a moneymaker, there are other investment opportunities available in real estate you may wish to consider. 

Which brings me to one last important point. If continuing to rent now rather than taking on the financial obligations of owning means you have more money in your pocket, use it wisely. Pay down your debts, shore up your savings, and put those savings to work by investing. Then, if in the future you decide to buy, you’ll be ready.

About the author

Carrie Schwab-Pomerantz

CFP®, President, Charles Schwab Foundation; Managing Director, Schwab Community Services; Board Chair, Schwab Charitable