Sometimes renting makes more sense than buying.
There’s been a lot of debate in the blogosphere lately about renting vs. buying a home. Millionaire Mommy Next Door touts renting as one of the ways she has amassed so much wealth. Paidtwice was confused as to how renting could be a good deal for both the renter and the landlord. Yesterday Paidtwice ran a guest post by Mike at Quest for Four Pillars on real estate investing. Catherine Schaffer of Wise Bread left the following comment (in part):
…Your basic thesis is that landlords are stupid. You can believe that if you want, but most landlords tend to believe the same thing of their tenants.
Now I’m not sure that most landlords think their tenants are stupid (after all, my landlord thinks I"m a genius for fixing a garbage disposal with baking soda and vinegar). But there does seem to be a misconception out there that renters are just throwing their money away.
I’m not saying buying a house is bad, but there are plenty of situations in which renting a home is a better idea then buying.
Good Reasons to Rent
1. When you can’t afford to buy with a fixed rate mortgage and a 20% down payment. Buying a home is a good thing under the right circumstances. However we’re obviously seeing the fallout from mortgages being approved for people in the wrong circumstances. If you buy a home with nothing down, take out an interest only or adjustable rate mortgage, you’re taking a big risk.
If the housing market fluctuates slightly downward, you can easily end up upside-down in your house. When the interest rates adjust upward, and you have no equity in your house, selling isn’t a great option, because you owe more than it’s worth.
2. When the difference between rental prices and home prices in your area is so great, that you can make more money investing the difference than waiting for your house to appreciate. Traditionally, the stock market does better than home appreciation values. If rents are much lower in your area than mortgages, you might be better off to rent and invest the difference.
3. When you move around frequently. It’s difficult to recoup the costs associated with buying and selling a home if you move every few years, as is the case for military personnel. If you aren’t going to live in your house very long, it’s usually better to rent.
4. When renting allows you to live in an area with better opportunities. Right now we fall into this category. We live in a great school district and a very safe small town. We can walk to the local grocery store, library, parks, friend’s houses…even to Walmart. If we were to buy a house, we could only afford a house in one of the worst areas in a neighboring city. We pay less than we would for a mortgage, our children are able to go to school in one of the best districts in the county, and we live in a safe neighborhood. That wouldn’t be possible if we were to buy right now.
5. When buying a home would stretch your budget beyond your comfort level. Even if you have 20% down and are able to qualify for a fixed rate mortgage, sometimes it may not be best to buy. If your mortgage, property taxes, HOA payment, and estimated costs of repairs puts a serious strain on your budget, you have to evaluate whether it’s worth it to buy a home at this time. If you stretch your budget too much with your home costs, you may be sacrificing other financial goals, such as saving for retirement, saving for your children’s college educations, or other financial goals you may have.
There’s No Shame in Renting
We will be renting for the foreseeable future. We don’t have a down payment, the mortgage payment alone for homes in our area is twice what we pay for rent each month, and that’s before taking into account other home related expenses.
We’ve developed a good relationship with our landlord. He lets us do what we want with the yard, and he’s agreed to let me paint the interior of the house, too.
Because we rent, we don’t have to spend a lot of time on little maintenance projects. We do what we can, but for anything big, we call the landlord. When the tree fell over in our yard a few years ago, it was nice to not have to figure out what to do with it. And if something like this ever happened to us, the landlord would have to deal with it. Not dealing with routine maintenance gives us the freedom to spend more time together as a family on weekends.
Will we ever buy a home? I don’t know. If we have a huge down payment and can get a good fixed rate mortgage that we will someday be able to pay off in full, I suppose it’s possible.
For now, though, we’re going to enjoy renting. And who knows? We may rent forever. Though there are definite benefits to owning a house, renting has it’s own set of benefits. Whether to rent or buy is a highly personal decision, based on your own priorities in life.
I think the "you’re throwing your money away if you rent" argument is a little overrated. Perhaps you’re not gaining equity in your home, but you might be gaining more in investing income, more in your family time, and more in life energy, to borrow a term from Your Money or Your Life.
For the time being, I’m going to buck the trend and be a proud renter.
Do you rent or own your home? If you rent, do you ever feel pressure to buy? If you own your home, was it the right choice for you?
Photo by Editor B.
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I think you’re right – that everybody is at different points in their financial lives.
Gosh, if landlords didn’t have tenants – they wouldn’t make any money, would they?
