Renting isn't a waste of money, no matter what your parents say
- Personal finance pros Pamela Capalad and Kelly Lannan joined Insider's Master your Money virtual event.
- They broke down why renting isn't necessarily a waste of money, and why buying isn't for everyone.
- It's not that one is better than the other, but one will be better for your current situation.
You've probably heard that renting a home is a waste of money.
Maybe you read an article about the importance of homeownership to generational wealth. Maybe your parents said it. Or maybe you heard a friend bemoan "throwing money away" every month.
But the idea that renting a home is inferior to buying one isn't necessarily an accepted truth - it's an opinion, and one that not everyone shares.
During Insider's recent virtual event, "A Deep Dive into Millennial Homeownership," financial planner Pamela Capalad and Kelly Lannan, vice president of Young Investors for Personal Investing at Fidelity, explained why renting versus buying isn't the black-and-white decision it may seem.
Buying isn't for everyone, even if you can afford it
"It's never throwing away money to put a roof over your head, period," Capalad said. "That is always a worthwhile way to spend your money." So when it comes to whether someone should rent or buy a home, she continued, it's not so much that one is better than the other, but that one will make more sense than the other based on your current situation.
To figure out whether you're currently in the position to stop renting and buy - assuming you even want to - Lannan suggests asking yourself five questions:
- Are you truly in a financial position to buy? "Buying a home is not the only expense you have in your life," Lannan said. If you can save, you're probably also saving for an emergency fund, for your children's college tuition, and for your retirement. Can you buy a house and still stay on track for your other goals?
- How long are you planning to stay? "When you buy, there are so many one-time expenses," Lannan said. A broker's fee, closing costs, urgent repairs - if you're only staying for a limited time, is it worth it?
- What is the better value in your area? "If you're someone who wants to stay in the city and not move to the suburbs, renting might be the better option," Lannan said, pointing to falling rents in major US cities over the past years. "Depending on where you want to be, that is a very important question to think about."
- What if the value of your home never rises? "A lot of people tend to buy homes because one day they hope to sell it back for more money and then maybe move to a different spot," Lannan said. "But spoiler alert: That doesn't always happen and you have to be OK with that."
- What does your gut say? While buying a home is a financial transaction, money is only part of the decision."If it doesn't feel right, if you're not ready to take on that responsibility, putting all sorts of financials aside, that's fine!" Lannan said. "That's OK. Definitely go with your gut."
If you're looking for more guidance on making this decision, Fidelity offers a free calculator that takes into account variables including your current savings and rent payments.
Buying a home is a long-term plan
In her experience as a certified financial planner, Capalad has found that buying a home isn't the automatic wealth-builder some people assume it to be. Rather, she's seen that the clients who most successfully use their home as a wealth-building tool are the ones who buy a "forever home" and hold onto it for decades, even passing it down to the next generation.
"The thing about homeownership and building wealth is it needs to be a very long-term strategy," she said. "It's a much bigger risk to plan to buy something to sell it in less than 10 years."
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