Do You Own Or Rent?

As someone who is voraciously seeking financial independence, I regularly go over financial decisions big and small and analyze them all to make sure I’m giving myself every opportunity to reach FI as soon as I possibly can. One area I’ve continued to analyze lately is my continued decision to rent instead of purchase my habitat. I currently live in a 2 bedroom condo that I rent directly from the owner. This probably sounds like a bad financial decision to some, but as I continue to hash out the numbers I have found renting to provide me a number of benefits. Let me explain below:

Renting offers a number of benefits, both financial and non-financial:

1. It provides stability to my monthly budget. If the stove stops working, the toilet starts leaking or the refrigerator no longer closes I simply call the owner and get it fixed. I don’t have to incur any costs. I simply send in my rent check month after month, which remains the same $450 payment. That provides me a consistent budget, which makes it a lot easier to know exactly how much cash I need on hand and how much capital I can use to invest.

2. It provides me geographical independence. Once I’m financially independent and no longer tied down to a job, I’m technically geographically independent. I can move around as I please. I can visit family and friends for extended periods of time, or move out of the country for a few years. If I own a home, I’m no longer geographically independent unless I sell the home (which comes with large transaction costs) or I’m able to rent it out (which comes with its own set of issues). With renting I only need to fulfill the terms of the lease, which is usually 1 year. Or, I can opt out of the lease early by paying one month’s rent. That’s a lot cheaper than “opting out” of home ownership. One of the top benefits of reaching financial independence, in my opinion, is the opportunity to engage in long-term travel. This would be difficult with a home tying you down to a specific location.

3. Risk reduction. I already face a fair amount of risk by investing a large portion of my net worth in equities. By also having a large portion of my net worth tied up in a home, I face additional market fluctuations on that investment, not to mention the large transaction costs to sell the house if I need the capital for whatever reason. By renting I can get in and out of an apartment or house with minimal transaction costs and I don’t have to worry about market fluctuations on the underlying property. The risk reduction also carries over in case I lose my job for whatever reason. Although I feel relatively secure in my employment, the recent recession taught many of us to never take things for granted. With a home I would have to find a job in my immediate area. With renting I reduce my risk in regards to employment security, as I can be open to going anywhere for employment. This ties a bit into point #2.

4. Renting can be significantly cheaper. If you want to talk frugality, you’re talking to the king right here. I love few things more than saving money and I have found renting to be a boon to my savings rate. I currently pay $450/month to share a 2 bedroom condo with my girlfriend. If I was single, I could easily find a 1 bedroom apartment in my area for $600 or less per month. I highly doubt I could find a quality property for sale that would come up to less than $600 per month when you factor in the mortgage, insurance, property taxes, HOA dues, lost opportunity costs of the down payment along with maintenance expenses.

5. I have more time. Time is money and money is time, right? Well, renting affords me the fantastic opportunity to keep more of my limited, and dwindling, time. When renting I don’t have to fix the leaky plumbing, cut the grass, shovel the sidewalk, clean the gutters, repair the fence, landscape or anything else. While to me the above list sounds like a real drag, to some people landscaping and doing household repairs is a joy. That’s where the buy vs. rent argument becomes subjective.

After much deliberation, research and weighing the financial differences between owning and renting, I’ve come to the conclusion that while home ownership is likely the more costly choice, it still makes sense for a lot of people. The buy vs. rent is a very individualistic decision that is highly subjective. Some people love to have a home to call their own with which they can paint (or knock down) the walls, or raise children in and that’s okay. Every decision in life doesn’t need to revolve around the bottom dollar. Life wouldn’t be very fun if everything revolved around money! However, I have come to the conclusion that on a purely financial level renting is likely the way to go. That is unless, however, you know for sure that you’ll work at the same job (or at least in the same city) for the next 15+ years, want to stay in the same home for those 15 years so you can build serious equity to negate the high transaction costs and you don’t have a desire to move around or live in different areas. Over the long haul, buying will likely be the better financial decision if you don’t move around a lot and have significant job security.

I look at renting as form of insurance. It’s insurance against market risk and insurance against major financial outlays. That insurance may or may not come at a premium, but if it does carry a premium to it I’m okay with that if it affords me the opportunity to stay flexible in regards to the ability to move around. One of the major benefits to home ownership, in my opinion, is further diversification. Real estate can be a fantastic asset class in the hands of a smart investor. I love stocks, bonds and short-term cash but real estate can provide an individual another outlet to turn a profit. Personally, I just feel that the high transaction costs, lack of geographical independence and maintenance on an asset that continuously decays is not worth the investment potential. Stocks do not require me to cut the grass or fix the roof.

