7 Reasons to Rent Instead of Buy a Home

Rent instead of buy

Owning your own home may still be the great American dream, but, the influx of foreclosures in recent years has made it a nightmare for millions.  If you are considering purchasing a home, I challenge you to at least think through the advantages of renting before you buy.  Here are a few.

1. Less risk

Strangely, risk seems to be the factor least considered when one contemplates buying.  Consider it.  If you are married and are basing your mortgage payments on two incomes,  you are in lala land if you ignore the possibility that one of you could lose your job.  With unemployment at 10%, there is a one in ten chance of a single income being lost and even greater odds that one of your two jobs could disappear.  Reality check: renters face zero percent chance of foreclosure. Bank of America is estimating that their foreclosure rate will be up 600% by December of 2010.  Obviously, lots of home owners didn’t correctly factor risk into their purchase decision.  Don’t allow yourself to be part of that statistic.

2. Less hassle

Sewer backed up?  Call the landlord.  Roof leak?  Call the landlord.  If you don’t own it, you don’t have to fix it.  Homeowners, on the other hand, do.  Renting saves not only the hassle of fixing whatever breaks, but maintaining the residence.  A renter doesn’t even have to mow…or own a lawnmower.

3. Flexibility

What if you get a great job offer that necessitates a move?  If you are a renter, you simply move.  I realize you may have to fulfill a lease agreement, but doing so is a breeze compared to selling a house.  The nuts and bolts (getting the house prepped, hiring a Realtor, etc) are bad enough, but what if you need to move before your house sells?  You will be paying both rent in your new location and also your mortgage on your unsold house.  You will be an absentee home owner and eventually a motivated seller.  Yes, this is all doable, but it is a hassle and can become very expensive.

4. Save money.

According to an article in Get Rich Slowly, a buyer can reasonably expect to pay 78% more in monthly expenses than a renter for the same house.  This chart compares renting versus buying of two very similar 1850 SF houses in the same neighborhood in the Seattle area:

Renting Buying
Rent/Mortgage: $1,495 $2,093
Insurance: $20 $163
Property Tax: - $407
Tax Savings*: - ($327)
Maintenance: - $354
Total: $1,515 $2,690

* (less standard deduction)

I recommend you read the post for all the details of this study, but the point is this: renting will often cost less per month than purchasing.

5. You are not throwing your money away.

Don’t swallow the old myth that renting is throwing your money away.  While you don’t get your money back, you are nevertheless getting something for your money:  a place to live.  This is not throwing it away.  Besides, buyers don’t get a huge chunk of their money back either.  In the above example, the only portion the buyer gets back from his $2,690 monthly expense is the principal on the loan, which, in the first five years of the loan, averages only $419.  The buyer, therefore, is “throwing away” $2,217 a month compared to the renter’s $1,515.

6. More liquidity.

By now you are tracking with me, but a renter, if he does indeed save by renting, has liquidity and therefore flexibility with that saving differential.  Again, referring to the above chart, the renter has over $1,000 a month he can use to pay off debt, build his emergency fund or invest for retirement.  The buyer does not have those options.

7. Tax advantages of owning are overstated.

Yes, owning has tax advantages: no capital gains taxes on profits of up to $250,000 for a single homeowner or $500,000 for married homeowners is a very sweet one.  However, with the recent plunge in real estate values and the projected growth of value sketchy at best, capital gains doesn’t seem to be a huge factor.

Homeowners can deduct the interest they pay on their mortgage, but for many this deduction won’t kick in until the interest, along with other itemized deductions, exceeds their standard deduction ($11,400 for married couples and $5,700 for singles in 2010).

But renters have one huge tax advantage: no property taxes!  In our example, this comes to $407 a month.

Closing thoughts

Don’t misunderstand me.  I am a home owner and have no regrets.  I still believe that owning a home can be the great American dream.  However, the decision to buy instead of renting is a huge one.  Hopefully, these thoughts on renting can help you make the decision that is best for your family.

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54 Comments
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  1. Thank you for putting this into perspective. The decision to buy a house (or not) is much more complex that it’s presented.

  2. …I mean it’s more complex than it is often presented to consumers. :o)

  3. Joe, you made some great points. I’m young, but I was looking into home ownership in the near future. This post (along with my own thoughts) has made me think a little differently, and considering renting a home instead of buying one. What do you think about renting the home I’m living in, and buying a townhome in a cheaper area and renting that out? Does that make sense or defeat the purpose?

