Why I Rent (And You Should, Too)
Celebrating the freedom that only comes from renting.
Last updated: January 12, 2022
In one of my previous articles, When a $100,000 Salary Isn’t Enough, I outlined my personal expenses and showed how that a six-figure income just isn’t cutting it, especially with a second baby on the way.
One of the main expenses in that article was housing. I spend just over $16,000 on rent or 14.3% of my income. That’s less than half of the suggested maximum for rent.
I was adamant that we were not going to buy anytime soon, and that renting is better than buying for the vast majority of people. This article goes into the nuts and bolts of that statement, describing the benefits of renting in four main areas.
- Money
- Time
- Stress
- Environmental Impact
Money
The standard arguments against renting follow the lines of “you’re just throwing your money away” or “you’re paying someone else’s debt”. On the surface that may ring true, but if you look just a little deeper, those arguments don’t hold any water.
The main financial benefit of renting is that there is a cap to your housing expenses, at least for the term of your lease. (We’ll get to rent increases later in the article.)
Down payment
Per Investopedia, “According to the Case-Shiller Housing Index, the average annualized rate of return for housing increased 3.7% between 1928 and 2013. Stocks returned 9.5% annualized during the same time.”
By comparison, the average 10-year Treasury bond (risk-free rate) for the same time period was 4.9%.
Let’s do the math and look at three different scenarios.
- You buy a $316,700 house with a 4.9% interest rate and a 3.7% price appreciation.
- You invest a 5% down payment at a 9.5% market return.
- You invest a 20% down payment at a 9.5% market return.
Other assumptions:
- In scenario #1, you spend an additional 25% of your mortgage on home maintenance and improvement.
- In scenarios #2 and #3, you rent instead of buy, with the average rent over 30 years equal to the 30-year mortgage amount. (Rents are lower in the beginning but raise over time.)
Scenario #1:
- House value after 30 years: $941,900
- Mortgage payments, plus maintenance: $756,365
- Financial Benefit: $185,535 (if you sell your house)
Scenario #2:
- Market Return after 30 years: $241,010
- Rent Cost: $605,095
- Financial Benefit: -$364,085
Scenario #3:
- Market Return after 30 years: $964,055
- Rent Cost: $605,095
- Financial Benefit: $358,960 (in a liquid asset)
Since most people can’t afford a 20% down payment, you might be tempted to compare Scenario #1 to Scenario #2, which would lead to the conclusion that homeownership is the way to go.
That’s what I did. Twice.
Number of times it worked out? Once.
The problem is that you only make money when you sell your house, and then you need to buy another house to live in, which will eat up a lot of your profit.
Sure, after 30 years, you’ll probably downsize due to the kids moving out, but even a 2-bedroom Craftsman will set you back, even if it isn’t a money pit.
And then what, pay in cash (with nothing invested in stocks?) or take out a mortgage (and have to pay for another 30 years?) Either way, you might as well rent.
At least in Scenario #2, you have a quarter-million invested that will keep on making money.
Mortgage Payment
The term “mortgage” normally means the principal and interest to pay down the loan you have with the bank. What most people don’t understand is that those are just two parts of the full PITI payment.
- Principal — the amount used to pay off the loan
- Interest — the cost of obtaining the loan in the first place
- Taxes — including property tax
- Insurance — homeowner’s insurance and PMI
In most cases, the taxes and interest are added to the base mortgage payment, with the extra being put into an escrow account. The taxes and insurance are then paid out of that account by the bank, without you having to write a check.
This might sound great, as you won’t have a chance to spend the money before budgeting for these payments. The flip side is that the full PITI payment is not normally advertised by realtors when showcasing a home.
Additionally, if you can’t afford a 20% down payment, you will get stuck paying an extra type of insurance called private mortgage insurance, or PMI.
This covers the cost of insuring your loan against default due to the higher risk the bank takes on in lending you the money since you can’t cover the full 20% down payment.
Remember, the banks never lose.
Let’s go back to our example house. The initial payment I used was $1680.81, which included merely principal and interest. Adding property taxes, homeowner’s insurance and private mortgage insurance means an additional $475 to the monthly payment.
Here are the updated 30-year totals.
Scenario #1 (Updated):
- House value after 30 years: $941,900
- Mortgage payments, plus maintenance, plus taxes/insurance: $927,680
- Financial Benefit: $14,220
As you can see, taking the entire monthly payment into account changes things substantially. Yes, you can get the PMI taken off after you reach 20% equity in your house, but that will have little impact as it’s the smallest of the three additional amounts.
