How to Figure Out Whether Buying or Renting Is Cheaper for You

Is it cheaper to buy a house or rent? The answer to that question is not as straightforward as you might hope. In addition to financial concerns, there are other individual factors to consider — things like your lifestyle, your job, how long you plan to stay in a certain area, and how flexible you want to be.

Some people decide to buy a house simply because they think it’s what they’re supposed to do. According to a survey conducted by debt management and relief company, Freedom From Debt, 59% of Americans view homeownership as part of the American dream. But some people aren’t prepared for the financial reality of homeownership and discover only after buying that owning a home is much more expensive than they anticipated.

How do you know whether renting or buying is going to be better for your bottom line? We did the research and broke down the most common monthly expenses for buying and renting to help you decide which is cheaper — and which makes the most sense — for you.

Location matters

Before deciding to buy a house, think about how long you plan to stay in a particular area and how flexible you like to be. Do you see yourself in the same place for the long haul? If so, buying could be a good option for you.

Every location has a break-even point — the number of years it takes for the cost of owning a home to equal the cost of renting in a certain area. In New York City, for instance, some data suggests it takes about five years to reach that point. By contrast, it only takes one year to break even in Saline, Illinois. According to SmartAsset, a financial technology company, the national average is 3.8 years.

Some cities and areas are more expensive than others and the price of renting and buying varies across the country. The first step is figuring out which is cheaper in your area.

Rent control

The National Multifamily Housing Council (NHMC) reports that as of September 2019, these states have rent-control laws:

• California (statewide)
• District of Columbia
• New York
• New Jersey
• Maryland
• Oregon (statewide)

In cities like New York, where real estate prices are high, staying in a rent-controlled apartment can be more affordable than buying one.

Another way to think about whether renting or buying is more cost-effective is to look at the price per square foot for each to see which is lower.

According to Statista, a real estate data site, the highest average price per square foot, per month, for rentals in the U.S. can be found in the District of Columbia, New York City, and Hawaii at $2.95, $2.43, and $2.39 per square foot respectively. West Virginia, Arkansas, and Alabama have the lowest rental price per square foot, ranging from $0.79 to $0.74 per square foot.

NeighborhoodX, a real estate research and analytics firm, published a report in August 2018 comparing average price per square foot of properties for sale in various cities. Manhattan (not including the outer boroughs) topped the list. The lowest-priced property in Manhattan on a per-square-foot basis is $447.

To calculate the price per square foot of a home, divide the total square footage of a property by the purchase price.

Homeownership costs

Apart from the cost of housing itself, there are other expenses wrapped into homeownership that many first-time homebuyers don’t consider. Shal Shahani, a top-selling real estate agent in the Boston area, says that home maintenance and utility bills are the biggest unexpected costs that first-time homebuyers face.

“The day-to-day expenses,” Shahani says.

“Your electric and gas costs, your heating bills, landscaping, snow removal, annual maintenance of your heating system, roof inspections, chimney sweeping — all of those things should come into your bottom line.”

Mortgage payment: Principal and interest

A standard monthly mortgage payment includes both principal and interest on your loan. Most conventional 30-year, fixed-rate mortgages are amortized, which means that even though your total payment amount stays the same over time, you’ll pay different amounts toward your principal balance (what you borrowed to buy your home) and the loan interest. As your loan balance decreases over time, so does the amount of interest you have to pay.

There are different kinds of mortgages, though, and some of them do have interest rates that can change over a specific time period.

If you have an adjustable rate mortgage (ARM), your monthly payment can change as interest rates rise and fall. ARMs begin with a period of time when the interest rate is locked. The most common time periods are 5, 7, or 10 years. After that set period, the interest rate adjusts according to a base rate set by the markets and the terms of your note. ARMs make sense if you plan to stay in a house for only a short period of time.

One nice thing about mortgages is that you can claim the mortgage interest deduction on your annual taxes. Real estate property taxes are also usually deductible.

Property taxes and insurance

Property taxes are often held in an escrow account by your mortgage servicer. An escrow account is essentially a savings account set up and managed by your lender that you deposit money into every month. The lender uses this money to pay the real estate taxes (and often your homeowners insurance policy). With an escrow account, you don’t have to worry about paying those things on time or in one lump sum because your lender does it for you.

If you have a FHA loan, a higher priced mortgage loan, or if your loan-to-value ratio is greater than 80% (90% in some states), you must set up an escrow account. Most lenders strongly advise all homeowners to use an escrow account, though you can sometimes choose to pay your taxes and insurance directly. No matter which way you decide to take care of these expenses, you’re required to pay them, although you can choose to forego homeowners insurance if you own your home outright.

Utilities

If you’ve never owned a home before, it can be easy to overlook monthly expenses like garbage pickup (cities and counties don’t just come and pick up your trash free of charge) and water/sewer services.

Average utility costs:

• Electricity: varies by state, but $111 per month is average
• Natural gas: varies by state; national average is $10.03 per 1,000 cubic feet per month
• Water: average of $70.39 per month for a family of four
• Garbage pickup: $50 to $100 a month; if you have a monthly city or county utility bill, garbage is probably included

Your average annual heating bill will depend on whether your house is heated using a furnace or heat pump and the fuel used.

Average heating costs by type:

• Electric heat pump: $500
• Geothermal heat pump: $259
• Propane furnace: $1,550 (per season)
• Natural gas furnace: $850 (per season)
• Electric furnace: $900 (per season)
• Oil furnace: $850 (per season)

Maintenance and repairs

In a July 2019 survey, Freedom From Debt found that 59% of homeowners surveyed said the cost and effort of maintenance and repairs on their homes were more than they anticipated. The survey also showed that 57% of homeowners listed emergency fixes in the top three hidden costs of homeownership.