    Also are there landlords out there who prefer long-term renters?

  4. My wife and I are renters. As college students, we don’t know where we’ll be living in a few years, and thus it would be imprudent for us to purchase a place of our own. Renting is just so convenient!

  5. Renting is also better when you simply can’t afford to buy. I say this because many are under the assumption that you MUST buy a home as soon as you get married and or have a child. Whether they can afford it or not. Which if you think about it sounds ridiculous but many do it – all the time.

    Just because you’re 29, recently married with a child on the way, doesn’t mean you HAVE to got out and buy a home, that (if you can’t really truly afford it) will be in foreclosure in 3 years.

    I have seen this happen a lot with various friends and family members in the last 5 years or so. They think there’s some sort of clock they need to beat and all they end up doing is screw everything up for themselves.

    Wait! till you can afford a home. Whether you’re 23, 33, or 53.

  6. I think the biggest argument I hear is that “you aren’t building equity – and you’re throwing money away.” For almost everyone out there, their homes are an expense – not an investment. Viewed that way, what’s the difference whether you pay $800/mo to rent or $800/mo to buy – it’s an expense you have to pay each month in order to keep you out of the rain.

    For those who adamantly feel that their home is an investment – talk to your neighbors selling their homes for barely what they bought it for. Most people today would be happy to get back what they put in. Not my idea of a great investment.

    For me – a house is an expense, unless I’m renting it out to someone else.

    Tim

  7. We bought our house as newlyweds last year and thought what a great investment! Recently, after adding everything up + maintenance, it was a cold realization that it will likely be a break-even when the mortgage is said and done, seeing as we are not able to save/invest too much currently. Happily ever after though…there will be a place for us to stay 22 years from now…. “rent/mortgage” free. What’s also keeping us satisfied, rather than doubtful of our decision to purchase is that we don’t have to worry about the instability of staying in a rental for a limited amount of time or flux of rising rental fees through the years ahead.

    But yes, I agree, the advantages of renting can be great and we rarely hear about it in the finance circles. Each situation needs to be weighed individually for where you are and consider the factors mentioned.

  8. Interesting. Completely different perspective. I was always told that we have to buy as soon as we can because renting is just a waste. I wish I’ve read this article a few years ago.

  9. @Ash,
    Hopefully, we made the topic a bit less complex.

    @Chris,
    A satisfied renter in today’s world is rare, but I am glad you are one. Do you ever plan to buy?

    @Briana,
    If your goal is to be a landlord, then read everything you can get your hands on about investment property. Then go but lunch for someone who has been successfully doing it for 30 years and learn from that person. Remember that debt brings on the same risks you would have if you bought your own home, so I wouldn’t recommend buying investment property unless you can pay cash.

    @Danny,
    Right! Premature home buying, as millions have learned in the past few years, is a formula for disaster.

    @Tim,
    Owning your own home is a great thing, but you rightfully point out that it is an expense and shouldn’t be thought of as an investment.

    @Kristi,
    I am glad that your home purchase is giving you a sense of satisfaction. Just curious…would you make the same decision now?

    @Aloysa,
    Yes, it is a different perspective. Millions have swallowed the myth t renting is always throwing your money away.

  10. @ Joe-Yes, I would. For the fact, that once we pay off our home, a finite time, we will retire on the early side. But I appreciated that your article gave many good points for other people to be satisified with their decision to rent.

  11. Great article! You’ve highlighted some of the reasons why I’ll probably rent forever! The idiotic ideas of “throwing your money away” and “you’re missing out on the tax benefits” can be so easily proven wrong – and you’re done a good job at objectively exploring these points! Especially since you are a homeowner with no regrets!

  12. Any debt is bondage. Scriptures warn against any kind of debt. So this includes a mortgage as well. Renting is best, especially when you are following God’s word to be debt free and free from the bodage of a mortgage. It is well worth the wait to save money to buy a home free and clear. Do the math, how much interest are you paying to the lender? How much time would it take to save the money instead of taking a loan? We did the math lately and found it half the time, so when we retire we can buy a home with cash, and not owe a dime more to the mortgage company in interest.

  13. @Kristi,
    Great. I am “semi” retired with a paid for house. It is the way to go!