That all being said, I still stay open-minded to home ownership. I wish someone could talk me into buying my residence, but I haven’t found an argument good enough to convince me that it’s the way to go. I believe in this economy staying nimble and able to work anywhere is a strong advantage. On a related note, I highly recommend the rent vs. buy calculator provided by The New York Times. It’s one of the most detailed calculators I’ve ever seen.

Note: The above discussion was in regards to real estate as a primary residence. Real estate as a landlording business is a totally different ball of wax. 

What about you? Do you own or rent. Why?

Thanks for reading.

Photo Credit: Salvatore Vuono

Comments

  1. says

    Very well written and analyzed, DM! I enjoyed reading that.

    The biggest thing for me here is that in the past 150 years or so, real estate has returned around 3% annualized but in that time frame the stock market has returned around 8% annualized.

    Being that I am 30 years old with plenty of compounding time, the stock market will probably prove to be the better investment for me in the long run. So I am putting my emphasis there. And as you and I have both discussed, with enough compounding time, the dividend income a dedicated dividend growth investor achieves will likely afford the investor a very comfortable living arrangement. I personally consider the real estate owners whom I rent from the “bag-holders” (although they may consider me their bag-holder:)).

    As you pointed out, a very personal decision based on many factors, but because of the annualized return I mentioned, and the flexibility of renting, I place myself squarely in your camp.

    Great stuff! Have a great weekend.

    • says

      Relic Obscura,

      Thanks for stopping by and offering your insight. Your opinion is greatly valued, as you know.

      I completely agree with you on the returns. I didn’t discuss that in the article only because of the old adage “you can’t live in your stocks”. I also believe equities will continue to vastly outperform real estate over the long-term, but I have to live somewhere. So, while I also put my emphasis on the stock market I still have to spend money on shelter. And because of that, I’ve continued to wonder if my $450 is better spent in the form of a rent check or a mortgage check.

      That all being said, I think the bigger question might be is if the 3% annual return on real estate is worth giving up the advantages of renting if you were to strictly compare renting vs. buying your habitat. That is, if renting provides a 0% return vs. a 3% return on RE, is that 3% worth giving up the advantages of renting?

      I think renting is cheaper on an absolute basis. But, even if it weren’t cheaper I think renting still might be worth it due to the flexibility and other advantages.

      Best wishes!

  2. says

    This is an excellent articulation of the reasons that renting appeals to me for the foreseeable future. As you say, it’s a very personal decision, but for someone as not-handy as I am, having a landlord responsible for all repairs is worth a lot both financially and psychologically.

    • says

      Graham,

      Thanks for stopping by and I’m glad you enjoyed the article.

      I also share your lack of handiness and due to that repairs as well as some maintenance would have to be outsourced which only increases the cost of home ownership.

      Stay in touch!

      Take care.

  3. says

    Renting always made sense to me. Especially if you are still not sure if you want to settle in one location.

    If you can finance your own home w/o a mortgage then buying over renting makes sense (if you are going to stay put) because then your property tax is like paying rent sans the mortgage payment.

    • says

      Nicky,

      I agree. One of the biggest reasons to rent would be the flexibility and geographical independence it allows. If you’re not certain that you want to stay in one location for 10+ years, then renting would probably be the better way to go.

      Although if you could skip the mortgage and just pay cash for your house, then you could also invest that cash and use the investment income to pay rent. Two ways to look at it, and that would be a situational decision.

      Best wishes!

  4. says

    Agree with you on points 1-3 and 5. I disagree in principle on point 4, though.

    Any landlord worth his/her salt is going to make sure that your rent check covers all associated expenses, with a little on top for profit. Although it might not seem like you’re paying taxes, HOA fees, insurance, and the like, you can be certain that you are paying them indirectly, through your rent.

    I own my house free and clear, but a couple of years ago (when I still had mortgage payments}, the total monthly cost of my mortgage + taxes + insurance + HOA fees was less than what the people in the house across the street were paying for rent.

    Perhaps in your case the rent equation does work out in your favor. Is this because the landlord has economies of scale on his/her side (multi-unit property, for example)?

    • says

      The Executioner,

      Thanks for stopping by. I appreciate your perspective.

      The thing to keep in mind on point 4 is the market you are located in. Markets like NY, LA and the like would probably favor the renter. Living in Indianapolis, however, might favor the buyer. The particular area I’m in (Sarasota) didn’t get hit as hard as other areas in Florida due to the wealth concentration here, but buying can still be relatively attractive here.

