Rent Forever, Don’t Buy A Home
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With the new year comes the inaugural post for my new series, the Devil’s Advocate posts, where I try to argue the other side of common sense personal finance advice (read the Devil’s Advocate series introduction post). This post will tackle one of the cornerstones of well-accepted advice: rent as little as possible and buy a home as soon as you can, renting is just like throwing your money away. I think that, like all one-size fits all advice, is completely wrong and here’s why.
Renting Keeps You Flexible
When you rent, you can pick up and move almost whenever you want, with very little penalty (perhaps an early termination fee of some kind); when you own, selling a home can take a very very long time. You lose a lot of flexibility when you “put down your roots” and this is one the biggest reasons why you shouldn’t buy. When you want to look for a new job, you’re restricted to looking in the geographic area around your home. If you ever get a job offer in another area, you have to go through the headache of selling your home before you can take advantage of it. If you rented, you could just end your lease, rent a moving truck (avoid U-Hauls!), and just go.
Someone Else Does The Repairs
When you own your own home, every time something breaks, you have to fix it. Every time something breaks and can’t be repaired, you have to fork over the cash to buy a new one. A new refridgerator costs thousands, a new washer and dryer is on the hot side of a thousand bucks, a new dishwasher can set you back a couple hundred bucks, and that’s just the cheap stuff. When you rent, hopefully your landlord will take care of all of your problems, fixing things that need fixing, replacing things that need replacing, and if you pick your landlord correctly, it’ll be a corporation with deep pockets.
Owning A Home Is More Expensive Than It Looks
With renting, you do throw your money on rent because you never gain ownership of the place you’re renting. However, when you own a home, you also throw your money away on other fees and taxes that never go towards your home ownership. For example, you’ll pay property taxes, homeowners association dues, condominium fees, and any number of other fees associated to the area your home is in – none of which go towards the equity in your home. For example, on my home, I pay about $3,000 in property taxes each year plus $30/month for HOA fees, and $500/yr for a parks and recreation fee.
Renters Insurance Is Much Cheaper
When it comes to home related insurances, renter’s insurance is ridiculously cheaper than homeowners insurance – oftentimes ten times cheaper. I was able to get renter’s insurance when I was renting for as little as $7 each month but now I’m paying for homeowners insurance at $55 each month – a difference of $576 each year.
Home Prices Can Go Down Short-Term
One of the cornerstones of the argument to buy a home is that home prices always go up. I’m not one of those haters who sees the current housing market and is ready to throw falling prices into the faces of all those people who bought a home (I bought one last May, arguable near the peak of the housing prices nationally), but if you treat the housing market like any other market, you’ll recognize that in the long run every market will go up (yay inflation). The problem with that theory is the fact that while you can invest in the long term, reality forces you to live in the short term and in the short term the market can go down. Is this a strong enough argument to rent? Likely not, hence being placed last in the set, but it is a consideration.
Summary
Owning a home is something seriously significant, it’s a life changing decision, unlike investing in a 401K, which would likely not change much in your life right now; and so it’s not one that should be entered into lightly. My honest opinion is that the general rule of “buy a house, stop renting” is probably the most strongly believed but most weakly defensible of the common sense personal finance advice concepts out there.
Please weigh in! If you have an opinion, one way or another, I hope you will share it!
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Jan 02, 2007 | Read more in Devil's Advocate
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I forgot to mention there is an income limitation to this loan- but fortunately I was able to by pass that due to the application process which was started before I started my new job…
What goes up must come down- And what’s down will eventually go up. It’s like the Stock Market, Real Estate will eventually rebound.
Your arguement that the renter doesn’t pay area taxes or property taxes is wrong. Your landlord wraps those fees and taxes into your rent. Someone has to pay property taxes, and your land lord isn’t paying that out of his own pocket.
The benefits of buying are the tax deductions, flexibility in your personal space, the long amount of time it takes for your bank to evict you vs the possibility nearly instant eviction by a landord, and the long term equity earned. No less important is the ability to put your house down as collateral for more adventursome financial adventures.
