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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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When you own, you get your interest payments back at the end of a year. Plus, depending on your credit score, you mortgage payments are not much higher than rent (mine is around $1,200 for a two-bdrm coach house vs. $1,120 for a two-bdrm apartment), so you might as well own the place instead of making somebody else rich.
You get interest payments back? In what world? I hope you don’t mean in tax deductions…that doesn’t come close to the actual amount paid.
Correction — you may get back about 30% of the value of your interest payments, probably not that much. It depends on your tax bracket.
Mortgage interest payments are a deduction, not a credit.
Another aspect of this equation is the ratio of rent to home price. A recent study by the Wall Street Journal showed that rents are now at their lowest price ever compared with home prices. In my home town of Boston, You can rent a two bedroom in a nice area for 1200/month. To buy would be roughly 400K with a monthly nut of roughly 3000. It is obviously a better deal to rent the place, instead of making someone else rich by paying an inflated price. I’ll wait to buy until economics make sense!
Note to Alex – you don’t “get your interest back” at the end of the year. The interest you paid went to the bank. If you are refering to the tax deduction, you don’t have to pay taxes on your interest,but it doesn’t make sense to spend 1000/month in interest to get a $250 tax break. Are you including maintenance and taxes when you compare the price of renting vs. buying? You might also want to factor in the cost of your labor as you spend your weekends raking leaves and shoveling snow…
Ooo I like this idea for a series! It just goes to show that there are positives and negatives to just about everything.
One day I would like to own a home. However, with my current budget its not feasible. I live in a cheap apartment that I share with a roomate. My half of rent and utilities (not counting phone because we each have our own cell) is $350. There’s no way I could find a house with a mortgage payment that low, let alone including utilities. Even if I had a roomate it would be tough to find a low enough mortgage payment. Not to mention all the little things that do come up when you own a house. So for right now, I rent.
I like this idea. Keep ‘em coming!
I really want to buy a home, though the cons to ownership seem big enough to scare me off. But I hate renting… I guess I just don’t like the idea that the place isn’t mine, I can’t paint if I want to, I have to pay “pet rent” if I ever want a pet… things like that. Then again, if my boiler breaks down in the middle of the night (which it did), the maintenance people appear first thing in the morning to replace, whether I’m home or not. Don’t get that when you own a home.
Two years ago in Chicago, rents were ridiculously lower than what my friends were paying for their mortgages. Since then, rents have gone up, but it is still significantly cheaper to rent.
The buying vs. renting argument is also pretty skewed when dealing with new grads. Many just don’t have the money for a mortgage plus other associated expenses, nor do they have the life foresight to think that they will be laying down roots and staying one place.
Everyone has a different situation. This particular topic definitely is all about finding what works best in yours.
I like the idea of post. I think that younger people especially have to be wary of buying a home to soon. For most of us, it isn’t an issue since we just don’t have the money, but for those who can there are definitely other considerations. I would hate to be sadled with a mortgage right now because I’m considering a career change and might need to take a lower paying job temporarily to get experience in a new field. I might be less likely to pursue my dream job if I had an obligation like a mortgage.
I think Renter had it right. It really can depend a lot by geography. I lived in Boston and I have to agree with what he’s saying. Because I was nicely forced (big raise) to move across country, I had to either sell my place in a declining market or rent it for about 2/3s the mortgage payment. I think I’m lucky that I had superb credit and renting it is only at a small loss at the moment.
In Silicon Valley, the mortgage of a 2 bedroom condo ($650K) probably comes in at just under $4000 if you have great credit. My rent is $1900 for an equivalent place. Would I rather buy a very, very small percentage of something for $4000 or nothing for $1900 and invest the rest? I’ll decided with the later and I think it’s a great deal.
Renting can certainly make sense in many instances. I rented for about 5 years before buying a home. In those 5 years we moved 3 times. Couldn’t have done that with a house very easily. And the flexibility for us to pick up and move on the drop of a hat was essential in taking advantage of career moves. In a case like that you can’t argue with renting vs. buying.
