{"id":1158,"date":"2007-07-16T05:00:08","date_gmt":"2007-07-16T12:00:08","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/2007\/07\/16\/renting-vs-buying-the-realities-of-home-buying\/"},"modified":"2020-12-12T21:28:08","modified_gmt":"2020-12-13T05:28:08","slug":"renting-vs-buying-the-realities-of-home-buying","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/renting-vs-buying-the-realities-of-home-buying\/","title":{"rendered":"Renting vs. buying: The realities of home-ownership"},"content":{"rendered":"<p><i><b>This is a guest-post from Tim Ellis<\/b>, author of <a href=\"https:\/\/seattlebubble.com\/blog\/\" target=\"_blank\" rel=\"noopener\">Seattle Bubble<\/a>, a blog and forum dedicated to discussing real estate market conditions in the Seattle area.<\/i><\/p>\n<blockquote><p>&#8220;If you rent, you&#8217;re throwing away your money.&#8221;<br \/>\n&#8220;Owning your own home is a forced savings plan.&#8221;<br \/>\n&#8220;Home ownership is an excellent path to build wealth.&#8221;<\/p><\/blockquote>\n<p>You&#8217;ve probably heard statements like these plenty of times. On television, radio, the internet, and in casual conversation. Such sentiments are common in any discussion that involves home-buying and personal finances. It&#8217;s common knowledge that buying a home is a better financial move than renting. After all, you&#8217;re building equity instead of throwing away your money, right? Well, maybe not quite&#8230; Rather than assuming the &#8220;common knowledge&#8221; on this subject is accurate, let&#8217;s take a look for ourselves at some of the financial differences between renting and home-buying.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"a-real-world-example\"><\/span>A Real-World Example<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>For the purpose of comparing renting to owning in this article, I&#8217;ll be using real-world data gathered from my area (northeast of Seattle). Although most first-time buyers tend to move from renting an apartment to buying a larger, stand-alone house, as much as I can I will compare apples to apples.<\/p>\n<ul>\n<li>For rent, I located a 3-bed, 2.5-bath, 1,840 sqft house with an attached 2-car garage, on 0.2 acres. Monthly price: $1,495.<\/li>\n<li>For purchase I found a 3-bed, 2.5-bath, 1,850 sqft house with an attached 2-car garage, on 0.22 acres. Price: $424,950.<\/li>\n<\/ul>\n<p>The two homes are located within two miles of each other in similar neighborhoods, and neither is located on a busy road. We&#8217;ll assume that our hypothetical homebuyer is a married couple with $85,000 in the bank to make a 20% down payment. To calculate mortgage payments we will use a recent 30-year fixed interest rate of 6.25%.<\/p>\n<p>Let&#8217;s look at how the monthly costs break down (approximately) for our hypothetical potential first-time homebuyer:<\/p>\n<div align=\"center\">\n<table border=\"0\" cellspacing=\"0\" cellpadding=\"0\">\n<tbody>\n<tr>\n<td><strong>Renting<\/strong><\/td>\n<td><strong>Buying<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Rent\/Mortgage:<\/td>\n<td>$1,495<\/td>\n<td>$2,093<\/td>\n<\/tr>\n<tr>\n<td>Insurance:<\/td>\n<td>$20<\/td>\n<td>$163<\/td>\n<\/tr>\n<tr>\n<td>Property Tax:<\/td>\n<td>&#8211;<\/td>\n<td>$407<\/td>\n<\/tr>\n<tr>\n<td>Tax Savings<span style=\"vertical-align: super; font-size: 75%;\">*<\/span>:<\/td>\n<td>&#8211;<\/td>\n<td><span style=\"color: #ff0000;\">($327)<\/span><\/td>\n<\/tr>\n<tr>\n<td>Maintenance:<\/td>\n<td>&#8211;<\/td>\n<td>$354<\/td>\n<\/tr>\n<tr>\n<td><strong>Total:<\/strong><\/td>\n<td><strong>$1,515<\/strong><\/td>\n<td><strong>$2,690<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><span style=\"font-size: 75%;\">*: (less standard deduction)<\/span><\/p>\n<\/div>\n<p>Right off the bat, you see that simply trading straight across from renting to owning results in a 78% more expensive monthly bill. That&#8217;s not exactly chump change. With even a slight upgrade from renting to buying (which most first-time buyers are prone to do), you can easily see how the total monthly costs would be more than double.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"%e2%80%9cif-you-rent-youre-throwing-away-your-money%e2%80%9d\"><\/span>&#8220;If You Rent, You&#8217;re Throwing Away Your Money.&#8221;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Common knowledge says that despite today&#8217;s large premium, buying a home is a &#8220;good investment&#8221;. Hey, at least you&#8217;re not &#8220;throwing away&#8221; your money, right? True, the renter in our scenario spends $1,515 every month that they will never see again. I wouldn&#8217;t exactly say it has been &#8220;thrown away&#8221; any more than money spent on any other good or service is &#8220;thrown away,&#8221; but granted, there is zero financial return on that money.