      I think you nailed it on the head when you mention economies of scale. Economies of scale are in plain sight when you visit a large apartment complex, and that’s why I can find a small 1 bedroom apartment in my area for significantly cheaper than an entry level SFH or condo.

      For instance, in my area I just found a 709 sq. foot 1 bedroom condo for rent for $500 per month on craigslist. Using the calculator I referenced above, I’d have to find a $60,000 condo with a $200 monthly HOA due (a common HOA charge) to even be close to competitive, and even then the break-even point is in 14 years. I would argue that a $60,000 condo around here is likely not something I’d want to live in for 1 year, let alone 14. This is where the buy vs. rent argument becomes subjective. What’s an attractive place to live in for me would be different for others.

      Best wishes!

  5. says

    Great Post! These are things I wished to have known before I got a house. Haha, I did the math a while back (about 3 months ago, here is what a home mortgage is costing me! With cheap rent you can maximize savings. However if you paid for a home outright I think you would be okay (assuming a long stay in that area). Here is what I wish I had done: If I had rented a room $450 a month (only $5400 a year), I could easily have invested $100K in 3 years, assuming a take home (after taxes) of 55K a year. However, I did the dumb thing of taking on a home with payments in 2007. Lesson learned. One thing you may consider, while more risky is becoming a landlord. Rental property has a good ROI, for example my friend has a 4bd/3bath and rents the 3 rooms, so his P&I is completely covered by the tenants – this might allow you to invest more per year (just a suggestion). So don’t neglect that feature of owning homes.

    • says

      jasonhmann,

      Thanks for the comment! Really glad to see you liked the article.

      So you purchased a home and now regret it? I think that ownership is not meant for all, but do keep in mind there are plenty of advantages built in to owning your own place. Having control of your surroundings, not being evicted if your owner sells the place and also being able to enjoy capital appreciation on your investment are all advantages that I don’t have as a renter.

      I agree with you that using real estate as an investment by renting your space out could be a great business venture if you’re so inclined (and handy).

      Keep in touch!

  6. says

    DM, as you know i’m pretty experienced with real estate investments. I rented in college then entered my local housing market in 2005.

    The bottom line = own if you know how to fix things. And be a landlord if you really know how to fix things. I learned about construction while fixing up my own rentals. With that knowledge I built my own house. It took me 7 months to do it alone. Once my house was complete, I spent 55k on a 2.2k sq ft. brick home worth 140k.

    I project all mortgages to be paid off in under 6 years and I could quit my job if I choose to; just living off of the rental cashflows.

    I can tell you though, if you contract any of your work out, you will lose big. I don’t care how you ‘write off’ your losses, they are still losses.
    investing-early.blogspot.com

    • says

      Investing Early,

      You clearly have some advantages on me! Being handy is something I wish I was, but alas I’m not the person you want to call if drywall needs to be hung or tile needs to be laid. I can promise you that.

      I agree that being a landlord can be a very profitable business model if you have the correct skill, patience, acumen and motivation. I lack all of it, but I have found that I’m halfway decent at investing my capital in other ways and so that’s what I concentrate on.

      It sounds like you really know your stuff with RE investing and have been phenomenally successful so far. I hope you continue to find great success with it.

      Best wishes!

  7. says

    DM,
    Great article, and you make some very good points for renting!

    This is a topic I’ve been debating over a lot recently myself, as I’m also very much invested in the stock market :) Sometimes I think it may be a good idea to give home ownership a try since prices are down (for the most part), and interest rates are so low.

    Maybe it’s worth while to invest in a rental property, while still renting? I know in some parts of the country, the rental income you bring in is basically immune to market fluctuations (silicon valley is a good example), b/c demand to live there is so high. I’m always on the lookout for solid investments that are secure and won’t ‘cut their dividends’.

    My 2 cents. Keep up the great work!

    • says

      FI Fighter,

      Glad to see you have started your own journey to FI. You have made some tremendous progress in such a short period of time. Good for you.

      Prices are low right now, but keep in mind that as interest rates start to rise that could cause prices to go down or at least stagnate. That could put someone in your position (with a large amount of accessible capital) in a nice spot. Something to think about if you’re interested in owning real estate.

      Renting or buying is a difficult decision. I like to keep my life as uncomplicated as possible, so like I said above even if renting was slightly more expensive over the long haul I would still probably be interested in it. The fact that renting can actually be cheaper is just icing on the cake.

      Best wishes!