Renters are and always will be tossing their money down a deep, dark hole. N_G
Rents are based on what the market will bear, not on the landlord’s expenses. Like other prices of goods and services, the seller doesn’t just set the price unilaterally at whatever he/she feels like. The owner pays property taxes. If you don’t own the property, you don’t pay them. You pay a monthly fee to occupy space, and nothing more.
UGH! Just when we were getting somewhere, a Neanderthal comes in and takes us back to square one. Time to get schooled, N_G!
N_G
well Said!!
Sorry but I totally disagree with you! Prime example: My father bought a home in 1967 for $11,000. He paid it off by 1980 and with interest, taxes, repairs, appliances and maintaining it, it cost him as of 2009: $75,000! The home is now worth $220,000. The only problem he would of had if he had choosen to sell it would be the length of time to sell it. Small price to pay for the gain in Value. If you need to sell in the short term you might lose money, but long term… you are totally WRONG!!!!
Housing market issues aside, you are not accounting for the time value of money
with the money you would have invested into the house you can invest in the stock market instead and get greater gains on average
Hi Tony,
Please factor inflation into your calculations and then resubmit your post.
Thanks!
I have to say, I bought a condo about 7 months ago and it’s the worst decision I’ve ever made. I WISH I could go back to the simplicity of an apartment. I thought buying a house would be liberating, but it was the most suffocating, stressful thing ever!
As soon as I bought, there was an onslaught of BS from my HOA about stuff I didn’t even do! Then, they assessed me (and the rest of the homeowners) thousands of dollars in “special assessments.” I live in Dallas, so buying even a brick and mortar house without an HOA is next to impossible. That’s why I went ahead and got a condo…I figured that if I had to pay some HOA dues, I might as well have it where stuff is fixed for me. It sounded good…have my stuff fixed AND build equity. Hah…laughable. After this terrible experience, I doubt I’ll ever be silly enough to buy again. Property taxes suck, repairing and upgrading things suck, fighting with (and paying) contractors over things you can’t fix yourself sucks, handling expensive plumbing issues sucks, replacing a roof sucks, chasing sheet rock imperfections sucks…
If I could have bought a brand new home, I doubt I’d feel any better. New builds are made so cheaply and without regard for quality that you just watch your investment literally deteriorate over the years. You just end up chasing problems. At least with an older home, anything you do to it is an improvement…you just have to have the cash (and time) laying around to invest in it. That’s difficult when you are juggling work, HOA dues, property taxes and routine maintenance. Buy vs rent? I say RENT. If you want the freedom and space a house gets you, RENT ONE.
Interesting post. A number of flaws in your argument, though.
You’re flexible as a renter: Sorta. If you are a month2month, yes. Most require a lease commitment though and it’s less flexible (depending on state law, MUCH less flexible). Of course, if you need to be flexible, then you probably don’t need a home of your own anyway. One of the points of homeownership is planting ‘roots.’
No repairs as a renter. Again, state laws vary, but appliances are seldom included in landlord repair costs (or included in home at all). Often, repairs still have a maintenance fee to do and if the renter caused the problem, often it is their expense totally to repair. With a home, you can get a home warranty, which will cover everything under the roof for about $500 a year.
You don’t pay taxes, insurance, HOA dues, etc when you rent. Uh…yeah you do. It’s just included in your monthly rent. You don’t think landlords LOSE money by renting do you?
Renter’s insurance is cheaper. Yeah, you’re only paying for the contents in renter’s insurance. But that’s not the only insurance you’re paying. See above.
Home Values go down, short-term. Sometimes, but you don’t buy a home with short-term thinking. A lose, or a rise, in value is only important IF you’re trying to sell. The beauty of a home is that it is tangible and has a purpose besides just being an investment.
Sometimes landlords DO lose money by renting. It depends on market conditions. That’s one of the risks you take when you sell something, that you won’t be able to sell it for enough to cover your costs.
You can’t buy a HOME. You can buy a building or part of a building. A HOME is something you make by having family, friends, a safe haven from life’s difficulties. As for this building having a purpose other than being an investment, that’s true, it’s also a place to live and to keep your stuff, but that purpose can be duplicated by rental housing, so the only real reason to buy a house is because it’s cheaper than renting (rare) or because you think the value will go up, during the time you own it, faster than other investments with similar risk profiles.
