Renting To Get Richer?

This MSN Money article argues quite vehemently that renting is cheaper than owning a home:

I have something un-American to confess: I rent an apartment despite having enough money to buy a house. I plan to keep renting for as long as I can. I’m not just holding out for better prices. Renting will make me richer.

I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I’d rather rent the latter and own the former.

The author goes on to provide a litany of reasons why renting is more cost-effective than home ownership, mostly in the idea that you end up money ahead if you invest the difference between the total cost of home ownership and the total cost of renting.

Here’s the thing: during the period of paying for a house, the author is absolutely right. You can do far better on investing as a renter than you can as a homeowner with a mortgage. The total monthly cost of a home, with a mortgage payment, utilities, insurance, and taxes, far exceeds the cost of renting, a difference that can be invested.

However, when you reach the point where you actually own a home and the mortgage is paid off, you’ll have significantly more available to invest than the renter will, and you’ll also have a large asset that will slowly appreciate over time and provides inexpensive housing for you and your family.

Let’s say, hypothetically, that you have a home that is eating $1,200 a month in payments, $500 a year in insurance, $1,000 a year in extra utilities, and $3,000 a year in taxes versus a rental situation that costs $800 a month to rent and $100 a year in insurance. The home will cost $767 more per month for the life of the mortgage, but the day that the mortgage is paid off, you own an asset worth $200,000 or so and suddenly have $433 a month more to invest than the renter.

Here’s my feeling: home ownership takes the long view. It is there to provide housing for you throughout your life – you’re essentially paying more now while you can so you can pay less later on and have an asset of significant value (possibly to be cashed in for care during one’s dotage or passed onto children).

Home ownership also enforces financial discipline, something that many people do not have. They pay their required bills, then are much more likely to do unnecessary things with the rest of the income. A home ownership situation raises those required bills so that they’re not left empty handed in old age. From recent experience, saving and investing while renting was a constant battle of the wills – I knew I could take some of that money and buy frivolous things. However, a mortgage payment is a required payment – I have to plan for it and have to pay it.

I think that, overall, renting is a better solution for a person with a strong sense of internal financial discipline that is willing to choose to invest hundreds of dollars each month. However, if you’re likely to dip into that investing money on a regular basis, you are lacking the financial discipline it takes to make renting more cost-effective than home ownership. The author of this article assumes financial discipline from the reader, which is a very big assumption in this day and age when the savings rate is negative and many American households are carrying stupdendous debt loads.

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57 thoughts on “Renting To Get Richer?

  1. Kathy says:

    Well, my house payment has been = $0 since 1993, and I am not too anxious to trade places with him. It took me 16 years to get there, but now it’s WONDERFUL.
    Good luck with your “money saving” renting, bub.

  2. dong says:

    While I actually think owning in the long run is more sensible, I also think renting vs. owning is driven much more as an emotional decision rather than a financial one. Making a real comparison between renting and owning is actually very difficult once you factor in opportunity costs. The argument given the article is that the fundamentally the extra money not paid towards home ownership can get greater returns in the market. If you factor that into your example on when the mortgage has been paid off you would need to factor in the increased capital that would’ve been thrown off by alternative investments. I think the renting makes much more sense in expensive cities where the cost of owning far outstrips the cost to rent. NYC is a prime example.

  3. Dave says:

    It varies depending on the situation. There is no rule that holds true for everyone.
    A friend of mine even does both. He owns a house, which he rents out for income, and rents a significantly cheaper place. By renting somewhere else, instead of living in his own house, he earns thousands a month.

  4. Sabrina's Money Matters says:

    There are so many cons to renting, one being that you’re paying someone else’s bills, which is a BIG one for me. I don’t want someone else getting rich of MY dime, that’s for ME!

    Additionally, I bought a house six months ago, when we decide to move to a bigger house in the next few years, this house becomes a rent house, so I can be the landlord and make money and increase my net worth at the same time on someone else’s dime….I guess he’s okay with being someone else’s retirement plan. I’m not :).

  5. Javi0084 says:

    Rent costs me $615/month (water/trash/sewer included). If I want to buy it would cost me about 2.5x my rent for a decent house in a decent community so I can’t afford it and probably wont afford it any time soon. Would it be a good idea to take out my 401k savings (about $11k right now) for a down payment when I can afford to buy? I’m 23 so I have a long ways ’till retirement.

  6. Matt says:

    @Sabrina – somebody else is getting rich off YOUR dime….unless you’ve somehow avoided paying interest on your mortgage.

    Good point in the last paragraph Trent. If one has the financial discipline to invest the extra savings, one day you could very well pay cash for a house outright cash thereby saving the payments later on in life. I see that as an option for me. But then I’m 25 and mobility is important to me right now.

