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How many times have you heard someone say “renting an apartment is just throwing money away?” Maybe you’ve been told it’s better to buy a house when the monthly mortgage payment is equal to rent. It sounds reasonable but it isn’t true: Renting isn’t throwing money away.
The dollars left out of the deal
Buying a house will cost you much more than just a monthly payment. Rentals often include things like water, trash collection, and even heat that a mortgage just doesn’t cover. A home owner has to pay those on top of their principle, interest, taxes, and insurance.
It costs us $250 a month for electricity, natural gas, and city services – not to mention basic cable package that some of my younger friends get free in their apartment. Those are the dollars our mortgage broker left out of the deal.
I can prove with all certainty that owning a home costs much more than renting – even for someone renting a house:
Money is green, so is the grass
I spend 2 hours every Saturday mowing the lawn. Not only is my day scheduled around this activity but I had to replace the mower last year ($300), the weed-whacker needs a new spool every few weeks ($20 for a pack of 3), and gas is running about $3.50 a gallon.
I choose to look on the bright side: I get to listen to podcasts while getting some exercise in the great outdoors. It’s either that or I pay a kid down the street to do it for me ($25-$40).
Anybody know how to fix garage doors?
Guess what I worked on for 3 hours one Sunday afternoon last July? Our garage door opener. What do I know about garage door openers? Nothing, but it’s up to me as a homeowner to fix it or pay someone who can.
Looking on the bright side again I can claim that I know my garage door opener intimately now. Yep, me and Mr. Craftsman go way back.
Wet carpet, wobbly decks, a contactor and a capacitor
In the past 2 years we have spent $9,000 on flooded carpeting, a wobbly wooden deck, and a new contactor and capacitor for our 5 year old air conditioning unit. This ain’t no chump change, this is serious money! I could put my daughter through college for what we spend on maintaining and repairing our house.
The bright side? Ummmm, there really isn’t one for this example.
The real benefits of owning a home
The financial benefits of a owning vs renting come down to only three things: Tax deductions, tax-free appreciation, and home equity. These reasons may not be enough to call taking out a mortgage “a smart financial decision”. However, many of the benefits have nothing to do with money.
The real benefits of owning a home are comfort, stability, security, and personalization. You don’t have to share a wall with your neighbor or parking lot with the maintenance man. We can paint the basement or bedroom any combination of colors we like without having to check with the landlord. My wife can plant a garden and my daughter can have a dog or two. These benefits are immeasurable.
The best time to buy a house
I wish I would’ve known then what I know now. It is quite possible that I could have rented a year longer to save up an even larger downpayment and save thousands of dollars of interest and knocked months off the final payoff date.
Don’t feel bad if you are renting – you’re not throwing money away. You are buying patience for the time when you decide to get your first house. Be wise when you start shopping for a home and don’t buy too much house just because the bank said you qualified. Put down a huge downpayment, have a good size emergency fund, and budget between 3-5% of the home’s value for maintenance.
The best time to buy a house is when you are ready. While the benefits are not financial, buying our home has been one of the best things we’ve ever done.
Now, if you excuse me: I have to put gas in the lawnmower.
Renting definitely does have its perks when you weigh the cost of home ownership. I might not have a yard but the grassy area is always green and I don’t have to lift a finger! 🙂 I only ever had a few people say anything about throwing money away by renting but I definitely don’t feel that way about it.
That’s great Kasey! Pick what’s best for you and be happy with your choice. The great news is you can always change your mind – and have peace of mind when you do!
I have no plans to buy a home anytime soon. Maybe some day if and when I’m married to someone who can take care of all the fixes and maintenance for me 😉
Bah! I can see what you’re thinking. “Us guys” love to make our wives happy – you can use that little nugget of information against him.
I always hated making that rent payment each month as I thought it was going to nothing, but at least they cut the lawn and fixed most things that broke. I love not being in the apartment style setting anymore and having some privacy, but I do wish we would’ve rented another year or two to save up a bigger down payment.
Thanks John, I’m with ya. If I knew then what I know now, I might have pushed harder to wait and save up a bigger downpayment. Of course, if I knew then what I know now then we would have NEVER signed up for a 5 year ARM (thank God interest rates went down and we were able to refinance 3 years into the deal).
Oh well, hindsight is 20/20. I hope you made a good choice on your home.
I get the same feeling everytime the monthly payment for property taxes disappears from my account. Feels like you aren’t getting anything concrete for your money. Owning or renting, it’s still money you pay for the priviledge of continuing to live where you live without legal action being taken against you.
Yes! Thanks for this! I’m 43 and have never owned anything, aside from a few things that are annoying, like not being able to do any major renovations (ugh I’d love to get rid of this carpet and get hardwood floors), I don’t miss being a homeowner. There is a certain freedom with renting. Plus I live in LA, and on my income, owning is a pipe dream.
You are welcome Tonya. Happiness is where you hang your hat, right? (or should that be “where you lay your surfboard” for you?) 🙂
We have been renting for the last year, mostly because we’re not prepared at all for home ownership. It definitely does have its perks, but I haven’t had to deal with maintenance issues yet. At our last place, all utilities were included, so we didn’t have to worry about much. Here, we have access to a nice pool, gym and lounge area. That’s what we took into consideration when deciding whether to rent a house or apartment.