We personally made a lot of money over the years with rental properties and greatly appreciated our tenants! We also will own our our home in 8 more years. It definitely was the right choice for us. But, we also live in an area where housing is affordable for median incomes. (We make 49K a year). If we lived where housing was so outrageously priced – we’d be renting, that’s for sure!
I have no problem with people renting. We rented for many years until we decided we were staying here for the long term.
In the market I live in, renting a house comparable to ours would cost us more than the mortgage/property taxes etc does. So we decided to buy. But I don’t think that is always the best choice, especially in certain markets.
I agree – everyone was pushing my husband and I to buy (in Los Angeles, where we live) 5 years ago, and I’m SO glad we didn’t! We didn’t have money for a downpayment, and maybe we WOULD have gotten sucked into one of those ARMs. Right now we pay a lot of rent, but less than a mortgage in our area with excellent schools all the way from K – 12th grade. Sometimes it freaks me out to think of what we’re paying in rent, but at the same time – no repairs, no declining home value (which is happening to all my friends), can live in a great school district, and no worries about loss due to earthquakes (except furniture, etc).
HOWEVER – I’d still like to one day; just not until we’re ready and it makes sense economically.
My husband and I rent for many of the reasons you listed. We do want to own a home, but we want to be financially ready. By rent, we’re saving money and putting that away so we can at least have 20% down.
This time last year I was a tenant, and now I own. I’m pretty settled in my city, and the cost of renting is similar to the ongoing cost of buying (start up costs are different). This means that over the long term I’ll be better off buying as rents go up but there’s probably not a great deal in it.
It annoys me too when people say that renting is throwing your money away. It’s not, it’s spending it on in a certain way. Mortgage interest is after all another way of spending your money.
I have been a homeowner for two years now and while I like having my own place, I still get offended by people saying “at least you are building equity” when compared to renting. I think renting versus owning has many components in it. You addressed many of the financial and touched on the emotional. I do get tired of snow removal and mowing my lawn and fixing those things that break. Renting costs less than owning where I live and having someone else take care of maintenance (or breakage) is very nice. Definitely lowers stress. Even with being able to subtract mortgage interest and property tax on my federal taxes, owning a home is costly in time and money.
There’s a lot of pressure for my husband and I to buy a house. Many of the other military couples we know are moving to a city that’s ten minutes from the base and usually ask us why we still decide to live on base in base housing. The biggest reason I don’t want to move is having to sell a house when the military decides to send us elsewhere. I’m too weary of the market to take that big of a leap of faith, so to speak. We also have nothing in the form of a down payment, so I absolutely will not finance an entire house. Another concern of mine is safety for our cars, at least on base I know absolutely nothing will happen to them while we’re at home.
Of course, I do dream of owning my own place someday, but one where we won’t have to move in a few years and can stay permanently. By then I hope to have a nice down payment and do everything right instead of jumping in because other people are telling us to.
Like Katie, we also live in Los Angeles. Tiny (and not very nice) one level, 2 BR houses in my neighborhood go for $800K still. We rent a 2BR for $1325. Rents are more about $1600 if you move now, but that’s way less than a mortgage for $800K. In LA, it still seems crazy to buy. Because we want to buy, long term it’s not going to be feasible for us to live here.
I live in an area where both rental and housing prices have been very reasonable and in some areas, downright cheap. I rent, but I’ve been tempted by houses of late and I definitely feel pressure to buy from friends and family. I’m just not certain I’m ready to take on the extra responsibilites of a house just yet, financial and otherwise.
The rents in our area are pretty high — I suspect because it is a college town and there are plenty of students whose parents will pay it.
The last place we rent was a 1200 sq ft 3 bedroom duplex (we lived there for a year after moving out of a 900-ish sq ft 2 bedroom apartment) had a pretty high rent. We were about to have a price increase for our second year living there, but since we were in the process of buying a house, we didn’t sign on for another year (obviously). It ended up that our house payment with insurance (for not having 20% to put down), homeowners insurance, and property taxes all came out to $25 less a month than what our rent was going to be, or $4 less than what our current rent had been.
But, like you said, then when something like our garbage disposal junked out, we had to go to Lowe’s and buy a new one and replace it. We agreed that all the years we were married before we were homeowners (about 7 years renting) were nice in that when there was a problem, we just called someone else to deal with it. We are especially thinking that right now while we are getting estimates to have our roof redone. Augh!
