Edward Hardy

We are increasingly a nation of renters without a place to live.

Approximately one in three American households rent their home, according to the most recent U.S. Census Report data, the highest it's been since the early 1960s. The number of apartments available to rent has not kept up. Thanks to under-investment, urban zoning laws and even Airbnb, there are fewer and fewer places for the ever-growing population of renters to live.

As a result, the number of vacant apartments is approximately 60% of what it was in 2010 and the median price for a unit has nearly doubled.

Here's what you need to know about renting vs. buying a home.

Different Ways to Rent or Buy

Buying a home can mean, usually, one of two things:

• Buying a parcel of land and the building on it

• Buying a place to live inside another building or on top of someone else's land

The first case is the classic example of buying a house. You purchase the land and either the house built on it or you then clear some space and build a house yourself. This is most common in suburbs and rural communities, where land is more accessible. In some cases, such as a mobile home park, you might buy the home but rent the space where it sits.

The second case is more common in cities. This is the example of buying a condominium or an apartment in a larger building. In this case you've purchased the unit, but as part of a larger structure that you don't own. You own this home, but subject to the restrictions set by the building's owner.

Renting a home can mean, typically, one of the following:

• Renting an apartment in a building on a formal lease

• Renting a free-standing house on a formal lease

• Living in a single-room occupancy

• Living in a rented property without a lease

Most rental leases last one year. If you don't have a lease but live in a unit anyway most jurisdictions protect your right to live there on a month-to-month basis.

Renting vs. Buying a Home: Cost Calculation

One of the biggest differences in buying vs. renting is up-front cost. Buying a home typically involves substantially more money at signing than renting one does, including:

• Down payment, typically anywhere from 5% to 20% of the purchase price

• Appraisal and inspection fees

• Earnest money (deposit) to hold a property

• Insurance, taxes and other fees upon closing

Of these, the down payment is typically the most significant. In order to secure a mortgage on favorable terms (or, in some cases, to secure a mortgage at all) you will typically need to pay at least 10% of the total value of the property. With the current median price of a new home at $342,200, that's at least $34,220 up front to buy a house.

Not surprisingly, renting costs substantially less. A typical landlord will require some or all of the following payments up front to sign a lease:

• Security deposit

• First month's rent

• Last month's rent

• Broker's fee

• Move-in fee

A move-in fee, when applicable, will typically cost several hundred dollars. In most cases the broker's fee and security deposit is equal to either one month's rent each or 1.5 month's rent each. In high-rent areas such as San Francisco, Boston and New York these payments can add up to the point where it might cost $10,000 or more to sign a lease.

Advantages and Disadvantages of Renting

It is typically less expensive to rent an apartment on a monthly basis compared to buying property.

Renting an apartment typically involves few costs other than paying the rent itself and paying for utilities. You aren't responsible for maintenance or property taxes, and renter's insurance only covers personal property. Owning a home means paying for all of these things, as well as the homeowner's insurance that has to pay for an entire building and the interest on your mortgage.

It is worth highlighting, in particular, maintenance and property taxes. These are two issues that renters simply don't have to worry about. While fighting with a landlord over maintenance issues can be a struggle, homeowners have to worry about structure-level concerns like boilers, roofing and other major costs that rarely come up even for renters with bad landlords. The same goes for property taxes, a potentially substantial cost that significantly increases the cost of homeownership but is not a concern to renters, although these costs are part what determines rent rates,.

According to data gathered by NerdWallet, by the time you factor in all costs homeowners pay an average of 54% more per month than renters do. In some cases the numbers are even more extreme. New Jersey residents pay nearly twice as much to own as they do to rent, and in Connecticut it is an 82% premium.

Advantages and Disadvantages of Buying

Buying a home has two major financial advantages over renting.

• You develop equity in the property.

Simply put, renters are throwing money into a hole. Renting an apartment means spending a lot of money to get nothing more than one month's occupancy in return. Once that month is over, you have nothing to show for your money. When you move out of the apartment, that's the end of the transaction.

Homeowners may spend much more than renters, but they are putting their money into something that has retained (or hopefully even gained) value over time. When a homeowner moves out of their house, they sell it and can get that money back. This doesn't make your home a liquid investment; you can't get the money out without being homeless. Once you do sell the property you'll likely have to spend that money again on a new house.

• You insulate yourself more from the month-to-month market.

The downside to a mortgage is that you create a long-term obligation. You functionally can't move unless you can find someone to take the house off your hands and this debt can create a real problem if something happens to your income.

On the other hand, a mortgage can also help protect you from stagnating income. In more than 80% of U.S. counties, personal income has either stayed flat or declined over the past five years. In that same time period median rent has increased by 60%, from $700 per month to $1,000.

This has created enormous financial pressure, as households increasingly have to do more with less. (All of which doesn't even mention the added financial burden of student debt, given that renting is heavily concentrated among the young.)

Rent can go up every year as landlords can renegotiate from scratch as soon as your lease is up. A mortgage doesn't. While some mortgages will have an interest rate that floats based on certain, defined metrics, the monthly payment on the principle remains the same. Even if your income has stagnated, there's no risk that your costs of housing will double in the next five years if your mortgage is fixed.

But, buying does come with one major for disadvantage:

• Potential for loss, to the point of going underwater.

What Is an Underwater Mortgage?

The risks of a mortgage are not trivial.

Readers may have heard about the "underwater" mortgages of the Great Recession. This is, short of uninsured catastrophic loss, just about the worst-case scenario of buying a home.

A home goes underwater when the property is worth less than the mortgage on it. For example, say you take out a $100,000 loan to buy a house. Now imagine that the local real estate market does terribly, perhaps the major employer in the region goes out of business, driving the value of your home down to just $50,000. It is underwater; you owe more than the property is worth.

When this happens, you have three choices. You can continue to make payments and hope the home recovers its value someday; you can sell the house and try to pay off the rest of the mortgage; or you can stop making payments and default on the mortgage. This last might not be optional. If you lost your job when the employer went out of business, you may no longer be able to afford payments on the property.

However, selling the property does not end your obligation.

It is essential to understand: When you default on a mortgage the bank can seize the property and still collect on the remaining balance of the loan.

For example in our case above, if you can no longer make payments on this mortgage the bank will seize the house. It will sell it for $50,000, but that won't pay off the entire loan that you owe. You will still have to pay the remaining $50,000. You won't have a house, but you will have debt. It's the biggest risk of a mortgage, and it's worth keeping an eye on.

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