Financial Misconceptions of Renting

Renting vs. Owning: An Overview

Whether you rent or own your home is a major decision. It doesn’t just affect how much money you have left at the end of each month, it also affects your lifestyle and the size of the savings you accumulate over time.

Every day, people buy homes when financially they’d be better off renting.

People see home ownership as an investment that will grow, but when you factor in interest, maintenance, property taxes, and heating costs, it’s often not the case. These hidden costs of home ownership add up over time—these same costs are either nonexistent or minimal if you rent. The money you save renting can immediately be reinvested month over month into an investment portfolio, generating passive income you can enjoy today!

Beyond financial savings, people also choose to rent for the minimal responsibilities and other advantages it offers, such as flexibility, predictable monthly expenses, and someone else handling maintenance and repairs.

Renting

The biggest myth about renting is that you’re ‘throwing away money’ every month. Not so. You need a place to live, and that always costs money in one way or another. While it’s true that you aren’t building equity with monthly rent payments, you also aren’t building equity with much of the money you’ll put into owning a house, due to interest payments, property tax, maintenance and larger heating bills.

When you rent, you know exactly how much you’re going to spend on housing each month. When you own, you might pay nothing more than your mortgage and regular bills one month; the next, you might spend an additional $12,000 on a new roof or heating system, which your homeowners’ insurance might not cover. When you rent your home, you’ll never have to pay to replace your roof.

Homeownership is often touted as a way to build wealth, but your home can lose value. The acceptable neighborhood you moved in could decline. A major employer can leave the area, causing a significant population decline and a surplus of housing. Alternatively, there could be a residential construction boom, which would also keep prices down. You might buy a house for $300,000 tomorrow, and in 20 years find that it’s worth just $300,000, meaning you’ve lost significant money after inflation and maintenance costs.

Do you like having your evenings and weekends to use as you please? Do you work long hours or travel frequently? If so, then the time commitment that comes with homeownership might be more than you want to take on. There are always maintenance requirements around a house that you will need or want to take care of, from finding a plumber to replace a rusted-out pipe to repainting the bedroom to mowing the lawn. If you rent, your landlord will take care of all the repairs and maintenance.

Owning

Homeownership brings intangible benefits, such as a sense of stability, belonging to a community, and pride of ownership. However, it is not good if you plan on moving or have to relocate due to work, a change in health, etc. Real estate is the original illiquid asset. You might not be able to sell when you want if the housing market is down. Even if it’s up, there are significant transaction costs when you sell: brokerage commission, sales taxes, legal fees, etc. Changing your mind about where you want to live is far more expensive when you own.

The overall cost of homeownership tends to be higher than the overall cost of renting. That is true even if the monthly mortgage payment is similar to or even lower than the monthly rent.

Here are some expenses you’ll be spending money on as a homeowner that you don’t have to pay as a renter:

Property taxes
Landscaping and mowing
Snow removal
Water and sewer service
Repairs and maintenance
Homeowners insurance

Perhaps the biggest throwaway expense is mortgage interest, which can make up nearly all of your monthly payments in the early years of a long-term mortgage. Take this typical scenario: You borrow $350,000 at 4% for 30 years. Your first monthly payment will be $1,670, of which $1,157 is interest, and $514 is principal. It will be 14 years before more of your monthly payment goes toward principal than toward interest. In total, you’ll lose $251,543 in interest, and that does not even take into account the maintenance and upkeep costs for your property over time!

Once you add up all these costs, you might find that you’re better off financially by renting and investing the money you would have spent owning a home into a retirement account that generates regular passive income that you can enjoy today.

Financial Misconceptions of Renting - Financial-Misconceptions-of-Renting-2

Special Considerations

Which option is best for you isn’t just about money, it’s also about comfort and your vision for your life. Ignore people who tell you that owning always makes more sense in the long run, or that renting is throwing away money. Also disregard those who say that it makes more sense to buy if your monthly mortgage payment would be the same or less than your monthly rent payment, and remember the example above: unless you have a long time horizon, the majority of your money with home ownership goes toward paying down the interest and gaining little to no equity for 10 years or more.

Housing markets and life circumstances are too varied to make blanket statements about ownership.

Thrive Living

If you are interested in pursuing apartment living, Thrive Living has a beautiful home waiting for you. At Thrive Living we strive to deliver a remarkable lifestyle for our residents. Creating a beautiful and comfortable home that is safe, clean, and convenient is our duty to you. With an abundance of amenities and connected to beautiful communities, living with Thrive delivers on happiness, while granting you the lifestyle you deserve.