Wednesday, September 26, 2007

Rent is NOT Waste

Time and again I hear people (some of them very close to me) refer to renting a house as a waste of money. As I previously mentioned, I don't share this opinion. Today we renewed our lease on our house for the fifth year. Yes, we have been renting our house from the same elderly couple for the past four years. Happily our rent has remained unchanged for the next year, and has increased just 10% since we started renting the house. According to Rentometer our rent is well below average for our zip code. Here are the benefits we are getting from renting vs. buying:

Flexibility - renting allows us to get up and leave at any time. Anyone who has tried to sell a house in the past year realizes that it's not such a simple undertaking in a down market. We are not facing that challenge. Some would say that this sword cuts both ways - we could get kicked out of our place next year. Sure, it could happen, but we have been living here for several years, the owners view this house as a rental property, and they like us because we keep the house well maintained and always pay our rent on time.

No Headaches - if something goes wrong with the house, our cost is zero. Just today I called our landlord and mentioned that we have spotted a minor leak below the kitchen sink. 20 minutes later our landlord was here and the leak was fixed. If I owned the house, I had to either fix it myself (not bloody likely) or pay someone to do it. I pay an all inclusive monthly fee, that covers everything from property taxes, to maintenance to trash collection. When I speak to my friends and colleagues who are home owners the conversation frequently turns to the repairs and housework that they do on weekends. I've got better things to do with my time.

Free Money - quite the opposite of being a waste of money, renting is a low cost financing option that allows me to commit our portfolio to a historically superior investment: the stock market. In a previous post I have written that our annual rent of $24,000 amounts to approximately 2.6% of the value of the house, according to Zillow. If this is the cost to finance my investment in the S&P 500, which has shown an average annual return (incl. dividends) of about 9%, by renting we are essentially making money, not losing money . But house prices have historically appreciated just as much as the stock market. Nope. House prices have historically barely kept up with inflation. Check out this graphic. Don't let the past 10 years fool you.

Far from being a waste of money, if you are a disciplined and diligent investor who does not need someone to force you to save money in the form of a mortgage, renting is actually a way of making money.

16 comments:

plonkee said...

Swearing Americans. I like it.

It annoys me when people say that renting is throwing money away, and I've just bought a place.

TFB said...

Ever since I bought my house, I've "thrown away" a lot of money, which I didn't have to pay separately before. Mortgage interest is only the start. Property tax, homeowner's insurance, garbage collection, landscape maintenance, ... Housing is consumption whether you rent or own.

PETER TEIMAN said...

PETER TEIMAN here
Rent can be a waste since a mortgage ultimately is within a fixed paradigm over 25 years, whereas rent is continuously increasing.
PETER TEIMAN
Sweden

Mrs. Micah said...

Amen. I'm willing to rent this little one-bedroom place for quite a while (until kids, when we'll have to rent a bigger one) as we save, invest, and pay off debt. I'm not against owning a home someday, but I'm happy with our current situation and don't see it as throwing money away.

Millionaire Mommy Next Door said...

We've been renting for the last four years and have made a bunch of money by doing so. The real estate and financial industries want people to believe that renting is akin to throwing away money, but it just isn't true! You made some good points in your post.

Anonymous said...

Whether renting or buying a house, housing is an expense. Renters tend to rent what they need; buyers tend to buy more than they need--to allow for future family expansion, future salary increases, or sometimes even to enhance "resale value." Buying more than you need costs you money, whether you realize it or not. Renting is generally an economically more efficient solution for people whose housing needs are likely to change in the near future.

Jason said...

"Flexibility - renting allows us to get up and leave at any time."

Didn't you say you signed a leas for year. I don't know about your lease, but most don't let you just pack up and leave whenever you want, at least not without some heavy penalties.

Who Struck John said...

Jason, the penalties for breaking a rental lease are a pittance compared to the costs incurred in trying to sell quickly in a falling market.

There's a time to rent and a time to own; at the top of a housing bubble is not a time to own.

Nor Azam said...

you are tight - at the time of housing bubbles is a headache to own...

but it certainly give a good bargain hunting activity!

Anonymous said...

100% correct. Owning a house is a LIABILITY not an asset as so many people believe.

Some people make the argument that Rent goes up where as buying your payment stays the same... BUT what about TAXES?? What about INSURANCE RATES??? What about the BIG ONE... MAINTENANCE?? Over time, that house IS going to need a new roof, new appliances, new this or that and it's going to cost the OWNER of the house WAY MORE than any "rent increase" over the years.

Do the math, the REAL math and you'll see that owning a house is WAY MORE expensive that renting.

Anonymous said...

Everyone seems to be avoiding the fact that there's a return of equity when making those mortgage payments. After 5 to 10 years, renting leaves you with no real return for the money spent, however the money spent on a mortgage leaves you with equity in a property.

There are some valid points here. Ok, so you have to pay the extras so it might be more expensive, at the start, but I would rather have my money DO something for me other than go straight into the wealthy property owner's pocket.

Like Mr. Teiman from Sweden said, "Rent can be a waste since a mortgage ultimately is within a fixed paradigm over 25 years, whereas rent is continuously increasing." Over the next 30 years, I would have paid over $650,000 to rent my current appartment. Now you tell me that's not a waste?

Shadox said...

Actually, the answer to your question is very simple. You are assuming that (i) either you get your house with no money down and that your mortgage payments are equal to your rent payments - in which case you are correct, but you are also probably living in fantasy land; or (ii) you are assuming that there is nothing better you can do with your down payment.

So, let me clue you in for a second. Assuming that your house purchase requires a down payment of $200,000 - which may be high for most parts of the country - but in California is much lower than you would need for most decent houses. Now assuming that instead of buying a house and using that $200K for the downpayment, you instead invested the money in an S&P 500 index fund, which would average a return of 8% over the 30 year term of your hypothetical mortgage. Further assume that you held onto the fund and did not sell it for the entire period - hence would have very little tax liability.

Do you know what the value of that $200K down payment would be after 30 years? $2,012,531...

Now you tell me that renting is a waste of money.

The problem is that people have been led to believe that housing is a good investment. IT IS NOT, except for in times of real estate bubbles, such as the one we just experienced. House is something you live in, not something you invest your life savings into.

Stop listening to those interested parties (Congress, realtors etc.) who would lead you to believe otherwise, and dig deeper.

Anonymous said...

Invest and place your faith in stocks, they never fail.

Shadox said...

Wooooo.... cynicism.... :-)

Anonymous said...

Is everyone missing the point that if you cant afford to put a down payment down for a mortgage then u have no choice but to rent????? !

Tiago said...

There are many factor to analyze over this issue. But may of them are attached with each ones live, expectations, job, etc. Some may feel more secure having their own house, other perhaps hate to move out or to renegociate the rent every year. I have to travel a lot at my job, I may stay 2 years in a country and then move to another. Then I live from rent to rent and I have never bought anything. Today I am in a furnished apartments buenos aires because I haven´t even buy furniture because of the cost of transporting them from country to country.
But I don´t believe that an option is better than the other, it depends on the person situation and will. But is good to know that there are options