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