    • says

      DM,

      Thanks for the encouragement! The journey to FI is long, but I’m trying to enjoy it as much as possible. I’m new, so definitely learning a lot from others such as yourself.

      Definitely agree on the added complications + extra work owning property would bring. I’m thinking I may be more inclined to go down this path eventually, more for the interest in learning how property management works, upkeeping, etc. than to make big $$$. Of course, I wouldn’t venture in unless I thought it was profitable either.

      I admire your philosophy on life – simple is indeed the way to go. Plus, as you stated, you’ll have the complete freedom to move about as you choose without having extraneous obligations rooting you down. Can’t beat that.

      Cheers.

    • says

      FI Fighter,

      The journey is long, but every step forward is one less step you need. We’re all learning from each other, and that’s what’s so great about our DGI community.

      Property management could be an interesting business model to learn more about and tackle as you go along. I think being handy and knowledgeable in many areas as a broad renaissance man would be incredibly helpful. Of course, there are also plenty of landlords out there that outsource the property management for others and just collect the rent checks. To each their own.

      It’s interesting that we’re talking about this now as I was just reading that Derek Foster sold his house and most of his possessions to live a more mobile lifestyle. I’m trying to find more details on this, as he is one of the people who initially inspired me to start my own journey to early retirement.

      Best wishes!

    • says

      DM,

      It’s great to know that this community is growing everyday, it seems. I keep hearing more and more stories about young people giving up the ‘American Dream’ to pursue a life really worth living. This inspires me more and more.

      One story in particular was a 60 Minutes segment on free soloing climber Alex Honnold. Here’s a guy who’s 26 years old, dropped out of college and lives in an RV so he can pursue his passion on a daily basis. I’m guessing not too many other people get to say that.

      To have a plan in place, and be retired at 34 like Derek Foster would be a truly amazing accomplishment. I’ll gladly settle for 40 and call it a huge success ;)

    • says

      FI Fighter,

      It’s funny you mention Derek Foster and a person who lives in his RV in the same comment.

      I’m not sure if you know this or not, but apparently (from what I understand) Derek recently sold his home and most of his possessions and purchased an RV for him and his family to travel in.

      That guy is definitely an interesting character. Derek is actually one of my first inspirations to start my own journey and I credit him for showing me that it’s actually realistic for someone with a modest salary to retire early.

      Best wishes!

  8. says

    Sadly I do have a mortgage loan and ive learned your lesson the hard way. I bought my 2 room flat for ~100 th. $ (1$ = ~2,7 Lithuanian litas) at the peak of booming RE in Lithunia and now its market value is something like 2/3 of that 65 th. $ or something around . And its old building high sky high heating costs so its value is even in worse situation :( I have reduced my mortgage loan in 5 years to 85 th.$ but it still way over my flat value so im in -20 th.$ Im very hoping that RE market value will increase due to economy recovery and long term world inflation and I will sell my flat as soon as I will be able to do that.

    • says

      Justas,

      Well real estate is just like any other investment that can increase or decrease in value. Real estate can be a tremendous asset if you invest in it the right time. You, as many others, unfortunately invested in it at the wrong time. It would be just the same to invest in stocks or bonds at the wrong time. No different.

      The great thing about your situation is that you have to live somewhere and you have to have shelter, so that makes it easy to ride out the storm and wait until the underlying asset value rises to the point where you have some flexibility. With stocks, you can’t live in them…so for some people it becomes emotionally more difficult to ride out.

      Best wishes!

  9. says

    This is a never ending argument. Where I live, I wouldn’t be able to buy an equivalent apartment or home at the same effective price as rent. However, in many communities there isn’t a lot of rentals so if you want to live there, you may have to buy.

    As my income has gone up, my rent has gone up but at a slower rate. This has meant that I am able to invest the excess. Over time my investments create the ability, through dividends, to pay the rent without working.

    • says

      SFI,

      You are absolutely correct. The rent vs. buy comparison is very much an individualized decision. There is no right or wrong way to do it.

      I could probably make the numbers work out right if I found just the right property at just the right price, but I would still lose out on all the advantages that rent has (no maintenance necessary, flexibility). I’m actually surprised that renting doesn’t come at a huge premium to home ownership in most markets since there are really so many huge advantages built right in. If you really think about it, one should pay a bit of a premium for the flexibility of it, but I haven’t found that to be the case in the different markets I’ve lived in. Interesting.

      Glad to see that you’ve done well with renting as your income has risen.

      Take care!

  10. says

    Hi DM,

    You make a lot of good points for renting versus buying. However, there is no right or wrong answer. There’s too many factors involved and it depends on your investment goals and interests.

