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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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see above comment..Thanks…bamababy24
Great debate…
In any major city or hotspot, buying is far, far more expensive then renting. If you feel confident that you are going to see double digit appreciation on your home though buying is a good idea. If not, it is far, far better to rent. And after the recent market run up, it is hard to see double digit appreciation for at least another decade.
I have a few homes that I rent out. They have break even cash flow and will likely apreciate 3% or so/year over the long term. (Even that is questionable. In cities like Dallas, Cincinnati, and Pittsburg, your home might be worth less ten years from now than it is today. This is possible if you don’t buy in a quality neighborhood where people will flock to year after year.) Of course, they also require work and renting them out from a distance is problematic.
People are so excited about deducting their loan interest and property taxes. The funny thing is, many, if not most, of us don’t itemize, so we don’t get to deduct any interest from our income. Even if we do, often our itemization is only a little bit above the standard deduction, so we only get to deduct a small part of the interest from our income.
Awesome website….. good job.
I live in Houston where property prices barely edge the inflation rate yoy. As much as homes here are relatively inexpensive compared to the rest of the country, the cost of maintenance, property taxes (3% per year), home owners insurance, flood insurance, repairs, community dues, yard work and lawn maintenance, tree trimming, foundation repair issues, termite treatment, painting, updates etc…… list goes on forever. In addition, tied down to the location for a long time because selling it is another 6% drawdown.
At the end of the day, economically speaking it is not worth it if you calculate inflation adjusted. It is more of a lifestyle issue to get a feeling of permanence (which in reality it is not and is driven by jobs etc…).
Tax benefits are humbug…..
It is just not paying the mortgage for the house. It is everything else. The real estate folks do a very hard sell to people getting them to believe that it is “The American Dream”. I think it is the “American Debt”. It is a drain on one’s time, energy and money.
Interesting!..I owned and now I rent and am planning to own again. I think I like the idea of owning. It is mine. I see the point of not having worries from renting. My bug now is do I buy a new home or older/existing one and make repairs…Which is a better investment?
All I have to say about renting vs owing is that you go ahead and rent and I’ll be the landlord. I have owned several homes and rental properties and it has afforded my family more that they would have had if we were just renters. Each home I bough, including the first one we could not afford because the mortgage payment was higher then it should have been (because it took so long to closen on the house and interest rates were climbing so fast) has yeild us more money than most can imagine. My husband and I took off work for a whole year after selling our first home and buying our second home. We clear about $100,000. on our first home and paid cash for our second home. Later we started buying rental property and saved even more because the IRS lets you right off all your expenses and your depreciation. Due to this we rally paid income taxes even though we both worked and made good money, mater of fact one year we received an income tax refund of over $10,000. so we were able to have much less taken out of our paychecks for taaxes and therefore have more money in our wallets. After selling our 2nd home we again cleared over $100,000 and then sold our rental properties as we moved out of state and used the money to build our dream home without borrowing a dime. We also had money in the bank and purchased more rental property for cash. I say to the renters go ahead and throw your money away, pay it to landlords and we will reap the rewards. My husband and I have retired, live in our dream home that is worth five times the money we paid to build it if not 10 times. We own a few rental properties and we have our retirements to fall back on when we need them. We were poor when we started and now we live the good life of retirement at a very yourng age. Our children lived a good life growing up. They alwasy had more than there friends and we always shared our fortune with oters. We help where ever we can but we also relax when we want. We now own a sailing yacht and have a great time sailing. I’m always looking for realestate, but I buy low and sell high. In between we rent them which pays for the mortgage, repairs, taxes, insurance and still gives us income. So if you realy want to rent go ahead but my advice is to buy somethig, even a fixer upper, but never pay full price, then your too can reap the rewards. Just don’t forget that the mortgage always comes first and pay extra when you can so you pay lest interest over the years and learn to save for emergencies, vacations, and hoildays.
I’m glad that things seem to work out for the lady in the last post who buys properties and rents them out, but something doesn’t quite add up there for me.
