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.
Renting can beat homeownership
May 10th, 2017 at 03:38 pm
May 10th, 2017 at 04:19 pm 1494433159
May 10th, 2017 at 06:38 pm 1494441520
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.
May 10th, 2017 at 07:52 pm 1494445929
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.
May 10th, 2017 at 10:43 pm 1494456216
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.
May 10th, 2017 at 10:47 pm 1494456444
May 11th, 2017 at 03:08 am 1494472102
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.
May 11th, 2017 at 03:38 am 1494473882
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.
May 11th, 2017 at 03:43 am 1494474217
May 11th, 2017 at 02:28 pm 1494512889
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.
May 16th, 2017 at 04:02 pm 1494950527
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.
May 18th, 2017 at 02:33 pm 1495118004