To Rent or to Buy?

The Millennial generation is often called “Generation Rent,” and rightly so. Because of student loan debt, delayed marriage, and other reasons, Millennials are waiting longer to purchase a home than the Baby Boomers and Gen Xers who came before them.

According to the left-leaning Urban Institute, the home ownership rate among Baby Boomers and Gen-Xers (at age 25 to 34) came out to about 45 percent. The Millennial rate? Just 37 percent.

Many Millennials are renting for longer periods of time in expensive markets, such as New York City, San Francisco, and other urban areas. Indeed, roughly half of all Millennial-led households  are “rent-burdened,” meaning that over 30 percent of their monthly income is used to pay rent.

Compounded by five- and six-figure student loan debts, high rent payments only delay saving for a down payment. The Urban Institute found that 53 percent of Millennials simply can’t afford one.

However, recent research suggests Millennial home ownership is on the rise. Thirty-three of the America’s top 50 housing markets are seeing increases in Millennial home buying. In Birmingham, Alabama, the Millennial generation makes up nearly one-fifth of all home owners. A similar trend has emerged in cities like Buffalo, New York and Pittsburgh, Pennsylvania.

More and more Millennials are asking themselves: Should I keep renting or buy a home?

It’s a tricky question, and the answer is obviously situation-dependent. But, if you’re on the fence and you can afford it, I recommend buying that home. Real estate is arguably the best investment on the market, and it’s impossible to see returns—real or projected—if you’re stuck paying rent.

That money isn’t growing. It’s just gone.

Of course, you need to do your homework. Home ownership is no small feat, but it’s also not a decision to be taken lightly. Before you send in that down payment, evaluate the real estate market. Truly evaluate it.

Look up real estate prices in the area over the last two decades, and try to predict what the market will look like in the next 20 years. Take into account monthly rent levels in the area, in case you become a landlord one day. Evaluate the public school system, violent crime rates, out-of-state investment levels, and other factors that determine the viability of your potential real estate investment.

I’m a Millennial myself. I’ve dealt with student loan debt, and I’ve seen the barriers to saving that many recent graduates face. It’s not easy. With good fortune (and a bit of hard work), I found ways to consistently increase my annual income and save enough money to make home ownership a realistic option.

Last year, I asked myself that question: Should I keep renting or invest in real estate? In my case, I was paying about $2,000 in rent to live in Washington, D.C., where daily expenses are, well, expensive. Frustrated with the cost of living, I identified an opportunity to purchase a brand-new apartment in Portland, Maine, where the real estate market was booming and my mortgage payment would be lower than the cost of rent.

Performing the cost-benefit analysis outlined above (and scouting Southern Maine in person), I pulled the trigger. Twenty percent down payment, down. Home ownership, achieved. None of it would have been possible if my student loan payments were significantly higher or my annual income significantly lower, but good fortune and hard work intertwined at just the right time.

A lot of Millennials are simply not in that boat, in many cases, through no fault of their own. If you can’t afford a 20 percent down payment—sparing you those dreaded mortgage insurance payments—I don’t recommend buying a home (yet). Nor do I recommend it if your employment situation is unstable or your credit score is suboptimal.

But, if home ownership is a relatively low-risk proposition (emphasis on relatively), it is time to pull the trigger like I did.

Best-case scenario, you have a new home that you love, and your real estate value will grow for decades to come. Home ownership is a strong predictor of long-term financial health: Based on the Federal Reserve’s Survey of Consumer Finances, a typical home owner will be ahead of the average renter by a multiple of 45 on a lifetime financial achievement scale. According to the National Association of Realtors, the average child of home owners is significantly more likely to achieve higher levels of education and earnings. Home owners even report better physical and psychological health than the typical non-owner.

Worst-case scenario, you can make adjustments and rent out your home to pay off the mortgage. Assuming your home is in at least a somewhat desirable location, your tenants’ rent payments may cover your mortgage or even secure net income month-to-month. With home-sharing services like Airbnb and HomeAway, finding tenants is simpler than ever.

Once you realize that the “worst-case scenario” isn’t the end of the world (and perhaps even a blessing in disguise), home ownership starts making a lot of sense. Remember: The money that you used for a down payment isn’t gone. Unlike a monthly rent payment, that money remains yours in the form of equity. And it can be put to good use.

So, to rent or to buy? It depends. But, all things being equal, it is better to own a home than not.