The same holds true in the opposite situation. Once you are settled down and established you can likely find a home with a mortgage that has the same or a slightly higher payment. Then building the equity into a home would likely outweigh some of the flexibility and additional costs associated with renting instead.
Anyway I like the idea of this series because as you said, there is almost never a 100% answer that applies to everyone. Too often we hear people spouting information like gospel, when in reality it may apply to most people, it will likely not apply to many others. It is refreshing to see some commentary that goes against the grain (even if it does ruffle some feathers along the way).
Great idea for a series!
I agree with the above comments that if you cannot afford the mortgage + extra costs, then it makes sense to rent. But i dont agree with the devil’s advocate argument that you should rent *forever*. I still believe in the conventional wisdom that as soon as you can afford it, you should buy a house. It costs more to own than to rent for that very reason – you OWN the place, and not just rent it. If the value appreciates (which it likely will, in most markets) its yours! If you choose to put a mini golf course in your back yard, you can! Heck, if you want to go paint the walls green and purple, and have boa constrictors for pets, you da*n well could. That feeling is priceless.
(Not to mention that in the later years of your life when the mortgage is paid off, you will thank yourself for not listening to the devil’s advocate
My wife and I did two columns with an Excel spreadsheet, rent vs. buy. Everyone always thinks the interest deduction is so great and a big reason to buy. As someone already mentioned, you spend $20,000 to get back $7,000 (go broke doing that). Also, we always end up spending money on unexpected items, decorating, repairs, etc. Ten years ago we figured that anything under $1500 a month was rent territory, anything over you get a benefit from buying (we seem to move every two years for transfers). In our moves home appreciation has helped us 3 times, depreciation hurt us once. The interest rates have been in our favor as well. If my company did not pay all the moving expenses, I would have been way better off renting, as it is, we hope we are in our last home, and that in the long run it will be better than renting. I will say this, for maximum flexibility in retirement, we will be looking to rent vacation homes/apartments, etc. and will severly resist buying a vacation home that would sit empty most of the year. We look back on times that we rented as equal if not greater periods of wealth accumulation. The times we have had home ownership, we generally had a higher quality of comfort, satisfaction, the times we rented we had much more freedom to get away, etc. Good luck to all, go with your best situation, rent or buy, its your life!
With mortgage interest being tax deductible in the states, it’s a no brainer to buy a home instead of rent if the rents in the area are within a few hundred dollars of a mortgage payment.
FT
It’s not about comparing the mortgage payment, it’s about comparing the amount you pay in monthly interest plus the closing costs – those two amounts are the ones you’ll never see back again. In my case, my monthly payment (excluding taxes and insurance) is $1331, but about $1200 of that is for interest. Instead of paying a landlord rent, I’m paying the lender rent. And that’s after paying nearly $9000 in closing costs. The closing costs can be even higher if you’re the person selling the house, too; both ends of the deal are hit hard.
Meanwhile, if I only pay the required monthly payment and never pay extra money toward the principal, then I’ll be paying lender “rent” of over $1000 a month for over nine years on a 30 year, fixed rate 6.5%, $210,600 mortgage.
The other thing about the mortgage interest deduction is you have to itemize to get it. Given that the standard deduction is quite high now, $10500 for married, filing jointly, only the amount of your itemized deductions above $10500 is actually a “win”. If you have, say, $12000 in mortgage interest and pay $4000 in property taxes, the “tax free” part of your mortgage is really only $5500, not $12000.
I agree with AMBER- I will rent until the cost of owning a home is a better deal, at this time I get a WAY better deal with renter’s insurance and repairs done by the leaser. The downside is for apartments and the possible noise level of the other tenets, though even there, I live in a more ‘professional’ area so when they are home they aren’t very noisy.
Renting a home would be nice in that way.