Are we all forgetting something???? Sure you have to pay some extra costs in buying a home, but the majority of the money you pay to your mortgage goes into your own asset, in which you can sell and get your money back. When you rent you are flushing the money down the toilet.
not forgetting anything. you’re adding an assumption that isn’t foolproof: that the property will appreciate beyond what it has cost you. This requires a “time element” that you cannot always control.
renting is not “flushing money down the toilet”.
I put $90,000 on my home in 2003 and they raised my payment from $1000 to 2300. I lost my big beautiful home at an auction last Nov (2008). Talk about flushing your money down a hole.Now I rent a big townhouse for $980.00 The only way I will ever buy another home is with CASH.Just because you have a mortgage does not mean you Own the home.
We are all renters unless your house is paid off.
And even then-the tax man can throw you out.
Home ownership is a scam…just like the marriage fairytale.
lol… Sorry about your loss Anna, glad you brought it out.. all are renters! I own a few homes straight out, so you can say I have achieved what a few are working towards, but in the end, you’re still renting; but you will never know this till you do it full circle.
@ Anna:
AMEN, sister! I agree 100%! Last night, after Easter dinner with my wife’s family, my brother-in-law gave me a good talking-to. He told me that I “shouldn’t spend your money on just anything you want, but save your money, instead, so that you can buy a house of your own!” He told me about how low prices are and told me that “You’re missing the chance of a lifetime!” You know what? MAYBE I DON’T WANT TO BE A HOMEOWNER!!! I, personally, feel more comfortable renting, and have lived in apartments most of my life…I’M USED TO IT. For someone to tell ME I should own a home…there’s a screw loose in his/her head! Why should I take part in what could be one of the world’s BIGGEST scams?! It’s MY money, and NOBODY else’s! I CAN DO WHATEVER THE #&@* I WANT TO DO WITH IT! So THERE!
I agree it’s better to rent than buy for many people. If you have kids, want to belong to a community and plan to stay for at least 5 years than maybe buy. But don’t expect to make a fortune when you do sell.
FYI your bills for HOA, taxes, repairs and if you throw in your electric bill probably equal my rent. So it seems I am really not throwing money down the drain afterall. Plus I spend my weekends travelling not mowing a yard. hmmmm. Thanks for writing this.
I like this! Thanks everyone, because I learned alot! I’ll rather rent, too! The lord showed me more than 10 years ago, the economy crashing as well as other things. I thank him so much that I listened.
I think it was a good idea, IF you did it YEARS ago (I bought mine in 1977), but… the financial angles have gotten so overly complicated, it’s a pain in the a$$ and a scarier venture now.
But I’ve NEVER been sorry I bought my house, although it carries constant responsibility. Since I live in a semi-rural area, the taxes have never been terribly overwhelming. The payments were $158/mo. I paid it off in 1993, so no one can throw me out now. When I lost my job of 23 years, what a blessing it was not to have to worry about that.
After living in a house for 3 years and seeing how much interest one pays for having a mortgage, I think it is better to rent. Not to mention the property taxes. Why wouldn’t it be better to rent for about 700-900/month and save the difference of a mortage payment, in my case 350/month, for the same time as a life of a mortgage loan. 350*12 = 4200/year. Multipy that times 10 years and one would save about 42,000.
In NJ renters can apply for a partial rebate for the portion of their rent that is considered to have been applied to property taxes by the landlord. It is assumed that about 18% of your rent is going to your landlord’s property taxes. As stated earlier, the goal of the property owner is to make money, or at least break even, and most do. So yes, renters ARE paying property taxes, they just can’t write off as much as a homeowner.
Semantics. That’s like saying renters should qualify for a percentage of frequent flyer miles because their landlords use the rental income to take vacations. Renters do NOT pay property tax. They pay RENT. Whatever the landlord then chooses to do or not do with the money is irrelevant as far as the renter is concerned.
NJ ??? Say no more! This must be flame bait.
Renters don’t pay property taxes. One can assume all they want about where the money goes but there’s no way to quantify it in real terms unless the tenant pays in marked bills, lol.
Well, I’m not originally from NJ, and not that big a fan, but I’ll leave the NJ jokes to those who find them interesting. I will say though, that it’s the only state of many that I’ve lived in that let’s me write off part of my rent that goes to property taxes, so I can’t complain about that.
