Rent or buy? It’s a big decision, particularly for young professionals as they launch their careers and begin shaping their long-term financial plan. A July 2022 IPropertyManagement report found that more than 100 million Americans rent their homes and nearly 35% of them are under the age of 35, but that doesn’t mean they’re taking the cheaper route. Millennials spend around $97,400 on rent by the time they reach age 30.

That number could climb as rent prices increase nationwide, potentially pushing more young professionals into the homebuying arena. U.S. apartment rental rates in 2022 have increased by 77.1% in two years, and 23% of Millennials say that’s a motivating factor in their decision to buy, according to a survey by Multifamily Executive.

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

Start With Cost Considerations

Cost is an obvious factor in the rent or buy decision. However, it’s important to have a well-rounded financial picture of how the two compare. “There’s always a tipping point as to when the cost of purchasing will be more beneficial than renting, but there are some factors that play into what and when buyers will purchase,” says Agent Gina Ko of New York City-based real estate group Triplemint.

Beyond a property’s purchase price, young professionals should also consider things like the down payment, closing costs, homeowners association or co-op fees, insurance, property taxes, utilities and maintenance. Those costs can vary widely based on the type of property you’re interested in buying.

Your choice of market also matters. In certain cities, there may be a big difference between rental rates and a mortgage payment. San Francisco is a prime example. The median rent price as of August 2022 was $3,750, according to Zillow. By comparison, Zillow states that the median mortgage payment in the Bay Area at $5,700, an increase of 37.4% from the previous year.

The down payment could be a deciding factor. While it’s possible to get an FHA loan with as little as 3.5% down, Ko says that even this amount could be difficult to save for someone who’s in the first years of his or her career.

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

The Federal Reserve increased the federal funds rate four time by August 11, 2022, with additional rate hikes expected before the end of the year. Freddie Mac 30-year fixed mortgage rates rose the week of August 11, 2022 from 4.99% to 5.22%, which may not be an incentive for young professionals to lock in a higher rate on a mortgage right now.

Consider the Long Term

In addition to cost, young professionals should be thinking about where their career path may take them when contemplating the shift from renting to buying. Ko says that she often encounters younger buyers who aren’t sure where they’ll be career-wise in three to five years. A frequent compromise is purchasing a condo that they can rent out if their job takes them in a different direction or to a different city.

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

Woodruff says that, if you know you’ll be staying put in your current location for at least three years, buying can be worth it. But you must look at the various what-if scenarios. That includes the possibility of being transferred, having the startup you’re working for go belly up or moving to a different company and taking a pay cut. 

Starting a family also comes into play. Lee says that, if you’re single and have no immediate plans to start a family, buying may not be on your radar at all. On the other hand, if you envision a spouse and kids in the picture – or you already have a family – owning a home can offer more security and stability.

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

Be Ready to Buy When the Time Is Right

If you plan to rent for a little longer before you buy, don’t waste that time. Use it to get yourself financially prepared for homeownership.

“Your credit score is huge,” Woodruff says, and young professionals don’t always understand how credit works. Credit scores aren’t the only determining factor in mortgage decisions, but they’re very important, and a higher score could translate to a lower interest rate on a home loan. If you’re just getting started with credit, Woodruff recommends opening one to two credit cards and charging only what you can afford to pay in full each month. And 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 on paying some of it off so you have more income available to pay for a home.

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

Understanding exactly how much home you can afford and which type of mortgage is best can help pinpoint the amounts you need to save for your down payment and closing costs. Running the numbers through a mortgage calculator can give you an idea of how your estimated costs of buying compare with your actual costs of renting.

The Bottom Line

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

“Decide what your priorities and goals [are],” Ko says, “and work backwards to make sure you can attain and reach them.”