I’d buy a home if I could afford but not in the Bay Area. And I pay $500 something a month in rent. Home ownership would cost several times that much in California.
I’ll rent for now and continue to save for the downpayment and see how the market works out. And I’m not real sure where my career is going and if I switch I want the flexibility to be able to pack up and move.
Reason for the conventional wisdom….
How many people on the Forbes Wealthiest Americans list (or any comparable list) are there having rented instead of purchasing a home? I’ll go a step further. How many even rented a place into their 30′s or 40′s?
That said, I think that this article is a brilliant start to this series. Your do bring out a lot of valid points. Keep up the good work.
“Heck, if you want to go paint the walls green and purple, and have boa constrictors for pets, you da*n well could. That feeling is priceless.”
The other side of that is: if a hurricane comes and wipes out your area, if you own the home, it can be a disaster (look at all the people stilll haggling over Katrina “wind” versus “water” damage). I have zero risk in that regard, and that feeling is pretty priceless as well. Oh, and when my air conditioner breaks, I call the office and it’s fixed by the end of the day for FREE. Didn’t even have to wait at home to let the repair man in. That, and I can up and move to Timbuktu without the hassles of selling/renting my house. I’m personally not so sure that for some people renting forever doesn’t make sense: if you don’t need a ton of space, a smaller apartment, combined with diligent savings (which is really what mortgage payments are) could add up to much more long-term wealth than feeling compelled to purchase a home.
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I tend to agree that this is true for some people, although probably a minority. I’m gay, single and highly unlikely to ever have kids. Housing costs in my area price me out of the market by a wide margin. For now, I like living here…but it’s just not worth it to try to kill myself to own something.
At the same time, 1/4 to 1/3 of my gross income gets saved in the 401K because I rent a studio apartment.
“With mortgage interest being tax deductible in the states, it’s a no brainer to buy a home instead of rent if the rents in the area are within a few hundred dollars of a mortgage payment.”
This looks like almost the same mistake in Alex’s comment, that renter, Dan, and Foobarista have already responded to. It’s really *doesn’t* make it a no-brainer–you need to do more comparison to see if buying is a better deal financially, as well as whether owning fits your lifestyle and future plans. Further, if the only mortgage payment that’s comparable to renting is a negative amortizing, interest-only ARM that’s going to increase a few years out as the housing market collapses, leaving you stuck in it and unable to afford to live there, that’s not a good way to go at all.
Love this topic. The whole not being able to paint the walls thing… you should look at your lease. Every apartment that I have lived in has let you paint the walls whatever you want to, you just have to paint them eggshell white before you leave. The came goes with affixing things to the walls. Nail hole filler is like $5. Now, you can’t take out a wall, but generally speaking you can do alot as long as it is reversable.
Check you lease.
I plan on renting for a number of years because I am not settled, I don’t want the responsibility or expense of home ownership, and my rent for a one bedroom is cheaper than the taxes, fees, and upkeep for a similar condo. Not to mention I get to stay in a nicer part of town and get a fitness room for free. Granted I live in a place where rent is not $1,200 a month. If that was the case, I might feel differently.
As long as you take the difference you would have spent on the mortgage and put it away, renting might be preferable.
I just don’t want to be a little old lady worried about increasing rents. I would rather know that I owned a home, but thats about 30 to 40 years away.
“…rent as little as possible and buy a home as soon as you can, renting is just like throwing your money away…”
“With mortgage interest being tax deductible in the states, it’s a no brainer to buy a home instead of rent if the rents in the area are within a few hundred dollars of a mortgage payment.”
These are exactly the type of statements I hear from a lot of my friends. It drives me up the wall when people to make claims like this with ZERO backup information.
I agree with your points 100% and have been a proponent of renting for a long time. I used to think that I was missing out on this big wealth-building opportunity of owning a home until I actually sat down and crunched some numbers (lots of them).