  7. Interesting p.o.v. they have, but I agree with you Trent. I’d hate to thinking about all the money I’d thrown away when I’m older in age. Apartment renting doesn’t build equity.

  8. Tyler says:

    I have to agree that it depends on the area. We used to live in Wisconsin where owning made much more sense. Now in Southern California we pay $1050 a month on a two bedroom apartment which is much more affordable than purchasing a $500,000 house in an inflated market that seems to be slowing.

  9. Amy says:

    Just running your numbers, assuming you invested that additional $767 per month in an index fund with your favorite 12% annual return, and that you were starting with a 10k down payment and 30 year mortgage, you’d have $2.66 million saved after those thirty years. Leave that in an account and it’s earning tens of thousands of dollars of return per month, dwarfing your homeowner’s paltry $433 advantage in costs.

    The complicating wrinkle, of course, is that if rents rise at a fast enough pace compared to the costs of homeownership (the mortgage payment is probably fixed, but property taxes, maintenance costs, etc. will generally rise), the homeowner could eventually come out ahead. You forecasted significant inflation in a previous post…if you really believe that then it does make sense to take on as much fixed-rate debt as you can.

    And I do take your point about discipline as well. But there are ways around the discipline problem, and a home equity line of credit undoes much of the enforced savings of the mortgage payment anyways. However, I just don’t see that it makes sense to characterize buying a house versus investing as taking the “long view” versus the “short view”. Minimizing risk and maximizing stability, perhaps.

  10. Trent says:

    Inflation does matter here quite a bit. I just touched on it in the last paragraph by mentioning that rent will go up over time. If you look at a 4% inflation on rent, that rent payment will be $2,600 a month at the end of the thirty years, while the only increase for the homeowner will be in taxes and insurance (much less growth). In fact, over the last several years, the rent payment would exceed the home ownership payment in this example.

    I calculated this without inflation in order to give the biggest benefit to the MSN author’s argument.

  11. Tim says:

    the problem with having all that equity is the fact that is not accessible unless you move out. if the housing market is flat, then you are sitting on a depreciating asset in terms of inflation, so i’m confused as to why people are in a hurry to pay off a mortgage.. home equity does absolutely nothing if you cannot tap into it. are you going to move out of the house in order to get the equity out? are you even able to do so?

  12. Doug says:

    I wonder if this is an apples to apples comparison. Can you really get the same thing for $800/mo in an appartment that you can get for the $1500/mo in a house? I’m talking rooms, garage, square footage, etc. I’d think seriously about it if I could get a 2400sq ft apartment for $1500/mo. With quiet neighbors and good schools…

  13. Sylvain says:

    Just run the numbers. If a house is worth $200k and renting a similar house would cost $1000 a month ($12k a year), owning the house gives a $12k a year return. From the $200k of the house, that’s a 6% return. If the stock market gives a 10% return, having your $200k there instead of in the house means getting $12k for the rent and an extra $8k! Using those figures, even buying a house cash with no mortgage would be worse than renting.

  14. Farley says:

    I think Amy made the point I was thinking when I read the article – compound interest. She doesn’t say it but her example “Just running your numbers, assuming you invested that additional $767 per month in an index fund with your favorite 12% annual return, and that you were starting with a 10k down payment and 30 year mortgage, you’d have $2.66 million saved after those thirty years. Leave that in an account and it’s earning tens of thousands of dollars of return per month, dwarfing your homeowner’s paltry $433 advantage in costs.”

    Makes it clear.

    While the person who bought the house will have more to invest once the house is paid off the fact that the renter has been investing for 30 years will make the renter far, far richer in the end.

    I have just read so many of your posts Trent that I can’t believe that not investing early is better.

    A personal example – I just opened a 529 account for my son’s school. Now I would have waited until our house was paid off and then I could have put more money in the 529 account but it seems like I am going to have more money in the account by putting money in now – even though it is less money per deposit.

    I am kind of scratching my head as to why you didn’t factor in the interest on the investments when you looked at the pros and cons.

  15. Amy says:

    The comparison between renter and homeowner is a bit tricky because the homeowner is sitting on a cost-decreasing asset (a home) whereas the renter is sitting on an income-generating asset (some stocks). If that asset grows big enough, it will generate enough income on a monthly basis to cover the renter’s costs while still reinvesting at a rate that covers future inflationary gains, meaning at that point the homeowner will never come out ahead.

    A rigorous calculation would determine at what rate rents need to rise such that the homeowner comes out ahead within a reasonable timeframe, say, no less than fifty years after paying off the mortgage, and compare that to historical rates of rent increases. My sense is that there would be a pretty large discrepancy between those two figures in the favor of the renter.