    @Khaleef,
    I am glad you “get” the gist of this post. I am not advocating renting instead of buying; simply pointing out some reasons to rent. In today’s world, these reasons need to be considered.

    @Olivia,
    There is a reason why scripture warns against debt…it can hurt you! My point number 1 was “Less Risk”, but your plan to save up and pay cash for a house negates that point. I like your plan! A paid for house can never be foreclosed on.

  14. Great article. I’m about 3 years out of school, and until about a year ago, my thought was that all of my savings needed to go into a down-payment for a house. While I still aspire to be a homeowner, it’s no longer my top priority.

    My question about the article is, in the example above, why would a property owner charge almost 50% of what they’re paying to rent?

  15. Daniel,
    I am not clear about what you are asking. Could you share the specific numbers to help me better understand? Thanks.

  16. We went from owning to renting about two months ago. My blood pressure dropped – really! – I checked it recently. Why there isn’t more anger directed towards the realty industry that has given this nation the “hard sell” on homeownership – to the detriment of many people – is beyond me. I’ll take lounging by the apartment complex pool over mowing the yard any day.

    “American Dream”, my backside.

  17. Joe,
    Sorry for the confusion. My questions was in regards to the example under Reason 4: Save Money, where the article compares renting vs. buying two similar houses in Seattle.

    Renting (1) Buying (2)
    Rent/Mortgage: $1,495 $2,093
    Insurance: $20 $163
    Property Tax: – $407
    Tax Savings*: – ($327)
    Maintenance: – $354
    Total: $1,515 $2,690

    I don’t understand why the owner of property (1), who is renting their real estate out, only charge $1,495 when they could possibly be paying $2,690 to own the house as column (2) shows? They would be losing $1,195 a month on their investment.

    I guess the simple answer would be that there are many variables to consider that the owner of the rental house would take advantage of, including additional tax savings, paying for the property in cash, etc.

    Does this make more sense?

  18. Daniel,
    Yes. It makes very good sense and I don’t have an easy answer. My guess is that he owns the house outright and is not making those $2093 payments each month. I mentioned in point 5 that, for the first five years of the loan, an average of only $419 goes for principle, which means that he is paying about $1600 interest per month for those five years.

    The lesson is that it would be nearly impossible to make money renting out this house if you have to borrow money to buy it.

  19. Hi Joe — would you have some insight about renting vs buying a condominium unit as a home? I’m currently in the process of buying a condo (just a studio, since it was obvious that i couldn’t afford even a 1-BR on my salary) — which i’m thinking might be a different scenario compared to the home vs apartment example you gave. My idea for buying is that this is going to be where i’ll spend the rest of my life, and i want to own it. Am wondering though if i’m missing any downsides to my decision… Cheers!

  20. angie,
    I don’t see a huge difference economically between buying a condo or a home. All of the factors I listed (except the “hassle factor” … which you still pay for when buying a condo) still apply.

    You say you are in the process of buying a Condo. Does this mean you have already bought it and you are in the process of making payments? Or does it mean you are shopping and considering the purchase?

    The reason I ask is because, if you haven’t purchased yet, I recommend being extra conservative in order to lower the risk factor (point 1). My criteria before buying are: 1) Zero debt. 2) Three to six months of emergency funds in the bank. 3) Payment not more than 25% of your take home pay. 4) Good down payment…hopefully 20% or more. 5) Fixed rate loan with no longer than 15 year term.

    One more thought: you might think you will spend the rest of your life in this studio condo, but don’t be too sure. Life brings about many unexpected events. But even if you are right about living there the rest of your life, that one fact is not a good reason to jump into a purchase.

    I hope this helps. Write back to let me know.

  21. As a lifetime low income renter, I consider renting very risky in the long run, since rents tend to rise substantially in the long run, whether your income rises or not. Indeed, the worst situation for a renter to be in is to have flat income while incomes around you soar, as those conditions are conducive to galloping rent increases.

    For low earners, ownership of a modest – even tiny – home can represent the difference between enjoying a modest retirement (after the mortgage is retired) and never being able to retire at all (because you are paying half your income for rent).

  22. For low earners, buying a home (with a fixed-rate mortgage) should not be viewed as an investment so mush as a hedge against soaring rents. This is crucial for low earners who cannot earn and save enough to stay comfortably ahead of the rent curve.

  23. Terry,
    I agree that life time renting is also risk and a possible deterrent to retirement. My post did not recommend life time renting; I am simply trying to help readers consider renting until such time as they may want to buy. I said in my closing paragraph that, “I still believe that owning a home can be the great American dream.”

