Writing Your Money: The Missing Manual has been intense. I’ve spent a ton of time researching personal finance topics ranging from buying a car to funding a 401(k) to the relationship between money and happiness. My research has reinforced some of my convictions (index funds are the best investment for 99% of personal investors, for instance) but has toppled others. One of my beliefs that’s been set on its head is that Americans are better off buying their own homes. I don’t believe that’s necessarily the case anymore.
Advantages to renting
In 2007, Tim Ellis shared a guest post with GRS readers about the realities of home ownership. “It’s a real shame when people are driven to get into the housing market because of misplaced notions of imagined financial benefits,” Ellis wrote at the time. I didn’t pay much attention (because I was in London!), but I now believe he’s right. Yes, homeownership makes sense for some people. But there’s no shame in renting; in fact, for many folks, that’s the way to go.
The housing industry is huge, and it spends a lot of time propagating certain myths about homeownership, myths like:
- If you rent, you’re throwing your money away.
- Owning your home is a forced savings plan.
- Home ownership is a path to wealth.
My own research shows that over the long term, housing prices (and gold prices) barely outpace inflation. In fact, since 1926, home prices (and gold prices) have returned about one percent above the inflation rate. That’s hardly a good investment. (Stocks have averaged about 6.8% above inflation!)
There’s no question that buying a house makes sense for some folks, but mainly for non-financial reasons. Owning a home gives you stability (you’re not at the mercy of a landlord) and freedom (you can do what you want with the place). But financially, it’s not usually the best bet. (It’s true that you build equity, but you do so at a very high cost.)
In an editorial in the June 2007 issue of Kiplinger’s Personal Finance, Knight Kiplinger wrote, “It often costs less to rent. The annual cost of owning a property, be it a house or a condo, is usually greater than the cost of renting, after taxes.” And there are other advantages to renting.
For one, you have flexibility; you can move at a moment’s notice. For another, you’re not responsible when things go wrong. If the shower starts leaking before you leave for your vacation in Duluth, you don’t have to worry about it — you call in the landlord.
Still, this is a personal finance blog, so let’s look at some ways to examine the decision to rent or buy in a financial light.
Renting by the numbers
One way to tell whether it’s better to rent or buy is by checking out the price-to-rent ratio (or P/R ratio). This number gives you a rough idea whether homes in your area are fairly priced. Figuring a P/R ratio isn’t too tough. All you need to do is:
- Find two similar houses (or condos or apartments), one for sale and one for rent.
- Divide the sale price of the one place by the annual rent for the other. The resulting number is the P/R ratio.
For example, say you find a $200,000 house for sale in a nice neighborhood. You find a similar house on the next block for rent for $1,000 per month (which works out to $12,000 per year). Dividing $200,000 by $12,000, you get a P/R ratio of 16.7.
But what does this number mean? Writing in The New York Times, David Leonhardt says, “A rent ratio above 20 means that the monthly costs of ownership will exceed the cost of renting.” That’s \a little opaque, but what Leonhardt means is that the higher the P/R ratio, the more it makes sense to rent — and the less it makes sense to buy.
During the housing bubble, the national P/R ratio came close to 20 (and went far above that in some cities). In other words, you could rent a $200,000 house for $10,000 a year (or just over $800 per month), which is a pretty good deal.
The normal range nationwide is between 10 and 14 (meaning it would cost between $1200 and $1600 to rent a $200,000 house). During the 1990s, just before the housing bubble, the national P/R ratio was usually between 14 and 15 (about $1100 to $1200 to rent a $200,000 house).
Another way to gauge the cost of housing is to compare it to your family’s income. From 1984 to 2000, median home prices were about 2.8 times the median yearly family income. (In other words, the typical house cost about three times what a family earned in a year.) During the early 1970s, home prices were about 2.3 times median family income. During the housing bubble, this ratio jumped to 4.2.
These numbers may not mean a whole lot on their own, but they can give you some sort of idea whether housing is overpriced in your area. Plus, it seems safe to assume based on past figures that most families can comfortably afford a home that costs about 2.5x their annual income. (So, if your family makes $80,000 a year, you can afford our theoretical $200,000 house.)
Home sweet home
Despite the results of my research, I’m not about to sell our house. The thing is, there’s more to this decision than just the numbers. As I always say, money is more about mind than it is about math. Our financial decisions have more to do with our psychology than with the numbers.
Kris and I are happy in our drafty old house. We love the vast yard that gives us space to grow a vegetable garden, blackberry canes, and fruit trees. We love the uneven floors, the outdated kitchen (everything’s from 1950!), and the zillions of windows. It may not make the most financial sense, but there’s more to happiness than just money.
