Should You Buy or Rent in Chicago?

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August 4, 2020

Buying a home is one of the biggest decisions that most people undertake in their entire adult life. When should you make the leap, and when should you continue to rent?

5 reasons to buy a home rather than continue renting
What to check before deciding if to rent or own a home
Understanding the price-to-rent-ratio
How to calculate your price-to-rent ratio
Best neighborhoods to buy a home in Chicago
Other factors you should consider before buying a home in Chicago

5 reasons to buy a home rather than continue renting

Buying a home, especially for the first time, can seem daunting. For many people, renting often feels like an easier and more affordable option—especially in the short term. However, in many cases, you actually end up spending more on monthly rent than you would on a mortgage, all while living under someone else’s roof. There are 5 main reasons why you should consider homeownership:

  1. Home values in Chicago have been on the rise in recent years, meaning that you’re likely to recoup your down payment when you eventually decide to sell.
  2. Your monthly payments will go towards building your personal equity rather than lining your landlord’s pockets.
  3. Homeownership comes with a sense of permanence and stability, free from the whims of your landlord.
  4. You have the freedom to customize and expand your living space as you see fit.
  5. Although you’ll certainly pay more upfront, you’ll most likely pay less each month than you would if you continue renting.
rent vs. buy in chicago

What to check before deciding if to rent or own a home

Most prospective homeowners face the following questions when they first embark on their home buying journey:

  1. Can I afford the down payment? It’s well known that the upfront cost of homeownership is much, much larger than the security deposit for a rental. The exact amount varies depending on where you live, but you can expect to fork over anywhere between 5 to 20 percent of the home value towards a down payment (see our homebuyer assistance guide for more information). This can be a daunting amount for some families, leading them to pose the next question:
  2. Will I save money in the long run? One of the appeals of homeownership is that the money you spend on your mortgage goes towards building your personal equity rather than lining the pockets of a landlord. Most people are willing to put down more money upfront towards owning a home in exchange for lower monthly payments and the freedom from unexpected rent hikes.
  3. Is home-ownership right for me and my family? This last one is highly personal and will depend on each person’s individual circumstances and needs, however some people find that the money saved by buying a home isn’t worth the hassle in the long run. This is especially true for anyone who expects to move around every few years – buying a home can be time consuming and riddled with unexpected costs, meaning that some people just prefer the predictability (and flexibility) of renting. 

One of the best tools available for first time home buyers is the price-to-rent ratio, which can help you pencil out the pros and cons of buying a home versus continuing to rent and investing your savings elsewhere. 

Understanding the price-to-rent-ratio

The price-to-rent ratio is a useful guideline to determine whether or not it’s worth it for you and your family to invest in buying a home. The premise is to compare the cost of renting or owning a home for two similar properties in a similar neighborhood. The ratio is achieved by dividing the total cost of the home that is for sale by the annual rent for a similar property.

A price-to-rent ratio of 1 to 15 indicates it is much better to buy than rent; a price-to-rent ratio of 16 to 20 indicates the two choices are about even, and a price-to-rent ratio of 21 or more indicates it is much better to rent than to buy. For prospective buyers who are still in the early stages of their search, the price-to-rent ratio can be a useful tool in determining what neighborhood is best suited for home buyers.

How to calculate your price-to-rent ratio

The simplest way to derive your price-to-rent ratio is as follows: median home value ÷ median annual rent = price-to-rent ratio

In this example, let’s take the median prices for the United States in 2019: $226,000 ÷ ($1,465*12) = 17.5 Price-to-Rent Ratio. This means that within the United States as a whole, the costs of renting and buying are about even, with the advantage slightly skewed towards renting.

However in Chicago, the median home value was $249,159 and the median rent was $1,943: $249,000 ÷ ($1,943*12) = 10.7 Price-to-Rent Ratio. In this market, buying is often a better choice than renting since it’s likely to save you more money in the long run.

best price-to-rent ratio in Chicago

Best neighborhoods to buy a home in Chicago

As you can imagine, the price-to-rent ratio varies widely depending on where in the city you’re looking to live. Expensive neighborhoods such as the Gold Coast, Wicker Park, and Streeterville all have ratios over 40.0, whereas more affordable neighborhoods such as Englewood and Roseland have ratios below 10.0. That said, you may be surprised to learn that the price-to-rent ratio is not always tied to affordability: below you’ll find a list of reasonable Price-to-Rent ratios for some of Chicago’s most popular neighborhoods.

NeighborhoodMedian RentMedian Home Price Price-to-Rent Ratio
Galewood$1,525$238,60013.0
Rogers Park$1,468$279,16015.9
South Loop$4,438$876,99816.5
Portage Park$1,850$411,10018.5
Roscoe Village$3,999$964,60920.1
University Village$2,217$541,13320.3
Heart Of Chicago$ 1,860$457,34320.5
West Town$2,718$694,57021.3
Irving Park$1,642$427,95621.7
Bucktown$2,736$776,95723.7
Humboldt Park$1,548$455,24524.5
River North$4,019$1,193,43224.7
Noble Square$2,291$681,01724.8
Pilsen$1,580$479,76725.3
West Loop$3,422$1,084,06726.4
Bridgeport$1,350$430,03426.5
Logan Square$2,004$646,21726.9

Remember, the price-to-rent ratio only shows you whether or not it’s cheaper to buy than to rent – it is not an indicator of overall affordability.  As you can see from the table above, West Loop and Bridgeport have similar price-to-rent ratios but Bridgeport is much more affordable.  For more information on how to determine what type of rentals you can afford, head over to our guide on calculating your rent-to-income ratio.

Other factors you should consider before buying a home in Chicago

In the grand scheme of figuring out the most efficient use of your money, the rent vs buy ratio is certainly helpful. It puts the annual cost into perspective, but that doesn’t necessarily mean that home ownership is right for you. Even if the rent vs. buy ratio is a 14, renting still may still be your best bet. If you find that your price-to-rent ratio is about even, consider the following factors before taking the plunge into homeownership.

  • The length of time you plan to stay. Unless you’re looking to invest in a rental property, you usually want to buy a place where you want to put down roots and stay for at least 5 years. If you move more frequently than that, buying may not be cost effective since you’ll end up spending much more in closing costs and broker fees. This is especially true in expensive housing markets such as New York City, Washington DC, and San Francisco.
  • Expected appreciation for your home. If you’re hoping to use your property as equity, then you’ll want to know whether or not your home will appreciate in value. In most cases home values tend to increase over time, however in some cases (such as poor construction, infestations, or neighborhood decline) your home may lose value, leaving you underwater on your mortgage. Due your due diligence to research a property and neighborhood to minimize the chance of any expected surprises down the road.
  • How you feel about repairs. Homeownership comes with a lot of responsibility – if you find a leak, it’s up to you to make sure it gets fixed! Whereas some people relish the idea of spending an entire weekend resurfacing the driveway, others may prefer the perks of 24-hour on call maintenance that come with renting. 
  • Your Zoned School District. Many young families find themselves in this conundrum: they have finally saved up for a down payment, however it’s not enough to afford a home in their desired school district. In this case, it may be worth renting for a few more years until your family saved up enough money to purchase a home in the neighborhood you really want.
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