    This being said, I am not insensitive to your situation. Not being able to EVER afford to buy can indeed put you in position to be subject to the whims of your landlord.

    The trick is to balance the risk of purchasing prematurely with the risk of being a lifetime renter. If you had it to do over, what would you have done differently? Is there any possibility for you to still yet buy a modest – tiny – house in the future?

    • George

      On a side-note, as you had stated earlier, you can just move when you want. And “when you want” could definitely include when the rent begins to rise. Who knows… with enough pressure from the landlord to pay more or get out, you might search harder and end up striking gold with a bigger house for less than or equal to what you were just paying. Not that I’m informed much about renting and buying, but that seems like a (probably low) possibility. I’m a student and I’m just about to rent a house and one of the things I want to ask about is the possibility of renting to own. The place is a fixer-upper that is near elementary, middle, and high schools. For me, This is perfect to eventually raise a family. So I would hate to just be renting and then not be able to rent for years down the line, even to the point of putting my future kids in college.

  24. @Joe – Thanks very much for the comments on my condo purchase. I’m #2 — in the process of making payments. But I’ve had to plonk my entire savings (which was 6 months’ salary) as the first down payment of 10%, the 2nd 10% will be stretched (at 0% interest) over 9 months. My debt is only on my credit card, which is currently 40% of a month’s salary.

    No question though, future savings (including bonuses and overtime) will go to mortgage payments (which will be about 54% of my basic take home pay), so the nest egg will be very modest for a while. My rented place for the past year was about 60% of my take home pay, which was the 2nd factor i’d considered to buy instead of rent (first was the fear of living on the streets when i’m old).

    I’m *hoping* to pay the mortgage off in 10 yrs (or less!) — the amount of interest for this is already staggering. I’ll be keeping in mind your recommended fixed-rate loan, and see which banks can offer this.

    Times like these i do wish i already knew what will happen in my life! It’d make planning and decision-making so much simpler and risk-free. Thanks again for your article! Cheers.

  25. Angie,
    Yikes! 54% of basic take home pay going toward a mortgage is scary. And credit card debt of 40% of your monthly salary? What am I missing?

    And I am still confused about where you are in the process…you say you are making payments, but you also say you will look for a bank to offer a fixed rate loan. I am assuming that you have already purchased the condo and will consider a fixed rate loan when and if you refinance. Right?

    I hope all goes well with your condo purchase, but you have left yourself very little breathing room if your income ever hiccups or you have any unexpected expenses.

  26. Hi Joe — Whoops, i meant the current balance on my credit card is approx. 40% of one month’s take home pay, meaning i’ll be clearing it in about 2 months. The unit i “bought” is still being built (there’s a completion guarantee, so no worries!), hence the bank financing (for the remaining 80%) isn’t required yet, only the down payment (20%).

    But yes, I see what you mean about the 54% of the monthly pay; I’m still also saving about 13.5% of my pay, so there is that. I’ve also minimized spending (less eating out, changed mobile phone plan to something lower, etc.) so… we’ll see. Thanks again!

  27. Joe –
    Anything is theoretically possible, but I don’t see any realistic prospect of buying any home except a cheap trailer, which has never made any sense to me.

    Cheap trailer parks are packed like sardines, the lot rent is too high, the trailer deteriorates, becomes obsolete, and loses its value.

  28. I am a happy renter and I really appreciate your insight.

  29. I *LOVE* renting. My favorite reason is #5 – I’m not throwing money away, I’m getting a nice safe place to live. How is that a waste of money?

  30. Lots of good points, but I don’t understand how an unemployment rate of 10% means that there’s a 1 in 10 chance someone is going to lose their job. All that number means is that 10% of the working population can’t find a job.

  31. We bought our first little condo townhouse 2weeks after we go married. We lived there for 7yrs and then sold it, using the profit to purchase 3 acres of land and start building our “dream home”. We packed up our belongings and camped for nearly 2 yrs in my parents unfinished basement, paying a modest $300/mth to cover any increase in their utilities and the inconvenience of having us there and our cars in the laneway. We built as we earned the money, borrowed some from a relative at whatever the current rate was if they’d reinvested as each CD as it came up for renewal. When we were done construction we eventually got a regular mortgage and repaid the relative. At that point we had a $220k mortgage on a house worth about $300k. Now, our home is worth about $600k and the morgage is down to $170k. We’ll have it paid off in another ~4yrs.

