Is Renting a Waste of Money
You’ve been told that you’re “wasting money on rent.” Someone in your life made you feel bad about not purchasing a home and building equity. And guess what they said: “Ugh, I just hated paying someone else’s rent!”
There is only one problem: it isn’t true.
First, let me ask you a simple question: Do you “throw money away” when you eat out? Obviously not. You are paying for quality.
However, when applied to real estate, this logic completely falls apart.
Is Renting a Waste of Money
I decided to conduct a Twitter poll to find out what people thought.
Surprisingly, 95 percent of respondents said, “No, you didn’t “throw money away” on a nice meal.
Then I asked the same question, but this time for rent.
LOL! When I asked if I was “throwing money away renting,” the response rate dropped from 95% to 81%. In other words, a growing number of people believe that renting is a waste of money.
We all know that if we spend $20 on a meal out, we want good food, table service, and someone who cleans our dishes.
Rent is the same thing: you’re paying for a roof over your head (the meal). You’re also paying a landlord to handle any paperwork or maintenance issues (the service).
So, why do so many of us blithely repeat the phrase “throwing money away on rent?”
Why is renting great?
The financial benefits of home ownership are frequently exaggerated. However, there are two significant non-financial advantages to renting that you should not overlook.
Most importantly, renting allows you to be flexible. The majority of rental leases are only for a year. If you aren’t ready to commit to living in the same place for five years or more, renting allows you to stay for as long (or as briefly) as you want. It’s difficult to flip a house in two years or less and break even unless you know how to fix up an ugly house on the cheap or you get extremely lucky.
It is also worth emphasizing the freedom that renting provides from monotonous and costly maintenance. When we first moved in, I couldn’t wait to get a lawnmower and mow my new lawn. After a few years, I pay someone to mow it, and if they call in sick, I’m irritated that I have to spend two hours of my weekend pacing back and forth around the yard. And, since buying our house, we’ve had to spend thousands of dollars on plumbing leaks, basement flooding, worn-out appliances, and other expenses. I adore our house, but it has not been without its challenges. When I was renting, I took for granted the fact that I didn’t have to worry about maintenance. But, make no mistake, it is a significant advantage to be a renter.
Finally, you can use renting to your financial advantage. You can invest the difference if you live in a market where you can rent an apartment for significantly less per month than you could own a home. The difference does not have to be dramatic. Assume you pay $1,000 in rent but would have to pay $1,300 in mortgage payments on a comparable home. That amounts to $3,600 per year that you can save or invest. And, unlike home equity, those savings are readily available. You can put them towards an emergency fund, student loan debt, or a retirement account. None of which are possible with home equity.
Why do people think that paying rent is a waste of money?
Understanding why this myth persists is the first step toward discovering the truth about buying versus renting. Take a look at these reasons why many people believe that paying rent is a waste of money — what do you notice?
Our parents, the government, and the powerful real estate lobby all tell us that “real estate is the best investment of all.” There are even government tax breaks for purchasing! Repeat this for decades, and a population begins to believe without question, rather than running the numbers.
Here’s a sneak peek at how the real estate propaganda machine operates. Buying a house is subtly portrayed as the ultimate, foolproof way to get rich in America in this New York Times article. Fast. Hurry! Prices are only going up! Add HGTV, economic malaise, and phrases like “you’re wasting money on rent.”
“Less expenses.” LOL. Given that “expenses” can exceed 10% of a home’s selling price, that’s akin to me saying, “I really enjoyed this trip to the Grand Canyon!” Except for the part where my son died after falling off a cliff. Anyway, it was a lot of fun!”
If you don’t act quickly, you’ll be “priced out” for the rest of your life. This is the message that people receive, leading to irrational financial decisions.
Real estate, in reality, is not always the best investment. It entails significant phantom costs. Furthermore, there are frequently better investments, such as a simple low-cost index fund. Although sophisticated investors understand this, ordinary Americans have been duped into believing that their primary residence is a good investment. Frequently, it is not. (I could buy right now, but I prefer to rent because it is a better option for me.)
2. Real estate financialization
In America, we believe that our home should be an investment as well. Why? That is not the case in many other countries. Indeed, if you sit down at the dinner table with your parents, they want the price of their home to remain high — whereas younger people want the price of housing to fall!
3. the notion that someone is “playing you”
Americans despise the idea that someone is profiting from them. According to a Reddit comment, “if you buy, it may cost more, but at least you won’t be paying your landlord’s rent.” Do you realize how absurd this is? Do you ever say to yourself when you go out to eat, “I like the food here, but I just hate paying this restaurateur’s rent?” Obviously not. This phrase is only used in real estate. Stop doing it.
4. Inadequate understanding of phantom costs
People believe that if you buy a house for $200,000 and sell it for $450,000, you will have made $250,000. This is untrue. They are oblivious to maintenance, taxes, and other phantom costs, and they do not compare ROI to other investments. Did you also know that real estate prices fall?
5. Sticking to the same game plan as before
Purchasing a home was, in general, a positive experience for the majority of Boomers. In the 1970s and 1980s, there were also fewer low-cost investment options, such as index funds. As a result, they continue to teach the same lessons to millennials, who face unaffordable housing, stagnant wages, and better investment opportunities. This is the issue when people (Boomers) recommend something but don’t understand why it works: they just keep repeating it, even though the situation has changed.
