Renting Makes More Financial Sense Than Homeownership

[jeffrey]

Renting Makes More Financial Sense Than Homeownership (Real Estate: Personal Finance) | SmartMoney.com

I have something un-American to confess: I rent an apartment, despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer.

I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former.

[scfr]

Why is housing the only major financial commitment that gets this type of discussion when there are so many others?

Why not articles like:
- "I will never own a car. I will just ride my bike and walk because it is cheaper."
or
"I will never have a companion animal because you know they cost big bucks."
or
"I will never have children because they are just too darned expensive!"

My point is that homeownership, just like parenthood (whether to 2-legged or 4-legged littles ones) and even car ownership are not just about the money!

[Joan.of.the.Arch]

Originally Posted by scfr

My point is that homeownership, just like parenthood (whether to 2-legged or 4-legged littles ones) and even car ownership are not just about the money!

For my family it was almost nothing to do with money, but with desire to conduct the kinds of activities we wished without the stricture of a landlord and without bothering neighbors. A really big factor was that I wanted a patch of land on which to garden. My husband wanted to play his instruments, my young son wanted a dog and an apple tree. We all wanted to be able to talk loudly when we wanted and to walk through our own home without having to think about whether we might be disturbing the sleep of the guy next door who works late. There was also a health issue. We wanted a place with no carpets due to asthma.

Our house is in no way an investment . It is pretty much as inexpensive as you can get here. If we sold it in a financial crisis to recoup the equity, we would not be able to downsize. We are already downsized, so to speak. We could buy some years of rent with our equity, though

[robby]

Originally Posted by scfr

Why is housing the only major financial commitment that gets this type of discussion when there are so many others?

Why not articles like:
- "I will never own a car. I will just ride my bike and walk because it is cheaper."
or
"I will never have a companion animal because you know they cost big bucks."
or
"I will never have children because they are just too darned expensive!"

My point is that homeownership, just like parenthood (whether to 2-legged or 4-legged littles ones) and even car ownership are not just about the money!

I think because all the examples you listed aren't considered money making investments by most while nearly everyone claims a house is a money making investment.

[simpleyme]

although I agree somewhat that homes may not really be an investment I could sell mine and go rent for a long time with the money I would get ;-)

even with tax and insurance my house pay is cheaper than rent in my area
so I think it really varies from place to place

[Fizgig]

A nice loophole is when you can buy a place AND generate income from it. My mortgage, taxes, and insurance run $1100/mo, but I rent out the downstairs studio apartment for $485/mo. I'd have to live in a real rat trap of an apartment for only $600/mo in rent, and instead I get a nice house by a lake. Whee!

[okaythen]

man I think in most of the cases, like 95%? that owning a house makes more investment sense then renting. renting you are giving the money away and owning you are owning it. of course owning it will be better what do you mean renting makes more financial sense? and the article is too small..doesn't say anything heh

[MoneyHoney]

Do most homeowners really own their homes? Even if you've paid your mortgage off, consider the association fees and ever-rising property taxes. Those are two expenses you can't "budget down".

[Vapors]

My parents and my wife's parents are both entering retirement and both have fully paid off their homes. It's nice knowing that if push ever came to shove, they are both sitting on $400,000 that they would not otherwise have had they been renting all this time. Sure they have to live to somewhere, but if they sold they could buy a cheaper house or rent. They could take out a HELOC. Plus neither set has any payments to make except insurance and taxes, which is a few hundred a month, at most. To rent now they would be paying $1000+ easy.

It also makes sense as a nice way to diversify your investments.

Finally, we paid $185,000 for our home 5 years ago and it is now worth $450,000. Did I expect that return? No. Do I expect a good return over the next 5 years? Nope. But if we ever have to move, I have $265,000 to put down on my next house to bring my new mortgage payments more in line with my current one. You don't get that renting. If you miss a large run up in market value like we have seen, your rent goes up and up and you have nothing to show for it. If you want to buy in now, you are paying double what I would have to pay if I sold and rebought in now. If there is no run up in property value, owning still makes more sense if you itemize your deductions. The only good thing about renting is you can move any time you want, but you definitely pay for that privledge.

[poundwise]

Like it or not, the article makes good sense.

People are really sold on the idea of home ownership. "The American Dream" and all that. But, the fact is, most "homeowners" don't own anything but a mortgage and some few thousand in equity. Then have you to factor-in all the costs of taxation, insurance, maintenance and repairs, etc.

Don't forget too, that a great many people "buy" too much house, accept horrible terms (80/20 ARM) to "own" a house, and such as that, and end up with negative equity or otherwise having to sell.

I'm in favor of home ownership myself. But I think its best to approach things with an open mind and open eyes. A home is typically not a great long-term investment, though there are certainly exceptions. Renting is not necessarily a bad thing and can be better than buying. If you know those things going in, then fine. If you deny them because they go against what you've always thought or what you want to believe, then that's just foolish.

