Renting can be more lucrative than owning!

[MikeMcMann]

One of the most ingrained fallacies I am aware of is that renting is simply just throwing money away and owning is always the better financial decision.

It is stated by people constantly and with such confidence that most refuse to even debate or hear anything contradictory. They have simply been told or repeating that most of their adult lives and thus believe it. The biggest perpetrators of this myth are Real Estate professionals who are incentivized to try and get you to switch from renting and to become a purchaser.

The biggest benefit to Owning V Renting is the 'forced saving' aspect. You do not have that aspect with renting and must be a disciplined saver to get the same benefit but instead many people simply spend the extra cash saved by renting and thus why HomeOwners tend to be more wealthy after retiring as they have 'forced savings' equal to the amount they paid down on their house and its increased value they can bank.

In some cases depending on the rent V Ownership skew (supply/demand) in a community renting can be more lucrative or buying can.

This thread is to open some eyes by dismissing the old “renting is financial idiocy” view as Flat Earth thinking. (I know...many will dismiss it regardless due to being not open to challenging themselves or what they believe).


Would you be better off financially renting or buying a home?

Why it’s better to rent than buy

Discuss.

 

[xbone19]

Being a squatter is better

 

[TeTe]

Depends on the city. In San Diego it's the truth for sure. Rent prices are much cheaper than property prices.

In Chicago, it's a wash. I've been renting my whole life. I don't necessarily look at it as throwing money away.. I'm putting a roof over my head that I don't have to maintain. Plus I can just pick up and leave if I get tired of the area.

But, I've never been married and have no kids. I don't feel the need to buy a house. I could just buy a one bedroom condo, but I've never put forth the effort to save for a down payment.

 

[D Train]

My mortgage is less than rent would be on a similar property. Ideally, one day I'll own my home outright and that's where the real benefit is.

 

[ObsoleteSoul]

I like having something to sell when I retire. It works for me buying, because I will eventually sell it and get a condo on the beach or something similar.

 

[Cmart]

I'm no money expert, but if the place I live in appreciates in value, it seems logical that I'd rather own it than rent it.

 

[John Wang]

Just bought a condo recently. Renovating it right now then selling it in a few years. Can't wait to get a house! Fight me, renters.

 

[MikeMcMann]

I'm no money expert, but if the place I live in appreciates in value, it seems logical that I'd rather own it than rent it.

That is the common thinking and it can be correct.


But here is some easy perspective for you. Imagine you buy your house and it costs you $X. Over the course of your home ownership your house has increased in value to $X plus Y%. That Y% equals your appreciated value or forced savings and it will be in your bank account when you sell. That seems great as you now have more money then when you bought the house.


But for easy sake of argument lets say over the years you owned the house you spent more than Y% in property taxes, maintenance and other home ownership costs, all of which is lost money you are not getting back. You never paid much attention to those costs because they came out incrementally and in small pieces. But the whole way through you were actually spending more (sunk costs) to live there then you were saving. But you still walk away feeling good as you did not count those losses and never really saw them but you can now see your forced saving of Y% in your bank account.


Now that example is extreme as the costs have rarely exceeded the property value gains in our lifetime (think 2007/8 crash was one of the first outside small regional corrections) but it shows you the point. Most people only look at one side of the ledger (their gain) and never consider the other (their costs) in home ownership.

 

[Literally Bricked]

I'm no money expert, but if the place I live in appreciates in value, it seems logical that I'd rather own it than rent it.

This is where the issue is. If you rent a place for $1,500.00 a month or you pay $2,200.00 a month for a mortgage. Say you take that $700.00 a month and put it into something safe like preferred shares, though realistically you could just dump it into some ETF that tracks a market equivocal to your risk tolerance and be okay. So assuming that is in the range of 5-6% return annually, you would have doubled your return in twelve years. As the amount of that $700.00 ~30% of the amount you are putting in for your mortgage, you would have to see an increase in your home's property value of at least 31% to have it end up being worthwhile to purchase a home over renting. Outside of the last eight years here in Canada and the last fourteen in the US, you have not seen that sort of growth on a home since 1948 - 1951 in the US.

This of course does not include expenses involved in property taxes, maintenance fees associated with an apartment and other items like mowing your lawn, tending to your pool, etc.