Both have their value. In these times you really have to make sure you can afford everything involved with buying a home. It would be great if everyone could afford to buy a house out of college but things just don’t work that way. I think the goal of owning is great, but again, you have to be ready for it.
We’re renting as we have moved lots with more to come. I am hoping to purchase a home some day but I don’t see it happening within the next 8-10 years minimum, lots of time to save for it hopefully!
Speaking from personal experience, the only reason I have any money at all is because I bought real estate. Granted, luck has been with me all the way because I sure didn’t plan for any of it. Lately I have been giving some thought to the question of renting because, as you say, the money that’s saved over and above the rent could be invested. Same difference. But then I consider that California’s population is predicted to grow by 20 million people in the next 10-20 years so I figure they all have to live somewhere and I should be able to sell my real estate holdings at a good profit. That’s the plan but who knows? If renting makes sense for me in the future, I will rent.
I’m a happy renter! Our apartment serves our needs. We don’t know where we’ll be a few months from now, much less a few years from now.
So, later this year (once our emergency fund is complete) we’ll start saving for a house.
Maybe we’ll buy a house in a few years, maybe we won’t. No biggie!
If you can’t afford the deposit the mortgage payment, by all means rent while you save up.
Just realize that buying your own home is probably the KEY step to kick-starting your financial future (another one is: starting a business).
Of course, if you are renting so that you can plough more money into to your investments (including buy and hold income-producing real-estate) then you are doing EXACTLY the right thing … but I bet that’s not even 1 in 1,000 readers on either this blog or mine.
Thank you for writing this Lynnae. While a lot of people think renting is stupid, I disagree 110%. Renting allows me to afford to live where I want to, not have the headaches of maintenance, the avoidance of RE taxes, etc…the list goes on. I live 1 block from the ocean in an apartment that if it were for sale would be worth over $1 million..and I pay $1900 a month for it. Great article!
I have been a lurker here for some time and I love your site!
We are happy renters. We have a large apartment, lots of storage, low utility payments, huge yard for the kids to play on, pool in the summer……we love it!
Renting allows us to concentrate on getting out of debt, funding our emergency account, funding our HSA, and getting ourselves into a better financial position.
We do feel pressure from our families to buy a home. But, we are in no hurry. If we do someday, we will do it right, with 20% down minimum……or we will buy a home outright.
We feel very blessed that we did not fall to the pressure to buy 3 years ago. We would be another mortgage statistic right now if we had!
I am a homeowner and it’s definitely right for my husband and I since rent is only slightly lower than mortgage payments where I live. Also, we are 30 and 28 years old and plan to probably live in this house the rest of our lives (or at least until our not-yet-conceived children are out of the house).
It’s the right decision for us because we plan to stay in this house a long time and will have the mortgage paid off probably by the time our first child is 8.
I did own a house before I was married. It worked out ok, but I definitely lost money on the deal once you factor in maintenance costs and property taxes. Also, the upkeep was stressful for a single woman to take on. It’s a good thing my parents lived nearby!
I would say there is definitely pressure in my part of the country (Wisconsin) to buy a house.
Great post. Renting isn’t bad if you’re using it properly. I think you hit most points on the head. If you’re not able to put a 20% down payment and you’re not able to apply for a fixed rate mortgage, then a house isn’t for you. So many people want to be impatient and jump to the house purchase.
Maybe BOTH Renting AND paying a mortgage are stupid ideas.
It’s impressive in a sad way that Americans can only see these two possibilities. You either pay rent –not unlike slavery in my opinion– or you pay interest to bankers. Why should you do either? Why does one man have the right to force another to pay to live on the Earth?
Why don’t we simply tax the rich and build houses for those who need them using government money? Instead of selling houses, we can just give them to people. Ta da!
Why can’t we step off this absurd merry-go-round of paying each month just to live our lives? We don’t have to live like slaves if we don’t want to.
Look at habitat for humanity. This is not impossible. We need to step back and re-think this whole thing. It’s not about rent versus mortgage. That’s just too versions of a game where the poor get screwed. Let’s talk about rich versus poor and why anybody has the right to take money to simply allow another person to live.
My DH and I have owned several houses during our marriage but currently rent. Last year my DH took a job that put us in a resort area. We looked for a house for 6 months and could not afford anything. The ones we could afford, we didn’t want. We found that because it was a resort area the prices were inflated. We didn’t feel that any of the houses were worth the prices on them. Another matter was gas, we could afford further out of town but then the cost of gas would have eaten up any savings. Our solution was to rent. We found a very nice house through our church on an acre of land right outside of town. We are very happy with it and pay about half in rent compared to buying the same house. Kind of hard to get used to but for right now, renting is the best thing for us.