We’re not about to move, but you know what? If I had it to do again, I’d never buy this house. If we had stayed where we were, we’d now have just four years left on our mortgage. But knowing what I know now, I might even be inclined to rent. For most folks, renting isn’t a bad option.
Note: This post contains bits and pieces that have been discarded (and some that haven’t!) from Your Money: The Missing Manual. My final manuscript was much, much too long, and we’re going to have to cut a lot of stuff. This makes me sad, but it’s not a complete loss. I’ll be able to share some of it here at GRS!
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A lot of the time I wish we were still renting. We bought this house and have been doing tons of work to it (pretty much me all by myself!). I am hoping that we’ll come out ahead when it comes time to sell. Our realtor seems pretty optimistic, but we will see!
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I’ve done both, and am currently stuck with a house I am renting because it won’t sell. I probably won’t buy again. We are just not the home ownership kind of people. We don’t like yard work, we don’t like doing home repairs, etc. We also don’t like spending money on the house…I would rather do other things with my money. It was an expensive lesson to learn, but we have realized that we are just not home owners.
Also, after being stuck in a house with really bad neighbors (I’m talking the SWAT team being at their house on a monthly basis, etc.; gotta love regentifrication) we like the ability to just get up and leave if we don’t like where we live. You can’t do that with a house.
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JD, take heart. I know the editing process can be brutal. Each of those sentences, and each of those thoughts are like children… you create them and you want them to live on. I’ve worked with crappy editors (yes, there are some) and really good editors. The woman I worked with on Debt-Free Forever was FABULOUS and made the book better. And that’s what you’re aiming for… a perspective that will bring you closer to what will help your readers. If you feel like hissing and spitting, then build a representation of your editor in the snow (do you have snow?) and beat it with a stick. Then go back inside and follow the edits. The best of luck to you with the book. I hope it’s a HUGE success and that people flock to it in droves.
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I’ve been starting to lean in this direction myself. Our house hunt has gone nowhere fast. But so many of the expenses that come with owning are “built in” to the rent, and that flexibility of being able to move whenever we want is fantastic. New roof? Sucks for the landlord, not me. Busted toilet? Landlord’s call.
I still want to own, eventually, but it probably won’t be for financial reasons.
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I appreciate this. I rent, I plan to keep renting for a long time, and I get very tired of friends and coworkers giving the whole “throwing your money away” crap. I certainly don’t think renting is throwing my money away. Since I have no idea where I’ll want to live in five or ten years (I’m planning to move sometime this year, but I don’t know if I’ll want to stay where I’m moving to), buying a home would be a terrible idea, even if I remotely had the money for it. Which I don’t.
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I get sick of hearing that too. I always tell my home owning friends that the little extra that I pay on rent compared to their mortgage is worth it… to have mobility in this job market, and to NOT spend my free time doing yard work and home repairs. My fiance and I have a good amount tucked into our retirement plans, more than the amount friends claim their houses have “earned”, and they’d be lucky to get that…
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I came pretty close to buying a few times before I figured this out, and I’m really glad that I didn’t. I don’t envy any of my friends who are upside down on their mortgages and stuck wherever they are, but even ignoring the bubble/burst effect, ownership isn’t always that great of a deal over the long haul. It’s just amazing to me how well entrenched the American ideal of homeownership is — to the point that most people won’t even read or understand an article like this one. Just watch, within hours there will be comment after comment on here baselessly attacking the idea that renting could possibly be cheaper.
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One benefit of renting is that if you are single you can get a roommate to save on costs. I save about $300 a month living in a two bedroom apartment with a roommate as opposed to living in a bachelor or one bedroom. I know sometimes people buy houses with friends to try and break into the housing market (particularly in very pricey markets), but I would be weary entering into such an arrangement with a friend.
Quality of life is definitely important. I live in Toronto where $200,000 will get you a one bedroom condo in a less than desirable neighborhood or really far out in the suburbs. If you want to live closer to downtown and be able to walk to shops and take the subway then you are looking at at least $275,000-300,000. And that’s just for a one bedroom condo (usually with high monthly fees).
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I agree that most of the reasons to own instead of rent are not at all financial. I was just thrilled to be able to change whatever I wanted. I was tired of living in places with terrible windows. In general, landlords put the cheapest of everything in their apartments. I frankly don’t blame them, but that doesn’t make it any more pleasant on a freezing cold day when your windows leak. Plus I had a terrible experience with a landlord – one who stole my security deposit and threatened to sue me for damage that I didn’t cause. That made me desperate to find a home. At some point, my husband and I just wanted the permanence.