“Eligible homeowners and tenants who pay property taxes, either directly or through rent, on their principal residence in New Jersey are eligible for either a deduction or a refundable credit on their New Jersey resident income tax return.”
Source: http://www.state.nj.us/treasury/taxation/njit35.shtml
Sean- With all due respect, that’s a really bad analogy. Of course renters pay “rent”. No one is disputing that. The point was (*sigh*) that the landlord is passing on his costs of doing business (including property taxes) to his tenants. Therefore, tenants are indirectly paying property taxes; not directly, but giving the landlord money to pay the property taxes. The State of NJ recognizes this, and allows renters like me to claim a portion of their rent as a “Property Tax Rebate” on their state income taxes. I get a “Property Tax Rebate” every year. However, my boyfriend who owns a home, comes out farther ahead (in adjusted dollars) in property tax write-offs than I do. You’ll have to take any semantical arguments up with the State, I only rent here.
im actually tallying back and forth on homebuying vs rent and i must say you guys have pretty good opinions which actually make sense. i’ve been renting since i was 18 which is 10 yrs now (to calculate like Jes) i should have $42k saved up but i barely have $42! i basically need to come up with at least $5-10k to even purchase a home considering closing cost and dwnpymt for a home that costs $120k. needless to say im looking to RENT again for $900 a month and good part is the company i rent from (buzzuto) puts $350 a month aside to go towards a dwnpymt on their homes! not a bad deal ehh!
How do they put that money aside towards a downpayment? Is it $350/month for as long as you’ve rented from them or for a specific amount of time? That’s an interesting program. Would you be interested in one of their homes?
For years all I saw was how good it was to buy a home. Glad I didn’t fall for that in the last few years at least when prices were unreasonable. I almost bought a home for $290K which was $50K less than what Zillow said it was worth at the time. So glad I didn’t get it since now it is probably worth only $250K or less. That 40K will buy me 4.7 years of rent including my electric! Not too shabby. Plus I don’t have to fix anything or mow a yard. Granted I have some negatives like no washer/dryer or garage and dealing with lots of close neighbors and landlords. Still I live a busy life and renting is easier and cheaper at least from 2002 to the present.
i have a question….maybe you folks can help me.
i have never owned a house and when my dad passed away he left me about $150K.
i have been trying to decide if i want to buy a house or not. if i do…. it will be something REALLY SMALL and cheap…. AND i would pay cash for it.
my landlord has offered me the place i am living in for 30K. if i didnt buy that i would look for something else around the country at a similar price.
my question then is…. should i continue to rent? my rent is 475/month. or should i just
plunk down the cash for a small cheap home that i might pay up to 50K for. ( and YES they are out there)
i dont make alot of money so no big house buying for me.
i just cant decide what i should do.i am debt free and just need money to live.
so? what do you think? should i keep paying my cheap rent? or buy a place?
thanks for your 2 cents.
Ann
Ann,
You should simply put the 150K in money market funds, bonds, etc… and simply live off the interest. If you earn a modest 3% a year you would have $4,500/year or $375/month for rent.
You can either keep paying the full price for rent and let the $4500/year grow to more or apply it to the rent and pay just $100/month in rent.
Either way you should consider saving it because you never know when you will need that money Ex: health, legal, your kid’s problems legal or health, old age, etc..
When inheriting large sums of money you should continue to live as you were and enjoy the extra income from interest this way your money never disappears.
Ann,
You’re commenting on a post who’s title is “Rent Forever, Don’t Buy a Home,” so I’m pretty sure what they’re advice is going to be to you.
The truth is, without knowing your full situation, it would be hard to give you an accurate assessment on what you should be doing, but in general, here’s some food for thought for you.
If you pay $50K for a property, it will take you approximately 9 years to recoup that money figuring a $475/month rent payment. Of course, that’s assuming that your rent NEVER increases (yeah, right!). Using a VERY conservative appreciation factor, that same property in 9 years would be valued at about $75-85K.
I won’t even go into the whole ‘pride of ownership’ or the tax breaks or anything else that most here because is crap anyway (it’s not, btw). I’ll stick to their theories, and simply ask you, can you (or will you) invest the money in something that could possibly make a better return than that over the same time frame?