    We’d always planned to remain in this home until we were carried out in pine boxes. Now I’m rethinking the wisdom of that plan. Yes I still love the house, but frankly the design/build/decorate process was the fun part and now it’s just somewhere to live and a bit of an albatross to maintain. Now I see the equity we’ve built as a wasted opportunity. If we downsized to a rented apartment and took the over $400k in equity we could retire right now instead of in 10yrs. We’ve already saved enough to cover our retirement from 65 onward. I have no hang ups over renting vs owning at this point. I’ve had my opportunity paint the walls any color I want and knock down a wall if I want. Now retiring early and doing a lot of travelling looks a lot more appealing.

    The standard argument that owning is an investment may or may not hold true depending what the realestate market has done in your area in the past 2yrs (ours only flatlined but never dropped and is now rising again). My problem has always been people’s fixation on building equity. Sure, building equity is terrific. But only if you actually use it. Otherwise it’s just a number on paper. If you never borrow against that equity or sell the house and get your equity in your hands, then you never bennefit from it.

    Yes it would be a radical change in lifestyle to sell a 3000sqft home on 3acres and move to a rented apartment but I don’t see renting as wasted money. Living in a mortgage free home isn’t free either. If I assume our mortgage is paid off and only add up the cost of property tax and utilities we’d still spend $1000/mth. That would cover the apartment. As owners we should also be assuming at least $500/mth to set aside for future repairs and maintenance (we’re currently putting $20k into redoing the roof). Downsizing would also reduce our insurance costs, and moving back into town would mean we could get rid of one vehicle and it’s insurance. We also wouldn’t need the riding lawnmower or the giant snowblower for the 200ft laneway.

    Of course a rented 2brm apartment isn’t equivalent to a 3000sqft home on 3acres. But given the choice I’d rather have the apartment and $400k in my hands to retire early and travel.

    The only reason we’re still in the house is that I’m half of a couple and while I’m all for cashing in and running with the equity, my husband is mortified by my change of heart. He loves his basement woodworking shop and grew up in a very small town and loves our quiet slice of countryside. The idea of living in an apartment in the suburbs seems completely ridiculous to him. So here I sit. Glaring at our lovely home that did nothing wrong except go up in value and taunt me with all that unutilized equity.

  32. Your numbers are intersting. I live in the DC metro area and I see many comparable rentals which cost more than my mortgage (including the escrow they set aside for taxes/insurance).

  33. Another happy renter here. I may buy someday, but not any time soon.

    I enjoyed this article. But I’m not quite sure what to make of the “less risk” point. If you lose your job and fall behind on your rent, are you *that* much better off than if you lose your job and fall behind on your mortgage?

    And as an unmarried person, I have no choice but to rely on my one income to pay my rent (or potential mortgage). I guess I am in “lala land” no matter what?

    And it’s true that renters don’t face foreclosure, but renters’ landlords sometimes do. From what I’ve heard, that can be very unpleasant.

  34. Happy homeowner here. I think it really depends on the housing and rental markets in your area. We’re paying about $120 more a month (mortgage+tax+insurance) for a 4 bedroom house than my mother is for a 1 bedroom apartment (I don’t know how much renting an equivalent house would be, but it’s got to be way beyond our budget). I don’t know off-hand what we pay for maintaince, but I don’t think it’s $350 like in the example. Maybe if we averaged everything out, but that would be including the money we spent making our house more efficient, and we spend about a third on utilities that my mother does (her apartment’s heater is horrible).

    Where I live, if you can get together a down payment and the credit for a mortgage, you do that, because it makes much more financial sense than renting.

  35. Also, if you’re worried about losing your job and not being able to pay rent/mortage, you can postpone foreclosure a lot longer than eviction. My mom postponed forclosure for about 6 years after she stopped being able to pay her mortgage regularly. The bank let her refinance once or twice, for only a relatively small amount, and she did a bankrupcy that let her keep her house longer before she finally gave up. In a apartment, you’re out no more than 2-3 months after you stop paying. Of course that destroyed her credit, and you really don’t want to do that, but if you don’t see any other options, you can.

