The battlelines have been draw and feelings are strong on each side of the issue. Some say renting is the lower cost route; and some say owning. The right answer will have a significant effect on your personal finances.
At first glance, logic will tell you owning is cheaper. If this were not true we need to tell the income property investors while they still have a chance.
The reality is always in the details. When someone says renting is cheaper on social media they are often comparing apples to oranges. In 2022 the average apartment in the U.S. was 887 square feet, down 54 square feet from the prior 10 years. In comparison, the average home in the U.S. was 2,273 square feet, according to Rocket Mortgage.
Clearly, if the average home size is 2½ times the size of a rental apartment, we are not making a comparison of equals.
An employee of the author owns and lives in a single family home with only a few more square feet of space than the average apartment. Her principal and interest/taxes and insurance (P&I/T&I) is significantly less than the cost of renting an apartment in the area. The logic seems to hold that ownership must be a better deal compared to an apartment. Otherwise, nobody could turn a profit from rental income property. Right?
In taxes we always say “facts and circumstances.” And while owning is always (?) the lower cost route per square foot, the devil is in the details because there are times renting really is cheaper than owning, no matter which way you cut it. The culprit is the pesky facts and circumstances.
Knowing when renting or owning is the best financial course is a powerful tool in wealthy creation. Housing is a massive part of the family budget. So let’s discuss when renting is a better deal, for real.
5 Times Renting is Cheaper than Owning
1.) Stupid Landlord: Hate to be so blunt out of the gate, but there are some landlords dumb enough to rent their property for less than what it costs them. Usually they fire back with excuses like: “The tax savings create the profit.” or “I’ll make a killing when I sell.”
These are valid arguments, just not good ones. To “make it up” on your tax return means the depreciation will increase the loss and possibly lower your total tax liability for that year. But depreciation is merely a kicking of the can down the road. When you sell, the depreciation has lowered your basis and will increase your gain and tax at that time.
Realtors often like to use the “you lose now, but when you sell…” argument. Again, this is a bad philosophy. There is no guarantee you will see appreciation in your property. You might win big on appreciation, but it might not be enough to offset prior losses. At least you get a tax break. Right? Note: A Donor Advised Fund also has potential for a tax deduction.
Regardless the quality of the argument, there are times when a landlord will lease a property for less than what it costs to own. Remember, in the long run the landlord either turns a profit or goes broke. The new owner will then exercise a significant rent increase to eliminate losses.
2.) Little Old Lady: I love old mystery stories. Sherlock Holmes rented an apartment from a lady looking to supplement her income.
The same situation can exist today! The landlord may have reached a place in life where the property is no longer encumbered (no mortgage), offering positive cash flow with lower rent rates. The same landlord may wish to lease rather than sell. The reasons are varied and unimportant to our discussion.
In these special situations, should you be fortunate enough to uncover one, allows you a sweetheart deal. The landlord wants an income stream and leases the property at slightly below market rates in the hopes of finding a tenant that will be hassle-free due to the lower lease rate.
It can be a win/win for all parties involved. The risk comes when the landlord dies or no longer needs the additional income. A new owner may change the sweetheart deal into a market rate deal. Still, while it lasts, you enjoy a rent rate below the cost of owning.
3.) Short-term Life Events: Owning does come with one very large additional expense: transaction costs. After you are done paying the Realtor® and other sales costs, you can lose 10% or more of the value of your home. If your life situation makes it likely you will be in your home for only a few years before moving, the selling costs will often make renting cheaper than owning.
Marriage, divorce, career, and even health can play a role in how long you will live in one place. If you prefer a more transient lifestyle, then yes, renting will be cheaper than owning.
4.) Hassle-free Landlord: Not every landlord has the same goals. Maximizing profits on a property takes effort. Finding tenants that will maintain the property and pay their rent is the priority for these landlords.
The reasons someone will invest in real estate and rent at a rate lower than the cost of owning are varied. There are a large number of people who feel real estate must be a part of their portfolio. Similar to #1 above, these landlords have a valid reason for owning real estate that brings in less than the cost of owning.
Real estate is hard to compare. Apples and oranges is more than a cute catch phrase; it’s often the reality of real estate. That is why there are opportunities for renters to find shelter at a rate lower than owning. For example: Sometimes renters get a reduced, or even free, rent rate for collecting the rent and scheduling upkeep on the property. The same offer can be available for renters with carpentry skills. While the cost of renting is still higher than owning when including the value of your time, it can be a financially rewarding deal for both landlord and tenant.
5.) Maintenance and Upkeep:
Owning real estate does have one huge drawback: maintenance.
The cost of a new roof or furnace can be beyond the financial resources of many renters. There is no doubt real estate owners need a deeper financial well to account for maintenance and upkeep expenses than renters.
Most of the time large expenses are in the future, allowing for outsized profits while expenses are low. But the deferred maintenance always reaches the day where it can no longer be deferred. Deeper pockets are needed or borrowing is required.
Herein lies one area where taxes can benefit the renter more than the owner of real estate. A new roof, furnace, or other maintenance or improvement is deductible for the landlord currently or over a period of time. The homeowner does not get a deduction for a furnace replacement or new roof. Improvements, however, can increase the basis for an owner occupied home, allowing for a small potential for tax savings at some future date. Still, homeowners enjoy fewer current tax breaks than landlords. (No, you can not buy a property and rent it to yourself to turn personal expenses into tax deductions.)
Depending on the type of rental unit you have, regular maintenance (snow removal, clipping the lawn…) will also affect the comparison between renting and owning.
6.) Economies of Scale: There is actually one way to have a cheaper rent rate per square foot over owning in virtually every situation.
Apartment buildings have a form of economies of scale, where the more units to the building, the lower the cost per unit to own. This reflects in the rent rates of the apartments.
Often times the comparison between owning and renting butts a single family home against an apartment in a building with a large number of units. This is no apples to apples comparison. Compared to a condo we get a better understanding of which is lower cost. Even then it may not be a true comparison of equals.
Regardless, if you prefer (or don’t mind) living in closer quarters with neighbors, the apartment complex often provides economical rent rates compared to owning a single family home. (There is no pure comparison between owning and renting here, as the owner can’t live in every apartment at once.)
Maintenance and upkeep that is the responsibility of the tenant is often reduced, as well. Shared space (i.e.. hallways) is always the responsibility of the landlord.
On-site laundry facilities are not only convenient, but offer another way the renter can lower costs over owning.
Renting in a multi-unit apartment complex often beats the costs of owning a single family home. The smaller apartment size coupled with the economies of scale of multi-unit buildings can provide an avenue for people to manage their personal finances more closely over home ownership.
Often times home ownership comes down to preference. This author has a strong bias toward home ownership. I’d rather have control over my property than follow a landlord’s rules. Plus, I want more space: inside and out.
The simplistic view you find on social media comparing home ownership to renting often fail to make like-kind comparisons. A true apples to apples comparison will almost always show ownership as winning the game. Taxes don’t overwhelm the homeowner either. §121 allows homeowners to exclude $250,000 of gain on sale if they lived there 2 of the prior 5 years. Landlords also get tax advantages, but are unlikely to exceed the value homeowners get from §121.
In the end, there are only limited situations where renting is cheaper than owning. Fortunately, the opportunities are prevalent so renters have ample opportunity for lower costs over owning, as long as they are willing to follow the landlord’s rules and usually accept a smaller living space.