By Dr. Erik Hofmeister, WCI Columnist
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.
#7 Freedom!
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.
More information here:
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?
What a terrible post ! Especially when it comes from intelligent person, someone who calls himself doctor. People tend to listen to academics and get the wrong idea, because how can Doctor be wrong ? That’s why there is total distrust towards Elites/Academics. Either knowingly or intentionally, they distort facts to prove their point.
When Erik is comparing one rental house with other “owned” house, he is comparing two different houses. He is probably comparing smaller “rental condo” with Bigger “owner occupied” house to prove the point that rental is cheaper than owning. In NO scenario, the same house will cost less in renting than owning. Landlords are not stupid. I am Landlord myself for last 10 years having multiple properties (condos, single and multifamily). Whatever rent I get from tenant, from that rent, I pay mortgage, taxes, insurance, utilities, maintenance and some free cash. For my single family rentals, my tenants do snow removal, lawn maintenance.
Also, when you own, your mortgage costs are mostly fix for 30 years (except property taxes, but that does not necessarily increase at same pace as rents). Your total mortgage costs do not increase every year at the rate of inflation. But if you rent, I guarantee you, that your rents increase every year at the rate of inflation or more. Further depending on rental inventory, etc. , your rents can grow much faster. If you don’t like that increase, then you have to leave and find another rental. And when you own, your property appreciates slowly.
So unless you are looking to live only for 2-3 years at current location, always try to own the house. If you are renting condo currently, then buy a condo. Don’t buy big house, because then your owning costs will be more than renting. Own a house which is in your budget. In fact, when I started, I bought small house with 10% down and bough investment property with another 10% down.
Corporate America now a days is trying to convince Americans that “Not Owning anything” is COOL and renting everything is good. IT IS NOT THE CASE. Once you don’t own anything and there are corporate landlords everywhere, they can increase rent at much faster pace.
Even though I am Landlord, I always tell my tenants to buy house. I am real estate agent also, so I help them buy house. I even reduce my commission so that they can buy the house.
Mark my words, things are going to be very difficult for tenants going forward. Especially because of government decisions to ban evictions and other things due to which many smaller landlords are going out of market. So low inventory, handful of big corporate landlords are going to make matters much worse for renters.
So buy now if you can.
Corporate America is trying to convince people to rent? Really? Are you familiar with the realtor and mortgage lending industries?
I agree that from financial point of view, renting is probably making more sense than owing a house IF 1. You have money to afford a large nice rental unit 2. Have one or no kids 3. Have a major objection to accumulate lots of money in retirement 4. Have no responsibility of housing your elder parents. However, HOME has a much more significant meaning than a financial house. I have never understood American culture where you shall work super hard during your prime so you could retire at 65 and start living a life. Things that you enjoy in your 20s, 30s, 40’s, 50s are not the same when you are 70. You can rationalize to the point of saving every penny possible and then die rich – it is just not my philosophy in life. HOME is the place where your kids and grandkids come to, the place where you planted a tree and watched it grow, place where you have made good memories…. Money is just a tool. Enjoy your life to the degree that you can afford it because money will not buy you time or health
I appreciate your point of view, but in the article you stated that you will retire in your investment property. This implies that you are a home owner, you just don’t live in the home you own. Which of course is a good way to build wealth. If the tenant is paying your mortgage you get to own an appreciating asset while someone else foots the bill. This is why I disagree that renting is better than buying. Yes homeownership is costly, but at the end of it all, you benefit by having the underlying asset once the mortgage is paid off.
Additionally, I agree that the market matters. In most places rent is not that much cheaper than the cost of a mortgage so there is little benefit to giving up homeownership simply to save a few hundred dollars.
When you pay rent without also owning an investment property on the side, you are basically giving away money. Your situation is quite different than most Americans.
I think you view real estate investing too simply in three ways:
# 1 The idea that the point of real estate is to have a tenant “footing the bill.” Even if the rent covers the mortgage (which it darn well should), you’re still putting your time and likely a down payment with its opportunity cost into the deal. The tenant is unlikely to be paying for that. Not to mention risk, particularly when using significant leverage.
# 2 Rent needs to be significantly cheaper than a mortgage. Look at all the additional stuff the homeowner/landlord must pay for besides the mortgage just to avoid negative cash flow.
# 3 Sometimes renting is right move and when it is it isn’t about saving a couple hundred bucks a month. It’s about saving the transaction and other significant costs of ownership. Round trip transaction costs on a $300K home are around $45K. That’s hardly a few hundred dollars.
Many ( most ? ) people don’t accurately account for costs when doing the rent vs buy comparison. If you rent an apartment, it’s true that the costs of maintenance, property tax and insurance for the building are included in the cost of rent. But that’s the point – those coast are included in the rent. So the rent plus renter’s insurance is the total cost for the renter.
For the homeowner, maintenance costs are additive to the mortgage, and property insurance premiums are much higher than renters insurance premiums. Utility costs ( gas, electricity and possibly water ) will always be higher for the homeowner. And property tax will be much higher. These costs will continue even after the mortgage is paid off.
