What Gen Z Needs to Know Before Renting or Buying

For college students and recent graduates, the idea of managing rent independently – let alone planning to buy a house – can feel daunting. We recently talked to students about their questions regarding housing, including how long to rent, the benefits of renting versus buying a home and what steps to take to prepare for buying.

Edelman Financial Engines financial advisors Kay Russel and Kelli Smith are here to answer the most common questions and guide Gen Z through some of the trickiest aspects of housing decisions.

IS RENTING WORTH IT?

It’s no secret that renting has a negative reputation in terms of financial planning – the idea that renting is “throwing money away” has persisted for generations. However, Kelli says that the idea is outdated – while monthly rent may seem daunting, many of her clients are still paying off their mortgages well into retirement. If you’re passionate about apartment living, it can be sustainable for decades with the right financial plan.

“If you're an urbanite and you love to be in an urban location, buying something may be impossible,” Smith says. “But when you're renting, you don't have to worry about if the hot water heater goes out or about painting your home. There's a lot of sunk costs that go into owning a home that you don't have while renting. You're not building equity, sure, and you're always going to have a rent payment. But if you're doing your long-term financial and retirement planning thoughtfully, you can put that rent payment in as one of your living expenses.”

Indeed, while purchasing a property with a white-picket fence has been an aspirational financial goal for generations, Smith encourages Gen Z to interrogate their impulse to buy a home. Do they want to make the purchase because it will truly further their financial and personal goals, or because they just feel like they’re ‘supposed’ to buy a home when they reach a certain age?

“One of the things that I find very refreshing about the younger generation…I love hearing that everything isn’t about the house. Gen Z lives for experiences,” Smith says. “Prioritize what's important to you, what aligns with your values and both short-term and long-term goals, and then make sacrifices where needed, and budget and spend money accordingly. It’s as simple as that. The younger generation doesn't have to prioritize what Boomers prioritize.”

DECIDING WHERE TO RENT

One of the most important decisions for recent college graduates is deciding where to move after graduation. Kay recommends prioritizing locations with ample job opportunities in your desired field and then researching the cost of living in these areas to determine the best place to begin your career.

“I would research using job sites to see what areas offer the most job opportunities for your line of work,” says Kay. “Once you narrowed down the places, you can research to see the cost of living – tools like ChatGPT can help you with this.  Texas has a lower cost of living than California and has many technology opportunities, for example.”

CHOOSING TO BUY A HOUSE

But what if the lure of the white-picket fence is too strong? What metrics should you use to determine if it’s time to buy a house? Kay says that while some lenders may ask to see two years of rental history, potential buyers can start looking for a home as soon as they feel financially ready.

“The best time to buy is when your income is sufficient to manage the mortgage, and all the expenses associated with the house.  Be careful not to have too high of a payment that you can’t save for retirement or pay for an emergency if things come up,” says Kay.

Kelli recommends considering a variety of factors when choosing to buy a home – new buyers should be prepared to live in their home for 5-7 years to manage costs surrounding buying and selling and should aim to get their credit score over 700 to help secure  more desirable interest rates.

 “Before you save for a house, you want to have 3-6 months of expenses in emergency savings,” Kelli says. “Beyond emergency savings, build up enough savings to put down 20% on a house to avoid private mortgage insurance.”

Saving your money is essential if you’re working towards home ownership, Kelli says. She recommends living with roommates and carefully budgeting how much is spent on non-essential items to help young adults hoping to buy a house build the savings they will need.

“You're not going to graduate college making $150,000 a year and buy a $500,000 house. None of us have done that. We were eating tuna and ramen in college, and that's how we lived for the first 10-15 years out of college, until we kind of built our way up. So, we can't abandon the fact that we usually have to earn our way up to some of these goals that we have,” Kelli says.

Income is another important factor to weigh when considering buying a house, Kay says. Your income will determine what mortgage you’ll be able to manage comfortably, which will serve as an important guideline in your search for the right home.

“Once you graduate from college and you've secured your job, make sure that your mortgage is not any more than maybe 30% of your gross income,” Kay says. “If you stretch too far, that could cause a lot of stress. And if additional expenses that you weren't expecting come up, that could derail your finances.”

As always, consulting with a financial advisor can help set you on the right path, and as your goals evolve, they can continue working with you to help you stay on track.