To hear her tell it, she and her husband just scoop up properties like so many pieces of candy and rent them out profitably before selling them for a profit.
If they are that market savvy they should be teaching economics or real estate at an ivy league university because not everyone has those same insights.
Also, many people don’t want to be bothered cutting the grass on a Saturday afternoon, let alone maintaining other properties and handling requests from a lot of tenants.
For anyone who feels this way I would not recommend that they be a property owner, let alone a landlord and a renter of properties, and maybe take a look at the stock market as a place to invest their funds.
Hey Reader and renter…I smell a rat myself when I read Kathy’s post. She has several words that are misspelled. Misspelling is easily corrected by simply consulting dictionary.com. Every misspelled word subtracts credibility from a post.
Since my last post, real estate prices in all the hot spots have dropped several precentage points. My rent stayed the same.
And of course, I misspelled “percentage.” oops. Mea culpa.
I totally agree and love the comments made by Joe on 08.14 @3:04. I am totally like you – except I have a car unfortunately.
There is no easy answer to this. You have to consider some major variables. Do you itemize, and if you don’t itemize, how close are your current potential itemizations to the standard deduction? How long will you be in the area and what do you see as the housing market outlook in that time period? How much will you be paying in fees such as HOA that are not part of your mortgage payment? And finally, a big question: If you rent, what will you do with the money that would normally go into the monthly mortgage payments? Will you use it to buy more things you don’t need or invest it? If you take these questions seriously and plug them into Excel, you will get your answer. The answer will not be the same for everyone.
Sorry, but the guy who wrote the last post just doesn’t seem to get it, since all of his points deal only with financial considerations.
Some of are saying that there are other aspects to consider which you can’t just plug into Excel and expect to get an answer.
For example, if someone doesn’t care about sports cars, should he shell out $150,000 for one just because it might normally sell for $153,000?
Even if he planned to sell it for the $3,000 profit, he would have to spend some time on it, and homeownership doesn’t even guarantee a profit.
I bought a duplex in 1990 have lived in 1 side and rented the other side. The results have been good with the exception of a rocky last tenant which resulted in an eviction. The rental income has helped pay the mortgage and the amount of work involved in management has been ok. It is not the huge dream house that so many of us feel we must die with but has helped me thru some tough times with unemployment and has increased in value greatly recently refinanced took a bit of equity out and wiped out all debt. Still have lots of equity.
There are very many pros/cons expressed here which are very valid. As an ex-renter and multiple times home owner, I must say that owning always gave me a psychological happiness that was priceless. Also frugal renters will often enjoy their sense of saving by renting, but then turn around and spend hundreds/thousands of dollars a month/year in sports bars, ski slopes/trips and on other over-priced extravagances to feel “happy” and really have nothing to show for it later. I also noticed no mention of the fact that, if you principal residence goes up after two years and you sell, you get the profit with no capital gains tax. A very good deal making $100,000 with no tax. Most people would prefer to own and feel good (you sense that in these comments), but those who just can’t afford it have to rationalize and wait.
That’s fine if owning a home brings happiness to the person who wrote the last post.
But I don’t see how he can conclude that renters waste more money on frivolous expenses any more than home owners do.
Also, I will buy a house tomorrow if he will guarantee that I can sell it for a considerable profit whenever I am ready.
You make a point. I did not mean all renters waste money, but many chose to spend it elsewhere. I should have said many; I did not mean all.
As to guarantees, my friend, I nor anyone else ever got one regarding potential profits, yet the fact of no capital gains on RE profits, if you meet all the conditions, is a fact and law. I have made 100s K over the years and did not have to pay tax (how sweet is that?). I was able to jump up to the next level more rapidly and make even more. You could never save it that fast and will always be behind.
Also, that you “would buy a house tomorrow”, suggests you would really like to own more than rent, if conditions were right for you. Understandable, and exactly my point. It’s all about $$$ and economic strength which comes with time, patience, discipline, good decisions, luck and being in the right place at the right time. But you can’t have your cake and eat, and there are no guarantees or freebies. If I could guarantee a considerable profit, I would buy it myself. That’s the way the real world works.