  16. Ian says:

    Any discussion about this that isn’t accompanied with actual values and a spreadsheet is just spewing hot air. Based on historical rates of return in the stock market and home values, and depending on property taxes, repair costs, the likely increase in rent costs, there are indeed reasonable scenarios in which renting is the better plan, not just during the mortgage, but forever.

    I ran the numbers for my situation, and found that rents and house prices are so far skewed in my area that I’m better off renting forever. Even though your housing payment is (hopefully) constant for the duration of the mortgage and drops considerably after that (not to zero, though. You still have maintenance and taxes to pay), as I renter I’m getting so far ahead for the first 20 years that the difference will earn more in the stock market than the homeowner will ever save on no rent payment.

    But, by all means, keep repeating catch-phrases like “throwing your money away” or “paying someone else’s bills”, and thinking that renters aren’t building equity (of course we are. It’s just not in the building we live in) if it makes you feel better. Or you could actually run the numbers and make an argument based on data instead of sentimentality.

  17. Elaine says:

    Where I live, in my opinion, buying a home is lunacy. House prices have exploded but rents have not. I do not make enough money to afford a 1 bedroom 600 square foot condo for $300k. But I could afford to rent it for $800-1000 a month. Fortunately for me, there are 2 bedroom apartments to be found for under $1000, so a roommate and I each pay less than $500/month.

    Now house prices have been increasing at rather attractive rates in this area, if you already own one. Whether they’ll keep that up, who knows? But even if they are, I’m not interested in an “investment” on which I’ll spend the first several YEARS paying mostly interest, and which requires me to relocate and lose 6% of it if I want to cash it in. If I do buy property at some time I doubt I’ll think of it as an investment – just as another living expense.

  18. Mitch says:

    Depends a lot on whether you live in a densely populated area or a sparsely populated one, what size of a place you want to dwell in compared to the distribution of available housing in your area (e.g. does owning mean “1200+ sf house” or are smaller condos available), what is frugal leisure and what is just another “rat race.” I wouldn’t want to have to keep a 2000 sf house clean, for example, although that could be altered depending on who I was living with.

  19. Brad says:

    Some areas are definitely not worth buying in right now, unless you can get a deal of course. Moving frequently (such as for a career) would also mitigate the value of home ownership.

    That said, expecting a 12% return in the stock market for 30 years is a lot more riskier than expecting continual cost/price inflation in housing. Over the long run I have much more “confidence” in housing not having a huge crash in my market (NE of Dallas) than I do in stocks staying on the rocket-path to the future. Plus I am not limited to just spending my house payment. Once I get out of debt I can invest other money. Or I could pay off my home radically quickly and then invest that and more. This is the most likely path we would take. I would only rent if I was forced to do so, such as if I had to move to someplace like the northern Virginia area where we lived before.

    Brad

  20. Kim Siever says:

    “The total monthly cost of a home, with a mortgage payment, utilities, insurance, and taxes, far exceeds the cost of renting”

    Not for me. The house I rented previous to my first purchase was $650/month. The cost of my mortgage (including property taxes) was $500/month. That’s to say nothing of the fact that utilities in the owned home are half as much as they were in the rented home.

  21. Justin says:

    I’m with Kim (post above). My monthly mortgage payment is a bit cheaper than my previous rental payments. And the house I own is much nicer than the house I rented.

    That may be because I live in a college town with high demand for rents.

  22. Leo says:

    Trent, I think you’ve missed the fact that if you invest that $767, by the end of the term of the mortgage, the renter will have more than enough to buy his own home. While the homeowner will own a home worth $200K, the renter could buy a home worth $200K (or more) at that point, and still have a couple million left over.

    The point about self-discipline is right on, however.

  23. S. B. says:

    As most people reading this blog know, the financial merits of renting (plus investing in equities) versus buying are highly dependent upon many, many different variables.

    Authors in the mass media often deliberately make oversimplified blanket statements because it polarizes the audience and generates a lot of readership that way. (e.g. “Renting is always better.” “The stock market always returns more than real estate.” etc) The emphasis is usually on getting and monetizing readership, not accuracy of the article.

    Oh well, at least we can expect better from blogs and other sources that do not have to cater to the least common denominator…

  24. Leroy Brown says:

    I don’t necessarily know that raising one’s monthly bills ( buying a home ) is really a smart decision for the financially irresponsible. It just seems to me that someone who has issues paying their bills would have more issues if they had larger bills. Renting ( and the lower monthly output that goes along with it ) is a great choice for a lot of people, especially the financially undisciplined.

