It used to be such a simple question with a few tried and true answers depending on one’s lot and station in life.  Now, to put it lightly, not so much.

There have been just a few changes over time, perhaps even today while you are reading this, that play a role in making that choice [insert sarcasm here].  Times have changed; social values have changed; the roles of men and women in the economy have changed; life expectancy has changed; the process for buying and financing homes has changed; the ways people work and live have changed; the ways people save and spend money have changed; the speed, accuracy and flow of information has changed; all in all, everything has changed.  As we will see, all of these changes, and more, play critical roles in deciding whether to rent or whether to buy.

A true, comprehensive discussion of this topic could fill a doctoral thesis or a whole Time Life collection of books that you could buy on TV for $19.99 each (“but wait, there’s more . . .”).  My goal here is to speak plainly, practically and directly to those of you wrestling with this question in the big picture.  In Posts to follow, I will also try to put somewhat of a local spin on the question based on the experience of living, working, owning and renting in the DC metro area as I have done and still do.

First, a bit of history.  Then, some current events.  It is important to get a sense of the two before looking at the practical side of this quandary.

Old Way (the “history”) 

• Grow up living at home, generally through high school graduation.
• Get a job when you turn 18 or serve in the military – either way, you are out of the house & earning money; probably saving it too. 
• Go to college, probably get at least a part time job & live at home or find a place to live on/off campus; but, either way, typically not a free ride. 
• Rent an apartment with friends, classmates, workmates, etc., or alone if possible.
• Study and/or work hard, save, save, save; graduate, get a job, work hard, save, save, save.
• Make a sizeable down payment on a small home or townhome, usually with a spouse, and finance the rest with one mortgage loan from a local or regional bank where you actually know someone (and they know you).
• Work hard, save, save, save; small home or townhome grows in value over time.
• Use equity in home and/or some savings to move up and into a bigger home; typically when kids enter the picture or some measure of professional success/security attained.
• Continue process over time of buying wisely, building equity, saving, moving forward.

 New Way (the “current events”) 

• Grow up living at home, generally through high school graduation.
• Go to college, study and live either entirely on your parents’ dime or, at the very least, with scholarships and/or financial aid, load up on “free” credit cards & spend, spend, spend.  [Caveat here:  of course there are still plenty of people that do not rely on their parents for college and pay their own way.  These people are to be admired and praised.  For purposes of this Post; however, they are not the problem.  They already “get it.”]
• Skip college and go straight to work while living at home, load up on “free” credit cards & spend, spend, spend.
• Skip college, skip work, come up with a great idea, it goes viral, you retire rich forever at 21.  [I highly recommend this option if you can swing it!]
• Graduate college, find a job (hah, if you are lucky), mimic a boomerang, move back home.
• Spend, spend, spend & keep running up those credit card balances.
• Once possible based on income and available credit, rent an apartment with friends, classmates, workmates, etc., or alone.
• Eventually, without much in the way of long term financial or family planning, buy a home with little to no down payment, financed anywhere from 90% – 125%  by up to three mortgage loans from lenders you have probably never heard of.
• Spend, spend, spend.
• Encounter real life issues like recessions/depressions, job loss, unemployment, underemployment, real estate crisis, soaring health care costs, uncontrollable fuel & energy costs, constantly rising food costs, childcare, and so on.
• Lose equity, cannot refinance, rates adjust, lose home, file bankruptcy, credit wrecked, now what.

Granted; I have taken plenty of literary license here to make a point.  This is not the way it always happened nor is it the way it always happens.  The goal is to illustrate the shift in values and behavior by the majority, or by enough of the minority to cripple a nation and perhaps the whole world.  And, yes, I speak in sweeping generalities, again to make a point.  I am not looking to single out any religious, ethnic, racial or other group.  Fortunately or unfortunately, depending on the day for some, I believe people in all groups and in all walks of life have to face the new, current economic and social reality.  That is the backdrop against which I write. 

From what I read, see, hear and experience, apparently, “people” used to have stronger values to which they adhered to more strictly.  I will even soften that a bit by acknowledging that perhaps people have the same actual values and feel just as strongly about them; but, it sure is a whole lot easier to toss them aside when you lose your job for no good reason, or get a Notice of Foreclosure or of Eviction, or get sued, or suffer any of the other fearful examples of our current times.  For many, if not most, entrenched values have a funny way of taking a back seat to practical reality.  Although, some would argue with conviction, perhaps rightly so, that it is when one is on the brink or staring into the proverbial abyss that those values and adherence to them matter most.  Those with the strength to do that deserve accolades and admiration.  Most go another direction. 