After thoughts:
I hope I don’t sound pedantic; I don’t mean to. I’m just an older guy who has learned a few things. First, when you’re young, time is on your side; take advantage of it. The days, months, years begin to fly by before you notice it; if you’re out of the loop, you lose. It is so easy to lose track of your spending which the enforced savings (equity) of home ownership helps you with. While housing can go down, don’t expect houses to ever become free, even in these trying times. Also, a lawsuit can clean out your savings, but you will not lose your primary home in this country. Imagine saving like crazy and losing it all because of a DUI (one martini) judgement…back to square one and always a renter!!!
Also, lazy can be expensive. Calling the landlord for everything is nice, but he is not working for free (sorry). Homeownership is not rocket science; look at every house around you; some body owns it and is doing fine and making a profit, if they avoided the “bubble”. YOU CAN DO IT!!! And when you do, the losers will tell you that you were just lucky. Bull!!! (I have no interest in the R.E. industry. I’m just a Dad showing his daughter the ropes).
By the way, the only ones who got their fingers caught in the window during this “bubble” were those that didn’t know what I know and thought they had it all figured out. Everyone understands “common sense”, but not everyone has it. Later, if you want more…I take questions!
I have rented ever since i was divored 22 yrs ago. I love renting. I don’t have to worrry about repairs. and when neighborhoods start to change to my disatisfaction, I just pack up and move. I have watched my friends buy house then lose their jobs. homes get forclosed on after all of the money they have put in upgrading the home. I watch other friends who can’t afford to get repairs done, or have to really bite the bullet to pay ever increasing taxes. Right now I am preparing for a month long vacation to africa this summer, and all of my friends with whom i used to travel are worried about loosing their homes or have lost them. I don’t want to snicker but for so many years they insisted that i was wasting my money renting. of course you are, you get no tax breaks. That is why i am totally against the government bailing out these subprime home owners. they bit off more than they could chew trying to keep up with the jones. yes some were duped, but i have several friends who had more house than they could afford and when i questioned them they kept talking about the values of houses going nowhere but up and that they were going to get a promotion or a raise. Now two friends had 600,000 homes forclosed on and they are living in rental property, by the way both were laid off. I will rent until i am dragged away to the senior citizen building or i find a man who owns his own home
Quick Note:
Equity is worthless (until you sell)… 30K equity in a house that is worth $300,000 doesn’t mean anything. If you tried to sell your home today, with a $270K mortgage, you would have to bring money to closing. Everyone always talks about equity like it’s real. You can borrow against it, but then you’re hurting your overall net value (and cash flow) when you consider the interest. After you perform your rent vs. own analysis, be sure to include this test…
Quick test… Take the amount that your house will sale for (not what it appraises for) and multiply it by 88%, then subtract what you owe on the home… this is your real equity. This is the amount that you will walk away with if you decide to sell your home. So when you evaluate how long you have to keep your home before it becomes a good investment remember to include the “cost to sell”.
One thing that homeowners deal with that is now becoming seen as wasteful is the excess of space that comes with the deal.
It is not unusual for a family of four people to have a house with three or four bedrooms on the second floor and a good sized living room, dining room and den on the main floor.
In addition there is a vast basement with a garage and game room to heat and maintain, as well as an expansive (and expensive) lawn to maintain for appearances sake.
These are the kinds of priorities that have lead to the current housing crisis and hopefully, will give way to more modest, practical and affordable living arrangements in the future.
Something smaller and simpler would free up a lot of resources, leave a smaller carbon footprint and probably make for a much less stressful life for many people.
I have a 300 sf apt in Tokyo that you might be interested in. Just kidding!!!
Seriouly, remember that when you buy, someday you will sell.You have to get something that will appeal to and meet the needs of the average person (family). If a place is too eclectic or unusually spartan, you’ll be very limited in terms of potential buyers. Most people have no desire to live like a Bedouin.