I also think it depends on where you live. In our area, you would be hard pressed to find a house that would rent for less than $1,000, but our mortgage (with taxes) is only $1,000 and will go down to $800 once we pay off the second mortgage in a few years. That is much cheaper than we could rent the same house for. Yes, we have repairs and other things to worry about, but I don’t think it’s always that simple if you want to rent a house instead of an apartment.
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I really appreciate how much money I save by renting in just time usage alone. I’m not paying for the time and gas to go to HDepot (repeatedly), the time to make repairs, and as a DIY learning by mistake is inevitable and at times costly. After owning 3 different houses, a 70′s split level, and two 18th c. farmhouses. I may be jaded and tired, though I have learned a lot. I rent now, and instead of painting the walls, I’m painting landscapes in my free time.
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This is a great article. Thank you for the insight. I’ve read several articles on this topic but this is the best one I’ve seen. Most focus on the financial aspects of buying vs. renting. I like that yours focuses on the emotional aspect.
I am an Air Force brat and also spent my early twenties moving about once a year into different apartments with roommates. I got a great deal on a two bedroom condo three years and I finally felt like I had a home. Luckily, it was also a good financial decision for me, but the feeling of permancy was very important to me.
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It seems that I have seen this same thing written on a number of blogs lately. Since housing prices are not increasing 10% to 20% a year currently, now all of a sudden everyone thinks buying a house is a bad idea.
It is this very same rationale that causes people to buy houses and other things (such as stocks) at the very top of the market, and sell precisely at the bottom.
Everyone wants to buy something when it is very popular, and then sell it when it becomes unpopular.
To become wealthy, you need to do exactly the opposite. Buy when everyone else is selling, and sell when everyone else is buying.
It is for this very reason that I just bought my 2nd property last week (I am only 25). I bought a condo for $37,500 that I already have rented for $650 per month ($7,800 per year). That gives me a P/R ratio of 4.8. Yes, 4.8.
It seems like when a really bad market condition comes along, people always think that now the game has finally changed. The only thing is, the game hasn’t changed, and it probably never will. Human behavior is very predictable and human behavior drives the financial markets.
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Yes! And I must add that if you financed this home for 25% down (which is standard for investment properties where I live) then an annual appreciation rate of 3% or so is astounding! Let’s say you put up 30% of the purchase price to close. You’re actually making 10% off your money when the market goes up at the rate of inflation. My trick is to buy where the cash flow is a few hundred per month after I have financed the property. That way I have the cash flow to cover maintenance and vacancy, but my ROI from appreciation is still excellent. I found a great property last year which I closed on for 16% of the purchase price and the cash flow is $290 per month before maintenance or unknowns(over 10% ROI from cash flow per year).
They are throwing money at us at 4% per year. If you can’t make 4% a year, then by all means pay off your mortgages.
One caveat is that you must be happy about being a landlord. I love helping people. I love owning property. I love being a landlord. I read recently: “If you can’t do something with the happiness experienced by a young child feeding bread to a hungry duck, then don’t do it.”
I guess my point is, there are some great deals out there in some areas of the country right now. If you want to build wealth and like being a landlord, then this is still a great option.
If I wanted to live in an area where the numbers didn’t work out, I would totally rent. When you buy a place, any place, you need to be ready to be a landlord because you never know where life will take you.
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Great post. My wife and I rent and are in no hurry to purchase a house. While maybe some day I’ll look forward to home ownership. It’s not at the top of my agenda. I like the fact that I can funnel my money to other investments and am starting to create additional streams of passive income as opposed to having to pay for the additional costs of having a house like insurance and repairs. This is a good analysis of renting vs. buying.
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Very interesting post. In our area (London, Ontario, Canada), renting a three bedroom house was somewhere in the $1000 to $1500 range. My wife and I were renting a one-bedroom apartment for $720 a month (plus utilities), when our house came up for sale. Our mortgage is approximately $1000, including property tax. It seemed to make sense. I love that we have a house now. I have such a sense of pride and accomplishment that renting didn’t give me. I felt great this past spring (our first in the house), planting grass seed and spreading dirt, fixing the uneven lawn that was driving me nuts!
I wouldn’t go back to renting.
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Thank you for this post. My husband and I have been renting for years and will continue to do so for several more. We love renting- the simplicity, the low cost, the freedom. Also, with no children (and no plans to have any) many of the needs people associate with houses (yard, extra room, etc.) simply don’t exist for us.
I too grow weary of everyone giving me the ‘throwing your money away’ speech. The way I see it, I’d rather spend my weekends out riding my mountain bike and visiting friends than buying endless stuff at Home Depot and constantly having to fix my abode.