I think renters and landlords both have to respect each other. They have different types of investing goals (one hopes) and probably different personalities.
However, if my landlord said that renters were idiots, I would consider looking for a different place to live. I wouldn’t spend more to “spite” them, but one has to have a good relationship with one’s landlord. And if he or she’s a jerk, that’d probably be hard to do.
If you told me 10 years ago to buy a house, I would have said you were crazy cuz the prices were insane 10 years ago.
If you told me yesterday to buy a house, I would have said maybe, the prices are a lot more reasonable than before.
If you told me today to rent instead of buy, I would have to say that I don’t mind renting but I am watching the market.
It’s always buy anything low and sell high, not high and sell low.
In any case, always live within your means, even if your roof is rented or bought.
Great post! I rent and it’ll be several years before I’m ready to think about buying. I’m starting to feel a little out of the ordinary for being a renter…a lot of friends my age (27) are buying. So far I’ve moved around too much to even consider it.
I’m a buyer myself. It’s a little costly, and being conscious about what,when,where I spend my $ it took some getting used to, but one of the BIG things that helped me decide to stop renting the 1100 sq ft apartment was space. My wife and I, 2 kids, a dog, and a cat made it feel like about 110 sq ft. SANITY was a decision in my choice to buy a home! :)
It is worthy of a look when you can save $$$ on your psychiatry bill! :)
God blessed me with the opportunity to buy a house almost 10 years ago before prices went through the roof in CA. Then I met my husband and he moved in after we were married. We have refied twice to get lower rates, always at a fixed rate, and this house has allowed me to stay home with our three kids. Our mortgage is less than half what we would pay in rent for a similar house (I call it “rent control”), plus the interest is tax-deductible, not to mention the equity. I know that timing doesn’t work out for everyone, but in our case, we count it a real blessing that we own a home.
AMEN! EXCEPT that it takes a great deal of discipline to put your money faithfully into an account when you’re not forced to put it into a house. A house has been a forced “savings” plan. If you look at statistics there is a landslide of a difference between the average networth of homeowners vs those who don’t. A homeowner is less likely to default on accounts or file bankruptcy whereas a non-homeowner has the majority of their net ownership wrapped up in their car. Those statisics can be found here:
http://aspe.hhs.gov/hsp/07/Poo...../index.htm
So beware that – renting is good as long as you can be discplined to put your savings into an interest bearing account. We save $1200 a month by renting a house instead of owning the same house. We’ve even talked to financial advisors who sold their house at the top of the market here and our currently renting until the market settles down again. This is the first time in 50 yrs that financial advisors are saying – renting is pretty smart. I think people are having a hard time understanding why since for 60 years it’s always been buy buy buy. You’ll even hear people say, the market always bounces back, but I think this is different. This is not about housing, so to say…this is 60 years of the credit market finally reaching it’s peak. Housing in some locations of California has dropped by 40%. That was a greater slide in 3 months than in 6 YEARS in the mid to late 90s. This is different. And every financial advisor I’ve polled has said, it will be at least another year before it’ll level out. The market is correcting itself.
I care too much about social issues these days…I don’t know.
Catherine
Great post, we are a military family and have always rented when we did not live on base. We don’t plan on buying until we are out of the military and have at least 20% down, but hopefully more than that. Where we live currently it is significantly cheaper to rent. You can rent for about $1700, whereas a mortgage on the same property would be about $2500, not to mention the outrageous taxes.
Thanks so muchfor the encouraging article. If I hear “You’re just throwing your money away by renting” I think I will scream! We made horrible money mistakes in our younger years but by God’s mercy we are learning better ways and teaching better ways to our children. By renting I’ve been able to stay home with our four children and live in a home large enough for us and safe enough for us. This is the first year that my husband has made enough so that we aren’t paying over half our salery in rent. I thank God that in the midst of our mistakes He has blessed us with a nice home and is teaching us a better way. Living within your means is never a waste of money. I would love to own a home someday but it would be foolish to sacrifice everything just for some acheivement standard of the worlds making. The Lord has given me so many blessings I didn’t deserve. If having those means I’ll never own a home then it was all worth it and my hope is that our children will learn from us and then stand on our shoulders to do even more with what they have been given.