In any case, it is safe to say that there has been a shift away from working long and hard, focusing on saving, planning and preparing for the future, buying within one’s means and having skin in the game, using credit conservatively, etc.  These days, for my generation and those after us, it appears to be all about the here and now, the immediate, whatever is right in front of us controls and the rest can wait.  We do not save, we consume.  We do not plan, we act.  We use and abuse credit and live far beyond our means.  That “we” includes me, many of my friends and peers, work colleagues, local, state and national governments – just about everyone save those in the minority, the “old-schoolers” still breathing and walking among us.   

That shift in values and patterns has a direct impact on the buying versus renting question and contributes significantly to making the answer an elusive one.  The classic lawyer answer “it depends,” is about as concrete as you are going to get in this arena.  So, let us take a look at some scenarios, the corresponding considerations and where they lead to along the “it depends” continuum.  [Please note:  if you do not currently have a job or other source of income, both renting and buying will be a stretch and, while I can relate and empathize, this Post probably won’t do you much good until you solve that situation.] 

Conventional rent versus buy considerations. 

It used to be so simple, right?  If you were new to an area or just leaving home, you would rent.  If you were not able to put money away over time to afford a sizeable down payment, you rented.  If your job had you moving around on a regular basis, you likely rented, especially if you were single.  Basically, if you were geographically stable, employed and able to sack away a 20% down payment, you bought.  Otherwise, you rented. 

Renting sometimes gets a bad rap; but, under the right circumstances, it can be a sound personal and fiscal choice.  The traditional justifications for residential buying no longer carry the same power and security.  Specifically, putting a chunk of post tax, hard earned and even harder saved dollars into a home with the plan to live there, gain equity and ultimately sell and move up is a distant memory in most cases.  Values have dropped so much and things are in such disarray across the board that even the vaunted income tax write-off for mortgage interest does not pack the same punch as it used to.  In fact, that write-off has been on the chopping block in Congress lately.  These days people are left wondering just what income is it that they are looking to offset with that write-off. 

Renters do not have to worry about the fluctuation in value of the home they are in; the owner does.  Renters do not have to pay property taxes; the owner does.  Renters do not have to maintain the home beyond normal wear and tear usage; the owner does.  If the roof is leaking, if the HVAC is down, if a pipe bursts – that is the renter’s immediate issue in terms of limiting damage; but, it is the owner’s responsibility and COST to fix it.  In some cases, renters do not even have to cut the grass; the HOA or condo association that the owner pays for handles it.  See, renting does have its perks.   

In an environment where owners are not realizing the value gains that offset the economic and non-economic costs of being a landlord, renting looks that much better.  Now, let us take a look at the different situations people are in today and how the rent versus buy question plays out. 

You currently live at home or affordably rent. 

Congratulations.  You may not believe it; but, you are in the most flexible of all situations with the biggest upside and smallest downside.  If you are making ends meet either at home (and your folks are not kicking you out) or in your rental, you have the luxury of time.  That is your small downside; you can stay put and plan your next move strategically. 

Home values, mortgage rates and underwriting standards are in constant flux.  While values are anyone’s guess these days; it appears that rates will stay low and underwriting standards will remain stringent for the foreseeable future.  So; for you, that means you can study the market, find your sweet spot, take advantage of the historically low rates and take your time getting through underwriting.  To get through that process and get a loan, generally speaking, you will need good credit, a cushion between your monthly income and expenses, and a reasonable loan to value ratio (translation:  ability to come up with a decent down payment – skin in the game counts big!). 

The big upside here is that values are down just about everywhere.  If you are renting, looking to buy, and have the credit to take advantage of the low rates, you can get more house for less money than ever before:  pretty much, the best pure buying market in history.  The practical reality for you is that you can buy a home for less, finance it for less and move in with equity.  That’s right; you can get plenty of house, for an affordable cost, that has built in value for long term savings.  You can also try to stretch yourself into more house than you need and run the risk of it coming back to haunt you. 

If you are the handy type (which I am the furthest thing from, everyone knows that my toolbox is necessarily filled with tools AND band-aids), or if you do not mind living with some disarray while projects are started and completed, you can do even better.  Case in point, my childhood buddy JB.  JB picked up a home in a very affluent Montgomery County neighborhood.  When he bought it for peanuts around 2000, you could barely call it a home.  I mean, he and his girlfriend (now wife) lived there; but, it was a disaster.  One needed a ladder to get in and out of the basement level.  I am sure he took plenty of crap for his choice, including from me; but, fast forward 10 years and JB’s family lives in a beautiful home and they are laughing all the way to the bank. 