  36. @Broke by choice – Thanks!
    @Molly – Good for you.
    @Ryan – Hey. I brought out the student in you! Of course you are right. One cannot logically predict that 1 in 10 of current workers will lose their jobs because 10% of our nation is currently unemployed. Thanks for pointing this out. My point is that potential job loss is a risk factor that needs to be considered when signing up for a mortgage.
    @Jenn – What an interesting conundrum. The stat that, even if you had your mortgage paid off, you would need to pay $1000/mo for property taxes and utilities is an eye opener. Hopefully, you and hubby will get on the same page with your decision. By the way, you are a very good writer! Thanks for the comment.
    @Amanda – As I said in the post, I found those numbers on another post. I am sure they are well documented, but not necessarily valid for all parts of the US or even for our changing times. My guess is that with foreclosures escalating and loans becoming more scrutinized, rentals are more in demand and therefore more expensive.
    @Joanna – My point on risk is that foreclosure is a more traumatic event than being evicted from a rental. However, you make a good point that I didn’t really consider. And the fact that you are reading and commenting on this topic is good reason to believe that you are far from “lala” land. :)
    @Marle – As in my answer to Amanda, it is obvious that the numbers I used don’t hold true for all parts of the nation. About delaying the foreclosure six years, it may be possible but I would still not want to go through all the stress and anxiety for those six years that still resulted in a bankruptcy. Being evicted from a rental would likewise be traumatic, but (in my mind), not as intense as what your mom went through.

  37. I think it’s good that more sites are putting articles on this subject up and questioning long-standing poor assumptions about real estate. however, I would also caution about being too swayed by recent events when discussing a potential long-term decision. It’s easy to use recent events to show renting is good now, just like it was easy to use recent events to show buying was good a few years ago.

    I myself am both a homeowner and landlord and happy to be so. I also live in Seattle, so to shed a little insight on your example, the simple fact is that buying a home in Seattle (up until maybe recently) was a very risky financial choice, for exactly the numbers you presented. However, the rent vs. buy numbers in Seattle have for a while been in the worst 5% of the country, so it’s a rather poor example. They are not representative.

    For myself when considering a home purchase, the first round of math is really quite simple. Is the cost every month (all costs, not just mortgage) of purchasing the subject property less than it would cost to rent the same property? If yes, consider further, if no, it’s likely better to rent. If you purchase with this math in mind you’re far more likely to make a healthy decision. Ideally, the savings from owning is also sufficient to more than cover the transaction costs of buying and selling over the course of time you plan to stay in the property (without counting on appreciation). Also, by following this guideline, if you do need to move earlier than planned and you don’t want to (or can’t) sell you can likely rent the property at break-even (or a profit) when you move to your new location.

    On a side note, @Olivia, your viewpoint seems very one-sided. If everyone followed the no-debt path and refused to buy homes, how would you rent them? There wouldn’t be any landlords to rent from because almost all of us need to have debt in order to provide you housing. You say we’re providing you with a service that is essential to support your desired way of life while at the same time you say that by doing so we are failing to follow God’s word. That seems hypocritical.

  38. I own a condo (paid cash) and figure even with the utilities and condo fees, it’s not more than a rental would cost, and I have the satisfaction of owning my own place. I expect to live there unless/until the fees skyrocket out of affordability, then I will sell and live in a rental for the rest of my days.

  39. Reason #1 for buying: you can pay your house in full, no mortgage. :)

  40. Great post, Joe, on an often ignored topic. I’m a certified HUD-counselor who teaches first time home buyers. In our very first class, we always talk about the pros and cons of buying and renting.

    I’d add one factor that is frequently overlooked (and isn’t important to everyone): renting may allow us to be better stewards of the environment.

    Tenants in a building sharing party walls and heating equipment will use less energy than an owner in a stand-alone house. People who buy homes often increase the amount of stuff they buy and use greater resources.

    Another point I’d like to share is that many of my clients seek to buy homes because our college town has many substandard apartments that are poorly maintained. People who aren’t necessarily the best candidates for maintaining their own home think they can do better than live in an apartment with rats, inefficient heat, and peeling lead paint. Providing decent, affordable rental housing for people of varied incomes has to be part of the mix.

  41. I bought a house that costs me $920 a month for my mortgage, insurance, and taxes. The same house would rent for $1100 at least, so these calculations don’t apply everywhere.