<\/p>\n<p>However, when you take a look at the breakdown of the homebuyer&#8217;s monthly expenses, a large amount is money that will never return, either. Insurance, property tax (less tax savings), and maintenance, add up to $517 every month that is being &#8220;thrown away.&#8221; Even worse is the amount spent on mortgage interest. Consider how much of a mortgage payment is applied toward loan interest throughout the life of a 30-year fixed loan:<\/p>\n<div align=\"center\">\n<table border=\"0\" cellspacing=\"0\" cellpadding=\"0\">\n<tbody>\n<tr>\n<td><strong>Years<\/strong><\/td>\n<td><strong>% toward interest<\/strong><\/td>\n<\/tr>\n<tr>\n<td>0-5<\/td>\n<td>~80%<\/td>\n<\/tr>\n<tr>\n<td>6-10<\/td>\n<td>~70%<\/td>\n<\/tr>\n<tr>\n<td>11-15<\/td>\n<td>~60%<\/td>\n<\/tr>\n<tr>\n<td>16-20<\/td>\n<td>~50%<\/td>\n<\/tr>\n<tr>\n<td>21-25<\/td>\n<td>~35%<\/td>\n<\/tr>\n<tr>\n<td>26-30<\/td>\n<td>~10%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>In the first five years, approximately 80% of the mortgage payment goes toward interest. That&#8217;s an additional $1,674, for a total of $2,191 being &#8220;thrown away&#8221; every single month by the homebuyer for the first five years. Ouch! In fact, not until the homebuyer has been paying down the mortgage for <i>over 20 years<\/i> will the amount they are &#8220;throwing away&#8221; be less than the renter.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"%e2%80%9cowning-your-own-home-is-a-forced-savings-plan%e2%80%9d\"><\/span>&#8220;Owning Your Own Home is a Forced Savings Plan.&#8221;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>As you can see above, if home buying is like a savings plan, it&#8217;s probably the worst savings plan on Earth. Would you voluntarily sign up for a savings plan where well over half of the money you deposit in the first 20 years simply vanishes, and from which you can only withdraw money by relocating and paying a 6-9% fee (not on the amount you have &#8220;saved&#8221; mind you, but on the total sale price of the home)? Of course not. That doesn&#8217;t sound anything like a savings plan.<\/p>\n<p>If our potential homebuyer has that $85,000 saved up for a down payment and deposits it along with <i>just half<\/i> of the monthly savings over buying ($578 per month) into an account at 8% interest, the balance will be nearly $300,000 in just 10 years. That&#8217;s a liquid investment, that can be used for whatever you want, no relocation required. Buying a home is not a savings plan. <b>Actually saving money every month<\/b> is a savings plan.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"%e2%80%9chome-ownership-is-an-excellent-path-to-build-wealth%e2%80%9d\"><\/span>&#8220;Home Ownership is an Excellent Path to Build Wealth.&#8221;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>If your goal is to build wealth, you will be much better off investing your money in the stock market than buying a home. While both stocks and housing are cyclical markets, long-term historic trends show that housing appreciates at a rate barely above inflation, while stocks tend to return an inflation-adjusted 7-10%. <img decoding=\"async\" loading=\"lazy\" style=\"border: 0px;\" title=\"We pour money into our houses -- is it worth it?\" src=\"https:\/\/www.getrichslowly.org\/wp-content\/uploads\/moneyhouses.jpg\" alt=\"\" width=\"250\" height=\"188\" align=\"right\" hspace=\"5\" vspace=\"3\"\/>In our hypothetical scenario, a renter who invested in the stock market with the $85,000 down payment plus the monthly difference between the $1,515 rent and the $2,690 home-buying costs would be over $500,000 better off after 30 years than the homebuyer, assuming 4% average appreciation.<\/p>\n<p>An important thing to consider is that home prices in the United States are just now beginning to correct from an enormous unprecedented run-up in recent years. Despite what those in the business of selling real estate may insist, the correction in housing is still in the early stages. Four percent is most likely <i>overly optimistic<\/i> for most areas in the next 5-10 years. The only thing we know for sure is that double-digit gains are gone and won&#8217;t be coming back any time soon.<\/p>\n<p>Also keep in mind \u2014 I mentioned it above but it bears repeating \u2014 in order to cash in on any &#8220;wealth&#8221; you build through your home you will need to <i>sell<\/i> that home and move. No, &#8220;extracting equity&#8221; does not count, since that simply results in a larger debt. Debt is not equal to Wealth.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>For most people buying a home will result in their largest monthly bill (by far), and because they believe that it will bring them wealth or that they are &#8220;throwing away their money&#8221; if they rent, they often take on a much larger home debt than a prudent budget would allow. It is a real shame when people are driven to get into the housing market because of misplaced notions of imagined financial benefits. Of course, everyone&#8217;s circumstances are different, and for some (particularly those that live away from the coasts) the numbers may actually work out in favor of buying.