The process was simple.  JB and his girlfriend were renting and got into the house super, super cheap due to its condition.  They lived there, endured the mess, worked on this or that to make it better and to get through.  Over the next several years, their home quadrupled in value if not more.  They were able to borrow a fraction of what the value was at the time (admittedly way, way overinflated) and do a complete tear down.  End result, even after the ongoing market correction, is an amazingly beautiful, new home with a reasonable mortgage, valuable equity for the future and, most importantly, a great BBQ & beer backyard.  Nicely done! 

You currently own a home and are either even or above water. 

Consider yourself lucky.  To own anything right now and be even or above water is a blessing.  You must have gotten in a long time ago and did not abuse the real estate boom, pulling all the inflated value out of your home, only to watch that value disappear faster than Lindsey Lohan’s sobriety following an AA/NA meeting.  Either that or you are part of the minority that saved money for a down payment, bought within your means and, again, did not go crazy with your equity during the boom. 

You too have some flexibility; but, chances are, you are facing pressure to move forward or you would just stay put.  That pressure often comes in the form of adding mouths to feed to the family.  I can tell you from personal experience that it is not the need to store extra food; rather, it is all the crap that comes along with that extra mouth to feed that requires more space.  Toys, clothes, books, regular diapers, swim diapers, stuffed animals, towels, toiletries, backpacks, wipes, train tables, bulldozers, balls and baskets, cribs, bassinettes, beds, changing tables, rocking chairs, and so on.  It is a wonderful problem to have. 

The favorable buying market can work to your benefit; however, you can pretty much dismiss the thought of making a killing on your current home.  Perhaps you have enough equity to make a true step up purchase; one where your equity serves as your down payment and you do not significantly increase your debt load.  If you do not have that kind of equity, perhaps you have saved some money for a down payment or have the ability to put something together for that.  Translation:  bigger house, same mortgage, flat equity.  Of course, you will need good credit to make this work.  Otherwise, you will pay a higher interest rate which means a higher monthly payment which means you just lost your value proposition.  You might as well stay put. 

You currently own a home and are underwater. 

Welcome to America my friends:  the land of baseball, opportunity and underwater homes (oh yeah, and party politics at the cost of our nation’s credibility and stability).  You are not alone and, yes, your situation sucks.  One choice is to just ride it out.  If you can afford to pay your mortgage (don’t waste your time and energy trying to refinance unless you are only slightly underwater and have awesome credit) and do not have any pressure to move (e.g. job change, young kids, older kids moving back home, senior parents moving in, etc.), you might as well stay put. 

If you have to make a move or do not feel like living in the same upside down home forever, you might want to consider renting.  The other option would be to sell at a loss and then be able to somehow make up that loss both in terms of net worth (what lenders look at when evaluating you for a mortgage) and in terms of coming up with a sufficient down payment.  Unless you are independently wealthy, a lottery winner or have a silver spoon dangling from your mouth, option one is likely what you are looking at. 

In the end, renting may provide a tolerable compromise.  I say “in the end” because it is quite a process to get from start to finish here.  As an owner with a mortgage, you are going to have to make a choice as to the lesser of available “evil” options to achieve the end goal of getting out of the underwater asset and into a rental.  Those choices include:  (i) short sale; (ii) deed in lieu of foreclosure; and (iii) foreclosure.  I have previously posted extensively on each of these topics on this site and strongly encourage you to inform yourself as to the characteristics, advantages and disadvantages of those options before moving forward with any of them.  They all have their own constantly changing mixed bag of pluses and minuses that you need to understand before experiencing. 

So, fast forward to the situation where you are no longer burdened by the ownership of a home that is not worth what you paid or owed on it.  At this point, renting can be a wonderful solution.  It is important to remember that one still must apply for a rental.  There are still qualifications for being accepted as a tenant and it is not made easier by having to address a short sale, deed in lieu or a foreclosure.  All have negative credit implications.  The upside is that every day more and more people are in this situation.  That means more and more landlords are going to have to see their way through to accepting people as tenants with real estate related credit blemishes. 

As with most scenarios when these decisions are being made, the more institutional the landlord, the smaller the chances for being able to personally connect with someone in order to explain what happened, why you would be a good tenant, how you could afford it, etc.  While I can see how the landscape is shifting in favor of working with people with fallout credit issues from the global real estate crisis, there is nothing that says that they have to and you should be prepared to address that head on. 

Bottom line – if you can get out from under the distressed asset you owe on and can connect with a landlord that is interested in renting their place to someone that is not perfect; but, can demonstrate the willingness and ability to pay, renting could be a fantastic option.  Chances are you will get a bigger living space at or less than what you were paying on a mortgage for an overvalued home. 

You currently own a home and are in foreclosure. 

Sadly, you too are not alone.  Not by a long shot.  No sense in reliving the past several years of the real estate rollercoaster, the resulting crashes and value losses (with more yet to come); suffice it to say that there are millions and millions of Americans in this situation with more joining the ranks daily.  Your options are certainly limited by your current situation; however, renting may be a viable option in your not too distant future. 

