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Renting is Not Wasted Money


All my friends who bought homes before their 30th birthday love to proclaim that they’re no longer “throwing money away” by paying rent. Although I too aspire to one day own my home, I’ve never felt like renting is wasting money. That’s because when I do buy a home, I will buy a place to live; not an investment.

Update: It’s been almost two years since I first wrote this post (and, gulp, I have since bought a home). My decision was personal, but I think the case for renting is stronger today than it ever has been. If you’re curious, my wife and I bought a home because:

  • There aren’t a lot of rentals where we wanted to live. (Suburban Portland, Maine.)
  • At the time, mortgage rates (and housing prices) were near historic lows.

It was the right home at the right time, but we’re actually ambivalent about home ownership. For example, we would love to just be able to call the landlord to come fix our TWO running toilets. Instead that job falls on me and, seeing as I don’t have a lot of free time these days, our toilets are probably gonna run for a while.

But I digress. Let’s get back to the original points I made about why renting’s not such a bad idea.

YOUR HOUSE ISN’T THAT GREAT OF AN INVESTMENT

It’s true: some make millions investing in real estate. Some homeowners have even been lucky enough to retire solely on the resale value of their home 30 years after they purchased it. For most, however, reality is very different.

Yes: over the long run, a well-maintained home in a desirable location should appreciate. But according to this report, economists say the U.S. housing market had an average annual return of just slightly more than zero over the last 115 years (adjusted for inflation). The stock market, on the other hand, averaged seven percent annual returns.

Faced with those numbers, why would anybody invest in a home rather than the stock market?

HOMES SUCK MONEY

Next up is the undeniable fact that homes are costly to maintain. They must be painted, landscaped, and otherwise kept up to maintain value. And they are full of expensive appliances that break at the most inconvenient times.

Why do you think your landlord is so slow to return you call about the leaky sink? She wants to get as many years out of that sink as possible. Of course, she probably has a brand new sink in her own home (as would you, if you owned your pad). When we own our homes, we make repairs and renovations based on emotions, not resale value, making owning a home far more expensive than renting.

YOU CAN’T CONTROL TAXES (OR YOUR NEIGHBORS)

When you buy a home, you make a long term commitment to your neighborhood, for better or worse. If you live a city or town with a great economy and school system, chances are your home value will increase. (But so will your property taxes.) And if your salary isn’t soaring as high as those of new people flocking to your town, you may find yourself unable to afford to stay there. I’ve seen this happen to both my parents and my in-laws, and it’s not pretty.

On the flip side, if your neighborhood deteriorates, you’re the one not just living there, but owning property. If you rent, you can move at the end of the lease and let your landlord figure out how to deal with the depreciating property.

THE BOTTOM LINE ON RENTING

Want my simple, no-nonsense financial advice on housing? Consider your monthly housing expenses (whether rent or a mortgage) to be your payments for a place to live. Spend accordingly, and save or invest the difference. If you want the pride (and responsibility) of home ownership, by all means buy a home—you might even make money on it. But don’t count on your home as an investment.

And if you rent, please, don’t beat yourself up for “throwing money away”. It’s awfully nice to have a place to call home at the end of a long day.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. This is a badly needed discussion. For the past several years, renting has been much much cheaper than buying – at least in California and Manhattan.

    Real estate prices are still way too high to justify buying when you can rent for much cheaper still. Example. You buy a place in Los Angeles for $500K and your mortgage is $3500 minimum. You can rent the same place for about $2200/month – max. Sure you get some tax breaks, but as you point out David, owning has a host of other costs on top of just the mortgage.

    I actually do own and I’m happy about out, but I think its time for a rational and sober discussion like you present. Bravo.

  2. I have been a renter for the past 10 years. I have lived in San Francisco, San Diego, Austin, and recently, Oklahoma. When the housing market was booming in Southern California, I wanted to own. Who wouldn’t? Home values were going up by thousands of dollars every week. But when the market fell out, I was glad to be renting. I was able to move cities and not have to worry about selling my depreciated home. There are several people I know who recently (within the last 3 years) bought homes in San Diego and now have to stay in their homes. If they were to sell, they would lose $100,000 – $200,000! Yikes! If you don’t see yourself moving, and can afford a mortgage payment, then throw down for a house. In the mean time, I’ll stick to renting.

  3. The only reason I can think of for buying a home in the future is to get a good school district for the kids (if one chooses to have them). It can be difficult to find a good school in areas that have high degrees of rentership vs. home ownership. But other than that, the freedom of movement offered by renting is priceless.

  4. I’m 26 and live in Atlanta. I was renting an old house with a roommate for $1100 total. I recently bought a townhouse, smaller but newer, half a mile away. My mortgage is $1000 and I kept the roommate. So, I’m paying less each month owning than I did renting. I also got the tax credit for first-time homebuyers so it was a no brainer. For a lot of people renting makes sense. I know that I’m not going to get rich off of this house (I’ll be lucky to break even if I try to sell in a couple of years), but it’s nice having your own place and the extra tax refund is a nice bonus as well. Either way, my lifestyle hasn’t changed at all. I was still doing yardwork and fixing things at the house I rented.