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I’m not convinced that renting is the way to go. In the next few years, if we have hyper-inflation, all other costs (including rent) are going to go up while the (fixed) mortgage will stay the same. It wont’ make one rich, but it seems it might help you not get into a bigger hole.
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I certainly agree that in some places renting can be a financially beneficial scenario. Where I live my mortgage payment is the same as renting a comparable apartment and in 15-years when that is paid off I will have that additional $1,000/mo freed up to either save/invest (that is just the P&I, I will still have taxes/insurance). I remove the Housing piece from my monthly expense equation.
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This argument has been made many times, and if the end result is usually the same: If you’re planning on moving around a lot, renting is better. If you’re planning on staying put for many years, owning is better.
The thing is, there’s a good chance that someday you’ll be 65 years old. And you can either own your own home by then, or be facing $3,000/month in rent (which is what it will be by then, adjusting for inflation). The nice things about a mortgage payment are that it doesn’t grow with inflation, and someday you get to stop paying it, completely.
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“If I had it to do again, I’d never buy this house.”
My husband & I say this often enough. It’s great to have our house with our own yard. We have a pool for the kids & the dog has the run of a fenced in backyard (something renters have to take into consideration if they have pets is that the majority of rentals do not allow animals) and a small (very) garden. It is the only home our kids have lived in.
But, we have been thinking that in a few years when the kids are gone, we’ll probably sell and go back to renting, knowing what we know now about the true cost of being a homeowner.
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Renting looks more and more attractive to me. Most of the rent vs. own calculators (esp. those shared by realtors) seem to focus on the equity build vs. “throwing away rent money” aspects, ignoring the costs of repair, yardwork, utilities, etc. – many of which can be substantial, and many of which are included in the rent. Owning makes moving or going on long trips more difficult.
There is some peace that comes with paying off a mortgage. But even then, housing expenses/headaches don’t end, they’re just reduced.
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I’d like to buy somewhere (and I can afford to at the moment), particularly as 1-bed unfurnished rentals are not easy to come by where I’m living right now (I have a flat’s-worth of furniture in storage), and it’s as economic to buy as rent in my area.
However, I’m seriously considering whether I should continue renting when I finish my PhD, as I don’t know for sure if I’m going to be staying here long term – I want to stay in academia and short-term contracts are the norm for early career academics. Once you factor in the costs of buying and selling, renting is way cheaper if I’m going to move towns every couple of years.
As far as I’m concerned, if I buy a house, I’m not buying it as an investment, I’m buying it as a place to live in. Controversial I know…
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My P/R is 35! I am happy to rent for now.
I also plan for extended travel after my contract ends, which would be very difficult to do with a mortgage.
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I’m always listening to friends tell me that renting is “throwing my money away.” But, for me, renting almost always makes more sense. For one thing, I’m given the freedom of moving when I need to, without worrying about listing and selling a home. As a college senior, it’s very important because I’m not sure where my career is going to take me. Another thing is that if D or I lost our jobs, we could afford the rent on one person’s income. However, to afford a mortgage on our own would be very unrealistic at this point. (We have cheap rent – $460 each month.)
Also, I’ve looked at homes in our area, and almost all of them would be just too large for our needs. I wouldn’t want to buy a one bedroom/one bath home (for resale purposes), but that’s all the space we need. A lot of people buy a large house and then spend tons of money to fill up every room with furniture, even if it’s not going to be used frequently enough to warrant the expense. I’m not interested.
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I want to reiterate the point that having a mortgage is forced savings.
I have many friends who rent rather than own, and their monthly costs are definitely lower than if they had bought a home or condo.
But, with only a single exception, they do not save the difference, and this is the downfall of renting when you don’t have the discipline to invest the difference in costs. They blow the extra money they have on clothes, going out, cars, their lifestyle. In the end, they would be better off buying a home, because they would have something to show for 25 years of housing costs, aside from old clothes, hangovers and “good time” memories.
And I think that a lot of the articles that are now extolling the virtue of renting over owning, are missing the fact that people are only getting half of the equation here. In order for renting to be better, you need to 1) rent and 2) invest the difference between what your rent costs and what home ownership would cost.
IF you lack the discipline to invest or save the difference between what you would pay in rent, and what you would pay for a mortgage on the equivelant property, then you are better off buying a house and using your mortgage as a forced savings plan.
And sorry to say, I would guess that the MAJORITY of renters out there lack the discipline. GRS readers are the exception, not the rule.