Ultimately, the message I heard from this article is that home ownership is a fine thing, but it is not the be-all, end-all, especially from an investment point-of-view.

[okaythen]

if you have enough money to pay off the house at once....is it better to pay it off at once or do mortgage?

[Vapors]

Yeah I was really trying not to say that the house was an investment. It's more like insurance against future costs. I know property tax and insurance can increase your monthly payments, but generally not nearly as much as rent increases are.

I rented for 6 years before I bought. I moved every 2 years because my rent would go up $40 to $80 a month every year so I had to move further and further out from DC. Once I bought my mortgage payments go up $5 to $15 every so often, many years not at all. One year they went down. Couple that with the tax break and I know I am way ahead from renting.

I guess if I had to replace my roof and my central air broke both at the same time I might have a different opinion =)

[Aleta]

A very good article. Until I read THE WEALTHY BARBER, I had always thought that home ownership was always the best way to go. But the nugget that I took from that book was that one size doesn't fit all. It all depends on your lifestyle, how large your family is, how long you plan to be in a certain area, etc. One of the people in the book was a single person and only needed one bedroom and not much space and probably not all of the yard to take care of, insurances, property taxed, furnishings, etc. For him, owning a house would have been more expensive. Some people don't want all of the responsibilities that owning a house brings with it.

When I read ALL YOUR WORTH, I had a hard time fitting into Elizabeth Warrens's percentages. 50% need, 30 wants, 20% savings and debt. The reason why is homeowners insurance, property taxes, and health insurance. That doesn't even include home maintenance.

When I read Andrew Tobias book, I believe that he said that a home is not an investment, but a liability. That is looking more and more like the truth today.

For people who have seen property rise to ridulous prices; most don't remember how flat it was for so long. I do remember and I don't even think it was 3% a year.

[MoneyHoney]

The recent fallout from subprime mortgages in the housing market has resulted in a slew of articles and commentaries encouraging people to rethink home purchases. MSN has done a series on the topic, the lastest of which is 3]The Missing Link - MSN Money bad reasons to buy a home - MSN Money

One of the morals here is to make sure that a home purchase make sense for your circumstances. Remember, the law gravity applies to housing values too.

[okaythen]

But that's not the norm. In the 30 prior years, from 1969 to 1999, the average appreciation for homes exceeded the inflation rate by a little more than 1 percentage point. Compare that to stocks, which bested inflation by 7 percentage points in the same period.

wow is that true? for 30 years average appreciation for homes exceed flation by a little more then 1???

if that's true how come I hear all those people getting so filthy rich by investing in real estate?

[Aleta]

You're hearing more of it recently, because it has been all of the rage. After the internet bubble and stock market downside people wanted to invest money into something tangible.

There was a very long time in many areas of the country where the prices for real estate didn't move up that much and where my Mom lives they actually went down. So, many just replace the stocks with real estate. Also, we had people from South America coming to Florida buying property without even looking at prices because their own economy was unstable.

[LivingAlmostLarge]

It depends solely where you live. If renting is equitable to homeownership. Most areas of the country it makes more sense to buy because it's just as cheap as owning. Only where homes are ridiculous is it better to rent.

[getforfree]

When you are paying for your home vs rent, you will have the house after the 30 years. You will be mortgage-free by the time you retire. You will have something to give to your kids after you die.

Plus the rent always goes up. When you have the fixed rate mortgage, you will still pay the same (or maybe only a few dollars more every month because of the tax and insurance), and the 1500 you pay now every month seems like a lot now, but 20 yrs from now it won't be much, and I think it will be cheaper than to rent a similar place.

[Aleta]

Again, getforfree, it all depends on where you live. I live in South Florida and our property taxes and insurance is a huge problem down here. We have businesses that have relocated out of state. We also have folks on fixed income unable to pay the ridiculous property insurance. Not to mention that the insurers aren't really insuring what they used to. I look at the policy and say "why buy hurricane coverage".

I personally like home ownership, but for some people that are single, renting can come out more economical for them when you figure in ALL the costs.

[disneysteve]

Originally Posted by okaythen

wow is that true? for 30 years average appreciation for homes exceed flation by a little more then 1???

if that's true how come I hear all those people getting so filthy rich by investing in real estate?

That is true. The reason people can get rich with real estate, however, is leverage. Let's look at two scenarios.

1. Invest $25,000 in stocks. Have them appreciate by 10%/year for 5 years. You will end up with about $40,000 (before taxes and brokerage expenses). You've made a profit of $15,000.

2. By a $250,000 rental property with 10% down, thus investing the same $25,000 initially. The rent collected covers all expenses to a break-even point. The property appreciates at 5%/year. After 5 years, you sell the property for about $320,000. You've made a profit of $70,000.

So the real estate investment beats the stock investment by $55,000 even though the growth rate of the stocks is double that of the real estate.