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.