WOW! Those are cool perks. As a homeowner it would take a land survey, a couple inspections, building permits, and a fence to put a pool into our back yard. All you have to do is wait 30 minutes after eating (or after the last toddler gets out) to jump into your pool. Sounds like a nice place to be.
Renting is absolutely NOT throwing money away. It is buying you shelter, just like a mortgage does. The only difference is equity. And if you tap equity in your home for other things via HELOC, then you might be headed down the same path that led to the housing meltdown a few years back. With rent, you write one check a month. With home ownership, who knows how many you will write?
Amen Kathy. Amen.
I’ve rented before, and I definitely didn’t see it as throwing money away. You have to have a place to live, right? I think that renting and owning can be the right move for different people at different times in their lives.
Right on Holly! Besides, how could one move to different countries every 6 months if you didn’t rent? 🙂
Great post! I have been writing about this a lot lately.
If anyone thinks that buying is always better than buying or vice versa, they are mistaken. It’s not always about the money, so owning your own home may have appeal to you or it may not. Much of the time, it’s important to rent before you are ready to buy. And you may never want to buy, that’s fine too.
Renting is definitely not throwing your money away. It has it’s benefits just like home ownership.
Thanks for the article!
I like what you said Kalen “it’s important to rent before you are ready to buy”. It’s like renting a motorcycle before committing to buying one – how would you know you liked it if you never tried it? And when you did try it, what did you like most and least? Maybe there’s a different option that is more your style (like a fenced in yard or walk-out basement?)
Sounds like the makings of a good blogpost 🙂
I totally agree with you, renting is not a waste. It’s a roof over your head! I miss the days of calling the landlord to fix all my problems!
Me too Catherine. Me too.
This is so true and I’m happy that you’re saying it, too. We’ve been saying for a while that a home is not necessarily an investment nor a retirement plan. The Economist just had an article about it not too long ago, too. We receive push back, but this post underscores our points. I like your point about how the main benefits of owning a home have nothing to do with money. Nice piece!
Thanks John. I also think “owning a home” means something different for this generation.
Job specialization and the internet makes work completely different than it was 20 years ago. Now-a-days you can focus all your efforts in one niche and someone across the continent can find you with a simple Google search. Huge office buildings are no longer necessary – the overhead costs are a waste when many tasks can be done with a wi-fi connected laptop and a cell phone.
But I still believe house can be great investments – if they are paid for and rented to great tenants 🙂
I am actually planning move from renting to buying a place, but saving enough money for the down payment is not easy. A friend of mine mentioned the rent-to-own option, and I started looking into it. I came across a book on Amazon, that I feel explains the concept really well, with all its pros and cons, what to expect and what to avoid. I like the book was very honest and left it to me to decide whether it is a good path for me. Check the book if you want to learn about the concept too: http://www.amazon.com/Rent-Own-Essential-Guide-Homebuyers/dp/0992159202/
Honest article from a real homeowner, unlike the padded stories supported by real estate industry. There is one other advantage of renting not mentioned in the article. It gives enormous career flexibility to professionals in this globally mobile world. Renting allowed me to move up my career faster because I never had location restrictions as my house-tethered colleagues had. This is a significant advantage on top of having truly free weekends.
If you live in a big city, renting is often the better way to go. Houses appreciate at about 5% per year. Definitely not an investment tool considering the costs of ownership.
That said, I have owned for the past 8 years. I bought so I could have a place to customize and make my own. Of course here in Montana it is actually cheaper to own than to rent, as long as you have the desire to maintain a home and yard.
Hi Steve,
Sorry – but you are dead wrong on this. Its abundently clear from any data source you look at that homeowners have higher net worth – the available Federal Tax Data shows this, as does the Fed’s Survey of Consumer Finance, as well as private data sources like Danko’s Millionaire Next Door Data.
Why are homeowners richer?
1. Home price appreciation
2. Ability to borrow against your equity
3. Tax deductions
4. Ability to convert your home into income by renting a spare room, etc.
5. Mortgage paydown
Renters get none of these. If you post that “renters aren’t throwing their money away” it simply means that your statements are substantially at odds with known facts. Also, aren’t you really doing people a disservice by telling them they behavior which keeps them poor is okay?
Thanks,
James
James, I can appreciate your passion for home ownership – I love our house too. However, you can’t dispute the fact that homeowners like you and me spend more on houses than renters. Yes, a renter doesn’t get home price appreciation or tax deductions like I do but most of those benefits have been washed away by replacing the roof, buying new carpet for the flooded basement, and other things a renter would never have to pay for.
Well, I guess if you were able to buy a fixer-upper and flip it then you could make quite a bit on the appreciation then that would be true. I stand corrected.
BTW: The ability to borrow against home equity is not an asset that makes homeowners richer – it would, however, make them poorer on a net worth statement. But you are totally right with #4 – renting a spare room. I had not thought about that benefit. Good job.
This is awesome. In my area, the rent-to-price ratios are really high, which makes renting a bad investment. For example, the house that I live in costs, on average, $140,000 in the area (it’s a model home) but rents at around $1300. That’s approximately 11% using that formula. For someone who pays $1300 in rent, based on our housing costs where I live, you can buy twice the house for the same amount of rent (factoring mortgage+insurance+property taxes).