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The rent-buy decision really depends on where you live. We wanted to live outside of town, and our only choices were to rent an apartment for $1000 a month or find a smaller house. We’re paying less on the mortgage ($900, including taxes) than we would to rent – and one day, the mortgage will be paid off and we’ll only be paying taxes.
There are two types of senior citizens in our town, the renters and the home owners. Both types are struggling right now, but once you’re retired the difference between owning your home and paying for rent can be HUGE. Yes, you’ll have to fix the roof when it leaks. Yes, that broken toilet is your problem. But it’s much easier to “make due” and survive if you don’t have the threat of next month’s rent coming due. A new roof costs $5,000 one time… but paying $700 in rent costs $8,000+ each year. If you don’t think you’re “paying” for that roof or repair, think again.
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Owning a house is one of our long-term goals, but it is not our top financial priority. We got out of debt and started having kids and saving for retirement first, and our next goal is to replace our almost-outgrown car.
It’s difficult to rent long-term when you are really a homeowner at heart, but it has been one of the best financial decisions that we’ve made.
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I love the blog, but I have to disagree with this.
I am a landlord of 3 properties myself, but renting where I live at the moment (weird situation) so I know both sides of the story. I am looking to buy somewhere within the next 6 months and for some very good reasons.
Right now my rent is 25% of my income. Assuming I never moved, my rent would increase each year and my rent would always be 25% of my income or thereabouts.
However, buying a house today for £300k my mortgage would be 30% of my income. However… in 10 years time my wages will have risen with inflation but my mortgage will be the same. After 25 years I wouldn’t have a mortgage at all.
Also, while growth of house prices may be the same as inflation, all £300k of my house is growing but I will have only put £100k as a down payment, so I’m getting growth on another £200k. I could put a smaller down payment and increase the leverage.
If I pay off my mortgage in 9 years (which I plan to) then no one can ever take my house away if I lose my job. I then only need to take a very low paying job to cover property tax, gas, electric and food. If I continue renting however I will have to fund the rent from somewhere else and could end up evicted as a low paying job would not be enough.
Renting is good for some people in short term scenarios or if they move a lot or can’t afford to buy in a nice safe neighbourhood. I love people that do chose to rent as they are funding my retirement fund but for most people, especially people reading this blog I can’t imagine it is the right long term choice for all but a very small percentage of people.
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you never really OWN a house in the common sense of OWN, esp while the bank has rights to it. After finally paying the bank up to twice the house “price”(yep, interest), yes, it can still be taken away.
the government can take your house away.
natural disasters can take your house away.
fire can take your house away.
termites can take your house away.
a medical issue can take your house away.
a spouse can take your house away.
a bad title can take your house away.
These and more CAN AND DO take “paid off” houses away.
but if you sleep better, forget i mentioned it.
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My P/R ratio is 11. I just bought a home for less per month (and I didn’t put anything down really – yes there really are still ways to do this) than the comparable rental in my neighborhood. I guess its actually about $50 more when you add in the HOA fees, but still, very similar to renting, in an area of the country that has very high home prices and high renting prices (northern VA – metro dc area). But there were a LOT less headaches when renting. I’ve owned the house for less than 6 months and replaced the entire piping system, entire HVAC, sump pump, redone the entire basement because it flooded from a failed sump pump, etc the list goes on. My budget now includes a line item for the home depot because I go there so much. I personally like doing projects, but my Fiancee is not so happy about it. Hopefully one day we will be “finished” with all of the upgrades I want to do.
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This analysis has been done time after time. I’m going to somewhat agree with Kevin on this in that you would want to buy if you are going to stay somewhere for a while (five years or more) and rent otherwise. You can thrown numbers at the game, but really you can pretty much pick and choose to make your decision look correct.
I also feel that this analysis is a bit “trendy”, given the current real estate market — which is indeed in a slump for sellers and contractors. But it’s in GREAT shape for people who are wanting to buy a house. For the “buy a house” part of the entry, you analyze numbers since 1926, saying that homes have beaten inflation by one percent. In the section on renting, it’s all based solely on “now” numbers. How much have rents increased since 1926? I’m betting that rents have increased more than mortgage on that same house in 1926!
All that said, it really does come down to how you want to live your life, and what stage you are at in that life, as well as where you live.
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I have another reason to not jump into a house, and that’s the cost of changing your mind. You can always leave an apartment at the end of a lease, but there are significant costs to changing homes.
I bought my l’il condo in December, 2003. There were exactly 3 places in Chicago that met my criteria. I did get a great deal, and got a place in an up-and-coming neighborhood so that the value has risen nicely.
