How Renting Makes You Richer And Why You Should Consider This
As the housing market has waxed and waned in recent years, so has the tone of home-buying advice within the world of personal finance. Some experts have maintained that buying a house is one of the best assets you can invest in, improving your net worth and securing your finances for years to come. After all, a big house with a white picket fence is the epitome of the “American dream”… right?
There are some experts to whom the advice of you-must-buy-a-house-to-be-wealthy seems appalling. In fact, many on them insist that renting is actually the smartest route for many consumers, making them richer than their mortgage-laden counterparts.
Related: 16 Money Rules to Grow Rich By
It’s hard to know what the right answer is. Should buying a home be your family’s end goal? Or can you actually put yourself in a better financial situation by paying rent for the rest of your life? As with most personal finance topics, perhaps the truth lies somewhere in the middle.
Let’s take a look at a controversial viewpoint today: how renting a home, instead of buying, makes you richer in the end.
Opinions Are Changing
Over the years, there has been an industry-wide shift in regards to home-buying. Just take a look at any mainstream finance website or forum, and you’ll observe a number of articles touting the idea that real estate–your own home!–is not truly a good investment. To those who grew up with buying a home as one of their life goals, this can be both deflating and terrifying.
The conversation first began to shift drastically when the housing market crashed in 2008-09, leaving Americans with mortgages they couldn’t afford and homes that were much larger (and more expensive) than they ever needed. Now, you’ll find the narrative of “don’t buy too much house” everywhere you look.
Of course, this is (and has always been) a prudent recommendation. And there were experts giving it back then, even when the market was booming. The difference is that this sage advice was more often than not drowned out by shouts of, “Buy as much house as humanly possible! It’s guaranteed!” instead.
After the housing market crash, the narrative shifted over a bit further, with interest rates and housing prices plummeting. This made it cheaper to buy a home if you could afford it, even though banks had tightened up their lending and requirements. Now, once again, the market is on an upward trend, with interest rates and housing prices climbing steadily. This, of course, leads us back to the question: Should you rent or should you buy?
Why You Want to Buy
There are a number of great reasons why you would want to buy a home.
You may have been saving for a down payment for years, eagerly awaiting the day that you pulled into the driveway with a Sold sign in the yard. Your dreams for the future might include giving your children home to grow up in, where pencil lines mark their heights in door frames and you can paint the walls whatever color you choose. And there’s nothing wrong with that.
For many of us, myself included, owning a home is the final step in growing up and becoming financially secure. We are no longer at the mercy of landlords and property managers, and it just “feels” like a milestone to set down some roots. After all, buying a home is a serious financial commitment.
Owning your home not only means creative independence and “adulting,” though. It also brings with it financial benefits.
First and foremost, there’s the issue of “throwing money away on rent each month.” When you rent your residence, you are essentially paying down someone else’s investment over time. You will never see any return on that mortgage that you are paying, because it belongs to someone else.
If you owned your home, that monthly payment would instead go toward paying down the principal and interest on your own mortgage loan. Over time, the balance due would dwindle until, after 30 years (or less), you would own your home outright. When you eventually went to sell, every penny made would be profit, turning your home into a veritable nest egg. Renting eliminates this opportunity.
You also aren’t eligible for federal tax breaks that are reserved for homeowners. Home improvements, mortgage taxes, homestead exemptions… these don’t apply to you, and your rented property won’t reward you come tax return time.
However, as tempting as all of these benefits can sound, the reality is that renting very often makes more sense than buying.
Why You Want to Rent
It can be difficult to justify handing hundreds or thousands of dollars to someone else each month, in order to pay down their mortgage. But depending on your financial situation and even your future plans, this might actually be the smartest option for you and your family.
If you buy a home and stay in it forever, it will inevitably become a nice little nest egg. Its value is likely to increase over time, while the amount owed will steadily drop even when you account for the expenses involved. After 20, 30, or 40 years, you will have a few hundred-thousand dollars at your fingertips, only a quick home sale away.
The problem? Most people don’t actually stay in their home that long.
While buying will almost always beat out renting in the long game, the same does not hold true in the short game. If you buy a home only to move 2, 5, or even 10 years later, you may very well lose money. Not to mention the frustration and headache that can come with owning a property.