    @Tim A house can be an investment depending on how you go about buying one. You are putting money towards a home that can be passed down for generations to come. Also, it sounds like you bought when the market was high, which is never a good idea. I bought a distressed home, which had one of the lowest selling prices in the neighborhood. However, the house was in good condition and just needed a little effort to polish it. If you don’t know how to play the investment game, then don’t chastise it just because you’re losing.

    Also, it sounds like people were/are going out and trying to buy massive dream homes. These are the worst homes to buy in the housing market. Starter homes maintain their value. To me, it sounds like most people are trying to stretch their dollars too far. Buy a modest house and pay down the mortgage early, and then try to tell me it wasn’t a wise investment.

  42. @Andrew – Thanks for shedding light on the Seattle numbers I used. It is good to know that they are not representative of the nation as whole. Do you figure risk into your math analysis of rent vs buy? Even if the per month cost is exactly the same, buying could bring about more risk than renting.

    @Tara – Paying cash for a condo certainly eliminates the risk factor doesn’t it? I applaud you!

    @Lily – I too have a paid for house. No mortgage is wonderful.

    @Pamela – I have to admit that I had never considered the environmental factor. It’s a shame that those in your town who are not in a position to buy do so anyway because of the poor rentals available.

    @Shane- As Andrew (above) pointed out, these numbers are not representative of the nation as a whole. Thanks for sharing your comparison numbers.

  43. From Joe: “Do you figure risk into your math analysis of rent vs buy? Even if the per month cost is exactly the same, buying could bring about more risk than renting.”

    Well, yes and no. Since the original #s (the cash flow equation) include both maintenance and insurance they’re already accounting for a significant portion of the risk as a well-cared-for house is less likely to have significant (and costly) failures and you insure against many of the large risks that are outside your control.

    That said, there is always significant uncertainty left whenever making a purchase as significant as a home. Luckily, that risk comes in both directions — both threats and opportunities. I find that if the basic cash-flow #s are good then the risks do a lot to balance each other. For example, there is the threat of depreciation which could cause you to end up upside down when you want to sell. This is a cause for many current arguments against home ownership. However, I believe this is buffered by the opportunity for appreciation and the fact that, if the cash flow #s start out right, you have bought yourself the flexibility to rent out the property and wait for a better time to sell for a good price.

    The other major threat is significant damage to or failure of the property that is not covered under the insurance (i.e. the roof problem that the inspector failed to notice when you were purchasing, or the new crack in the foundation as the property settles). I believe this is balanced again in the original cash flow equation since you’re paying off equity in the property every month and in case of an emergency that equity can be borrowed against to help address these sorts of problems.

    Another way to buffer the risk is to make sure that you retain a reserve fund for the house when purchasing. That is, don’t put all the money you have available into the down payment. You should retain around 6 months of your monthly costs in reserve in case a problem occurs early during your ownership.

    Also, on the opportunities side, owning real estate provides a nice buffer against hyper-inflation. In the event of significant inflation renters often find themselves having to come up with higher rents at a rate disproportionate to their gains in income. Meanwhile, your ownership expenses are more stable and in fact inflation makes it easier to pay off the house early.

    At the end of the day there is definitely risk in home ownership so any purchase depends on the risk tolerance of the individuals involved. I think doing the #s well at the start mitigates most of the risk. Right now home ownership looks bad because a lot of people purchased poorly (didn’t follow the cash flow equation), resulting in the bubble and the drop, and those people who kept renting and avoided the bubble made out well. During other some other times in history people have made out better by buying. At the end of the day, my personal stance is to urge people not to focus on only the most recent events to determine which decision is best for them. Look at a wide range of possible scenarios, consider your own risk tolerance, and above all do the math.

    Cheers,
    Andrew

  44. Joe,
    Great article. I particularly like point #5 – I always hear people say you are throwing money away by renting.
    For me, the flexibility that renting offers is by far the greatest benefit, at this stage of my life.

  45. We’re renting in an unusual circumstance in that we’ll inherit the home we rent for below market rates. We couldn’t afford to rent an apartment in the area and mortgages are out of the question. Fortunately, a relative bought our house for $26k in the 1970s. Today, the houses in our neighborhood are selling for $1 million plus. It’s a 900 sq. ft., 2 bedroom, 1 bath home in the Silicon Valley. Our neighborhood is sweet and family friendly and great schools, but the homes and lots are small and you can hear the freeway from our bedroom. I’m always surprised when someone new moves in, having spent a million dollars or more on a 3 bedroom tract house from the ’40’s!