What you need to know about buying vs. renting
Renting isn’t always better than buying, and buying isn’t always better than renting. It is dependent on a variety of factors, including:
My advice is to crunch the numbers and educate yourself. But never, ever say you’re “wasting money on rent.”
As a real estate investor, you must calculate the opportunity cost of both buying and renting – depending on your circumstances, either may make sense.
For myself, I prefer to rent assets that do not generate revenue and to purchase those that have the potential for a return on investment.
So I rent my home because owning a home is essentially a glorified bank account that I would have to pay for and maintain, whereas I buy commercial properties as investments.
Your decision will undoubtedly be influenced by your personal portfolio and business / tax structures, but many established real estate professionals take the same path that I have – they will rent their residence to keep their owner-occupied expenses low because that capital will not provide an immediate return on your investment and use the funds to purchase more cash flowing assets.
When Is It Better To Buy Rather Than Rent?
So far, we’ve looked at a variety of reasons why renting rather than buying makes sense. However, renting is not always the best option. So, before you dismiss homeownership entirely, let me answer the question, when is it better to buy rather than rent?
Simply put, if you can put down 20% and keep the combined monthly cost of your mortgage, property taxes, maintenance, and home insurance lower than the monthly cost of rent, it may make more sense to buy a home.
That being said, the best-case scenario would be to save enough money to buy a house outright, but I realize that is unrealistic for many people. As with any major purchase, you should carefully consider all of your options in order to make the best financial decision possible.
As long as your property does not depreciate, you will accumulate equity in it over time. With each mortgage payment, you “save” a few hundred dollars or more in your home equity, which you could eventually liquidate in a sale or refinance event.
All else being equal, if you could live in the same house for $1,000 per month in rent or $1,000 per month in mortgage payments (of which an average of $600 goes toward principal), owning the house appears to make financial sense because you’re saving $600 per month before factoring in maintenance and other costs. That is unquestionably a good thing, but I don’t believe it is substantial enough to entice people to become homeowners prematurely.
There are simply too many other variables to consider, but I believe the two most important are:
If you do not live in your home long enough, realtor commissions and closing costs on a new home will wipe out much or all of your equity.
Home equity is not a liquid asset. If you require cash, you will be forced to sell or refinance your home (taking on debt and paying more interest).
Yes, paying a mortgage and building equity in your home can help you build wealth. However, it only works if you stay in the same house for an extended period of time and do not borrow against it.
Is it even possible to profit from my home?
You might be able to profit from your home, but only if you sell it. If you only live in it, it does not generate income and is not an investment.
It’s also difficult to make purely logical decisions about your home because your decision to buy or sell is motivated by emotional and often uncontrollable factors like getting a job in a different town or growing your family. As a result, you won’t be able to time the purchase or sale date strategically enough to ensure you make money on the property.
Of course, some people do make a living from their homes. But these people most likely lived in their apartments or houses for a long time, putting up with less-than-ideal neighborhood conditions until the area improved and home values rose. Or they bought a total dump and renovated it, and they may even be renting out part or all of their home. In these hypothetical scenarios, the homeowners would profit because
a) they invested and bet on a significant, quantifiable market change b) they made repairs and investments solely for the purpose of reselling c) they have renters paying some or all of their mortgage, which reduces or eliminates the need for ongoing investments
The average homeowner is unlikely to be able to make these types of sacrifices and investments in time and money, effectively eliminating any return on investment.
So, to answer the earlier question, no, buying a home is not usually a good investment. In fact, it might not even be considered an investment at all.
When you pay a reasonable rent, you open the door to other investments other than the potentially volatile or stagnant housing market.
Consider that, between 1975 and 2009, the stock market averaged 3.375 percent yearly returns after taxes and inflation, compared to the sub-zero average gain on housing investments. That appears to be a better investment!
It is also not difficult to begin investing in the stock market. To find out what your options are, all you need is a brief introduction and a conversation with a good financial advisor. Investing is an excellent way to both support and profit from the growth of your favorite companies, as well as to play a role in how these companies change the world.
Other excellent uses for the extra money you save by paying rent include investing in yourself by getting an education and increasing your earning potential. Alternatively, you can invest in your own business with the intention of expanding it. If you already have a side gig, investing in your passion project can turn it into a full-time job.
The point is, regardless of what your grandfather, sister, or friend tell you, renting a home is not a waste of money, and buying a home is not a good investment. Of course, you can buy a house! — but make sure to put your money into genuine investments that will yield a real profit.
It’s past time to abandon the notion that home ownership is the only option. Share this article with a friend who could benefit from a fresh perspective on investing!
Statistics on Renting
More than one-third of Americans live in rented housing. The majority are under 45 years old and have gone to college.
Renters account for 44.1 million, or 35.9 percent, of all households in the United States.
The average rental household has 2.48 people.
Rental housing is home to 109 million Americans.
Rent control applies to 48,248 rental homes, or 0.11 percent of all rental homes.
The weekly requirement for minimum wage earners to afford the average apartment is 127 working hours.
5.5 percent of renters have been in their current residence for more than 20 years.
Renters under the age of 35 account for 34.4 percent of the total.
16.5 percent are over the age of 65.
86.4 percent of renters have a high school diploma or equivalent.
Sixty-four percent of renters are White, including Caucasians, Hispanics, and Latinos.
Renters are 51.8 percent Caucasian, 20.3 percent Black or African American, and 19.7 percent Hispanic or Latino.
Between 2006 and 2016, the number of renters increased by 23 million, while the number of homeowners increased by less than 700,000 during the same period.