Let’s consider a home purchase, ownership, and subsequent sale. You will have to pay closing costs upon buying the home, in addition to the improvements you may want to make to the house in order to make it your own. Each year, you are sure to encounter maintenance costs both big and small, whether that means repainting the exterior or replacing the entire HVAC system (or both! In the same month!). You will need to pay for homeowner’s insurance, property taxes, and interest on your mortgage, every year.
Then, when you go to sell the property, you will have to make improvements to make the property market-ready. You’ll need to likely negotiate on your selling price, losing you even more money. You will have to pay an average of 6% to your realtor for facilitating the sale. And those are the bare minimum costs.
Conversely, renting doesn’t involve any of these. You can typically count on moving into a property that has been cared for and updated over the years. You’ll never have to worry about replacing the flooring or fixing a leaking water heater, and your landlord is the one responsible when the sewer line bursts. When you move out, you simply need to leave the property how you found it, without worry of improvements or upgrades.
If your financial situation changes and you are renting, you can adjust your living situation to match. Want a bigger home? Wait until your lease is up and find a new one! Lose your job and need to downsize? Start looking for your next place, and find something that better matches your new budget. You aren’t locked into a 30-year mortgage, so your family has options.
Your Home is Not an Investment
One of the often-repeated sentiments to support buying a home is that it’s a good investment. However, it’s important to remember that while your home purchase may result in a healthy nest egg in the long-run, it is not truly an “investment.” (Of course, this isn’t the case when talking about buying an investment property, but that’s not the conversation we are having here.)
Sure, you may have more money in your pocket by buying a home than you would from renting for 30 years. There’s no doubt about that. But the entire premise of investing is turning X number of dollars into more than X number of dollars; buying a home doesn’t do that. With few exceptions, a home purchase won’t actually put more money in your pocket than you spent, which is the point of investment.
House prices and rental rates have been closely linked throughout history, with both increasing at the rate of inflation–or about 3% a year since 1900. A house, after all, is an ordinary good. It can’t think up ways to drive profits like a company’s managers can. Absent artificial boosts to demand, house prices will increase over long periods at the rate of inflation, for a real return of zero. And, of course, that doesn’t even take into account all of the auxiliary cosa6ts involved with buying, maintaining, and selling a home.
Here is a supporting calculation that might surprise you, if you want to see the math. It shows how renting, and then investing the difference you would have normally paid toward maintenance expenses, actually pays off more than buying a house and spending on the incidental costs over 30 years. While this won’t be the case for every homeowner, it does further support the idea that buying a home is not an “investment,” regardless of whether that’s what you decide to do with your money.
Should You Rent or Buy?
Deciding whether to rent or buy a home is a difficult choice. After all, it’s been ingrained in our culture by the media that the “American Dream” is to own a piece of land and a house upon that property–and we’ve even been led to believe that it is a failsafe investment. Market events over the last decade or so have proven otherwise, but that doesn’t necessarily make it easier to decide between buying or renting.
There are a few questions to ask yourself before buying, or renting, a home if you want to be sure to make the most of your hard-earned money. You need to look not only at the immediate costs but how either choice will impact your finances for years to come.
- What are the odds of my situation changing? Is there a chance I could be relocated, get married, have children and need a bigger home, etc. in a few short years?
- Would my down payment make more sense as an investment?
- Would buying a home require me to wipe out my savings?
- Can I afford a mortgage, insurance, taxes, and the maintenance required for the next 30 years, if I buy a home? What is my backup plan, and am I comfortable enough that I can still build emergency savings, save for retirement, and adhere to my budget on top of all of these expenses?
- Is my credit in the right place to get a good mortgage interest rate, or should I spend a few more years working on it?
The answer to the rent-vs-buy debate is different for everyone. There isn’t one answer across the board, as it truly depends on your own situation and plans.
The main takeaway here, though, is that buying a home isn’t always the best option, and renting doesn’t always mean “throwing money away” each month. For many families, renting could very well result in more money saved over time than buying, which might be surprising to some.
While I don’t believe the American dream necessarily mandates buying a house, I still love the idea of a forever home and the nest egg it provides. Until I find the perfect place and am ready to settle down for 20 years or more, though, I will continue renting… and calling my landlord with those pricey maintenance requests instead of writing my own check.