Everyday Economics For People, Chapter 2: Rent and Ownership

Mental Heuristic #2: Never rent something you are going to use every day Mental Heuristic #3: Never own something you only want for a short period

Okay, so, interest payments are pretty much the lowest hanging fruit, because everyone wants to get rid of their interest payments, and everyone is very happy once they have gotten rid of their interest payments, and most people are then fairly motivated never to accrue credit card debts again.

And yet, there is another, very similar phenomenon occurring. Very often, people buy things that they could just have rented instead for how little use it gets. This is most frequently the case with entertainment items like books, movies, DVD sets, video games, or special event paraphernalia like fancy clothes, costumes, and jewelry but can also include items like pools, exercise equipment, camping equipment, tools, guns, redundant cars, and more, depending on the regularity of one’s actual use habits.

In many cases, if you look closely at your purchases, you will find that you could achieve all the same use from things that you could rent, at a fraction of the price, and that your home will then be less cluttered with things that you do not use after you are done with them.

The key to making the right decision about whether or not to rent something is being realistic about how much and how often you will want to be using it in the future. If there is only a low chance that you will use it throughout its useful life, then you may be better off renting or, if at all possible, borrowing from a friend or network like a “Buy Nothing” group on Facebook. Check the pricing. Check for a public option or otherwise shared option. And remember, it’s easier and usually cheaper to remedy the mistake of having rented, by buying later, than it is to remedy the mistake of having bought by trying to resell.

It is much less common for people to rent things that would be cheaper for them to buy. In most cases, somebody who is budgeting in the costs of rent starts noticing that ownership would be cheaper, so they will stop renting and buy. For example, nobody would rent silverware or furniture or everyday clothing, because they can easily assume that they will use those things on a daily basis for the foreseeable future, and so it would be insane to pay a markup and overhead to somebody else to use theirs. The only reason people would rent something that they will use every day is if they cannot afford to buy the thing straight up, but they need it immediately.

This brings us to housing. Everyone needs a space to call home, every day of their lives. The problem is, homes are very expensive, and if you don’t own one, you still have to live somewhere, which means that you have to pay somebody else who owns an extra home or extra space in their home. Unfortunately, there are not enough homes being offered for everyone to have one, and you basically need one to live, so all the renters are pitted against each other and rents are outrageously high. Rents are so high that they are often enough to cover mortgage payments, meaning that the renter is basically just buying the house for the “landlord.”

I’ll just say that again: rents are so high that they are often enough to cover mortgage payments, meaning that the “landlord” only needs to have just enough money for a down payment, and then they can charge enough rent for the property to pay itself off in 15–30 years. If they start with 15–30 houses, then that would be enough to buy another house every year, and start renting it out as well, increasing the rate at which they can accumulate more houses. There are some people who own a lot more than 30 houses.

Who is paying for all of those houses for them, in addition to all of that mortgage loan interest the banks are collecting? Why, renters, of course! Renters are paying all of that! And, again, rents are often high enough that you could cover a mortgage for the same monthly amount if you just had enough up front for a down payment.

So, are you catching on to what I am saying? Once you switch from renting a house to paying for a house, it’s like switching over from being a customer to being an owner. You are the one who is accruing all the equity and you are the owner of any appreciation in the value of your home. It is critical that you get yourself into a situation in which you are not paying rent ASAP. Thus, it is crucial that you get into a low-cost living situation in which you can save money. The most desirable is usually thought to be owning your own house, but that might not be an option to you (yet!) so let’s talk about other possibilities.

First, think about moving back home with whoever raised you. Even if you rent your old bedroom at market rates, it would still probably be more like an investment, because you’ll probably get it back from them in some form or another. And, you have an existing relationship with the landlord, etc. If it can be worked out, try it for as many years as manageable, and use the time to accumulate savings to make your own down payment on your own home in the future.

If you can’t move back in with your folks for whatever reason, then we have to start branching out into some less comfortable territory. But, then again, for some it might be much more comfortable. What about moving in with somebody else’s folks, or some other person who is also trying to save on rent to buy a home? You’re definitely not alone in your situation, and if you could partner up with two or three others like you, together you could really afford a decent place while also saving. Where do you find each other? Try the Facebook page I made for people who have read this book, or otherwise, try talking to your friends and family members about it. Ideally, you would know somebody pretty well before you live with them…

Another option is to leave the city you are in to find a much cheaper city. Are you making extra money because you live in an expensive city, or are you just paying extra for everything because prices are so high? If you are not part of the powered career group who are making a killing, then you’re probably the one getting killed. Is it really worth it to you to keep living somewhere that you can’t save any money, just to stay there? Wouldn’t you rather live somewhere cheaper for a while so that you can save up to buy a home where you want to settle one day? What short-term wants are you willing to give up for your long-term goals?

