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 six 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, the actual rate of return on U.S. real estate (when considering inflation, taxes, and mortgage interest rates) from 1975–2009 was actually below zero:
Assuming an annual depreciation rate of 2.5 percent, a property tax rate of 1.5 percent, a mortgage interest rate of 7 percent, and a marginal income tax rate of 25 percent for a typical taxpayer, the adjusted real rate of return on housing actually falls below zero (1.3-2.5-1.5+0.25(7+1.5))=-0.575 percent!
The stock market, on the other hand, averaged 3.375 percent annual returns for this period, after taxes and inflation.
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 longterm 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.
Earn and save more with our free course:
What would you do with more money in your bank account? Join over 15,537 other young professionals receiving our best money hacks to get out of debt by 30, increase your income (starting this year) and invest for financial freedom.
100% free! I will NOT spam you and I will NOT share your email.