  25. Dean says:

    I am in the process of buying my first home and my monthly payment will be $816/month (for the first year of a 30-year fixed rate mortgage). I am currently renting an apartment with less than half the living space of the new home for $555/month. After 12 years or so, inflation will cause the rent to surpass the amount per month that I will be paying on the house. Assuming another 12 years will make up for the difference of the higher payments, I will be money ahead for the remaining 6 years of my loan. After that I will have no payments and I’ll really be getting ahead, as opposed to paying triple the rent that I am now. The savings now by renting doesn’t really mean that much to me because I know that if I were to rent a house that was similar to the one I’m buying, it would cost me quite a bit more than the mortgage payment right up front even before the rent goes up. I’m just happy to know that I don’t have to live in this cramped environment any longer and I’ll have the freedom to do whatever I want with the place, such as plant a garden in my backyard or have a pet.

  26. laura k says:

    Brad touched on this a little in his comment – does it make a difference if you move a lot? When I was growing up, we moved often (the longest we lived anywhere was 3-1/2 years) due to job transfers. My parents have been retired for a few years, but they still have a mortgage. From that model, I guess I thought I always would too.

  27. Marcus Murphy says:

    Why not rent, invest the difference, and then buy a house when you can pay cash for the house you want to live in. Only incur debt on properties you are renting/leasing to tenants (just make sure you are collecting more than your expenses are).

  28. Brip Blap says:

    I certainly think that if you look at homebuying in the northeastern (hyperexpensive) US, renting is rapidly becoming more attractive. I spend $850 a month … before I pay the mortgage. That’s property tax and association fees. My total bill is almost $3000 per month for a 3-bedroom townhouse. And I bought before the huge 2004-2006 runup in prices. My neighbors might be paying $4000 a month.

    I think Ian made a good point although in a slightly irritable fashion. If you take that difference in the money between renting and buying and invest it, you are building equity, just not in your residence.

    One of the big assumptions made about buying is that someday your monthly payment will be “nothing.” At least here in the northeast, property taxes will continue on a monthly basis for eternity, so I’m never going to see that monthly housing expense drop to near 0.

    And before anyone comments, yes, we think about moving away all the time, but we have a huge extended family all living in New York so it’s hard to imagine moving away.

    At the end, buying a house is an emotional question, too. Some people value a place that is their own, where they can replace the carpet when they want to, put a swing in the backyard, etc. It’s not always 100% about the money (maybe just 99% about the money)!

  29. MossySF says:

    If the point of this exercise is to just analyze the numbers — we ignore the non-financial benefits of owning versus renting, here’s how it plays out based on Trent’s original scenario:

    $20,004 per year for housing. Rent starts at $10,800 and increases at 3.5% a year. After 30 years of investing the housing allowance and deducting the ever increasing rent, the renter has $1.3M at a 10% return. If we run the simulation for another 20 years, the monthly rent will have grown to $4856/mo and the portfolio will have also grown to a $7.5M. Basically after roughly 13 years, the lumpsum will have grown large enough where the drawdown could cover rent and still allow the portfolio to continue to grow.

    The homeowner pays off his mortgage his 30 years and then has a home worth $200K + 30 years @ 5% returns which calculates out to $864K. Afterwards, he resumes investing $20,004 every year for the next 20 years to catch up. At that time, inflation on maintenance and taxes will have risen to $12630 annually. Deducting that out of the annual contributions, we have a stock portfolio of $247K and a house worth $2.2M at the 50 year mark. The stock portfolio will need about 30 more years of contributions before it can cover the rise of post-mortgage housing costs.

    Again, these numbers are solely based on Trent’s original criteria. Income tax was not considered because it gets totally convoluted looking at how much is in taxable, how much is in retirement, did you have to reduce retirement contributions to buy a house, etc, etc, etc. If the criteria changes, the analysis outcome can change.

  30. js says:

    Leroy: I agree that financially irresponsible people shouldn’t buy, or really even people who are financially responsible and are considering a career change or anything that makes future finances uncertain really shouldn’t buy.

    It seems to me that having a mortgage dramatically increases risk initially, at least the risk of defaulting on that mortgage, although of course ownership reduces risk in the long run. Because where I live (CA), ownership is several times the cost of renting. And when you take on an expense several times higher and you have any degree of uncertainty about your income you are taking a risk of not being able to meet your expenses. In other words, it seems to me that if you decide to buy that 500-600k house, you better be serious and expect your current income to continue for a long long time and to be disciplined enough to sacrifice for a long time as well.

