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Renting can beat homeownership

May 10th, 2017 at 03:38 pm

I was thinking a lot about friends discussing how renting is throwing away money. It's really, really not. I can see how people think buying a home builds wealth. It's an enforced savings plan. Every month you build up savings by paying down the principal of your house.

But here's the truth! If you saved that principal payment and invested it, as well as invested the entire down payment of your home I'm pretty sure you'd come out ahead of the home owner. But the reality is three-fold.

One how many people would actually save the principal difference between renting and owning? So in that sense yes homeowners do tend to build wealth faster because they are forced to. And typically renters don't have the discipline to save. This is usually true as well because renters often times lack the discipline to save the principal for a down payment on a house. So home buying will build wealth but renting often doesn't because of lack of discipline. I see it too often with most of my long term renter friends they say "i could afford the same monthly payment as rent but I have no down payment." My point to them is then why aren't you saving?

Second, usually people's mortgages are more than rent. Renting often is less perhaps due to the fact that many people will rent the minimum space needed but buy a home much bigger because they are stretching the budget. I can attest to that. Our townhouse we sold was 3bd/2.5 bath townhouse 1500 sq ft. We were DINKS without kids. We didn't need that much space but we bought 5 years before kids to "grow" into to. Probably would have been smarter to rent a 1 bd apartment (like we had just sold) and then moved into something bigger 5-6 years later when we had kiddo #1. So for sure we were pretty dumb, but we liked owning and having dogs. I'm sure our rent would have been something like $1600/month (it was $1400 for a month to month studio at the time) instead of our $3k/month mortgage. But we could afford it and enjoyed the space. So if we had invested the $1400/month difference? We'd likely have made more money. Granted out of the $3k we were paying down I think $700/month principal so we were saving about half the difference. But still $700/month = $8400/year for 10 years is $84k and we could have invested that. So renting would have built up our wealth just as well.

Third I've noticed and perhaps I'm wrong when you renter you get a better location than when you buy. Most people have to compromise on something. So everyone I know compromises and has long commutes of 1-2 hours to get a "big" house. This means if they rented they could usually get something closer to where they needed to be but to afford to buy?

Right now if we wanted to save money DH and I could buy the place we're in for $600k. Instead we're buying something closer and more expensive but about the same size. So we compromised on size of home instead of location. We are paying for location. Also the $600k home would probably break even with our rent which we are overpaying because we had a dog. It should have been $2k/month we paid $2400/month for a dog. Our mortgage now is quite a bit more. But we also could have tried to rent in the same neighborhood we bought at it would have started at $3500 and we probably couldn't have a dog. So to us it's a wash.

But I don't think renting is losing money. I actually think to buy a home many times you are paying a premium to own. I think that many renters don't take advantage of the financial side to keep up with savings and match a homeowner. I think if they did it would become clearer how renting can be financial advantageous.

Have you ever considered renting if you own? And have you ever considered buying if you rent? Did you run the numbers?

For us we banked the extra money so renting we easily matched a homeowner. But I like owning with the stability and I like having a dog. I like feeling like we can do something to the house and not worry. Will we be paying a premium? Absolutely but it's one that my DH and I are willing to make because we want to. We know the financial disadvantages and advantages but still want to.

FWIW I think buying property and being a landlord is different. I think it's different numbers and cash flow and it's an investment not a primary residence you live in. I think it's something that can match stocks easily but you have to know what you are doing for arguments sake we aren't talking about RE investing.

11 Responses to “Renting can beat homeownership”

  1. ceejay74 Says:

    I totally agree. Especially with the less-than-strategic homebuying decisions my family has made, we'd be much better off financially if we'd just rented this whole time. We bought what and when we WANTED, not what made the most financial sense. In our case, we sold our condo at a substantial loss and stre-e-etched to buy a fairly sizable duplex of our own in a neighborhood we loved. I would never claim that it was an "investment" in any way. It's kind of like having kids. I try to be frugal and smart about what we spend on the kids, but there's no way they're the most strategic financial choice. They're what we wanted, emotionally.

  2. creditcardfree Says:

    Our rent is more than our mortgage ever was, but we also live in a home worth more than the homes we owned. However, I don't think we are wasting money either. The risk is much higher to own a home and then need to sell it three years later (which would be the case with us in the military). And the selling usually comes with a big price tag. I've enjoyed for the most part not having to deal with the repairs. Although, sometimes getting the landlord to comply is a hassle!!

    I think we spend less despite renting for more than we had for a mortgage. Renting changes what changes what you can even make to the home, so we save there. Our mindset changes and says we know we are just renters, so no we aren't going out to buy new X for the house. We do talk about things we would do to the house if we owned it, so I know that we would be spending money to make improvements. Not having that option saves us money. In some ways we have learned to be content with what is instead of always trying to improve.