    For me, I own two properties. One is a rental. I spent $50k on the rental and refinanced it to a lower rate. I now make about $400/month profit from it. $200 month to me and $200 month pays down the principal balance. The rest of the rent covers expenses and mortgage payments, HOA, etc. I can offset the extra income with property taxes and mortgage interest plus maintenance costs so that I don’t owe any taxes on the income. The principal amount will continue to go up do to the ammortization of the loan. The rent will continue to go up slightly each year due to the market improving. I’m basically earning 9.6% on my $50k investment.

    I live in TX and property values never went down here, they have just been stagnant. Eventually the market will pick back up and property values will start increasing again. This is when I will really start to capitalize on these investments.

    I will probably buy another home within a year and rent out my condo. Let me be clear though. I never expect to make a lot of money by renting. I put down a fraction of the cost of the home and let someone else pay my mortgage while the TOTAL VALUE of the asset appreciates.

    This makes even more sense when the market starts to pick back up. Someone above mentioned that historically real estate appreciates at 3% a year. Let’s say you put down 10% on a $200,000 house or $20,000. The value of the property after the first few years would be $206,000; $212,180; $218,545.40 etc. To me, this is sort of like dividend investing. When you reinvest your dividends to buy more shares, you will earn dividends on those new shares. It has a compounding effect.

    I plan to have at least 30% of my total investments into real estate.

    • says

      austinbroker,

      Thanks for stopping by.

      You are absolutely correct. There is no right or wrong answer in this debate. I was simply showing the reasons why I continue to rent and how it’s served me well. For instance, I may not be in Florida right now if I would have purchased a home/condo in Michigan back in 2009 when I moved. That was a difficult time to try and sell property, as it still is to a degree, so I might have never realized my dream of moving to such a beautiful area of the U.S.

      Good for you in owning rental properties. As I stated above, rental properties as an investment is a different ball of wax from considering your primary residence. The great thing with owning rental properties is that you’re turning a profit (hopefully) with OPM. OPM can be a terrific way to leverage your way to wealth. I personally just don’t like debt at all, so I enjoy having a low amount of debt on my books, as I only have student loans to contend with right now. I feel that with less debt, I have more personal freedom. That may or may not be the case, depending on who you ask.

      If I was to ever purchase a home, a duplex in which I was able to live on one side of while I rent out the other side might be a great way to go. That way you’re on site for any issues. Of course, I’m not handy at all so that’s an issue.

      Thanks for sharing your story. It sounds like you’re doing quite well with RE so far. Keep it up!

      Best wishes.

    • says

      Hi Austin,
      There is a good podcast on real estate called “real estate guys”. They devoted the last story to Dallas, which is apparently an awesome place for real estate investing. Check them out.

      Perhaps you are in the best spot in US and can take advantage of being in the center of a booming market. Good luck.

  11. says

    Well about property value increase. The value does not increase the value of your money just decrease. Since US in printing more dollars then country own stuff in their economy that means that dollar lose its worth. As I have economy university grade this is one of things that it is thought in macroeconomic basics. Personally I think this is due to states to be able to pay their debts. Well in sum it helps me and all other mortgage owners :)

    • says

      Financial analysis,

      I’m not totally understanding your comment.

      Are you saying that with inflation the value of your dollar goes down, so that even with increasing property values you’re not truly realizing a high rate of return?

      I’m sorry, just looking for clarification.

      Best wishes!

  12. Anonymous says

    Hey DM. Nice analysis! Am just curious if you have ever looked at GPC. I read a lot of dvd blots and rarely see this beaut mentioned. It has raised dividends for over 50 years and has pulled off its 52 week high.

    • says

      Anonymous,

      GPC is a solid DG stock and one I have looked at in the past. I find it to be a tad expensive right now, but a solid pick as one of the few stocks that have been able to grow dividends for 50 years. The time to get into GPC was last summer as it was significantly cheaper than it is now. It is one that I keep on my watch list and I hope to own a piece of that business at some point in the future.

      Take care!

  13. says

    Hi DM,

    Excellent post. I agree with you that renting is a better option if you want the freedom of being mobile. It is certainly a time-saving strategy as you are not cutting the grass or painting the walls.

    What I disagree with is the comment on risk #3. Investing in multiple asset classes with less-than-perfect correlation will decrease risk. That part of modern portfolio theory is probably one of the few I actually agree with.

    The money does not have to be tied in the property. It is easy to take out an equity line of credit and take the cash back out of the house if you need to.

