Renting vs. Buying as a Young Adult

Let’s take an honest look at the pros and cons of renting vs. the pros and cons of buying for Americans in their 20s. These insights can help you make the best decision for your brightest future. 

The Pros and Cons of Renting as a Young Adult

Pros of Renting

• Flexibility and mobility. Renting allows you to move easily, allowing you to relocate for career opportunities, family needs, or even romance. You simply leave when the lease is up or terminate your lease early with minimal penalty.

• Lower upfront costs. Renting generally requires a security deposit and possibly the first and last month's rent. This is much less expensive than a down payment on a home. 

• Less maintenance responsibility. Landlords are typically responsible for repairs, property upkeep, and major maintenance tasks. So you don’t have to spend your time or money on maintenance as a renter. 

• Limited financial risk. You don’t have to stress if real estate values temporarily dip because you don’t own the de-valued property. 

• Access to amenities. Many multi-family buildings offer amenities like gyms, pools, or shared workspaces, which might be expensive or impractical for homeowners to afford.

• Opportunity to invest in higher-yield assets. Renting while you’re young allows you to allocate funds towards investments like real estate syndication or crowdfunding, which typically generate higher returns than single-family homes.

• Compound interest. Investing early allows for greater compounding returns over time. This exponential growth builds wealth. 
  
  

Cons of Renting

• No equity building. Your monthly rent is not going toward increasing the value of an asset you own. It’s just spent and gone. 

• Limited control over property. Renters can’t make permanent changes to their units, so renovating is out of the question. You’re also subject to the landlord’s decisions, such as rent increases, pet policies, or even the sale of the property.

• No tax benefits. Renters don’t get access to the tax benefits property owners get. 

• Potential for rent increases. While mortgages are generally stable over time, rent can potentially increase with each renewal, making it harder to budget long-term.
  
  

The Pros and Cons of Buying a Home as a Young Adult

Pros of Buying

• Building equity. Some amount from each mortgage payment is used to pay down your debt on the home, which increases the value you own in the home.  

• Potential for appreciation. Real estate typically appreciates over time, growing in value and providing a return on investment when you sell in the future. You can also force appreciation by adding value to your property.

• Tax benefits. Homeowners benefit from tax deductions on mortgage interest and property taxes, which can reduce taxable income and provide significant tax savings.

• Personalization and control. As a homeowner, you can renovate, decorate, and modify your home as you see fit, allowing for improvements that suit your needs and style. You also decide how to use the property. For example, you could house hack to generate passive income.

• Predictable payments. While renters have to worry about constant rent increases, homeowners with a fixed-rate mortgage see stable payment amounts over the life of the loan. Although to be fair, property taxes, insurance premiums, and maintenance costs all tend to increase over time.

• Pride of ownership. Owning a home can give you a sense of achievement, being a tangible representation of your financial success.
  
  

Cons of Buying

• High upfront costs. Buying a home requires a significant upfront investment, including a down payment (the average downpayment for a first-time buyer is 8% of the purchase price, but some loans allow for as little as 3%, and some restrictive loans offer 0% down options), closing costs (usually 3-6%), moving expenses, and repair costs. Plus, thanks to the NAR settlement, buyers also have to pay real estate agent fees (typically 2.5-3%) unless they can convince the seller to provide a financial concession to cover this cost.  

• Ongoing expenses. In addition to the mortgage principal and interest, homeowners have property taxes, homeowner’s insurance, maintenance costs, utilities, and HOA fees (if applicable), which all fluctuate over time.

• Maintenance work. On top of the maintenance costs, maintenance work takes time. Many homeowners spend hours each week on tasks like lawn care, repainting, replacing worn fixtures, or shopping for new appliances.

• Unexpected repair costs. Homeowners regularly deal with broken HVAC systems, damage to the roof, or any number of other unexpected issues. All of which cause frustration and cost money.

• Less flexibility. Buying a home ties you to a specific location, making it harder to relocate for any reason. Unlike simply ending a rental lease, selling a home takes time and involves fees. You could rent out the house if you needed to move but didn’t want to sell. Just be ready for the realities of managing a direct-ownership rental property.

• Some financial risk. Property values don’t always rise linearly, and if the market declines, you could potentially owe more on your mortgage than the home is worth. Being "underwater" on your mortgage can make selling the home difficult and lead to financial loss. Plus, if something happened to your income, and you couldn’t afford to pay your mortgage, the bank could potentially foreclose on your home, resulting in a total loss. 

• Severe amortization schedules. In the early years of a mortgage, a significant portion of your monthly payments goes toward interest rather than principal. This amortization means it can take years to build any real equity.
  
  

When to Rent vs. Buy as a Young Adult

• You don’t plan on living in one place for long.
• You are not ready for the responsibilities of homeownership.
• You don’t have enough money for a down payment.
• Your credit score isn’t high enough to qualify for a mortgage loan.
• You want to avoid the risk of being tied to a mortgage in case your income or financial situation changes.
• You want to take advantage of other investment opportunities while you have time to take full advantage of compounding.
  
  

• You’re ready to commit to one place for the long term.
• You want to build equity in a long-term investment.
• You want the freedom to personalize and control your space without landlord restrictions. 
• Property values are increasing steadily in your area.
• You’re financially prepared for the upfront and ongoing costs of homeownership.
• You want to avoid rent increases and have a predictable housing expense.
• You see homeownership as part of your long-term financial or retirement strategy.
  
  

How to Invest as a Young Renter

1. Start your retirement savings early. With time on your side, you can build a substantial nest egg by saving just a little bit each month. Employer-sponsored 401(k)s are a good option because they offer tax advantages. Plus, some employers offer matching programs where they’ll invest in your account when you do! If that’s not an option, open a Roth IRA. This type of retirement account uses after-tax contributions, but then your money grows tax-free, making it ideal for younger investors. It’s even possible to invest in real estate with a 401K or IRA, so you can capitalize on the market without being a homeowner.   
2. Invest in real estate without buying property. Real estate investments can provide strong returns, particularly when managed by industry experts. So consider real estate investment trusts (REITs), real estate mutual funds, and real estate syndication to take advantage of the market without the hassle of ownership.
3. Diversify. Diversification means spreading your capital across multiple investments to mitigate the risk caused by the underperformance of any single investment. Diversification is key when building any investment portfolio.   

How to Transition to Homeownership Later

• Build and maintain good credit. The higher your credit score, the more favorable your future mortgage interest rate will be.

• Save for a down payment (and closing costs). You can use your investment capital plus the proceeds from your investments to fund your future home purchase.

• Keep debt manageable. You certainly don’t have to be debt-free to buy a home, but you want to make sure high-interest debts (like credit cards) are paid off and that you can comfortably afford the payments on all your debts. 

• Decide on a long-term location. As your career develops, pay attention to where the job opportunities are. Don’t forget to consider factors like school districts and kid-friendly neighborhood amenities if you plan to make this a family home. 

• Start paying attention to the local real estate cycle. While timing the market perfectly is a matter of luck, you can work with cyclical market conditions to decide when it makes the most sense to buy.
  
  

The Bottom Line on Renting vs. Buying at a Young Age