For many people, property ownership is an important checkbox as far as the American dream is concerned. However, there are a few cases when renting property makes more financial sense than buying, and apartments are a perfect example of that.
Renting an apartment is usually cheaper than buying because tenants aren’t responsible for property maintenance costs, property taxes, and HOA fees. Renters also incur fewer upfront costs, enjoy cheaper insurance, and are less affected by volatility in real estate markets.
In the rest of this post, I’ll explore in detail why renting an apartment may be cheaper than buying to help you decide the best option for your finances and other personal needs. Let’s dive right in.
Renting Comes With Zero Upkeep or Repair Charges
This is an outright financial advantage that tenants have over home/apartment owners. As a tenant, you’re exempted from the financial burden of covering maintenance and other related costs.
Rather, it’s the landlord’s legal duty to maintain, repair, and improve the property. So anytime an appliance or part of your home stops working as it should, all you need to do is call the landlord to get it fixed. Given that maintenance and property improvement costs can be quite substantial. Renting can be a great way to keep your home’s operational costs low.
Better yet, renting can save you more than just money. Since you won’t be handling things like follow-ups with service providers, sourcing any supplies they might need, or supervising the repair projects, renting can also save you some valuable time and energy.
Tenants Don’t Pay Property Taxes
Unlike home and condo owners, renters have no obligation to pay real estate tax. Usually, this financial burden rests on the property owner.
While the real estate tax burden varies according to several factors, the home’s property value and the size of land it sits on are usually key determinants. With modern homes in the US constantly getting bigger, property taxes are increasingly becoming one of the biggest financial burdens homeowners have to deal with. But by renting, you get to bypass it.
Renters Incur Fewer Upfront Costs
Upfront costs are another area where renters get a better deal than buyers. The usual one-month security deposit aside, renting doesn’t require a significant down payment.
By contrast, you need to cough up a significant amount of money in the form of a down payment when buying. In most cases, you’ll need to pay 20% of the market property value upfront, which can go all the way down to 6%, depending on the nature of the buyer-seller agreement.
But while a lower down payment is possible (and seemingly more attractive short-term), financial experts recommend paying 20% of the property value (or something closer to that figure) upfront for several reasons.
First on that list is that mortgage lenders typically use the 20% down payment principle as a benchmark for deciding borrowers’ interest rates. Generally, the more you can afford to cough up as down payment, the safer it is for mortgage lenders to give you a favorable package.
That means if you can afford to pay 20% of your property value upfront, lenders will see you as a safer investment and are more likely to give you a favorable interest rate.
Second, the 20% value determines how much you pay in private mortgage insurance (PMI). When sourcing a mortgage from a private lender, you need to pay private mortgage insurance until you’ve covered 20% of your home’s market value.
That means if your down payment equals or exceeds 20% of the property value, you won’t need to pay anything in the form of PMI. Since PMI rates can be as high as 2.24%, this type of insurance cost can add up over time, meaning paying a 20% down payment can save you a lot.
Given the significant financial implications of the down payment size, homebuyers tend to aim for the 20% value, which means they pay way more upfront compared to someone who’s renting. And even with a lower rate for the down payment, a renter would still pay significantly less upfront.
Tenants Enjoy Cheaper Insurance Than Homeowners
Usually, both renters and homeowners need to have some form of insurance. More often than not, this comes in the form of homeowner’s insurance and renter’s insurance, respectively. And as you would expect with any form of insurance, there are some costs attached to each type.
The thing is, renters’ insurance policies are typically cheaper compared to those of homeowners. According to recent insurance statistics, the average cost of a tenants’ insurance was $180 per year in 2017. In the same year, homeowners spent an annual average of $1,211 on insurance.
Indeed, renting means less money spent on insurance.
Tenants Are Less Impacted by Volatile Real Estate Markets
Homes and condos earn and lose worth all the time, and sometimes it has little to do with the property itself. Localities might go back and forth in value, for instance, and social amenities like school districts can significantly affect the value of property in an area.
Volatility in the real estate market brings several challenges for property owners, largely because things like taxes, resale value, and mortgages are all dependent on the market value of the property. That means in a rocky market, homeowners can easily incur losses when, for instance, mortgages with adjustable rates fluctuate unfavorably, and property taxes increase.
By contrast, tenants are barely affected by shifts in the real estate market. An extreme economic crisis aside, the amount of rent you’re obligated to pay each month won’t change due to market forces. In case of any change in this amount, it’ll be communicated in advance via a landlord’s notice so you can plan.
Renting Allows You Access to Facilities That Would Otherwise Be Too Costly
Another financial advantage of renting over buying an apartment is that the former grants you access to amenities that usually come at a major cost to homeowners.
In many mid-to-upscale apartments, luxuries like a fitness center or a swimming pool come standard without any additional costs to tenants. While you’re going to have to share these with other tenants, it’s still a big plus because for a homeowner to enjoy such amenities, they would have to spend a fortune in the form of installation and maintenance. Likewise, condo owners often have to pay monthly access fees for such amenities.
Note that swimming pools and gyms are just a few examples. Depending on the nature of your apartment complex, renting may grant you access to many more amenities that would be too costly to install in a home.
Tenants Don’t Have to Pay Homeowners Association (HOA) Fees
In simple terms, Homeowners Association (HOA) refers to an organization in a community that governs properties within its jurisdiction. Such organizations are common in communities with shared amenities (such as a swimming pool, a security gate, a tennis court, a gym, and so on), and are tasked with maintaining a good quality of life and property value.
Usually, HOAs collect fees from property owners for upkeep, and failure to pay can result in a lien or encumbrance placed against their property, making it difficult to sell. This fee adds to the already long list of expenses that property owners have to cover, and the fact that tenants don’t have to pay it is another advantage of renting over buying.
The Bottom Line
As I’ve seen throughout this post, renting an apartment is usually cheaper than buying due to several reasons.
With that said, property ownership does come with its fair share of benefits (especially in the long run), and it’s up to you to decide which option suits your financial situation better. If you find yourself in a dilemma, talk it out with a financial advisor who understands the fine intricacies of real estate investment.