Even though I bash on the “joys of owning,” I would definitely buy a home if I had enough money to comfortably afford one…but I don’t believe for a second that it would be the best financial decision for me.
When you rent, you’re paying for a place to lay your head. When you buy, you’re paying for a place to lay your head PLUS making an investment. You should evaluate whether buying is a good investment using all of the same factors you’d use for every other investment including duration, tax implications, potential appreciation, etc. I find buying an interesting investment because I can leverage a relatively small amount in a mortgage payment less what I would pay renting anyway into a monthly mortgage that lends me a very large sum.
As you can imagine, I made the decision to buy. Renting was going to cost about $1,000 and I found a similar quality condo for $300k where the mortgage is approx $2,000.
Some back of the napkin math shows that I am in a 37% tax bracket, 28% federal, 9% state (@!%&* D.C. taxes), so my mortgage actually cost me $1260 a month after the tax deduction (not free as discussed above of course).
Assuming 10% return on $250 (difference between renting and owning), I’d have to sell my house for $6,400 ($250*12) + $400 ($600 – taxes @ 37%) more than it cost me (closing costs, real estate taxes, maintenance, etc.). I estimated that even in a down market, my house was going to appreciate more than 2% ($6,400/$300K) in two years and I would be in the house just long enough to avoid having to pay capitol gains tax.
A lot of factors worked out in my favor (low interest rates, high rent to buy ratio, ability to stay in one place for an extended period of time, etc.) so it turned out to be a good deal for me. I only paid $6,400 and if my house appreciates 3% over two years, I will make 50% on my money ($3,000). If it appreciates 3% per year (APY), I will make 200% ($12,000).
Of course, YMMV depending on your situation.
Nice post. My husband and I recently did some quick back-of-the-envelope calculations on renting versus buying here in the Bay Area. I concur with almost everything everyone else has said about living in CA. By our calculations, to breakeven with what we’re paying for rent (and assuming our estimates on property tax rates, maintenance costs, etc. were fairly accurate), the house would have to appreciate at >5% per year for it to be worth buying. Blah.
Renting is always cheaper in the short run. In the long run, it’s more often cheaper to own your home – but the analysis entails unknowable future projections and thus risk.
I do not see owning a home as a ticket to vast appreciation and wealth. Instead – I earn minimum wage – I see owning your home as a crucial long-term defensive position (esp for low earners) to (1) stabilize your housing costs – something renters cannot do, and (2) guarantee that you will have SOME wealth down the road. I generally recommend buying as little home as you need, not as much as you can afford – remember, I’m thinking defensively, not aggressively.
I would like to build decent, affordable, OWNERSHIP housing (not necessarily single-family detached) for America’s working class. I don’t see anyone else doing it. Is it not possible?
In the longer term, the best argument for buying is inflation and hedging: your mortgage will decrease relative to rents over the years, and a fixed-rate mortgage is a hedge against rent increases. Also, California has one rather large reason to buy: property taxes are “set” when you buy your property and the assessment only increases by 1%/year. So, if you’ve owned a house in California for several years, you will catch up with the market rent price, and eventually do better. Also, CA allows you to “keep” your property tax assessment once you turn 55, so you can sell your place that was bought many years ago in the city and buy a nice retirement place in the country without getting reamed by the new property taxes.
As an example, our PITI + maintenance on our house in Mountain View, bought in 1997, is now significantly less than market rent would be on it.
But the above argument is why renting is better than buying unless you are going to stay in one place for a longer time, have a true “investment angle” (ie, you’ll live there for a couple years and then rent out the property at a profit), or have a compelling noneconomic need to own property.
I don’t have much of an opinion one way or the other, but I know in the city of Michigan I’m from, my parents rented a four bedroom, two bath house with a finished basement for $800.00 a month, whereas now we have a two bedroom, one bath, unfinished basement home, that they are paying $1200 in mortgage payments on.
This is a very interesting series, and idea! I will very much enjoy seeing your upcoming posts!