 

[sub_thug]

That is the common thinking and it can be correct.


But here is some easy perspective for you. Imagine you buy your house and it costs you $X. Over the course of your home ownership your house has increased in value to $X plus Y%. That Y% equals your appreciated value or forced savings and it will be in your bank account when you sell. That seems great as you now have more money then when you bought the house.


But for easy sake of argument lets say over the years you owned the house you spent more than Y% in property taxes, maintenance and other home ownership costs, all of which is lost money you are not getting back. You never paid much attention to those costs because they came out incrementally and in small pieces. But the whole way through you were actually spending more (sunk costs) to live there then you were saving. But you still walk away feeling good as you did not count those losses and never really saw them but you can now see your forced saving of Y% in your bank account.


Now that example is extreme as the costs have rarely exceeded the property value gains in our lifetime (think 2007/8 crash was one of the first outside small regional corrections) but it shows you the point. Most people only look at one side of the ledger (their gain) and never consider the other (their costs) in home ownership.

There is a lot of good info in this post. Great stuff, man.

I would also add the cost of interest. In additional to home maintenance, closing costs, taxes, and fees, you really need to consider what you are paying in interest. If you get a 30-year fixed with no money down, you will spend the first two years of your home ownership just paying interest payments. All that money goes straight to the bank, doing nothing to build equity in the home. If you put down 20-40% down on a 15-year fixed, you will lose significantly less to interest. However, you'll pay more each month in your minimum payments.

A prospective buyer should look at how much more they will lose in interest, flat fees, taxes, additional fees, etc, and add in OPPORTUNITY LOSSES as well. If I lose an extra $10K/year to ownership instead of renting, then what would I otherwise do with that $10K? If you are investing it to make lots of money, then it may not be worth the investment into the home because I'd make so much. If the money is going to be spent on beer and dumb stuff, then an extra $10K/year is nothing compared to the increased value of my portfolio through the home's equity.

A lot of this has to do with how long you plan to live int he home, how the market is looking at the time, and some other factors. Anyways, I hope this helps, Sherbros!

 

[Rhett Henley MD]

The escrow items are killer on my mortgage (taxes and insurance). As my property value increases, so do my property tax and insurance payments.

 

[Cmart]

This is where the issue is. If you rent a place for $1,500.00 a month or you pay $2,200.00 a month for a mortgage. Say you take that $700.00 a month and put it into something safe like preferred shares, though realistically you could just dump it into some ETF that tracks a market equivocal to your risk tolerance and be okay. So assuming that is in the range of 5-6% return annually, you would have doubled your return in twelve years. As the amount of that $700.00 ~30% of the amount you are putting in for your mortgage, you would have to see an increase in your home's property value of at least 31% to have it end up being worthwhile to purchase a home over renting. Outside of the last eight years here in Canada and the last fourteen in the US, you have not seen that sort of growth on a home since 1948 - 1951 in the US.

This of course does not include expenses involved in property taxes, maintenance fees associated with an apartment and other items like mowing your lawn, tending to your pool, etc.

I typically don't see two similar houses where one is for rent for $1500 and the other has a mortgage payment of $2200. Usually I see the opposite. Two places, say both valued so that their mortgage would be about $2000, but the renter will pay $2500 or $2700 to cover utilities and wear and tear. The homeowner covers the mortgage plus bills and so does the renter. The renter just never sees a return when he leaves. This is just my typical observation, I certainly don't have statistics to back this.

 

[Cmart]

That is the common thinking and it can be correct.


But here is some easy perspective for you. Imagine you buy your house and it costs you $X. Over the course of your home ownership your house has increased in value to $X plus Y%. That Y% equals your appreciated value or forced savings and it will be in your bank account when you sell. That seems great as you now have more money then when you bought the house.


But for easy sake of argument lets say over the years you owned the house you spent more than Y% in property taxes, maintenance and other home ownership costs, all of which is lost money you are not getting back. You never paid much attention to those costs because they came out incrementally and in small pieces. But the whole way through you were actually spending more (sunk costs) to live there then you were saving. But you still walk away feeling good as you did not count those losses and never really saw them but you can now see your forced saving of Y% in your bank account.


Now that example is extreme as the costs have rarely exceeded the property value gains in our lifetime (think 2007/8 crash was one of the first outside small regional corrections) but it shows you the point. Most people only look at one side of the ledger (their gain) and never consider the other (their costs) in home ownership.