However, at the time I compromised on a number of things, thinking that I could always sell and buy a different place if I really didn’t like it. Fast forward 6 years and guess what? If I don’t want to move to a different area, I won’t get anything better for the money than I already have. The costs of real estate agents and moving and closing are prohibitive. So I’m not going to change places.
The moral of the story is: when you buy, there are some pretty significants barriers to exiting the place you choose.
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Interesting point of view. With your ratio calculations I didn’t see an adjustment for an increase in market value of the home? Regardless of the real estate bubble.
I don’t mind paying monthly a little more than I would to rent someone else’s house. After taxes, I come out ahead. It’s all about mortgage planning. Some people purchased when they shouldn’t have.
I love the fact that in 20 more years . . . I won’t have to pay rent or a mortgage. I could even pay rent somewhere else and rent out my place and receive a steady income. Maybe even invest now in a few more properties to do the same . . .
I wouldn’t call them myths – just not the standard for everyone.
Find an ethical, knowledgably mortgage planner and financial planner to plan your financial future.
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I live in Brooklyn, NY, and I cannot see myself buying a home, condo, or co-op here. I’m simply not interested in owning a house at this point of my lifeI, and properties are very expensive here. like the freedom of renting an apartment. If I get an irrepressible urge to own a home, I’ll probably move upstate or out of state.
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Just to be clear: The bottom line isn’t “buying is better” or “renting is better”. It’s “do what works for you”. If you can afford a house and want to live in a house, then buy a house. But if can’t afford a house or you’d rather rent, then rent. Either option is fine. What my research has shown — and let’s be clear that this isn’t necessarily “trendy” research as some are saying, since much of it is based on bubble-era articles — is that neither option is superior to the other; it just depends on your goals.
And while I hear what people are saying abut renting make more sense of tenants have the discipline to invest their savings, I still think it can make sense even if people don’t do that. If renting is cheaper, then investing the difference is great, but even if you don’t, you’ve improved your cash flow so that you can spend the money on other priorities. One example I keep using is that of Chris Guillebeau. He rents (and doesn’t own a car) so that he can have extra cash to travel all over the world.
Bottom line: Choose the option that matches your goals and priorities.
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I’m a little confuesed by you stating that these myths it appears that you are “pro renting”. These 3 items are only myths for some ill informed people, while are reality for others.
“The housing industry is huge, and it spends a lot of time propagating certain myths about homeownership, myths like:
•If you rent, you’re throwing your money away.
•Owning your home is a forced savings plan.
•Home ownership is a path to wealth.”
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I agree with you JD, I used to think ownership was the only way to go, but I’m older, wiser and can see benefits both ways. But – one thing that never seems to be mentioned is that a mortgage is built in inflation protection. Unless you have rent control, the same cannot be said for renting.
Our mortgage right now is about $1,050 and it will be until we pay off the loan in 30 years (or earlier like we plan). Our taxes may go up, but that just means the value of our home is going up too.
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Buying was the right choice for us. We like having control over our living space. The key difference for us is that we are (as Dave Ramsey says) living like no one else right now so that in 5 years we will OWN our home outright.
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I’m one of those people for whom buying a place makes no financial sense at all. I pay $1600 per month in rent, and I’ve priced similar condos to buy – my payment would be about $2500 per month even in a cheaper neighborhood AND I’d have to spend all my savings as a down payment. That makes no sense to me.
Add to that the fact that I’m early in my career and want to keep my options open for moving, that my husband is talking grad school (moving), and that I live in a city 1000 miles from my nearest family. I love it but I’d hate to feel stuck here.
The whole “forced savings” thing is kind of silly because I save plenty, and I keep it in a bank that’s FDIC insured, not in a house whose value can drop at any time.
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My life keeps taking me to live in high cost of living places. My rent is $1500/mo for a tiny one bedroom. If I make the move I’m looking at, it’ll prolly be about the same. I’m priced out of owning a home right now.
There’s no rush for me, though. The only places I could afford would be in some suburban area somewhere in the Midwest. I’m not ready to give up city life yet.
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Something that often gets overlooked in this equation is rent control. If you live in an area where laws cap how much your rent can increase every year, then that adds a huge security element to renting. But if you’re not that fortunate, then renting can be quite risky – just as risky as buying and being responsible for maintenance costs.
In my current area, there’s no rent control. My landlord could choose to triple my rent tomorrow if she wanted. And when I first moved here, that was a very common occurrence in rental apartment buildings when the landlord wanted to convert to condos. A lot of low income people (mainly single parent families and seniors) were made homeless by this practice.
I rent, and I’m happy to, but I find people often make renting out to be totally carefree, when usually, that’s not the case.