<\/p>\n<p><b>Don&#8217;t misunderstand me here.<\/b> I am not saying that no one should buy a home, or that my example scenario is a golden standard of truth for all. Don&#8217;t take my word for it. Run the numbers for yourself, check out other articles (a small collection is listed below), and <a href=\"https:\/\/www.getrichslowly.org\/do-what-works-for-you\/\">do what works for you<\/a>. I highly recommend the <a title=\"Is it better to buy or rent?\" href=\"https:\/\/www.nytimes.com\/interactive\/2014\/upshot\/buy-rent-calculator.html\" target=\"_blank\" rel=\"noopener\">great graphical calculator from The New York Times<\/a> for comparing the financial aspects of renting and buying. Many people will consider all of the consequences \u2014 financial, emotional, etc. \u2014 and conclude that buying a home is the best decision. Just don&#8217;t trick yourself into thinking it&#8217;s a good <i>financial<\/i> decision if it&#8217;s not.<\/p>\n<p>I myself intend to buy a house some day. However when that day comes, I will be buying a house because I want a nice, &#8220;permanent&#8221; place to live where I&#8217;m the boss, <i>not<\/i> because I think it will help me get me rich.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"additional-resources\"><\/span>Additional Resources<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Wall Street Journal: <a title=\"Your Home Isn&#039;t the Nest Egg That You May Think It Is\" href=\"https:\/\/www.wsj.com\/articles\/SB117329581356629863\" target=\"_blank\" rel=\"noopener\">Your Home Isn&#8217;t the Nest Egg That You May Think It Is<\/a><br \/>\nNew York Times: <a title=\"A Word of Advice During a Housing Slump: Rent\" href=\"https:\/\/www.nytimes.com\/2007\/04\/11\/realestate\/11leonhardt.html\" target=\"_blank\" rel=\"noopener\">A Word of Advice During a Housing Slump: Rent<\/a><br \/>\nNew York Times: <a title=\"Is it better to buy or rent?\" href=\"https:\/\/www.nytimes.com\/interactive\/2014\/upshot\/buy-rent-calculator.html\" target=\"_blank\" rel=\"noopener\">Is it better to buy or rent?<\/a> (graphical calculator)<br \/>\nThe Motley Fool: <a title=\"The Worst Investment Ever\" href=\"https:\/\/www.fool.com\/mortgages\/2007\/05\/18\/the-worst-investment-ever.aspx\" target=\"_blank\" rel=\"noopener\">The Worst Investment Ever<\/a><br \/>\nSmartMoney.com: Renting Makes More Financial Sense Than Homeownership<br \/>\nCNN Money: <a title=\"Stocks vs. Real Estate\" href=\"https:\/\/money.cnn.com\/galleries\/2007\/real_estate\/0704\/gallery.stocks_v_realestate.moneymag\/index.html\" target=\"_blank\" rel=\"noopener\">Stocks vs. Real Estate<\/a><br \/>\nPriced Out Forever: <a title=\"Priced Out Forever: Renting vs Purchasing\" href=\"http:\/\/pricedoutforever.com\/more-rent-vs-purch.html\" target=\"_blank\" rel=\"noopener\">Renting vs. Purchasing<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p><i><b>This is a guest-post from Tim Ellis<\/b>, author of <a href=\"https:\/\/seattlebubble.com\/blog\/\">Seattle Bubble<\/a>, a blog and forum dedicated to discussing real estate market conditions in the Seattle area.<\/i><\/p>\n<blockquote>\n<p>&#8220;If you rent, you&#8217;re throwing away your money.&#8221;<br \/>\n&#8220;Owning your own home is a forced savings plan.&#8221;<br \/>\n&#8220;Home ownership is an excellent path to build wealth.&#8221;<\/p>\n<\/blockquote>\n<p>You&#8217;ve probably heard statements like these plenty of times. On television, radio, the internet, and in casual conversation. Such sentiments are common in any discussion that involves home-buying and personal finances. It&#8217;s common knowledge that buying a home is a better financial move than renting. After all, you&#8217;re building equity instead of throwing away your money, right? Well, maybe not quite&#8230; Rather than assuming the &#8220;common knowledge&#8221; on this subject is accurate, let&#8217;s take a look for ourselves at some of the financial differences between renting and home-buying.<\/p>\n","protected":false},"author":3292,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[484],"acf":[],"_links":{"self":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/1158"}],"collection":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/users\/3292"}],"replies":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/comments?post=1158"}],"version-history":[{"count":0,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/1158\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/media?parent=1158"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/categories?post=1158"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}