    As someone mentioned above the cost of ownership is covered by rent so in general renting is not cheaper than owning (perhaps your case is an exception). I own rental properties and believe me, my tenants pay for everything, they just don’t see it that way.

    Finally, property values tend to go up. The latest downturn in US will eventually end. My house, which was not an “investment” but a place to call home, had appreciated by $150k since we bought it 6 years ago. It would have been darn hard to make that much money in the market given that we only put $35k down. Even if it went down in value, I have another point – we rent out the basement which brings roughly $10k per year. If we stay in this house for 30 years our tenants will pay more cash to us than the mortgage we took and at the sale time the rental suite in the basement will add another 20k to the selling price….

    Another point on being handy – you don’t have to be. There are trade people who will fix stuff for you. I can do a lot on my own, but would not lay tile or fix my roof, nor paint an apartment – I save my time just like you do even though I own rather than rent.

    So yes, renting has its advantages, but there are plenty of other aspects to consider.

    • says

      AverageCFA,

      Great points there.

      The point on risk can go either way. You could look at it as diversifying the portfolio and keeping your asset classes as uncorrelated as possible. Of course, you could also look at the other side of risk for all the people who bought homes back in 2007 and are now severely underwater. Stocks have performed much better. There’s two sides to that coin, but I do agree that diversifying your assets is a wonderful thing.

      I’m not totally against home ownership. I’d love to have real estate in the fold, but find that REIT’s might fit the bill better as they don’t require me to upkeep them as they continue to decay, cut the grass, paint the walls or anything else. They just pay me a large yield on my invested capital, and still allow me flexibility.

      I do think now is a fantastic time to buy, but the interest rate risk is still there. If interest rates spike (not happening anytime soon), the underlying asset will fall in value.

      Best wishes!

  14. says

    Hey DM,

    Great post! I’m renting at the moment as it is cheaper to rent than own due to the way the market has been performing up here in Canada. When this dynamic switches, then I will definitely consider switching over. I especially agree that renting allows flexibility with location, especially when you’re not sure you’re ready to settle down in a certain area for 5+ years!

    But renting is so taboo; I receive endless grief about ‘throwing my money away’ on renting. If only they will sit down with my spreadsheet and I so we can go through the numbers. :)

    • says

      Vicky,

      Canada’s real estate market has been extremely hot, and some speculate it may be in a bubble. I’m not educated on that subject so I won’t comment on that. However, I think you’re making a fantastic decision to rent in the face of elevated real estate values instead of “jumping in now before the price goes up!” like many people have been/continue to do.

      It’s interesting to note that while many people espouse how renters are “throwing money down the drain” on rent, they fail to mention how property insurance, property taxes, mortgage insurance, maintenance, repairs (outside improvements) are also ways to “throw money down the drain”.

      Again, I’m not against home ownership. If I was to find a fantastic property with a great price I’d be willing to buy. But unless there was a significant discount on it compared to renting because of the flexibility/convenience that renting allows, I think I would pass. I really do think renting should come with a premium price attached to it because of all the conveniences attached, but have found in many markets you not only get the mobility/lack of maintenance but also save money too.

      If you ever get a chance, check out James Altucher’s blog. He’s given many reasons why renting is better.

      Also, a writer for SmartMoney wrote an article on this subject a while back:

      http://realestate.yahoo.com/promo/renting-makes-more-financial-sense-than-homeownership.html

      Of course, this article was published right as the RE market here in America was boiling over. He may have changed his tune recently.

      Take care!

  15. Soggy says

    I can see the upsides to renting, as I rented for something like 7 years. But my last landlord started raising my rent by 25-50 dollars a month every year. With the 10% tax credit being offered to first time home buyers a couple years ago, I felt buying a house just made too much sense. I put almost nothing down, got an excellent interest rate, and found a townhome with no HOA dues in the same part of town for $50/month less than the rent I was paying. But instead of living in a 450 sq ft efficiency apt built in 1929, I now have 3 br/2 bath place w/ 2 car garage that’s 60 years newer. If I ever decide to get a roommate, my housing expense would be very close to 0. The 10% tax credit made a nice addition to my stock portfolio, and I could never go into a bank and get a sub 5% bank loan to invest in an equivalent amount of stocks, for example. So, for me, I think it will wind up being one of my best financial decisions and it certainly raised my quality of life. But like in everything else, price matters.

    • says

      Soggy,

      It sounds like you made the right move. That first-time home buyers tax credit that was being offered a little while back was a great incentive to get people to buy. Of course, I believe that real estate values have fallen since then, so the calculations would have to be done on a case-by-case basis.