  31. Quick solution to the “constant battle of the wills” … Set up an automatic investing plan with a mutual fund and have it automatically withdraw every month. I pay my mortgage via automated withdrawals, this is exactly the same thing, but just to a different account. It takes the same amount of internal financial discipline – less than 10 minutes of your time for the next 30 years.

  32. Curbed LA says:

    “amy” claims to have an index fun with a 12% return. HA HA HA HA HA thats a good one.. Seems to me that everyone who advocates renting thinks the stock market will never go down, while those of you who say buy and hold are betting on real estate..

    only time will tell who is right

  33. Jeremy says:

    Trent,

    There have been some good points made by other readers – if you run the numbers, for many people (I’d say most in today’s still bubbly priced housing market), it makes much more sense to rent than to own.

    Instead of making statements like “throwing your money away” and “paying your landlord’s mortgage” run a few more numbers and see who comes ahead in today’s environment based on reasonable assumptions.

  34. xshanex says:

    same argument here that seems to be an increasingly popular topic this last year as the double digit yearly increase in real estate values has drawn to a close

    I keep it simple for my needs and beliefs. If the monthly cost of owning X property is within 10% of renting it then I’ll buy if I’m planning to be there at least 5 years. Where I live and will live it is skewed though as renting is averaging about 60% of the monthly cost of owning. A $1k premium to own vs rent is not worth it to me at this point. There is no way I can realistically make the numbers work to buy. After buying a place and being in a place where I’m established and have the extra $ I’ll probably buy a rental property if and only when I can do it cash positive as in rents for 120% or so of the mortgage…looks like we’re a ways off on that for the time being

    Doesn’t anyone remember back in the days before the real estate boom where it actually cost more to rent than buy? That seems like it has been the historical norm

  35. Rob in Madrid says:

    there was a looooong discussion about that very thing on another board I frequent and it came down to that was buying a house was an as much as a financial one. Even those who have “run the numbers” often end up buying because it’s our nature to want to own something. That’s even true for my wife and I, were on our third house in the third country (1st one Canada was sold when we decided to stay in Germany) Second one was a small apartment in Germany and now were leaning towards buying a place in Madrid as we plan to stay here long term.

    As an aside there’s been a number of stories in the Canadian media of people who’ve been forced to downside after over extending themselves of home based lines of credit. They simply couldn’t afford the payments anymore.

    Of course it doesn’t matter is you rent or own if you consistently live beyond your means

  36. yvie says:

    Interesting discussion. I did notice that those people who say renting is better than owning either live by themselves or with one other person. I think if you’re young, renting is the way to go. Stash away what you save by renting. But what if you want a couple of children? You probably will want some square footage, and maybe even a yard. In that case, it is likely cheaper to buy. It may be inexpensive to rent an apartment, but it is more expensive to rent a whole house. In that case, owning is a better investment than renting.

  37. Brad says:

    A point was made above about not wanting to make a landlord rich.

    I would note that I am more than happy to make anyone rich, as long as I am achieving my goals and those goals are good. I don’t care who gets “rich off me” as long as I make the progress I want. :)

    I think envy plays far to great a role in modern society. And as a future landlord, I hope to find others that are very happy to pay off houses for me, even if it is for a season in their lives!

    Brad

  38. Dave says:

    Laura K,

    Yes it matters if you move a lot. 99.99% of the time, if you’re only going to live somewhere for a short timeframe, you’ll come out ahead by renting. The transaction fees of buying/selling a home are huge, and it’s unlikely you’ll make up for those fees within a year or two

  39. Meera says:

    interesting article but surely it is difficult to generalise. we have a lot of similar sentiments here in the uk and people consider renting as dead money. however i feel it is entirely dependent on where your house and when you are renting/buying etc. from our own experience, my husband was renting in 1998 a 1 bed apartment in a london suburb for 650 pounds excluding utilities, council tax etc. the landlord had to pay for building maintenance charges. in 1999, he bought a 1 bed flat similar to the one he was renting in the same locality for 70 K with a repayment mortgage of 63K
    his monthly mortgage payment was 360 pounds excluding utilities and maintenance charge of (40 pounds a month). so all in all he was better off to the tune of 250 pounds by buying. come 2005, we decided to buy a bigger place and rented out this apartment. we used some of its equity to purchase a bigger place. the rent we got was around 750 pounds. now we are in the process of selling this apartment and it has been valued at around 170K. if we had purchased this apartment now, we would have a mortgage payment of more than 1000 pounds, while it would have cost us around 750 pounds to rent it. so i would have been better off renting it now

    basically, what i was trying to say through this convoluted anecdote is that the decision to buy should be taken very carefully. renting is much better if you want flexibility, reduced financial liability and hassle. however if you plan on staying at one place long term and the market is not completely skewed,and you find a house you love, you can then consider buying as a good option. you should not rely on the house value appreciating and should factor for paying the mortgage even when your circumstances change due to childbirth, redundancy, illness etc. if any slight change in your life can scupper your finans and jeopardise your mortgage repayment, then probably it is not the right time to buy. other options could be to buy a house and take in a lodger to help with the costs. but it probably wont suit everyone.