  5. I guess renting might be for you if you don’t mind living with the broken sink and landlord who won’t call back for weeks on end. I don’t quite see how this is a plus to renting…I like the freedom of being able to replace the sink when I see fit or paint the walls whatever color I want or put a nail in the wall to hang a photo.

    • Or renting is for you if you don’t mind your bathroom ceiling falling in chunks on your head while you’re trying to shower in the old school bathtub that manages to get water all over the ground causing mold buildup after awhile (even if you dry it well) next to the creaky hallway adjacent to the neighbor with the dog who barks 24/7. Don’t even get me started on parking…
      I’m saving for a house, thanks.

      • PS I should mention that I’m currently living with my parent$, and I’ve only rented during college.

  6. I love it. I’m a renter as well. Could I buy a home? Yeah- probably. But I’m not in a great position to do it, so I continue to put my money away so I’ll have a better down payment on it. I don’t want PMI.

    AND I am definitely not throwing my money away. :)

    Great post.

  7. Gosh, I actually have an article on this very topic on my schedule to write. I’ll throw a link over here when I do right it.

    I obviously couldn’t agree more. To add to the benefits of renting: it lets you live with a lot more “travel freedom”. I plan on spending some time in Europe in the next few years, which means buying a home now would just shackle me down.

    I don’t plan on buying a home until I’m ready to have a big clunky castle to call home. ;-)

    This obviously isn’t to dis ownership — that’s great in many, many situations. But it’s also bad in other situations. It just depends, like most financial decisions, on what your context is and your goals are.

    Again, great post.

  8. I personally disagree. Obviously depending on your situation, renting might be better, but ultimately home ownership is better in the long run. I pay $770/month for rent right now. If I owned a home, that money would be going toward building equity instead of going into my landlord’s pocket. Five years of renting vs. five years of owning a home will leave the home owner in a much better financial position.

    Granted, I’ve never owned a home before so I might be wrong, but I’m saving every cent I earn so I can buy a house next year. Even if I am wrong though, that wouldn’t deter me from buying a house. The idea of having a house to call my own appeals to me very much.

  9. As a home owner, I have to disagree. You are right that a home really isn’t an investment and that it does require maintenance costs that renting doesn’t have. That is why a live in small place that is easy to take care of. But the money you pay on a mortgage, unlike rent, doesn’t just go away, except the interest but that, unlike rent, is tax deductible. Every bit you put into the home should ultimately come back when you sell. Sure the market fluctuates, but there is strong potential to get your money back and more when the market is right. Bottom line my monthly upfront cost of homeownership (including utilities, insurance, and a little socked away for emergencies) is about $1100. This enables me to live by myself. The after tax cost is about $925. If someone rented my place they would pay about $1300 per month and they would get any back in the form of equity, tax deductions, future sales revenue, etc.

    But as for investments, stocks are the way to go (over the long-haul), not real estate. I am unusual in that less than 50% of my wealth is real estate equity.

    • Just to clarify- rent *is* tax deductible in some states (like my current state of Massachusetts).

  10. I am sick of the assertion that renting gives you unprecedented freedom. Most rentals require a lease, usually no less than 12 months. If you have a job or life change in the middle of that lease, you are still stuck with the balance to pay or the onus of finding a replacement tenant, and you risk losing your security deposit over a capricious appraisal by the landlord on inspection. If you own a house, you can sell it or rent it to someone else at any time something unexpected comes up. That is the kind of freedom I am looking for.

  11. I think renting is definitely smart too. Although it is my & my husbands dream to have a nice house, if we bought a $250,000 house right now with $10,000 down and a 30-year mortgage, we’d be spending a TON on interest – almost as much as the entire value of our house, and we wouldn’t own it until we were 55!

    Instead, we are living in a NICE apartment for only $800/month. We are going to pay off our student loans and cars, thereby drastically increasing our disposable income (not even factoring in raises and bonusues), and save our money for a few years. We figure in just four years we’ll have over a $150,000 down payment and then we will be able to easily handle a 10 or 15 year mortgage (depending on the house we get) and we’ll own it at age 40. Renting just those few extra years will save us over $200,000 in the long run (Even WITH netting out the cost of rent!). I dont understand why more people dont do that. Interest is just handing money over the bank! I think so many people only look at the total cost of the house and the monthly payment, not an amortization schedule. And it is eye opening.

    Also, the added benefit for my husband and I is that it can give us the opportunity to move and be flexible with our jobs, because our careers are important to us right now. But, we can still be settled with a nice home by the time we have babies! :) Its a little hard for me to see my friends and their houses and their remodeling projects, but they are all leveraged up to their eyeballs. I think what we are doing is worth it. A little sacrifice can go a long way.