Much the same as those living in homes that are underwater; but, who can currently afford the payments (or choose to afford the payments until it strategically suits them otherwise),  in the end, renting may provide a tolerable compromise.  With a foreclosure underway, your time period for taking action is shortened; but, you still may be able to make a choice as to the lesser of available “evil” options to achieve the end goal of getting out of the underwater asset and into a rental.  Again, those choices include:  (i) short sale; (ii) deed in lieu of foreclosure; and (iii) foreclosure.  I have previously posted extensively on each of these topics on this site and strongly encourage you to inform yourself as to the characteristics, advantages and disadvantages of those options before moving forward with any of them.  They all have their own mixed bag of constantly changing pluses and minuses that you need to understand before experiencing.  

So, fast forward to the situation where you are no longer burdened by the ownership of a home that is not worth what you paid or owed on it.  At this point, renting can be a wonderful solution.  It is important to remember that one still must apply for a rental.  There are still qualifications for being accepted as a tenant and it is not made easier by having to address a short sale, deed in lieu or a foreclosure.  All have negative credit implications.  The upside is that every day more and more people are in this situation.  That means more and more landlords are going to have to see their way through to accepting people as tenants with real estate related credit blemishes. 

Again, as with most scenarios when these decisions are being made, the more institutional the landlord, the smaller the chances for being able to personally connect with someone in order to explain what happened, why you would be a good tenant, how you could afford it, etc.  While I can see how the landscape is shifting in favor of working with people with fallout credit issues from the global real estate crisis, there is nothing that says that they have to and you should be prepared to address that head on. 

Bottom line – if you can get out from under the distressed asset you owe on and can connect with a landlord that is interested in renting their place to someone that is not perfect; but, can demonstrate the willingness and ability to pay, renting could be a fantastic option.  Chances are still that you can get a bigger living space at or less than what you were paying on a mortgage for an overvalued home that you could not afford. 

You lost your home to foreclosure. 

Once again, sounding like a broken record here, for whatever it is worth, you are not alone.  For better or for worse, never before in the history of our country have so many homeowners been displaced by foreclosure.  These former homeowners and their families need to live somewhere and face limited options.  They can stretch out the foreclosure and corresponding eviction process as long as possible (for several years in some cases); they can move in with family and friends; or, if they are lucky, they can rent. 

A concluded foreclosure is a significant obstacle to overcome in most rental situations.  Unless it is someone you know, someone that is desperate (may not be a good idea for other reasons), or someone that will otherwise look past the foreclosure without much concern, you are going to have to deal with that blemish.  Remember, to keep your sanity, your pride and your self esteem intact, it is critical to remember that it is not personal.  It is business.  Think about the situation in reverse and what you would want from someone coming out of a foreclosure that was looking to rent your place.  Chances are that you would not just hand over the keys on a handshake.  Neither will anyone else. 

My suggestion is to be as open and as honest as possible with any prospective landlord.  Address the foreclosure issue head on.  Maybe offer to get a cosigner; maybe offer to pay a few months rent in advance (hopefully you saved while not paying the mortgage); maybe a letter from your employer that your job is safe.  Your role is to do whatever it takes to show that the foreclosure was a departure from an otherwise solid history of incurring debt and paying your bills on time.  Chances are that your prospective landlord has not escaped the pain of the last few years either and will be open to something reasonable.  

Again, the more institutional the landlord, the harder it is going to be to get past the foreclosure issue.  Over time; however, I personally believe there will have to be a softening of standards across the board, from the biggest banks and property managers down to the little guys, in order to avoid empty rental spaces and empty homes.  Other than transitional moves and people with adjustable rate mortgages (the tiny minority at this point), who other than those displaced by the years of real estate crisis will be left to rent and/or to borrow?  If standards of renting and lending do not adjust to this reality, there will not be too many of us left that can qualify to rent or borrow to own.  

As you can now surely see, the renting versus buying debate in the current social and economic environment is complicated.  For many, it is like an onion, where there is layer upon layer to get through and they all make you cry.  Like onions though, once you get through the cutting and the crying, you can turn it into something entirely digestible.  No matter where you come out on this issue, stay flexible and connected to the various sources of information out in the marketplace.  Things are changing so quickly, for better, then worse, then better again, that this whole piece may be outdated by the time you have finished it. 

Stay tuned.  Whether you are looking to buy or to rent, you are probably thinking about real estate agents.  A good agent can be an invaluable asset in both situations while a bad one can make an already stressful process unbearable.  My next Post will break down when you need an agent, when you don’t, how to go about finding a good one and how to know when you have a bad one.