I’m single and sold my 1600 SF house in 2005 for 148K. The mortgage was paid off at the time. I invested the proceeds from the sale and rented an 850 SF apartment. Today, that investment is worth 585K. Zillow says my old house is now worth 314K, even after the insane run-up in prices the past 2 years. Yes, I’ve paid out about 175K in rent since 2005, but I’m still about 100K better off having rented. And that does not include the maintenance costs, tax and insurance on the house, which would make renting look even better.
Granted, had I sold a 1600 SF house and rented 1600 SF instead of 850 SF, I probably would have been just as well off owning, or maybe better off financially. And the numbers might look better in another region. But I live in the Midwest. And I suspect renting would look even better in expensive coastal markets.
Bottom line is we are all going to pay for housing until the day we die. In most places over a long period of time, owing is probably better, given a true “apples to apples” comparison. But renting is not “throwing money away”. If done wisely, renting can easily beat owning.
Coming back to this from today’s blog post- guess I was in the midst of moving when this first came out. I appreciate the protection of home ownership (eminent domain aside) from being displaced through landlord selling/ needing home for self/ rent hikes beyond the budget. As a privileged hippie gardener I figured the property I wanted to enjoy as I did would cost maybe more than my mortgage did and didn’t actually exist (I’m sort of in the ‘if you want to fill the backyard with rocks you’ll have to buy’ category, except it’s compost piles and unorthodox lawn care any landlord would wince to witness*).
Our privilege- money to burn- and hating moving so much has us buying again not renting, but another issue is I thought I was buying my forever home 16 years ago. Aside from the grandkid being 6 hours away, that forever home with 2 people not 4 and the grannies not fit to live up a flight of stairs in the kids’ rooms if they moved in made it, in the end, my 16 year (and maybe should have only been 14) dream home.
*in our new town we avoided a similarly priced and appointed newer home with HOA issues- turned out you HAVE to have a see through fence, and growing FOOD visible through that fence or in the front yard was not permitted! Definitely not the neighborhood for an organic gardener hoping to convert the entire lawn to food production.
Hello, I enjoyed this article very much. I’m a FI renter, reasons I prefer renting,
I don’t want the upkeep expenses of a home.
I don’t want to pay strangers to care for the upkeep of my home.
I’m a city gal who doesn’t like driving and like having public transportation and walkable shopping nearby.
I like that if the neighborhood goes to crap I can move.
I like the security/safety I feel in my apartment home.
Those are a few, I could care less how much money the property owner has, my concern is that they provide and continue to provide a clean, safe, well maintained, 0 tolerance property.
The biggest bill I have is rent and even with the increases it’s a fraction of my budget, as I live well below my means. I wanted a nice neighborhood, I wanted a balcony for container gardening, a wood fireplace for the occasional power outages and washer/dryer or washer/dryer hookup, allowed pets and I got that in my apartment home.
Find a apartment, condo, townhome, mobile home,house, rv, Rent, Buy, but live within your means. No place is better than the other if you’re not happy and struggling.
Think for yourselves, everyone’s needs, wants, lifestyle is different.
Paying to have a safe, healthy place to call home is never throwing money away.
Have a awesome day.
My wife and I just moved from Philadelphia to Southern California for an amazing job opportunity. The math in this area seems to very strongly work out in favor of renting.
We found a condo the suits our needs to rent. Our monthly housing costs are $4000. However, if we were to purchase the unit with a 20% down payment ($240,000), our monthly housing costs for the exact same unit would be $8,000/month, not including any maintenance that would be necessary. In Philly, the situation was the opposite. Our monthly housing costs were a little less as owners than as renters for similar houses.
Am I missing something in the So Cal math, or is it just insane to purchase a house here?
For now, we’re thinking that we will just put the additional $4,000/month and $240,000 down payment that are required to buy a property in investments and wait on the market to make more sense (rents going way up, purchase prices going way down, or a combination of the two).
Welcome to California. If the houses appreciate at 8% a year for the next decade, buyers will be fine! Wish I could tell you if they were going to continue to do that. Hard decision, sorry you’re in that situation.
Great post. SO many don’t understand this and argue with me when I explain this to them. I owned 800 apartments, prior to owning a single family home. I now own 2,100 units and we live on the lake and our apartments easily cover the costs and headache of the home (we have everyone do the things around the house that we don’t want to do).
Renting while I started to grow my real estate business was a no brainer and it made it easier for me to get debt early on to buy the apartment buildings that I bought. If I would have owned a home and had debt on my balance sheet that was not paying me each month those first few loans for investment properties – I would not have been able to get. Great great article.
The rental company covering all repairs is not necessarily true. I rent a house and the rental company will only cover major repairs like electrical issues, heater A/C replacement, etc but will not cover minor repairs and wear and tear maintenance like fixing blinds, broken towel racks, running toilets, clogged pipes, caulking tubs, etc. I still need a tool set and I had to buy a dining room table for my rental too. It is great being able to move if you don’t like the neighborhood or your neighbors though.
Every contract is different. Best to read them carefully.