Okay, so maybe moving somewhere cheaper isn’t an option, for social or emotional or family or practical or whatever reason. Even so, you’re not entirely out of options. A dear friend of mine had about $100,000 of educational debt upon graduating from university. His degrees were not in any fields of any particular monetary value. It would surely have taken him a very long time to pay off, except, he took truly spartan measures: he lived in his car for a year or two while he worked at a company that provided showers and a kitchen. Without having to worry about rent and utilities, he was able to apply almost his entire paycheck toward paying down his debt, and was rapidly off the hook and free. It was literally awesome. Now, if you’re already $100,000 in debt, this can be a way to approach paying it down, but if you aren’t in debt, you could still do the same thing in order to save up as much as you need for a down payment on a mortgage wherever it is you want to live. Obviously, this kind of solution will not appeal to everybody, like anyone with a family, but it is certainly a possibility for some under some circumstances.

The point is, basically, you can either move somewhere very cheap to live, or live more communally (which takes emotional work, but also has emotional payoffs), or you can slash your living standards, or you can pay a lot of money to have a lot of your own space without needing to share. If you don’t have a lot of money, the other options are probably the most rational choices, and you only need to do them long enough to accumulate a lot of money to buy your own home. It’s probably not as far off as you think. In 2016, the average down payment on a house was $14,000, or 6% of the value of the home. In 2016, median income was $31,000. In other words, if the median wage person saves 10% of their income for 5 years, they could afford a down payment on a median home. Save 20%, and it’s 2.5 years. Save 50% and it’s a single year. How radically can you cut your expenses for a 1–5 year period in order to afford a house? Think about it. We’ll talk about it more in the next section.

There are other requirements, of course. You’ll need to have good credit, which of course you will, because now you only make purchases when you can pay back the balance immediately, and that is exactly how to build a good credit score, but you won’t need to think about it. You’ll need to have a low debt-to-income ratio, and again, you will, because you always pay down your debts immediately so as never to accrue interest payments; you won’t need to think about it. And, most importantly, you’ll need to find a house in an area you’d like to live. If you have your heart set on owning a home in a major metropolitan area, then you are potentially going to have to save up for a lot longer. You’re probably better off buying another house somewhere cheaper first and saving up to sell it and have enough for a big city home.

However, if you’re more flexible about where you want to live, there are a great variety of affordable homes across the country. Changes in technology and culture have enabled much greater potential for remote work. Keep this in mind as you think about making big city wages while living in a small city or town. Smaller settlements are underrated right now, which means their prices are undervalued. You won’t find them cheaper once everyone else notices the opportunity!

Homes and mortgages have expenses like interest and taxes and maintenance and repairs and things like this. Yeah, whatever. You pay thousands of dollars a year in rent — far more than taxes and maintenance and repairs, and (unless you got scammed) a lot less than interest on a mortgage. The mortgage itself is not spending, but investing, so there is really no comparison. Paying rent for your home is just giving away money hand over fist. Don’t let them keep taking such a huge cut of your wages. Get your own home to buy back your freedom. Is there anything else that you’re going to need every day until you die, which increases in value over time… that you would argue it’s better to rent than to buy? No. Do you suppose real estate magnates are losing money on their investments because they bought a bunch of homes instead of renting a bunch of homes? I’ll let you answer that one. Once you buy a house, your ability to store up wealth increases dramatically. It’s probably closer than you think.

Okay, but wait. Don’t just buy a house as soon as you can. This is a 15–30 year investment, so it makes a lot of sense to time it right for maximum benefit. Firstly, you’re going to want to look for a time when interest rates are very low. Like, if the Fed has rates less than half a percent, that might actually translate to pretty low rates when the banks lend to you. Secondly, don’t buy a house when everyone is buying a house. Wait until nobody is buying a house, and then you can bargain the prices way down. See, with most assets, you can’t always be sure that the value is going to recover after it falls. But, what could possibly keep people from wanting to buy houses? Famous last words. Remember, there is always an element of speculative risk in trying to act based on predicted future market conditions. But hey, at least with a house, you have a place to live even if it loses some value, and that’s nothing to sneeze at.

Section I: Building Wealth Through Financial Habits

Chapter 1: Credit and Interest Chapter 2: Rent and Ownership Chapter 3: Budgeting & Reducing Expenses Chapter 4: Bargain Shopping Chapter 5: Optimizing How You Allocate Your Productive Time Section I Conclusion

Section II: Taking Advantage of Factors Bigger Than Oneself

Chapter 6: Crash Course In Microeconomics Chapter 7: Crash Couse in Macroeconomics Chapter 8: Why Businesses Sometimes Sell At A Loss Chapter 9: You, The Savvy Consumer Chapter 10: You, The Savvy Producer