Carbon footprints??? Please!!! Look at what the princes in the United Arab Republic are doing and building with your gas $$$. Indoor ski slopes and ice skating rinks in the desert…You only go around once and I, for one, have no intention of moving into a tent with no electricity and sleeping with my dog in the name of, in the name of, in the name of ??? I don’t know what!!!
By all means, live within your means, but don’t get carried away. I had a friend who religiously saved every penny he made for years for when he got married. He married a party girl who never saved a penny, just partied; it did not work out well for him. He did have plenty of money for his alimony payments, though.
Another poster here stated that she’d continue to rent until they carted her off to a senior citizen place (taxpayer subsidized?), or she met a man who owned a house. Hmmm… scares me!!! And you’re worried about carbon footprints?
I can see it now. “attractive female wishes to meet financially secure man who owns his own house. Please send picture of the house.” Ouch!!!!!!!
Before I bought I was financially sound, we moved to Georgia and bought into a dream- ended up out of work and used every penny to try and keep up with mortgage payments. Owning – It costs more and that whole making some body else rich – bah! We do that everyday with consumerism. I think buying works if you have the money to own – real money. Where I live I can get an apartment for 500 less than what we pay and there are so many houses that the market’s flooded. It all depends on where you buy – to me that determines the value. Of course conventional wisdom says to buy but as I age I see “conventional” aint’s for everyone.
Hey Rosie,
I see your point and you might be right.
Buying a house is like marriage… No guarantees regarding anything…but nice to think and feel that it (she or the house) is yours…unless you don’t mind sharing or possibly getting sloppy seconds! It’s all about $$$, either you’ve got it or you don’t. Winners talk and losers say “deal!!!”
I would like to respond to a few of Augie’s 3/16/08 comments.
He says that it would be hard to re-sell a Spartan home to a potential buyer, but I think a smart and responsible buyer would see the value of modest accommodations.
If he believes that “You only go around once” then why would he want to be burdened with the endless hassles and loss of mobility and freedom that come with owning a house?
And he might not like the idea of carbon footprints, but when a minority of the world’s population consumes a majority of the world’s goods, it makes the basic necessities unaffordable for countless people.
And that kind of global inequity is not offset by knowing that you have a sprawling, green, manicured front yard.
First, I would like to commend Decider on his social consciousness and state tht I sincerely respect that. I think he is a clear and level-header thinker and I would like to make some observations regarding areas where we might disagree.
While a smart and responsible buyer would see the value of modest accommodations, my experience is that most folks look for the nicest home, with the amerities and “all the bells and whistles” that they can afford, within reason. Trying to sell your “socially relevant” statement could be tough!
I do believe “you only go around once” and should try to enjoy life. I think you grossly overstate the burdens of home ownership. Endless hassles and loss of freedom? Janis Joplin said “freedon is just another word for nothing else to lose…” What about stabitity, security, peace of mind, pride of ownership, privacy, and economic upward mobility? What about the hassles of becoming a parent and the loss of freedom? I won’t even begin to comment on the joys my daughter has given me since the day she was born, and up to the present. I wonder, are you speaking as an ex-homeowner or just as someone who imagines how it must be to own a house?
Carbon footprints? A relatively new cliche. Our country produces 75% of the world’s most desired products and new technology, while utilizing 25% of the energy resounces. Not a bad trade-off, considering that we are also one of the most generous countries on the planet. When we have a catastrophe, we fix it ourselves. When there is a tsunami, somewhere we never heard of, we send massive aid. We have fences to keep people out; not to keep them in!!! Why do you think that they want in??? Prosperity, freedom, rule of law, and an opportunity to live in the manner you so willingly wish to forgo.If you must worry, worry about the 3,000,000,000,000 Chinese who live in squalor and pollution because of their oligarchy: not because you own a house!!!
One point we totally agree on, a sprawling manicured lawn is a pain in the butt. I’ve been there and done that!!! Avoid a house with a lawn, if you wish, but don’t preach to those who want one. Patterson Park is there for you, at taxpayer expense, if necessary, and you don’t have to cut it.
Keep the faith and don’t get too uptight. You only go around once!
Regards.