  40. Mitch says:

    You know, it’s a really interesting question to me because it about being richer in a meaning-making sense. It’s a question about how I want to live my daily life.

    An owned property would allow me to set things up to suit myself (e.g. put up more low shelves in a kitchen, no-mow lawn cover) but also burden me with additional requirements. If I buy a house (say in Ann Arbor or Madison, WI), will I be able to work fewer hours to make up for the time spent on walls and gutters? Will the stress of walls and gutters keep me from hanging out at the library? If my pneumonia comes back, or if I sustain an injury, or if I’m just too small, can I count on finding help to shovel the snow? Will I be able to set up a system to take care of myself?

    I would also need to think about the daily lives of people I might be living with. With what probability will I need to allow for a second office or workshop space? Counterfactually, if I were having kids, I’d also want to make sure they had some peers on that street.

  41. Jim says:

    Whenever this topic comes up, I think of my brother, who had this conversation with me years ago when he was still single. We were roommates at college, and had an acquaintance who had a mortgage on a house because he didn’t want to “make someone else rich off his dime”. Personally I couldn’t see why he would rather make the bank rich than a landlord, but that’s another topic.

    Anyway, my brother calculated how much it would cost him if he had a mortgage (much like Trent did in the example) and put away the difference between that and his rent in a simple savings account. He wanted enough to do a decent down payment when he decided to actually buy. Two years later he got married. The rent went up, but he continued the same strategy. After about five more years, he decided he had enough to start looking for the house to buy.

    Well, as he started looking at different options, he was kinda surprised when he looked at the “build your own” option. If he just bought the land and built a small house, he figured he could pretty much do the entire thing with what he had already saved. He wasn’t really a builder, but both his father and his wife’s father were, and he had several brothers with varying degrees of building experience. We all helped out in some way or another. I spent a few days there myself, helping with the grunt work. It was three months of hard work for him, and not everything went as planned. He had some issues with the well, the ground being rockier than he had expected, and the furnace was damaged in some way due to inexperience. But as I recall he came in at only about $2000 over budget, which I was happy to lend him for 4 months or so. I remember when they moved in there wasn’t even any finish siding on the outside.

    But he didn’t have ANY mortgage payment after that. So he took some of the money he would have been using for a mortgage, and started his upgrade fund. The first year, it was siding and finishing the sheet-rock on the upstairs rooms. I don’t know exactly how he runs his upgrade fund, but here it is 15 or so years later, and he has built it into a very nice place. He has a huge garage, upgraded kitchen cabinets, concrete carport and turnaround, serious playhouse and swingset, orchard, nice tile and carpet, piano, and a lot of other things. All on a very modest salary.

    In contrast, his friend bought the land next door and had a nice house built with the conventional 30-year mortgage. For the first few years, his friend’s house was nicer. It started out with the finished upstairs, nicer kitchen cabinets, actual siding on the outside, and better furniture. However, after 15 years, the mortgage is only half paid, and the contrast in quality at this point is remarkable.

    I’ve always considered my brother a pretty wise man. I know this strategy can’t work for everyone, but it sure worked well for him!

  42. I did this calculation myself a year or two ago.

    I have a great apartment which is fairly cheap and the rent includes not only water, sewer, and garbage, but also heat, hot water, and basic cable.

    When I added those costs (that I’m avoiding now) to the ownership costs like taxes, maintenance, and insurance, I figured that you could give me a house for free and I still couldn’t live in it as cheaply as I can live in my apartment.

  43. Tristan says:

    In places like the Midwest you can own a modest home and have a house payment around $300 for 15 years. You can pay about the same to own a duplex or triplex where your renters will make your payments for you. You put a few hundred in savings each month for home repairs. That beats the heck out of the $1200 to $2000 a month rents in southern California or New York. I guess it all depends on where and how you live. It’s true that renting in those big cities is much cheaper than a house payment.

  44. Jim says:

    If you’re like me, you might figure in the maintenance costs. Not as much the house, but I really dislike trimming the hedges. I don’t mind taking care of the lawn, as long as the timed sprinkler system is doing a decent job, but I still haven’t learned how to prune the trees properly. Ah, for the good old days when I shared a condo with roommates, and someone ELSE did the yard work.