I understand that property doesn't always appreciate. My post assumes that the property I own does, though. Also, I've never seen a landlord who doesn't build in the cost of all his expenses (tax, etc.) into what he charges for rent. He wouldn't remain a landlord for long if he didn't. So as a renter, I'd pay all that anyway.

 

[Dogstarman]

In my neighborhood the rent is actually more than a mortgage.

 

[MikeMcMann]

I understand that property doesn't always appreciate. My post assumes that the property I own does, though. Also, I've never seen a landlord who doesn't build in the cost of all his expenses (tax, etc.) into what he charges for rent. He wouldn't remain a landlord for long if he didn't. So as a renter, I'd pay all that anyway.

Actually in most mature rental markets the monthly costs of owning and mortgage costs (assuming a 5% down payment) are higher than renting. Thus why everyone does not simply buy a rental property and rent it out for a profit and apply the surplus to their primary home.

Most professional landlords have to get close to 25% down payment to make sure the property rental incomes carry all of the costs of ownership.

Smaller markets that changes and owners find a bigger benefit when they rent out a part of their home (finished basement) to help cover the costs they have to pay regardless to live there.

 

[Oblivian]

In my neighborhood the rent is actually more than a mortgage.

In most markets, it is this way. I'll give a longer response on the topic here in a second. This example is flawed for most markets.

 

[Cmart]

Actually in most mature rental markets the monthly costs of owning and mortgage costs (assuming a 5% down payment) are higher than renting. Thus why everyone does not simply buy a rental property and rent it out for a profit and apply the surplus to their primary home.

Most professional landlords have to get close to 25% down payment to make sure the property rental incomes carry all of the costs of ownership.

Smaller markets that changes and owners find a bigger benefit when they rent out a part of their home (finished basement) to help cover the costs they have to pay regardless to live there.

Again, this isn't what I see. I looked at buying the house next door to mine and it would have been a fine investment as exactly that, a second property as an investment if not for a lot of immediate profit. Rentals were paying higher than the mortgage + utilities because of area people with money who couldn't get a home loan or didn't want to be tied down to a property via ownership.

 

[Oblivian]

I clicked on your first link and have not clicked on any others. First off, this discussion has happened a lot on here and we actually had links for several cities comparing home prices vs. rent prices on an apples to apples comparison. For the most part, most markets will have a rental price greater than the mortgage payment if purchased and financed at 100%. This is not difficult to figure out why - the landlord is paying a higher interest rate on an investment property, typically higher property taxes depending on exemptions allowed in the state, including costs for upkeep, and also calculating for times of vacancy or times of loss. Those costs are going to get passed to the consumer - otherwise, it's an insanely bad investment.

In the first link, we are talking about a $400,000.00 house - I'm assuming single family residence. At 4%, the mortgage (without escrows) if financed at 100% is $1900. Again, keep in mind this is without the homeowners insurance or taxes. Now we are going to assume the rent on that property is $1500? Bullshit. The homeowners insurance, taxes, and repairs would eat up a good portion of that for the landlord. If they financed that investment, they aren't even going to be close to making their monthly payment.

What it always comes down to is that people don't want to compare apples to apples. In the other thread, it came back to "well if you rent you are going to get something smaller". Well no shit it's going to be cheaper to rent less house.

The best argument for renting over buying is taking into account how long you are going to live there. I see people buy who do not have the intention of owning more than 5 years. In most markets, you will be better off renting. A house is a long term investment.

 

[Oblivian]

I actually rented my new house to the old owners at the market rate for rent for 3 months before I moved in. We financed at 80% and didn't have to escrow for taxes or insurance. The rental rate was 185% of our monthly payment. In fact, the rental rate was enough to pay our mortgage on the new house + the mortgage on our old house.

 

[MeatheadMike]

If you are planing on living in the same place for a few years its usually better to buy.

For one thing, the Mortgage tax deduction, saves you money that you would have lost flat out if you were renting, and in many scenarios the mortgage cost ends up being about the same or cheaper than renting anyway.

The main reason to rent is if you aren't planning on staying at the same place more than a few years, or if you don't have the money for a down payment to buy..... for most people the reason they rent is usually the latter.