  12. Sara- What you are doing is great, and it sounds like it will be a great plan for you and your husband. The only problem is most people can’t save $150,000 for a down payment on their first house. I also think that most people don’t look to buy their dream house as their first house. Early on most of your mortgage payment does goes to interest, but not all of it. Also, if you don’t have a stable job and you can see yourself moving around early in career, of course buying a house isn’t a good option.

  13. Sara
    I have to agree with BT that it is out of range for most people to save over $150,000 just from their household income. I am still a renter and looking to buy this year with a $20,000 down payment plus the 8,000 stimulus, but in my market that is not even 10%. Still – You are missing one big benefit of purchasing a house in your equation – tax deductions on interest payments. I strongly encourage you to “re-do” your taxes and pretend that you have bought a house. Put in the expected purchase price and estimated interest for today’s rates and watch the deductions pile up. Of course these interest deductions decrease as you start to pay more principal than interest, but that was definitely the eye-opening lesson to push me into the market. Either this portion of my salary is going to go to the bank as interest payments on my home, or it is going to go to the government as income tax. My choice.

  14. Al brought up a good point. The tax deduction is a huge benefit, especially for singles with no children. The amount of income tax you pay the gov’t that is offset by the tax deduction covers property taxes for the year. Meanwhile you gain equity (well, certainly not right away) in the long run and equity on your home is your wealth.

  15. Sara, BT, Al, and Jessie:

    Don’t forget that you can always pay ahead on the principal on your mortgage, and avoid lots of interest that way. Especially the first few years of the loan, when most of the monthly payment is interest, you can get ahead by putting extra towards the principal and avoid paying the interest on it.

    However, no one rule fits everyone. There are good reasons for both buying and renting, and the more each of us can do to make an informed decision, the better.

  16. IF you can get a 30 yr fixed, and
    IF the payments will be comparable to what you pay in rent THEN go ahead and do it. I did. Another option is a townhome/condo… you generally arent responsible for the outside and can do pretty much what you want to the inside.

  17. As with most things, renting vs. owning comes down to your lifestyle and goals. For me, renting is the better option because I like the freedom to travel a multiple times a year, both in the US and in Europe. I feel like I’d spend more money on a house and wouldn’t take the trips that I do to visit friends who are all over the place. I also plan on moving out of Saint Louis in the next 1-2 years so for me, owning would tie me down and I wouldn’t make any money off of a home if I only owned it for 1-2 years. At my age (25) I have a lot of friends who have recently bought or are looking to buy condos and houses, and I’m happy for them, but for me, it’s just not the right time.

  18. In the process of buying a house in Southern California now. We found a house that the payments will be comparable to renting, we have a low interest rate and the house is in an area that has held up better in the housing crash. My wife and I are 26 and our main reason for buying is because we want to own our own home. We have traveled the world via the military and paid outrageous rent in Japan. I can’t stand the thought of lining another investors pockets with my rent money. I would rather lose my money on my own home than put it into someone elses pocket. We have carefully gone over the amortization sheets and will be more than able to continue maxing out our retirement contributions along with owning this home. We know the risk but the benefits of owning far outweigh the possible costs.

  19. Meghan Holender says:

    There’s also Robert Kiyosaki’s way of looking at your place of accommodation. “The house you live in is a liability”. Better to rent somewhere nicer or cheaper to live in and a buy an investment property that will generate positive cashflow.

  20. I’m in Canada, so the tax deductions aren’t applicable, and the housing market is different than it is in most of the US. My partner and I are starting to think about buying so that we have something that is ours, and we can do what we want with (it helps that I work in the construction industry, so I have a lot of know-how and contacts). For the time being though, we scored quite a deal on our apartment, and we did so through a lease transfer. Unlike most other places, in our province after the initial year of the lease it up, unless the landlord agrees to something different, the lease automatically renews for another year. And continues on and on. So we ended up getting a lease transfer via kijiji (seems more popular than craigslist for apartments in this area) for a very very good price, as the landlord cannot up the price between tenants this way, as we were taking over the previous tenants lease. We’re quite happy for the time being, and happy to be saving up a nice downpayment, while taking the time to explore what is available for us to buy.

  21. Renters pay: The owner’s taxes, the owner’s repair costs, the owner’s pocket indefinitely into the future. Move here or there and you still pay one owner or another.

    Home owners pay their own taxes and repairs, but at the end of that mortgage is several hundred dollars a month of “profit” each and every month.

    This is the reason to buy property. With home prices and interest rates at all time lows, it’s the time to buy… if you can save the down payment and have a pretty darn clean credit score.

  22. My husband and I eventually want to buy a house, but are fine with renting for the next few years (at least). We live in the bay area, where my husband’s 65k salary pays just enough for us to move into a two bedroom this coming Jan. When we buy, we want to buy a house on a bit of land (probably *not* in the bay area!) where we can spend the rest of our lives. Renting seems to be the norm here, and the apartments where we’ve lived have been taken care of – no leaky roofs or noisy neighbors, and we can have someone come change light bulbs/smoke alarms for us.
    When we both finish school, hopefully we’ll be able to save enough to buy after a couple of years (we’re debt-free).