By Dr. Erik Hofmeister, Guest Writer
My wife and I hit our financial independence (FI) target number this summer, in our early 40s. We are both professional academics and are currently renting, and we will continue to rent until we actually retire—at which point we will move into one of our current investment properties. I am often struck by people’s obsession with owning a home. We owned a home for 15 years, and it was a wonderful experience for that time in our lives. But owning a home should not be universally equivalent with financial success.
Here are seven reasons renting can be much better than owning. Residents, in particular, take heed.
#1 Owning a House Is Really Freaking Expensive
Everyone thinks renting is “throwing money down the drain” compared to owning. You know what’s throwing money down the drain? Buying over $10,000 of “stuff” the first few months of owning my first house, which rapidly depreciated. Lawnmower, toolset, dining room table, new paint, hedge trimmers. It was ridiculous. A lot of people just look at the mortgage rate per month and compare it with the rental rate. Obviously, you need to add taxes and insurance. And then all the other “stuff.”
There’s a reason that investment property owners tend to assume that about 45% of the rent will go to expenses. There are a lot of expenses of owning a home separate from the mortgage, taxes, and insurance. A new AC unit, a new refrigerator, dealing with flooding. There’s always something going wrong when you own a house. When we sold our first house, it was an incredible relief. I was constantly worried something serious would happen that would be expensive to repair.
#2 Renting May Be Better Financially
This is different from #1 because it depends on the market. We currently live in a college town that also happens to have an incredible school district. This means that buying a house is fairly expensive because all of the faculty want to be in the city limits so their kids can go to a good school. Simultaneously, renting is relatively inexpensive, because the student population keeps rental prices down.
There are many markets like this around the country (and the world). The Bay Area, Toronto, New York City, and Seattle come to mind. You’re actually better off renting and investing the savings. It’s just too expensive to buy a house.
#3 Less Hassle Renting
Not only do you not have to buy the toolset if you rent, but you don’t have to do the work! Just call up the rental company, and it's taken care of. On a website where people regularly discuss the cost of something that saves them time (hiring landscapers, cleaners, etc.), I am surprised people don’t calculate the value of the time they spend taking care of their house. Maybe they hire out those things, as well.
How is your experience hiring a contractor to do a $50 job? Mine is abysmal. They rarely actually show up and then you have to check them to make sure it’s actually done. I don’t even have to be home for the rental company maintenance to come take care of something. It has been literally life-changing to not have to take care of home maintenance and repairs personally. I hated cutting the grass (to the tune of two hours), and the cost for paying someone else was far more than I thought it was worth. Maybe I could have found a neighborhood kid, but I would still need to get fuel for the lawnmower and do its maintenance. At my rental, it’s just . . . all taken care of.
#4 Location, Location, Location
I really enjoy walking to work. I’ve been doing so regularly for the past three years, and I cannot imagine ever again living somewhere I couldn’t walk to work. You know what’s not within walking distance of my current workplace? Single-family homes or townhouses. There are some small condos, lots of mobile homes, and some fancy student apartments. So, if I want to walk, I’m either renting or buying something I don’t really want.
Maybe your thing is being on the water. Maybe it’s having a pool you don’t need to maintain. I loved living in apartments in Phoenix and always having access to a pool that I didn’t need to think about maintaining. Maybe it’s being around people (or away from people). There are dozens of reasons why a certain location may be better to rent than buy.
#5 Transaction Costs
Everyone seems to hand-wave this away. Yeah, yeah, you have to own it for more than five years because of “transaction costs.” But think about the math on this. The realtor takes 6% of the gross sale. You usually have to pay a lawyer and lots of little fees like title searching. There are potentially other transaction costs, though.
Paying Double Rent (or Mortgage)
Depending on your circumstances, you may move into your new place before you can sell your old one. You would have to pay for both locations. Although this is possible if you’re renting (it’s happened to me twice), it’s usually a lot easier to leave a rental than to sell a house.
Upgrading the House
Some houses you may sell “as-is,” but you should expect to get a lower offer if you do so. You may need to do painting and other cosmetic repairs. You may need to roust vermin from your attic or under your porch (armadillos are surprisingly pernicious). You can DIY, saving money but costing you time and hassle. Or you can hire others, often at exorbitant rates. (Guess how much you’ll be charged to get rid of an armadillo. Triple that and you may be close to right.)
#6 Limited Downside
A key principle of successful financial management is to limit your downside—how much you might lose in a transaction. There’s a reason the term “money pit” exists for houses. Pretty much every house has hidden problems that can blossom into serious catastrophes. If you own, you’re on the hook for anything that happens. If you rent, the worst they can do is take your deposit and possibly bill you for damages you caused (e.g. carpet replacement due to cat urine). There is substantially less risk to your finances if you rent rather than own.
For a blog dedicated to people being financially free, I’m curious why so many are excited with the idea of being bound to a house. I suppose you could theoretically walk away and stop paying the mortgage, but that has significant consequences. If you walk away from your rental, the worst thing that happens is you pay the rent until the lease runs out. More importantly, you have a lease. You KNOW when you can get out. In planning for an early retirement, it is nice to know that we can plan our transition away from this house at the exact same time we transition away from work.
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Owning a house can sometimes be good. I tell the vet students to whom I teach personal finances that if they really want to dig up the backyard and fill it with rocks, yes, you need to own a house. If they want to knock down walls and install a walk-in shower, they need to own. But renting has many benefits and I think everyone assumes that, once your finances are set, you should buy. I am here to tell you: you can be FI but be perfectly happy renting.
If you include it in your retirement budget, it can be just like health insurance, food, travel, or any other expense. Run the numbers, consider the intangibles, and don’t let anyone else tell you what you should do with your housing.
Do you agree? What other benefits have you experienced by renting instead of buying during your residence? Comment below!
[Editor's Note: Dr. Erik Hofmeister is a Professor of Veterinary Anesthesia at Auburn University and blogs about veterinary academics at vetducator.com. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]