Financial Life after College: Renting or Buying?

Renting versus buying a homeOne of the best things about being a working man or woman is the freedom that comes from having your own money.

A steady paycheck opens all kinds of doors.  For example: the one at your parent’s house as you move all your stuff from your old room into a new place.

But higher purchasing-power usually means more tough decisions.  And relocating is no exception.

Should you shoot for the hipster neighborhood close to all the good restaurants and bars?  Or save money by living a little further off the grid?

Do you want roommates to help lighten your load?  Or has four years of labeling your Diet Coke and cleaning unwashed dishes made you ready to strike out on your own?

Are you thinking about renting an apartment?  Or taking the plunge and buying a new place?

Okay…so realistically, very few post-grads will have the financial backing to buy a new home straightaway.   Unless, that is, you’re a saving prodigy.  Or maybe found the time to launch a successful tech start-up between classes.

But it’s a decision that many of you will probably be considering soon – maybe sooner than you might think.  And, at the risk of sounding over-the-top, major financial choices that you make when you’re first starting out – like buying a home – can stay with you for a long time.

In the second part of this 5 blog series, we discussed creating a budget and planning large purchases (including some great, easy-to-use tools to get started).  In this post, we’re diving into the rent versus buy decision; so that when the time comes, you have the tools to make the right choice for your financial future.

Growing up, I always heard from adults the wisdom in buying.  Their advice went something like this: why rent a home when you can purchase it, pay a comparable monthly cost, and earn equity in the process?

But how sound is that advice?  Everyone faces different financial circumstances – from credit score, to family size, to the price of real estate where they live.   And sure, a one-size-fits-all truism makes things easy.  But a decision based on your unique situation is usually the smart play.

In other words, renting isn’t a bad thing – and in many situations makes more financial sense than buying.  What are the benefits?

Renting provides flexibility.  It allows you to explore different neighborhoods, cities, or even states before making a long-term commitment.  That’s especially appealing if you’re new to an area.  After all, there’s only so much you can learn about a place from online reviews.  Renting is also great if you still have career uncertainty, letting you mull job opportunities without being tied to one area.

A Credit Resource
Have bad credit?  Or maybe lack a credit profile at all?  Renting will allow you create a history of on-time rental payments to help build your credit.

Lower Expenses
Home ownership isn’t cheap.  Although there are exceptions – like VA loans – most lenders require a down payment to purchase a mortgage.  Not to mention there’s also plenty of upkeep expenses to consider.

With renting, the down payment – usually first and last month’s rent – is much more affordable.  Plus, there are no maintenance costs.  So as long as you have a reputable landlord, you should be set.

Remember the advice I grew up with about buying being my only option?  Well, even though buying has a ton of benefits, it really only makes sense if you’re in the right place personally and financially.

I bought early – and I’m currently trying to sell my home.  My wife and I have advanced professionally and we now have a child, so we’re looking for a larger place.  But if you’re familiar with the real estate market of the last few years, you know it hasn’t been easy.  Looking back, renting would probably have been the better option for us when we were first starting out.

That isn’t to say buying doesn’t have its perks.  Home ownership is a dream of most Americans for good reason.

Building Equity
Ownership is a great way to build equity – which you can borrow against if you meet requirements, usually 20% equity to 80% loan value.  That’s not only a solid way to finance home improvements, it can also be used to cover any number of other expenses – from braces to medical bills.

Tax Deductions
Tax deductions are another purchase benefit.  Each tax season, home owners are eligible to get income tax deductions for things like mortgage interest, property taxes, and the interest (on up to $100,000) borrowed on a home equity loan or line of credit.

Creative Control
Creative control is my favorite home ownership perk.  Say I want to build a new bonus room.  Or maybe add a nice moat to my front yard.  As a home owner, I can make any improvements I want – as long as they meet zoning laws.  (So maybe not the moat.)

If you’re like most Americans home ownership is one of your goals.  But it needs to make sense for you, too.

There’s nothing wrong with renting until you’re ready to buy.  Most financial planners suggest saving until you can afford a 20% down payment on your dream home – both to avoid Private Mortgage Insurance and make monthly payments less restrictive.

Still on the fence?  Check out this interactive calculator or shoot us a question in the comments section below.

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