Thanks for the link!
Mike
Well Lynnae, like you we have done both. The bad part of renting is that YOU have NO control. If your rent goes up, you move or pay. If the owner wants to sell, you get out. However, you have none of the maintenence cost, which is great.
Where we live, rent is more expensive than owning. At a 30 year fixed, you could buy a median house for around $1000, but you would have to rent it for $1200-$1400. So it just makes sense to buy if you can.
From an investment point of view, we bought our first house for $68000 and sold it for $143000! You can’t tell me that wasn’t worth it!! :) Then we hunted for a deal and bought our current home for $212000 and it is valued at $246000. By making wise choices, buying can be a great idea!!
I am happy to be a renter also. I don’t have time to get into the reasons why, but let me just say this- we were going to buy a house in our area. Then, we found out the property taxes alone were 8K a year. We pay $9060 a year for rent for our apartment. You do the math. I no longer strive to be a homeowner. I have learned too many negative things about it.
I rent, and have rented for most of my adult life (or lived with family), and I’ve also been a homeowner, and each has its benefits and its drawbacks.
I think what makes either one a good or a bad experience depends on two factors:
1. Whether you have enough money, and
2. Whether whoever is responsible for maintenance does a good job.
I have had bad maintenance issues in both owning and renting. I have had to suffer the consequences of not having enough money in both owning and renting. But I have also rented places I could afford which were also nicer, and I have lived in rentals where the maintenance department was worth more than the oxygen it used up.
Just not right now. But I don’t see ownership as the solution, either, not unless I had a huge financial windfall. Instead I’m hoping to get into a better apartment this year.
i’ve always thought home ownership was over rated. people buy a home for so many wrong reasons compared to their ability to pay. at least it’s been this way the past 5-10 years. what is so shameful about renting? it doesn’t make you a lesser person, doesn’t mean you haven’t arrived, doesn’t mean a lot of things that people seem to feel that homeownership means. i never understood any of the arguments about home ownership over renting.
I totally agree — right now we’re renting in a city that we could not have afforded to have purchased in when we moved here a little over a year ago. It was not the right time to buy (obviously, as houses that we looked at were in the 700k range when we moved and they are now around 500k) and we’re not willing to buy until we have that 20% downpayment. I have several friends who did a 0% downpayment and I just think that’s insane. Thanks for a great post, I’m definitely subscribing to your feed.leslie
We own (have a mortgage) but sometimes we wish we had continued to rent. My husband calls our house the “thorn in his side” (Bible reference) and much like Paul he wishes God would remove it! :) A tree fell on our house 1 1/2 months after we moved in. When we moved in the phone line didn’t work and within 2 weeks the plumbing stopped up. It’s a little ridiculous but when you have 2 kids and are pregnant you start to look for something with more room. Our mortgage is still lower than renting a 3 bedroom apartment. But it’s no fun when you are the “landlord” so you have to take care of everything. I agree with your points, there can be financial advantages to renting. I think most people look at home equity as a *guaranteed savings* – as in you don’t have to send $ anywhere or allocate for it (like you would investing in the stock market) so it’s sort of a no brainer. But today’s house market is proving that nothing is a sure deal! :)
I would like to put a piece of advice out there – if you’re a first-time buyer and think a home warranty will cover *any house issue* for the 1st year, you’re wrong. Ours didn’t cover beyond the foundation (tree roots in sewer line) and of course the tree wasn’t covered. Insurance took care of the tree *after* we paid the deductible (ouch). Also, the home warranty has deductibles too! (We didn’t know that either.) :)
I just read my post from a year ago this time – I remember how ANGRY people were at us for not buying last year…and re-reading this is interesting in hindsight a year later. BEST thing we ever did. I’m so glad we waited. We do still put that money into an account…
Whew! What a year.
~ Catherine
I am so glad that my husband rent, because the economy is so bad in my area. I work two jobs, to pay rent and extras. My rent is $445 a month and this includes gas heat, electric, water, sewage, garbage, the only thing we pay is for phone and internet, we cannot afford tv right now.
We live in a 1 bedroom with a living, bedroom, kitchen and bath. It has a/c and lots of windows to open for ventilation.
We bought a house 6 years ago when my husband used to work. But right when we bought it he had his first heart attack at age 30 and he eventually lost his job and now he can nolonger work and has been denied SS disability for 4 years now. We lost our house.
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