“What about annual rental increases?”, you might ask. Well, that is one of the few downsides of renting. Lease renewals will most likely have a slight increase, but then again, so does everything else we buy (thanks, inflation).
You can hedge against rent increases by signing the longest possible lease, locking in your rate. But in the end, the cost will rise. However, as we’ll see below, this cost will be negligible when compared to the cost of home maintenance.
Maintenance Expenses
Just like your car, a house has both regular and unexpected maintenance, with older homes requiring more of both.
The standard advice is to save 1% of your income towards maintenance, but that is for a brand-new home where everything works. If your home is 20 or more years old, then you need to bump that up to 4%, or even more.
Add to that this little nugget from NerdWallet.
About 3 in 10 (31%) homeowners say they don’t have money set aside for home repairs and improvements — a matter of concern, considering 44% of those who have purchased a home experienced their first unexpected repair within the first year after closing.
You know what you don’t need to worry about during your first year of renting? Unexpected repairs and improvements! All you need to do is call up the landlord and put in a work ticket.
And that’s just for the things that make your homework as it should. We haven’t even started about decorating or other niceties, aka home improvement.
Homeowners are spending more on home improvement projects than home maintenance projects. For every $1 spent on home maintenance, homeowners are spending an average of $5 on home improvements.
From that same report, homeowners report an average of 6.7 home improvement projects. If you’re a homeowner, think about all the little things that you just haven’t had the time to finish. That new door handle. Painting the basement. Upgrading the backsplash. Your home is in a constant state of flux.
Think about all the systems that you have in your house.
- Building Envelope: Walls, roof, cement slab, fireplace and chimney, gutters.
- Plumbing: Toilets, showers/tubs, pipes, septic tank/sewer connection, sinks.
- Appliances: Washer/dryer, dishwasher, stove/oven, water softener, refrigerator, water heater.
- Mechanical: Furnace and air conditioning units, ducts, vents.
All of these things cost money as a homeowner, and all of them have a finite lifespan. No wonder Lowes and Home Depot have seen their stock price increase by about 330% and 450%, respectively, since 2005.
Moving Expenses
The average first-time home buyers only stay in a house for 12 years. If you do a standard amortization, you have barely paid off 25% of the principal of the loan when you are 40% into the loan term.
Then you’re going to up and move to another house, probably a bigger one. So whatever equity you have in your current house will be spent on the next one’s down payment, and that’s if you get your asking price. The market may have tanked, and you’ll get much less.
Then, once you move, you need to spend more money to furnish that bigger house, utilities are higher, taxes are higher, and so on.
Money isn’t the only cost that homes come with. The second element is time, something much more precious.
Time
All of us only get 24 hours in a day.
No more.
No less.
Do you want to spend your time maintaining something that is a liability instead of an asset?
(Quick caveat: Some people enjoy working on their homes, and that’s just fine. However, you will find those people to be few and far between.)
Reactive Maintenance
What happens when something when you own a home? You can either call a contractor or DIY. Either way takes time.
- If you go the contractor route, you need to call, schedule, and review the quotes of at least three companies.
- If you go the DIY route, you need to learn how to fix the problem, buy the tools and supplies, then hope you get it right on the first try.
What happens when something breaks while you’re renting? You call up the main office and let them know that something is broken, and they come fix it.
No quotes.
No tools.
No costs.
It’s all part of your rent.
All that adds up to a ton of time spent in the pursuit of something better than working on your house.
Preventive Maintenance
Maintenance does not begin and end with a burst pipe. It also includes all the stuff that needs to be done to prevent that pipe bursting.
One of the biggest areas is the exterior of a house.
Mowing the lawn. Blowing out the sprinkler system. Cleaning the gutters of leaves.
It all adds up, and how!
When I look back on all the time that my wife and I spent maintaining a lawn that could have been spent with our young daughter, there is regret, shame, and self-loathing. Mind you, the work done on the lawn was to keep it to code, not to show it off during a neighborhood tour.
That was just one part of home maintenance that we wasted time on. Time that we won’t get back.
And for what?
What good did it accomplish?
So that our neighbors wouldn’t look upon us with suspicion that our grass hadn’t been cut in 2 weeks? To teach our daughter that she ranks second to keeping up a house that we were never going to live in for more than 5 years?
All our house did was suck up time that we didn’t have and give us nothing more than the town home we currently rent doesn’t also provide.