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I’m firmly in the buying camp. My wife works and we don’t live off her income (gives her a sense of freedom). We’re in our early 30s and have paid off our house. We don’t plan on paying rent or mortage the rest of our lives. There’s a strong sense of satisfaction with that that we could never get either renting for life or buying more of a house than we need. It’s nice to not have to plan on appreciated rent when we retire. We can do something else.
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Thanks for this article. I come from a real estate family, and despite getting my Masters degree in finance and having a 6 figure salary at a young age, investing regularly and living well within my means, I am the black sheep for not owning a house.
I have lived abroad, including 3 years in Bermuda and four years in Montreal, and have never in my life lived anywhere for more than 4 years. I love to travel and live in new places. Buying a house would anchor me down and make me settle. Yuck! I’m hoping for a transfer out to Australia or London next year.
This does not mean, contrary to my family’s belief and seemingly every PF book I’ve read, that I have no savings or net worth and will be forced to live my retirement under a bridge or with no quality of living. I am saving nearly 30% of my gross income every year and investing it diversely in tax sheltered index funds, bond index funds, and in good old fashioned ING savings for my EF.
Renting makes sense for some people!
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When we lived in Phoenix a few years ago people kept telling us we had to buy a house — that we were throwing our money away renting and we would seriously regret our decision. I can now say with total confidence we did the right thing. One of the reasons we didn’t buy was that we weren’t sure what we wanted to do in the long run. We now live in another state while my husband pursues a PhD — making that dream come true would not have been possible if we had been tied down to a house. Another strong reason was that we didn’t have a down payment saved yet — we were assured that this was not a problem and shown some of the ways that you can do 100% financing and how you could keep your payments really low with an interest only and then refinance with the amazing amound of equity we would have. I didn’t believe it — I’m stunned that so many people did. I do hope to own a home someday but when the timing is right for us professionally, personally, and financially. I really think one of the things that went wrong with the housing bubble was that people felt rushed into home buying and didn’t take the time to really consider the purchase on a practicle day to day level (upkeep) and financially. I’m happy renting for now and when I lend an ear to friends who are upside down, had their mortgage payments double, or are facing forclosure I sympathize, but am also very glad I made the “idiotic” decision to rent.
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Hey J.D.,
You nailed it with the bit about it not just being about money.
As long as people buy a house because they WANT to for personal and happiness reason – rather than for financial gain (which they obviously won’t get, as you point out) – then they should go for it.
It’s all about being conscious and having a clear reason for why you’re doing something.
Get the facts, see the big picture. Then do something only because you WANT to, rather than for some potential gain that probably won’t happen and will leave you unsatisfied.
Awesome to see more and more evidence that renting really is the smarter option for most people (especially young people in their 20s like myself). Confirms my suspicions… and gives me relief about not missing out by buying a house or whatever
Congrats on finishing your book “Your Money” and I’m excited for the launch of it.
Great stuff J.D.,
Oleg
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Here in Europe, renting is far more common than in America, and it is also socially accepted. What I like about renting is that it gives me a sense of freedom and wealth: I do not have a mortgage, and I am able to build up savings which makes me feel good. That means, I am earning interest, not paying interest on a mortgage. Looking at my bank statements makes me feel rich. Looking at mortgage statements would make me worry about being able to make my mortgage payments in the future.
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Mental telepathy! I was just about to write a post along these lines myself.
Unless you plan to live in a place for the rest of your life, buying may actually have more drawbacks than renting…or at least, so it seems to me.
My father, who was a merchant seaman, did not buy a house until he retired. We lived in rentals all the time I was growing up. When he did retire — at about the age of 53 — he had enough in the bank to buy a house and a car in cash and still finance his and my mother’s old age in the style to which they intended to remain accustomed.
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I love the housing affordability calculator.
I plugged in the numbers for my current housing situation: 40% down, house purchased 50% below market at a foreclosure auction a year ago (even in today’s crummy resale market) and the calculator told me what I already know: Buying easily made sense.
Then, I plugged in the numbers for the house I used to ‘own’ before this one: a McMansion newly built for me 7 years ago and into which I threw money for 6 stressful years. With an inflated mortgage of well over half a million dollars at the interest rate I was being charged at that time of 9.75% and 11.25% for two loans I couldn’t afford, it NEVER made sense for me to have wasted my money so. But that was back in the day when I still hadn’t confronted my psychological problems with money. Unfortunately, it took me a long time to realize that I was ultimately going to lose my house, which I did when the bubble popped.
Things are a whole lot different today thank goodness!! I love my 1970s architectural gem far, far more than my ex-custom pile. Probably because I can actually afford it.