Again, simply looking at a home as an investment vehicle is poor planning, in my opinion, but that’s the major reason given here for NOT buying in the first place.
Whatever your decision, make sure that the people giving you advice know ALL the details (not something for a public post). Good luck to you.
Roger
Roger thanks for your comment to me.
i have NO idea who to ask about this.
all i want is a place to live i dont care about it as an investment. if it goes up in value thats ok too but i am near the poverty line in the money i make and i am just getting by.
i dont even pay taxes because i make so little money.
i want to pay cash for a place to live and the pride of ownership thing doesnt figure with me.
its just a place to live…. as long as it neat and clean thats all i care about.
i dont dont care about houses but i dont know if its better to rent than to buy.
from what you said… i can see maybe buying is a better idea than renting.
but i did find a really cheap apartment for $200 in a small town.
maybe THAT would be better to rent than to buy something. i dont know.
all i know is … i am pretty well broke and i happen to have some money that i can buy a SMALL place with… or i can rent and try to find a safe investment for that money.
i dont think CD’s are gonna do it. if it not 100% safe i am not risking it.
i guess this was the wrong place to ask advice.
i just thought i would see what people had to say thats all.
Ann
Wow. $200 for rent.
With the market down. Take a risk in a mutual fund and let time make you $$$… It would be ridiculous to ignore that opportunity.
Renting and buying… So many factors…
Renting is many many times a great oppotunity if you can keep it cheap. Roommates make it even better.
Remember home prices average 4% historically… Barely over inflation…
And that doesnt cover all of the taxes/upkeep …
Plus when you buy and sell there are plenty of fees…
Its all about intelligently taking all of the factors into consideration.
Hi Tim… i dont think i would want to deal with roomates. LOL got use to living on my own but yes i did find a real cheap place to live.
there are alot of cheap places in the country if you dont mind living in a small town.
since i work online…. i can do that.
i dont want to take any chances with my money.
if i lost a single dime i would be heartbroken.
so it looks like CD’s are all i have to choose from.
its GOT to be 100% safe or i wont sleep at night. LOL
anyway…. thanks for your thoughts.
Ann,
I’d recommend talking with a financial advisor about your situation. It’s pretty much impossible for anyone on here to give you the best advice, as we simply don’t have all the information about your personal finances.
Look for an advisor with credentials – CFP (Certified Financial Planner) and/or CPA. I would recommend CFP who works on an hourly basis, as he will be less likely to try and sell you something. Search google to find a professional in your area with good ratings.
That being said, simply investing the $150K in a federally insured money market fund at a 2-3% interest rate will earn you $3,000 – 4,500 per year ($250 – 375 per month) in interest. FYI, you will likely have to pay capital gains tax on this interest at only 5%, considering your low tax bracket. This money would be federally insured, meaning virtually no risk. Even if the bank that is holding your money goes bankrupt, the government will pay you back.
Good luck
Wow so glad I found this forum! I am an EX-Realtor & Loan Officer and for years I have been told and brainwashed that buying (homeownership) is the American Way and the way to go. (Lies cause if you need a loan you aint buying you are asking for a loan to be a renter)
The funny thing is…that it’s not Homeownerhip at all it’s Rentership you are still forking over money to the banks (your landlord) to occupy your home.
It is a scam if you ask me…I never could wrap my mind on how for the first 5 years of your loan for a 30 year fixed most of your mortage payments go to paying down the interest first before paying down the principal (the important part to you).
Yes there is the tax break but it aint really that much of a break at all…what is breaking is pouring money into your home via. taxes, HOA, HOI, & Maintanace. After all that you have to pay water, gas & electric, not including add on’s such as telephone, cable and internet.
So after you have lived in your home for 7 to 10 years and then all of sudden your income is reduced or gone and you can’t afford to pay all of your bills and you fall behind and then are foreclosed on you have lost it ALL!!!
Not your bank (landlord) they just recoup what you owe from the sale of your house & you if they could not meet all the costs through the sale.
So really they are able to make out big any which way you cut it! & you the proud Homeowner (ha) is broke with bad credit no house, no money, all of your equity gone..down payment gone, hardwork in the house gone!…..cause it was never yours from the get go!