    The relative we’re renting from also inherited the home she lives in and another property from her parents. Her grandfather built her home from a Sears kit for under $2k. While she does have to pay property taxes (we’re in CA, so they’re the same as they’re not changing) and repairs, she owns several homes outright because the family has invested in home ownership and made a big deal about keeping property in the family. I can appreciate that, because while we pay below market rent to her now, she is making more from us than she pays in property taxes and repairs for all three homes, and the other property’s rental income is market rate, enough to live on.

    When coming to the decision about whether to rent or buy, those long-term considerations are important. Sure the market is crappy right now, but it’s a time when a house can be bought for much less than a few years ago, and historically house prices will rise. Our house will never again be $26k, and I don’t know of any other investment that would have turned that $26k into a million dollars in 35 years, without any real effort besides standard maintenance, as well as providing shelter for several generations.

  46. Dave D - FPU Coordinnator

    One thing about buying that many people miss is this – when you talk about the equity, this is really the gross (not net) figure. You put $20k down on a $200k house and sell it 10 years later for $325k (avg. 5% growth), but when you subtract the $82,000 in interest paid (5%), your whooping $125k “equity” is actually a modest $43k. We Americans have long been blinded by the “payment mentality”, and fail to calculate the total cost of ownership. We too own a home, and like others have said, it may be a total blessing, or your worst nightmare, depending on your overall financial well being. The rich rule over the poor, and the borrower is slave to the lender. Proverbs 22:7

    If we had it all to do over again, given the local market, we would rent for 15 years and then pay cash for a home. Just my two cents worth on the subject.

    -Dave

  47. I’m also a renter who wouldn’t have it any other way right now. I choose to live in a cheap appartment because I spend very little time at home and would like to use my money in other ways at this time. Add to that that I live in a province (British Columbia, Canada) that has very pro-tenant rental laws and a very overvalued housing market (IMHO) and it’s a super sweet deal.

    One of the things that I think people often overlook is that renters can take the difference between their rent paymens and what would be their total cost of ownership payments and invest it. This somewhat negates the argument that renters are missing out on appreciation – for goodness sakes, you can invest it in the REIT of your choice if you think that real estate market is such a great deal!

    I do this with an index fund investment. It’s similar to putting money into owning a home in that it also has a long term horizon however I think it has signifigant advantages since it’s more liquid in a pinch, is much more diversified, and is vastly more flexible (no one can tell me that I can only put 20% down in a lump sum in my investment accounts, and my investment accoutns don’t need to be liquidated or rented out if I want to move across the country).

    It may not be the right option for everyone, but it annoys me that it’s so looked down upon. Actually, scratch that. I apprecaite that it’s so looked down upon because it contributes to the weirdly low rental prices that I enjoy in my city. Ha!

  48. @Dave D,
    Thanks for running those numbers on how much interest one can pay in only ten years. It reinforces the concept of working toward a debt free life.

    @CB,
    Some say that renters pay just as much (or more) than owners, but you are obviously the exception. I will make the assumption that the rent vs own scenarios vary greatly based on location. You are using your positive differential just as I suggested in the post. That makes us both pretty shrewd, right? :)

  49. One thing I’ve noticed with mortgages is if you add the total interest plus principal is usually double the value of the house. So, after 30yrs, the house has to appreciate almost twice it was paid for. Am I correct?

  50. great insight! my husband and i are currently trying to sell our house so we can rent for a while and save up some cash!

  51. Very good advice! With the real estate market in such volatile shape, more people are opting to rent and save some money instead of buying. Even current homeowners are throwing up the for sale signs in order to move into rental properties. Many people still believe that renting is like throwing money away; however, I would rather rent for a year and save money than to have my house forclosed on. Just a thought!

  52. For some people , buying a home is not concerned with investment or losing money etc, its just satisfaction of living in own home. But your points are also true.

  53. 3- So true! That alone makes me never want to be a owner. I could never live in a staged house for months and months.The hoops some people jump through to get their homes sold terrify me. Much easier to rent, live in the place as it is until my lease runs out and never look back. Not my problem if the place doesn’t sell.

    A lot of owners are talk to state the possibility of having a bad landlord as a reason why they own. If I had a bad landlord, I’d make sure I could leave as soon as the lease runs out. Now if you have terrible neighbors on a property you own? You’re stuck.

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