If You’re a Young Professional, the Wrong Housing Choice Could Cost You

Rent or buy? It’s a big decision, especially for young professionals as they begin their careers and begin to form their long-term financial plan. After all, for about 22 million Americans, rent makes up 30% or more of their income. This percentage rises to more than 50% in many US states, including Florida (61.7%), Nevada (57.4%), Hawaii (56.7%), Louisiana (56.2%), and California (56.1%).

On the other hand, mortgage and homeownership costs are higher (and rising). According to the National Association of Home Builders, the median-priced home eats up 38% of the median household income. This percentage goes up depending on where you live: Honolulu, Hawaii (73%), Naples-Marco Island, Florida (71%), San Diego-Chula Vista-Carlsbad, California (70%), and San Francisco-Oakland-Berkeley. , California (69%)

But which one makes more sense? Here’s what young professionals should consider.

Start with cost considerations

Cost is an obvious factor in the decision to rent or buy. However, it is important to have a comprehensive financial picture of how the two compare. “There’s always a tipping point as to when the cost of buying will be more advantageous than renting, but there are some factors that come into play in determining what and when buyers will buy,” said New York City real estate agent Gina Kuo.

In addition to the purchase price of the property, young professionals should also consider things like the down payment, closing costs, homeowners association or co-op fees, insurance, property taxes, utilities, and maintenance. These costs can vary greatly depending on the type of property you wish to purchase.

Your choice of market is also important. In some cities, there may be a large difference between rental rates and your mortgage payment. San Francisco is a prime example. The median rental price as of September 2024 was $3,395, according to Zillow. Meanwhile, Zillow reports that the median home price in San Francisco is $1,260,086, which equates to a monthly payment of $5,288.84 (assuming a 20% discount including taxes and insurance).

The down payment can be a deciding factor. While it is possible to get a loan with a down payment of up to 3%, Koo said that even that amount may be difficult to afford for someone in the early years of their career.

Interest rates are also a consideration, said Wes Woodruff, partner and senior mortgage loan originator at Residential Funding Consultants in Atlanta. Interest rates affect how much you’ll pay for your mortgage, but they can also drive up rental rates. “You have no control over what the landlord will charge you, and it may be cheaper to buy today than to stay in a place with consistent rent increases,” Woodruff said.

Consider the long term

In addition to cost, young professionals should consider where their career path may take them when considering the switch from renting to buying. Kuo said she often encounters younger buyers who aren’t sure where they’ll be professionally in three to five years. A frequent compromise is to buy an apartment that they can rent out if their job takes them in a different direction or to a different city.

“Your career path has a huge impact on the decision to rent or buy,” said Shane Lee, corporate communications analyst at RealtyHop, and one of the most important factors is how a career change might affect your income. “Owning a home requires a huge financial commitment, and if your income is going to fluctuate over the next three to five years, it may not be ideal for you to buy.”

Buying can be worth it if you know you’ll stay in your current location for at least three years, Woodruff said. But you have to look at different “what if” scenarios. This includes the possibility of transferring, having the startup you work for go under, or moving to a different company and taking a pay cut.

Starting a family also comes into consideration. Buying may not be on your radar if you’re single and don’t have immediate plans to start a family, Lee said. On the other hand, owning a home can provide more security and stability if you envision a spouse and children in the picture — or already have a family.

When driven by family considerations, renting versus buying becomes more about finding the right neighborhood that offers good schools, a safe environment, and a reasonable commute to work. Not to mention having the space you need. “I think it’s really hard to have an apartment with kids,” Woodruff said. “Owning a house on your own with a backyard goes a long way to help a family grow.”

Be prepared to buy when the time is right

If you plan to rent a little longer before purchasing, don’t waste that time. Use it to prepare yourself financially for home ownership.

“Your credit score is huge,” Woodruff said, and young professionals don’t always understand how credit works. Credit scores aren’t the only deciding factor in mortgage decisions, but they are important, and a higher score can translate into a lower interest rate on your home loan. If you’re just starting out with credit, Woodruff recommends opening one or two credit cards and only taking out what you can pay in full each month. Most importantly, make your payments on time.

Evaluate your current salary against its growth potential to determine what kind of budget you’ll have to work with when you’re ready to buy. If you’re facing a large amount of debt, specifically student loan debt, Lee recommends working to pay off some of it so you have more disposable income to pay for the house.

Finally, consider the down payment and closing costs. Saving a down payment of 20% or more allows you to avoid private mortgage insurance (PMI), although it is possible to buy a home with less money. Closing costs can add an additional 2% to 5% to the total amount of cash you will need to purchase.

Bottom line

Both renting and buying have their pros and cons for young professionals. Renting allows you to avoid certain costs, such as repairs, upgrades, property taxes and homeowner’s insurance, but depending on where you live, owning a home may be the less expensive option. Weighing both sides of the equation, along with financial considerations, can help you decide which one makes more sense. Most importantly, keep your end goal in perspective.

“Decide what your priorities and goals are [are]“And work backwards to make sure you can reach it and reach it,” Koo said.