If you’ve never had to worry about taking care of things like leaky pipes, broken radiators, flooded basements or refrigerators that die unexpectedly, it’s difficult to know just how much these things cost. There are some good online resources for estimating the total price of certain repairs. But the thing about home repairs is that the cost of completing them falls into a pretty big range, depending on how severe they are. Foundation repairs can cost anywhere from $450 to $11,000, electrical issues from $318 up to $15,000, and roof repairs from $650 for a partial replacement to $10,000 for a whole new roof.

Many experts recommend setting aside between 1% and 4% of your home’s value annually for repairs and maintenance.

Some typical maintenance tasks to keep in mind include:

• Tree trimming: $250 to $500 on average, depending on number of trees and how tall they are. Trees should be trimmed once every three to five years, more frequently if the branches touch the roof of your house — tree branches can provide attic access to squirrels, racoons and rats.
• Gutter cleaning: $110 to $185 on average. House height and gutter size (length) affects your total cost. Gutters should be cleaned at least twice a year.
• HVAC filter-changing: $15 to $60 on average. Air filters should be replaced every one to three months, if possible. A typical HVAC maintenance service from a professional costs between $70 and $150. This service normally includes things like changing filters, cleaning evaporator and condenser coils, and unclogging drains.
• Snow removal: $350 to $450 per season on average. Snow removal prices are calculated different ways: per hour ($25 to $75), per event ($30 to $75), per visit ($30 to $50) and sometimes per inch ($60 to $95 for the first 6 inches of snow, then $30 for each additional 6 inches).
• Lawn mowing: $49 to $214 on average for each mow, depending on where you live and the size of your lawn. Lawn maintenance services usually include fertilization and weed treatment as well as mowing the grass.

If you plan to invest in any significant upgrades to your home, then you’ll probably also want to consider putting money away every month into a savings account intended for that particular purpose.

Other expenses

You could be responsible for homeowners association (HOA) dues. HOAs are common in real estate developments, condos, and other planned communities. They have bylaws and rules and regulations that must be followed. HOAs can help keep a neighborhood looking nice and maintain property values in that neighborhood.

HOAs can also issue fines to homeowners if they don’t abide by certain rules. Whitney S. and her husband bought their second home in Wichita, Kansas, in a neighborhood with an HOA.

“I regret living in an HOA neighborhood,” she writes in an email. “My husband and I are terrible at getting around to yard work and we often get cited $50 to $100 for not mowing our lawn enough in the summer.”

Renting costs

Now that you’ve sifted through all these expenses and created a monthly breakdown of your projected costs if you buy, let’s take a look at some typical rent costs. Remember, though, that to really determine which is cheaper, you’ll need to consider your personal expenses and plans over the long term.

Monthly rent payment

Your monthly rent payment is obviously the biggest expense when renting a house or apartment.

If you do not live in a rent-controlled house or apartment, rent payments can change unexpectedly. Most states allow landlords to raise your rent with a 30-day notice of the increase. If you have a lease, these increases generally must coincide with the renewal of a current lease (and often require more notice).

Sometimes at lease renewal, if your market is especially hot, your rent could double or more. You can always try and negotiate, but in most instances, landlords and property managers don’t owe you an explanation for charging you more. If you’re not able to cover the cost of the rent increase, be prepared to move — another expense.

By contrast, home mortgage payments are much more stable. With a fixed-rate mortgage, your interest rate is fixed and your loan payment isn’t going to change by much, even over decades.

Homeowners are also paying toward something: each payment you make as a homeowner means you are building equity in your home until, ultimately, you reach the point where your loan is paid off and you own your house outright.

Renting doesn’t provide the same payoff: you’re never going to see that rent money again.

Deposits and pet fees

Deposits and broker fees

Almost every place you rent requires a security deposit, normally equal to one month’s rent. Security deposits are refundable in most instances — as long as you leave the rental property in as good (or better) shape as you found it.

In some areas where having a broker might be required to rent certain apartments, you’ll also have to pay a broker fee, which isn’t refundable. A typical broker’s fee might be 15% of your annual rent, which means for a $3,000-per-month apartment, the broker’s fee would be $5,400.

Pet deposits and fees

If your family unit includes a four-legged member, you’ll probably have to pay a deposit. Some places could also require a non-refundable monthly fee for your pet and a cleaning cost.

An average pet deposit ranges from 40% to 85% of your rent. This means that for a $3,000-per-month rental, your pet deposit would be somewhere between $1,200 and $2,550. This deposit is sometimes refundable minus any necessary cleaning fees (or repair costs if your pet damages something).

Some rentals charge a monthly pet fee; the average is $50 per month. An average cleaning fee is $120.

Utilities

Some rent payments include utilities. If your monthly rent does not include utilities, you could be responsible for electricity, water, natural gas, internet, cable (if you have it), or any other utility fees.

Keep in mind that your home may not be outfitted with the most energy-efficient appliances — and you likely won’t have any control over that.

Maintenance and repairs

Although you won’t be expected to pay for repairs and maintenance, you also won’t have as much control over when those things get done. It will be up to your landlord or property manager to make those repairs.

Other expenses

Other fees you could be responsible for as a tenant include HOA fees, storage, and paying for a parking spot (or two).

If you want to protect your possessions in case of fire, theft, or other damage, you’ll also need renter’s insurance. An average policy for $25,000 of personal property protection and $100,000 of liability costs between $120 and $190 annually.

Is it cheaper to rent or buy?

Many people consider renting in an affordable area in order to save up money for a down payment on a house. It’s also possible that, if you want to live in a specific neighborhood, your financial position could mean that you’re only able to afford renting in that area.

Depending on how much space you want or need, how often you plan to move, and the cost of living to rent or buy in your area, you may decide it makes more financial sense to rent than to buy — or the other way around.

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