    I hope this time next year I can report we are moving again and renting a cheaper place! Next time schools won't make quite as big of a difference. Smile

  3. rob62521 Says:

    I think it all depends on the person and where they live as well. We are homeowners and here in Central Illinois, it is fairly reasonable to live in a decent home in a decent neighborhood. I can't say that I look at my house as my hugest investment because we certainly don't live in a mansion. I also think it depends on the person and whether being a homeowner is worth it. Both ways have advantages and disadvantages.

    I do agree with you that many wouldn't have invested the money for the downpayment and had it to show after many years.

    A friend of mine when she was 85 decided to sell her house. She was tired of the neighbors and she took a loss on the house. She is renting a condo and loves it. She misses her house sometimes, but she loves the freedom of not having to deal with upkeep and repairs. She has no children and her niece is already comfortable so it isn't anything that she would want to worry with when the time comes. My friend said it would make it far easier for her niece if it was a rental and not having to deal with selling the property.

  4. LivingAlmostLarge Says:

    Ceejay I think we probably should have banked the money and lived minimally for years until kids would have probably have been the wisest decision. Bought something smaller or rented.

    CCF it's hard to compare probably too because you've moved cities versus staying in one place and being able to compare the price of a home versus a rental in the same city right? It's easier for people who have rented long term and bought long term in the same city I bet. You are moving next year already?

    Rob that's definitely true about the rental.

  5. alice4now Says:

    I've had to make peace with renting out here due to the astronomical costs of property. I can rent a much nicer place than I could buy with my income. I'm also still able to save, so when the time comes for a move, the down payment is there.

  6. MonkeyMama Says:

    I am definitely all about the numbers. Other things to consider are the tax benefits of home ownership (which are more substantial in more expensive markets). & also the point that a mortgage (30 years?) should be rather temporary in relation to renting.

    In the city I started out in, the numbers went WAY the opposite way. Our parents pay $2,500 per YEAR for property taxes and insurance. My GMIL pays $2,500 per MONTH to rent a "closet." I've often thought she should have bought a condo and hired a chef and a maid. Seriously! She only recently told me that she just never expected to live so long. So now like 80% of her income is going to housing.

  7. MonkeyMama Says:

    Part II:

    When we graduated college, we couldn't figure out how to rent together. A studio apartment would have cost 100% of my income. Home ownership made much more financial sense. Given the cost of PITI + maintenance, net of tax breaks, our condo cost $1,500 per month. To rent the same condo was $3,000/month. There was no renting + "saving money". Certainly not an ability to rent and save enough for a down payment that large. But knowing this, we crammed as hard as we could to save a (20%) down payment ASAP. (In this case, I Wasn't very smart, but my husband was the financial brains. In fact, I remember thinking he was completely out of his mind the first time he brought it up. I just didn't know anything about mortgages or condos).

    In our current city, we never priced rentals, so I don't know which way the math would work when we bought and never did any in-depth analysis. We just knew we wanted the stability and that we planned to spend most of our life mortgage-free and rent-free. For those reasons, renting didn't cross our mind. (In crazy markets like this, if you want to rent a house, you will be moving ALL The time). That said, the going rental rate for our house is currently 2.5 times our monthly mortgage payment.

  8. MonkeyMama Says:

    P.S. To be clear, if renting made more financial sense (for us), we would have rented. I am probably more about the math than the emotions, in general. It seems that these calculations are going to vary widely based on various factors.

  9. LivingAlmostLarge Says:

    Oh MM the first place we bought it was cheaper to buy than rent. But rents were super expensive. So we came out ahead. If we had bought a comparable to what we had rented in the second place it would have been cheaper too probably but since we upsized in preperation for kids it wasn't. But after 5 years it was cheaper to buy our place because rent for a smaller place surpassed what we were paying. I wasn't factoring the tax break in either case.

    Currently it's a wash. Rents again are high, I suspect in about 2 years if rents keep escalating we'll be significantly better offer not counting the tax break. Including the tax break it's a wash for us to buy if you consider the enforced tax savings we're better off.

  10. MonkeyMama Says:

    Quoting myself above: "In crazy markets like this, if you want to rent a house, you will be moving ALL The time"

    The only renter in my office just told me her landlord is selling the house she is renting. & so it goes... It's the endless rental merry-go-round.

  11. LivingAlmostLarge Says:

    If we were happy in our rental I bet we could snag a 2 year or 3 year lease easily. But we aren't and we could easily come out way ahead renting where we are than buying. But most people don't see it that way.

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