  45. icup says:

    I’m not sure if anybody mentioned this, but those of you who believe that you can “rent your way to riches” are confusing *actual* return on investment with *potential* return on investment.

    The *potential* return is much greater for renting than it is for buying (2.6 million in the bank after 30 years vs. a couple hundred K), but I believe the actual return is much closer to a wash, or even leans in favor of the buyer.

    Otherwise, we would be a nation full of millionaire renters and nobody would own a house, but if you look at people who have millions, how many achieved their wealth by renting? Maybe some did, but probably not the vast majority.

    When you say, you’d be foolish to “buy a house when you can just rent one and get a vastly greater return for your money” you might as well say “you would be foolish to go to college and pursue a career because you can make so much more money being a movie star”.

    Yeah, potentially you can, but how many people actually do that? Very few.

    Its all about risk. Renting is, IMO, a riskier venture overall than buying.

  46. m360 says:

    The author makes it look a lot more straight forward than it really is. There are other factors that one has to consider. I do agree with Trent that once someone is over the hump of morgtage payments, it becomes a lot more economical. Real estate is considered more of a liability anyway. In reality, buying a home can be a wise investment. My parents bought a home for $70K 20 yrs ago. Now there is a shortage of housing (and space) and people are expanding their houses upwards. Their investment is now worth $400K.

    Living in the north can be more exspensive for homeowners, especially with oil, snow removal. We do save on AC in the summer time though. There are some things in general that you save on with a house though, like being able to have a washer/dryer (and a yard to have a clothes line). Feeding quarters into a machine gets awfully exspensive. A garden is also something that’s difficult to have when renting. Some landlords, like mine, won’t even allow flowers in the yard. If I want to get a tan, I have to pay to go tanning or drive to the beach, costing $15 per trip. Renting means less privacy, more noise, and pesky neighbors, especially when several apts. are stacked up on each other.

    Paying rent for 10 years is rather depressing as far as I’m concerned. It is indeed cheaper for me to rent but that’s money I will never see again.

  47. James says:

    My home cost me $460K in the summer of 2005 and now it is worth $700K. How is renting better than that?

  48. Peter says:

    Some very interesting points have been raised. I think the best bet is not to look at a one size fits all for this. My personal experience is that rental of a two (and definately three) bedroom condo/apartment in my area (mid atlantic region) has actually caught up and passed my mortgage payments (to include taxes and insurance) typically within 5 years of my home purchase. This happened both in the mid 1980′s and then later in the late 1990′s. Given our three children, I would be hard pressed to enjoy living in less than a three bedroom rental and I believe it has been the right move for my family and will benefit us in the long run.

    On the other hand, my single brother who lives in western NY has never owned property, and given his situation and where he is comfortable living, renting and investing the difference would be the best bet for him and would probably net him more in the long run if he had the finacial disipline assumed in the MSN article and mentioned in the discussions above.

    Like any life decision, money should be part of it, but you really need to decide what it is you and yours need, desire, value, etc. and then look at all your options.

  49. Steve says:

    I think the author of the msn article makes a good point. It is not an absolute certainity that buying makes more sense then renting. Many people blindly purchase homes when it doesn’t make sense to because they haven’t even considered whether it would be smarter to continue renting based on their personal situation.

    My complaint regarding the article is the author doesn’t take into account the return people will realize on a home purchase because of the leverage involved. If someone takes out a mortgage at a reasonable interest rate and dutifully makes the payment they will almost certainly earn a solid rate of return on their investment.

  50. lorax says:

    > My home cost me $460K in the summer of 2005 and
    > now it is worth $700K. How is renting better than that?

    That’s something close to 50% return on investment per year. Hopefully you got lucky and bought in a down market and will sell in an up market. Call us in 10 years and let us know. :)

  51. Dan says:

    au contraire, Lorax…

    spent 460k on a home, now worth 700k in two years. I’m guessing that the poster only put a portion of the price down, and pays a mortgage on the remainder. Let’s say they did 20% as a down payment, so about $92k down. Over two years, it’s worth an extra $240k. When you add the mortgage payments and additional expenses over the two years of ownership, let’s say a couple thousand a month…

    That’s a gain of $120k equity per year. Sounds a lot more like 100% return on investment to me.

    Here’s the great thing about real estate that no one is discussing: Try leveraging a few hundred dollars per month in stocks to purchase thousands in actual assets. Depending on your down payment, you can return many times over on your investment.

    As for me — I’ll take home ownership for 5-10 years, move and cash out the equity created, then get a new place and put a down payment down, investing the rest of my funds.