      If you can live in a 3 bedroom/2 bathroom townhouse for the same, or similar, cost as what you were paying for the 450 sq. foot efficiency then obviously you made the right choice. The rent vs. buy decision is one that is highly individualized to one’s unique circumstances and market. You made a great buy. Just don’t forget that even though your rent may have been and the townhouse cost the same on a monthly basis, you have to factor in maintenance/repairs and the time factor of such as well.

      The other thing, as you mentioned, is quality of life. Even if you end up paying a little more for the townhouse on an absolute basis, you are getting relatively much more for your money because your quality of life has been raised so much. That’s something that you can’t really put a dollar figure on.

      Good for you!

      Best wishes.

  16. says

    This is a good debate. For the first place I bought, the mortgage was equivalent to my rent. It was logical to make that switch.

    Which brings me to a question, what’s your scenario if you add 2 young kids to the mix, do you still rent? is a 4 bedroom still cheaper? (It won’t make me rent but I am curious)

    The other factor when renting is that you need to make sure you invest more to cover the cost of renting in retirement. A friend’s friend spends a considerable amount of money on entertainment and the reason I hear from my friend is because he rents :(. In fact, I don’t believe he is saving enough for retirement.

    Owning your own home is really just a way to reduce your retirement cost down the road so if you plan properly for what you need in retirement, it doesn’t matter if you rent or own.

    • says

      The Passive Income Earner,

      Thanks for stopping by.

      I would have to say that when you’re adding kids to the mix the bottom line absolute dollar figure probably doesn’t matter as much. You’ll likely want a place to raise your children, feel safe in and want them to experience a “home” that may or may not be attainable in a rental. Typically the biggest savings, in my experience, in rentals come from large apartment complexes where the economies of scale are built in. If you’re renting directly from a homeowner and want a house for your children, you may be better off just buying the place outright as the landlord is simply going to pass along costs plus profit.

      As far as retirement goes, it also depends on the unique situation as well as market..and also what your goals are. If your idea of retirement involves long-term travel then being tied down to a house may not be best after all. If your idea of retirement includes gardening, football games with grandchildren out on the front lawn and get-togethers with family then a home may be the way to go. This will be an individual situation.

      In my market, decent condominiums go for $100-125k as an entry level condo. I consider condos because I don’t plan on ever mowing grass, period. That’s just me. I could pay my $125k out of pocket, but still owe $200+ for monthly HOA dues, $100/mo for property tax, $50+ mo for insurance, and $?? for repairs/interior maintenance. So, conservatively that’s $400/mo for the pride of ow after I already forked out the $125k cash to buy the condo. Plus, I’m in a fixed location. Plus, assessments invariably come along when something large needs to be fixed that exceeds reserves.

      Or, I could invest the $125k in dividend growth stocks and receive $5,000 per year at a 4% yield, which comes out to $416/mo. I could take the extra $400 per month that I was paying out in scenario 1 (which is money down the drain, by the way) and I now have $816/mo to rent with. As I showed in an above comment, I easily found a 1 bedroom apartment for rent for $500/mo. That was a quick search. $800/mo rents a fairly nice 1 bedroom apartment (luxury) or a pretty decent 2 bedroom apartment around here.

      Just some quick math there, but it all depends on unique circumstances, local markets and really what you want out of life.

      My disclosure involves the fact that I never plan on having children. So that may sway me in the direction of renting. But, as I said above I’m not against home ownership. I’d have to find the right property at a strong price to consider giving up the mobility and freedom that renting provides.

      Best wishes!

    • says

      Kanwal,

      Thanks for stopping by! Hope all is well.

      You make a great point there. Owning your own home can come with many benefits that simply can’t be measured in terms of dollars and cents. Some benefits are worth more than money anyway, and having space to yourself is something that is hard to put a figure on.

      Sounds like you really enjoy your home and the setting it’s in. In the end, that’s all that really matters!

      Take care!

  17. says

    There are lots of emotional reasons people want to own a house and those are very personal choices. But, as a financial decision, the math is pretty easy. Since most on-line calculators are unnecessarily complicated, I came up with my own back-of-an envelope formula here:

    http://jlcollinsnh.wordpress.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

    Since owning a home is, as you point out, a risky proposition the numbers should heavily favor it before taking the leap. Here in the USA even now they rarely do, at least for the ones I’ve looked at.

    • says

      JC,

      Absolutely agree. There are many reasons to rent and many reasons to own, and not all of them are financially based…and that’s probably the way it should be.