I thank God for the great opportuinty that he afforded us and the learning and wisdom that we have gained from owning a home…but God did warn us to not owe a man nothing but love!
Having a Mortgage is what it’s name means “The Death Pledge”
Mort – Latin meaning Death
Gage – Meaning Pledge
I also like to add that there are some wonderful arguments about Renting vs. Buying
Maybe I’m being naive but I find that most people I know who have a mortage are STRESSED!!!!! I was thinking that alot of homeowners like myself are “house poor” when we went into this we were not but after soaring property taxes and increases in Homeowners Insurance and HOA and reductions in wages our homeownership has turned into a nightmare at best!
After doing research it would seem to prove us better if we were to let homeownership go and become renters for a few years and save and invest the difference so that we may once again get into homeownership but in a different way.
I mean the way of OWNING our home outright without a mortage. We may not be able to purchase anything grand but the thought of it being ours free and clear from a mortgage would be worth it to me!!!!
Oooops a lot of mis-spelled words…sorry, I know how some folks just cringe at that!
This varies from person to person. My husband and I have owned 2 homes in the past. The first we bought in 2002 and the second in 2004. We had mortgages on both. We have been renting since we relocated in 2007. We honestly wished that we had been renting all along. We would have saved SO much money. My FIL convinced us that renting was “throwing our money away” and actually buying those houses was exactly that. We weren’t able to put down 20% on either and with the second we had MAJOR repairs that we had to make. Until we have at least 20% and plan on staying in one area for 10 years or more (so our value might actually appreciate), we will rent. Yeah there is a sense of pride owning a home, but there is also a lot of stress that comes with it.
My wife and I have been renters our entire lives and I have to admit that buying is looking pretty good about now. I live in the Las Vegas area and I am seeing houses that were intended to be selling for over 300K going for right under 100K. These are houses that were built in like 2004-2007! The payments with fixed interest and the 10-15 year plan would STILL be cheaper than the rent that we are paying for or crummy apt. in the middle of the ghetto where we live now.
It would make sense that a brand new house in the middle of a brand new neighborhood wouldn’t have the maintenance issues that older houses would. It sure would be nice to get all of our “rent” money back the day we sell it.
Real estate is a complicated thing and to make out, you have to be on top of your game. There are some serious “numbers games” going on right now. It seems clear though, that a person could make TONS of money if they played their cards right. People can’t give their houses away right now, but everyone has to live somewhere. “One man’s loss is another man’s gain”… and there’s tons of loss going around… so therefore…
The old “buy low and sell high” concept has been around for a while now and I don’t see how the prices are going to be getting any lower.
Well, “Interested” if you wanna take the plunge go right ahead. It’s affordable to upgrade your living situation right now, no doubt about it. But buy to live, not to flip. 80% of the flippers of yore are now either holding worthless properties or had their credit destroyed by following the mindless herd to money without actually working for it. There is a reason it’s called a Housing Bubble – bubbles burst and don’t come back. Most people who can legitimately afford a home right now are living in one. True, everyone has to live somewhere – that’s what apartments are for, and at the lower end, cardboard boxes. You have to be able to actually afford to own a home now, what a remarkable concept.
BTW, that $300k tract house in Vegas? It’ll never sell for close to half that price again in our lifetimes.
1. It may be cheaper to rent than to buy. If you take out a mortgage on property, calculate the total interest on that property. (this is the money you are throwing away), if the property value passes an certain threshold, the interest you pay will be above your monthly rental.
2. Assuming that you invest the excess money that you were to pay towards a mortgage(principle) and assume that the interest on a mortgage is equal to rent, then your cash investment will compete with capital gains on the property and guess who will have higher returns
If it was cheaper to rent than to buy no one would ever buy property to rent out. And if that was the case rental rates would go through the roof. Which would then incentivize people to provide rental accomodations.
At certain times renting is cheaper than buying (see housing bubble). Sometimes buying is cheaper than renting. It really depends on housing prices, interest rates and the location.
Owning a home is expensive and takes more work than renting. It requires a lot of extra costs and effort that are not explicit in rental fees. Eventually though, when your mortgage is paid off, housing costs are minimal, leaving you with a fully owned asset.