    Keep in mind, you could hedge this argument by owning a home, taking a tax writeoff on all of your mortgage interest, and taking a home equity line of credit and investing the funds in a higher-yielding investment avenue.

  52. Jane says:

    The debate got me curious so I did the math with owning my co-op versus renting one in the same complex. I figure I pay $80.03 more than if I rented which is a whole $960.36 a year. As I pay off at least $180 in principle a month for my 30 year mortgage, I come out on top. It’s funny I live in the NYC area as Brip Blab does but I have far less of a difference as far as rent vs.own cost. I guess it just goes to show that when looking at things it it not just the area but the size of the purchase as well.

  53. Chris says:

    Where I live in Southwest VA, owning isn’t any cheaper than owning provided you have a down payment. Also many people neglect the fact that you get roughly a quarter on the dollar for your interest payments on the house back in taxes, and the house appreciates on average at 3% a year, for the total value its worth, from day one its accumulating approximately 3% annually on the full amount, throw in the tax savings with an adjusted W-2 and the house should come out on top. All the analysis I’ve seen this far neglects the appreciation of the house. The last thing that should be neglected is that rent payments increase each year while the house payment stays the same if you have a fixed rate.

    In my area a renter is throwing away money while a home owner is paying down ownership in value.

  54. Dina says:

    Hmm- it’s not a quarter for a dollar for interest paid and property tax decuctions- the tax savings after my interest and property tax deductions is equivilent to 14%, not 25. (Just did the math yesterday, found out the amount our taxes would be if we did not have these deductions)

    Please feel free to advise me on my own sell-or rent dilemma:
    I have been wrestling with our home expenses, and I am considering selling and renting for a few years and investing our equity. We bought our house two years ago in an expensive area. It was more than we wanted to pay when we started looking, but at the time I talked myself into it thinking that even if it would be tough at first, it’s a great area, great house, will only go up in value.

    We made a bad decision- we made less than we thought on the condo we sold after buying (that was a big ‘duh!’), higher utilities ($3500 a year on oil!), had to paint the entire outside of the house, and had an expensive indoor plumbing repair. My part-time freelance work was not bringing in enough, so I went full-time, but full time childcare costs a lot too (though still worth it to work full time). We are so strapped right now- I cook all our meals and we have no car loans or credit cards, but some months we don’t even cover the bills. Not to mention we both have hour long commutes, and we want to relax on the weekend, and not constantly work on maintaining our home. It has been a dream house nightmare.

    Anyway, in my expensive area, we could rent a townhouse near our jobs for 1/2 what we are paying for our house. (Buying one would come out to the same as our current house, however) Of course, we are going to spend some of our equity on selling fees and paying off the HE loan, but we would have a good little chunk to invest. I am trying to run the numbers but there are two wild cards for me- possible appreciation of the house for the next 3 years, vs possible investment potential for equity chunk.
    I am trying not to make another bad decision here! But it looks like in my case the lower costs that would enable us to put a bit in savings and afford our life a little better, and the investment of the equity stack up quite well against the estimated appreciation of the house and the tax deduction, especially when you factor in the utilities and home maintenence. I’m not sure how to facotr in that we would only walk away with 60% of what we put down as a downpayment after 2 years, but I’m willing to take that hit to improve the situation.

    Does anyone really know what sort of percentage I could make on the equity in 3-5 years if I invested it? I know that you aren’t supposed to be too risky with short-term investing. Any advice?

    Any advice in general? It would be appreciated!

  55. Raymond says:

    after the big run up of house values seen in the last few years, i think home owners will be lucky to see an average appreciation rate of 2%. so a 100000$ house paid cash “earns” 2 grand a year for you, that you can’t spend until you sell. during the same time, a bunch of equities worth 100000$ might optimistically earn anywhere between 7k and 11k and fully cover the rent.

    i’d say if you are sure to live in the same house for the rest of your active life and are concerned with your quality of life, then buy. If you expect to sell though, real estate agents will get the lion’s share.

    if you rent and invest the difference, the worth of your assets should grow faster than a mortgage get paid back for the same amount out of pocket every month. so the downpayment money will always be available to buy that house. with a large enough downpayment, the mortgage will shrink to the amount paid to rent a similar house anyway.

    since those who decide the tax laws are probably not renters, owners might get advantages from the fiscal point of view. so there’s no absolute good answer here, it will depend where you live, prices in that area…

    one sure thing is that buying a bigger house every 7-8 years and finally downsize once the kids leave is not the way to go. oh yea, and manual skills are way more profitable if you own since you have to do or pay for the maintenance.

  56. Mark Gavagan says:

    Now (July 2010) that we’ve experienced the financial crisis and housing downturn, many of the comments above are especially interesting to read.

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