      But, yes, on a pure financial level…just talking what’s cheapest…renting will probably win out in most markets. There are deals to be had both with rentals and with real estate, but I also agree that owning should come at a discount because of the risk/lack of flexibility/additional time costs that need to be factored in.

      Best wishes!

  18. Debbie M says

    I bought a house and paid it off. During the years when I was re-paying the mortgage, it cost me about the same to buy as to rent except during the first year and the year I refinanced, when it cost more due to the addition of closing costs.

    Now that it’s paid off, it’s cheaper to own than to rent (though not as much cheaper as I would like). And during that period, the value of my house has increased about 150% whereas my income has increased only 100%, so I might not be able to afford the same house today (plus it’s already the cheapest housing I like). Meanwhile, the stock market was pretty stagnant over that period.

    I did have the same employer the whole time, but I knew I was already in my favorite city and was fairly sure I wouldn’t want to move.

    So, I think it was the right decision for me. Though I hate having a lawn to deal with, I’m definitely better about getting things fixed than most landlords I’ve had. I also have the advantage that I can make improvements that save energy and thus reduce pollution.

    And for houses (which admittedly you can rent or own), I have the advantage that I can play the stereo 24/7 or I can dance or play the piano even late at night without bothering anyone. But then everyone with yards wants to stick dogs in them, or roosters, so there can still be a noise problem.

    Another disadvantage is that when you own your own place you’re tempted to do more stuff to it. Like “update” the kitchen or whatever.

    I would never buy in a place with an HOA. I’m not even a fan of buying a condo with a condo fee. In both of those cases it feels like you get all the disadvantages of renting (less control, monthly fees after the mortgage is paid) and the disadvantages of owning (you’re stuck where you are). It feels like renting with a really big deposit(the cost of the property). Even without those fees, I still have to pay property taxes and I still want to pay homeowner’s insurance and flood insurance, and of course I still have to pay utilities, so it just feels like a sort of cheap rental where I have to do all the work.

    • says

      Debbie M,

      You make some fantastic points there, and it sounds to me like you did the right thing by buying.

      I really like your last paragraph and tend to agree with you that owning a condo combines the worst of renting and owning because you share walls like renting, will always owe high fees like renting and have large amounts of your net worth tied up because of buying which makes it difficult to move. A worst of both worlds type of scenario. Interesting take on that!

      Best wishes.

  19. says

    I currently rent and am happy doing so. I do plan on buying within the next few years hopefully. I will be renting this out though. I think for the next few years at least I will be renting.

  20. Anonymous says

    I’m currently a renter. I’ll probably be a renter for the foreseeable future. I have so little interest in DIY anything that owning a home has very little appeal to me. Of course, being single, having a large home is just having more space to keep clean (another chore I’d rather minimize) and heat and cool (an expense I’d rather minimize). As life circumstances change, this opinion may change.

    I have given some thought to buying a 4plex or bigger and being a landlord. But that will have to wait until I find a place that I’d like to settle for a long period of time. That decision would also have to be balanced against maintenance fees. It’s quite likely that it could come out as a wash, in which case I might as well just stay a simple renter.

    • says

      Anonymous,

      Glad to hear you enjoy renting. As everything in life does, renting has its advantages and disadvantages.

      If I was to buy, buying a duplex or something larger might be the way to go. It would be a great way to live basically rent-free and you’d be on-site for smaller repairs/tenant issues. Of course, this would complicate your life over being a renter as you rightly point out. I like a simple life. That’s just me.

      Best wishes!

  21. says

    The danger with housing is that theirs much pent up demand in the system since 2007 the housing market has been in decline not just price wise declines have taken place in the movement of inventory on the market. On the other hand household formation has been expanding since 2007 by how much at least 1% a year. Their are few new homes being constructed so the real potential now exsists for another housing boom to occur because of low mortgage rates. The problem is the federal reserve needs to act now to head of another potential housing boom and bust. What many folks forget is that the price of homes in the united states is far lower now than any other industrialized country in the world. I recently was listening to some news story about the housing market in miami its red hot they were saying foreigners are buying everything in sight in some areas of miami This foreign demand along with domestic demand along with super low interest rates has the real potential to run off the rails if caution is not carefully exercised by the government by buyers and sellers by banks and mortgage companies and realtors. I can hear the chatter once again buy now theirs never been a better time to buy the young couple in their twenties is hearing it from the real estate guy in the office this will be a once in a lifetime opportunity what happened over the last five years was an extraordinary coincidence it will never happen again in are lifetime. So says that seeming bright eyed realtor with the frickes that looks like he’s twentyone but is really twentyeight.

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