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For millions of Americans, homeownership remains an impossible dream. If you’re in the position to buy, the recent market volatility might have you ready to commit. However, a home purchase represents many people’s biggest investment — it pays to ensure it’s what you want. The pros and cons between leasing vs owning are extremely challenging to compare.
You have some heavy-duty decision-making ahead of you. Waiting could mean the situation worsening, leaving you trapped on a rollercoaster where rent takes so much of your monthly income that saving for a downpayment becomes a pipe dream. However, acting before the crash that some predict is coming could result in paying tens, even hundreds of thousands more. Should you ever rent before owning? Here’s what to consider.
The Current Rent Crisis
Once upon a time in America, you could consider leasing vs. owning without risking financial ruin. The average wage gave most folks enough left over at months’ end to save for a downpayment. Your road to homeownership might be long but doable with the right plan.
Now, the average rental price recently topped $2,000 a month while average wages have barely budged in decades. Those fortunate enough to earn the median $29 an hour still pay half their income on housing alone. Housing experts — and mortgage lenders — want homeownership to take less than a third, meaning even folks lucky enough to pull in nearly $30 an hour may find themselves permanently priced out of the American dream.
Even those who survive the minefield of starvation wages and soaring rents, perhaps taking on multiple roommates to fuel their dreams, then have to contend with the investor class. Here, they simply can’t compete. Investors bought more than a third of American homes for cash in January of 2022, and firms like Blackrock show no intentions of slowing.
Homes are the traditional way of building wealth among American families. Unfortunately, there’s simply no way for someone with a mortgage pre-approval to compete with a cash buyer. The income inequality highlighted by the UN before the pandemic continues to grow with no relief in sight.
Situations Where You May Want to Rent Before Owning
Given the current economy, buying sounds like a good bet. For many, it’s the best way to safeguard yourself and your family against the next pandemic and subsequent inflationary spike. The U.S. aversion to rent control means many tenants saw their cost of living skyrocket in 2021 and 2022.
However, there are some circumstances when renting before owning makes more sense. You may fall into one of these categories.
1. Frequent Job Changes
Is possible relocation part of your job description? If so, you may want to consider renting for now. While breaking a lease is challenging, it’s far more cumbersome to sell a property. You could find yourself paying rent in an apartment in one city and a mortgage in another — not a prospect many can afford.
2. Family Considerations
Perhaps your job is stable — what about your spouse? It takes two to make it in many cases these days. If one of you were to lose your income, could you afford your mortgage? How hard would it be to replace it?
3. Credit Concerns
Perhaps you have a healthy salary but outstanding debt to match. Mortgage lenders look for the sum of your monthly obligations to equal 36% or less of your total monthly income. If you have overwhelming student loan debt, credit cards or car payments, you may need to pay some of your other obligations before becoming eligible to buy.
4. Your General Temperament
Finally, not everyone is cut out for the commitment involved with homeownership. When you rent and an appliance goes on the fritz, you simply call your landlord. When you own the property, it’s up to you to find a suitable repair or replacement. The right home warranty can help but isn’t foolproof against future expenses.
Furthermore, leases have defined beginning and ending dates. You might even go month-to-month if you can accept the price increase risk, giving you the freedom to pack up and move to a new country a month from now if that’s your whim. If you want to get out of homeownership, your only option is to sell, which can take considerable time.
Reasons You Might Not Want to Rent Before Owning
Some people get lucky. You might have an opportunity to buy now that could disappear in time. For example, you may have a friend or a family member ready to move but can’t afford two home payments. They may be willing to enter into a seller carryback arrangement with you where you essentially take over their mortgage payments without going through all the financial red hoops entailed with obtaining a traditional mortgage.
These deals are sure to become more rare as investors ramp up their efforts. Therefore, you should leap if such a deal falls into your lap. Once you own the property, you can always rent the property to another should you decide you don’t want to live there. Celebrate the reversal of fortune that comes with being the rent payee instead of the payor.
Should You Ever Rent Before Owning?
The real estate market is a volatile, confusing space. The differences between leasing vs. owning can change your entire financial outlook. Should you ever rent before owning?
Reflect on the above considerations before making your decision. The landscape has changed, and whether you should rent before owning isn’t as easy to answer as it once was.