And you could also spend the extra time and money to advance your career and get a raise!
Stress
When you add up the money outflow and time suck that results from owning a home, you end up with a whole lot of stress.
Check out these articles about the happiness of long-term renters.
- I’m a Lifelong Renter by Choice: 7 Surprisingly Smart Reasons Why I’ll Never Buy a Home
- Long Term Renters on Why They Chose Not to Buy a Home
- Renting Is Not Wasted Money: Why You Shouldn’t Be In a Rush to Buy a Home
Here’s a quote from James Altucher that I wholeheartedly agree with.
I saw what my parents went through at their worst moments owning a home. I saw what I and others went through in the Internet bust when I first owned a home. I saw what people went through in 2008. People were killing themselves. I don’t like that sort of stress.
From a generational perspective, being a homeowner just isn’t worth it to many Millennials.
60% of millennial homeowners say housing costs make it difficult to achieve their financial goals.
And here’s one of my favorite articles on the subject, 23 Scientific Reasons Why Renting is Better. The 1–2 punch of the renting bonus comes from numbers 15 and 17 (no homeowner stress + more leisure time).
Lastly, homeownership just isn’t a goal that everyone wants anymore. There is a level of contentment that comes with not being “tied down” to a house.
You don’t have to keep up with the Joneses and maintain in immaculate lawn.
You don’t have to worry that your Christmas lights aren’t on point.
You don’t have to spend extra time on maintenance issues.
The pressure to own a home is steadily dwindling, and with it comes the lack of social pressure to conform to something that you don’t really want.
Environmental Impact
Single-family houses are worse on the environment than multi-family buildings. Per person, more material is in construction, maintenance is more costly, and demolition more damaging.
Transportation impacts also increase due to the increased average distance to jobs and amenities. Transportation has a bigger environmental impact than the home itself.
Unfortunately, there is a dearth of multi-family housing in city centers, with most being either high-end condos or large, old houses that have been repurposed as low-income “apartments”.
The solution to this is the Missing Middle housing; duplexes, quadplexes, etc. that span the housing gap between single-family homes and sprawling apartment complexes. If I ever do buy a home, it will be as an owner-occupant of one of these types of homes. AKA, house hacking.
Lastly, rentals tend to be smaller than single-family homes, so you tend not to buy as much stuff. For a good look at what stuff can do to the planet, check out The Story of Stuff.
Who Should Buy?
Now that I’ve completely convinced you that buying a home is the Worst Decision Ever, I’ll contradict myself and say that homeownership is a good thing; if, and only if, you have the following.
- Six-month emergency fund. The benefits of an emergency fund cannot be understated. Life doesn’t stop happening just because you maxed out your finances in pursuit of a home. Make sure you have your safety net in place before you jump into the unknown of a new house.
- No debt. Aside from federal student loans, you should not have any other debt on your books. You might scoff at this, but it’s a necessity. High-interest credit card debt will kill you while trying to make your mortgage. And if you skip a car payment, the repo man will come after you.
- Maxed out retirement accounts. Is your 401(k) fully funded? I’m not just talking about meeting the company match, but truly contributing $19,500. How about the additional $6,000 for your ROTH IRA?
- 20% down payment, in cash. Your down payment needs to be sitting in your bank account just waiting to be used for a house. That’s it. Nothing more. It’s not your emergency fund. It’s not fun money. It’s tagged for a down payment, and it’s the full 20%.
- Freedom for maintenance. This is where you can afford both the time and money to maintain your home. Either you can easily call a contractor and get a problem fixed, regardless of cost. Or you can fix it yourself, regardless of time. If you can’t do one or the other, keep renting.
- Stability. The best time to buy a house is when you know you’re going to be somewhere for a while. Of course, no one can predict the future, but the reality is that you generally know when you’ve settled down versus intending to move a lot more.
Low down payments, rock bottom interest rates, and an insidious marketing machine have made the home buying synonymous with the American Dream. But don’t believe the hype.
Also, notice that increased housing prices in your market were not on my list. In case you didn’t pick this up from the previous 2,000 words, buying a house is not a financial investment. It’s a cost, pure and simple. It’s money you spend for someplace warm and safe to sleep at night.
So how close am I to buying a house? Not very!
I don’t meet any of these six criteria, so I’m staying put in my rented townhome until I do. And that maybe for a much longer time than expected.
For more on how I plan to meet the goals listed above, check out Attack Your Finances in 2020.
But until I meet those, I’m perfectly fine with where I’m at.
How about you?