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I agree that renting makes sense for lots of people (especially people who are about to move or who need to stay flexible in where they live and people who live in places where renting is much cheaper). I even agree that buying a house may not help you financially while you are paying a mortgage, especially if you keep refinancing to pull out more money. And although I do think that renting is “throwing away money,” I also think that financing a house is throwing away even more money. (Only $30 of my first house payment was going toward principal; the rest was all being thrown away.) Also it’s very hard to find houses as small as some apartments. And I should also mention that people tend to spend a lot more money decorating and personalizing places they buy than places they rent.
However, if you buy a house and live there for several decades, eventually you could pay off the mortgage. And when that happens, all you have to pay are taxes, insurance, repairs, and utilities. And because it’s your property, you can choose to make more updates that will reduce your utilities bills than you could if you were renting. You can also choose durable materials in your repairs to minimize future costs.
Surely just taxes + insurance + repairs will be less than rent. Right?
Meanwhile, when I bought my house in 1996, my monthly payments were $610 (+ repairs) and now they are $810 (+ repairs). If I were to buy my house now, even with the lower interest rates that are available today, I would be paying around $1,500/month. When I pay my house off in 2-3 years, that amount will be reduced by $505 (the amount of the principal + interest). So buying a house, when you know you’re not going to move (and I admit, no one ever really knows that) means that if prices go up faster than inflation, you can sell at a profit and if prices plummet, so do your property taxes and insurance.
Also, I would like to remind the house-owning readers that not all landlords actually fix things. Yes, it is their problem and not yours, but that doesn’t mean you don’t have to be living with a leaking roof while continually begging your landlord as they either do nothing or do something that doesn’t work followed by something else that doesn’t work.
Also, property taxes do go up with inflation and if you don’t pay them, you can get kicked out of your house. I like to think that if my taxes got too high to pay, then this must mean my house was worth a big pile of money, so I could sell it and move someplace cheaper. (Or it could just mean that the government is poor and raising taxes to compensate.)
@Meghan – I bought a house as a single person and usually have a roommate. You do have to pay taxes on this “income,” though, unless the rent you are charging is significantly lower than the market rate.
As far as nonfinancial issues: I don’t like dealing with the yard and repairs, but I do like being able to jump and dance (and even walk “loudly”) at all hours, not to mention play the piano. On the other hand, all my neighbors feel like they have to fill up their backyards with dogs or even roosters, not to mention weekly mowing, so I find things are actually louder now!
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I agree it’s kind of a toss up when you’re working, and probably oftentimes renting is a better idea during your working years. . . but I agree with people talking about the difference between renting and having a paid off home during retirement. Has anyone done the numbers on saving the amount during your life for rent but then renting during retirement vs paying off a home during working years and then just paying for taxes, maintenance etc. during retirment?
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I have been a renter for almost 3 years. I have lived in two different one bedroom apartments, 700 sq. ft. It might not sound like much space, but it is more than enough for me.
I have learned alot about what I like and don’t like, and I can apply that knowledege to a home, when and if I ever buy one. Vaulted ceilings makes a small room seem huge and living on the top floor eliminates the footnoise of a stompy neighbor, it is worth a little extra money to be on the top floor. I live on a golf course with a beautiful view, for $600 a month, it is less than any home, on any golf course, anywhere.
I am financially secure and make plenty of money to buy my own home, but I chose to rent because I like the perks of renting (namely low maintenance). In addition to that, if I had a 1500-2000 sq. ft. three bedroom home it would simply be more space to heat and cool.
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I don’t know about the US, but in Italy the prices of houses and flats keeps going down, while rents are always the same (expensive, that is).
Maybe in the US buying is less affordable ’cause houses are quite bigger than ours…?
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Great article. We have purchased 3 properties that we lived in and now rent out. Fast forward 10 years later with 4 kids in multiple activities and a desire to have a life of my own that does not include paying for and cleaning a huge house, we continue to rent out the other houses and rent a small 3 bedroom for ourselves. I love renting because of the time it gives me, the flexibility to move (6 times in 10 years). However, we are not the best at socking away money so we plan to keep at least 2 of the rentals as ‘forced savings’ for down the road when we retire. Financially it we would be better off selling and saving the difference but we know ourselves better and know that we would not save enough of the difference in 20 years that would give us a steady income of $6K a month that we should have by then if we hold on to them.
Love the comments too! Oh and let me mention another pro of renting. I have a huge pool and small, but lovely garden and gym that I do not have to maintain!!!! My kids do say they miss the big house, but I explain that their activities and excellent education and mommy’s sanity come at a cost….so stop whining: )
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