Sometimes renting makes more sense than buying.
There’s been a lot of debate in the blogosphere lately about renting vs. buying a home. Millionaire Mommy Next Door touts renting as one of the ways she has amassed so much wealth. Paidtwice was confused as to how renting could be a good deal for both the renter and the landlord. Yesterday Paidtwice ran a guest post by Mike at Money Smarts Blog on real estate investing. Catherine Schaffer of Wise Bread left the following comment (in part):
…Your basic thesis is that landlords are stupid. You can believe that if you want, but most landlords tend to believe the same thing of their tenants.
Now I’m not sure that most landlords think their tenants are stupid (after all, my landlord thinks I"m a genius for fixing a garbage disposal with baking soda and vinegar). But there does seem to be a misconception out there that renters are just throwing their money away.
I’m not saying buying a house is bad, but there are plenty of situations in which renting a home is a better idea then buying.
Good Reasons to Rent
1. When you can’t afford to buy with a fixed rate mortgage and a 20% down payment. Buying a home is a good thing under the right circumstances. However we’re obviously seeing the fallout from mortgages being approved for people in the wrong circumstances. If you buy a home with nothing down, take out an interest only or adjustable rate mortgage, you’re taking a big risk.
If the housing market fluctuates slightly downward, you can easily end up upside-down in your house. When the interest rates adjust upward, and you have no equity in your house, selling isn’t a great option, because you owe more than it’s worth.
2. When the difference between rental prices and home prices in your area is so great, that you can make more money investing the difference than waiting for your house to appreciate. Traditionally, the stock market does better than home appreciation values. If rents are much lower in your area than mortgages, you might be better off to rent and invest the difference.
3. When you move around frequently. It’s difficult to recoup the costs associated with buying and selling a home if you move every few years, as is the case for military personnel. If you aren’t going to live in your house very long, it’s usually better to rent.
4. When renting allows you to live in an area with better opportunities. Right now we fall into this category. We live in a great school district and a very safe small town. We can walk to the local grocery store, library, parks, friend’s houses…even to Walmart. If we were to buy a house, we could only afford a house in one of the worst areas in a neighboring city. We pay less than we would for a mortgage, our children are able to go to school in one of the best districts in the county, and we live in a safe neighborhood. That wouldn’t be possible if we were to buy right now.
5. When buying a home would stretch your budget beyond your comfort level. Even if you have 20% down and are able to qualify for a fixed rate mortgage, sometimes it may not be best to buy. If your mortgage, property taxes, HOA payment, and estimated costs of repairs puts a serious strain on your budget, you have to evaluate whether it’s worth it to buy a home at this time. If you stretch your budget too much with your home costs, you may be sacrificing other financial goals, such as saving for retirement, saving for your children’s college educations, or other financial goals you may have.
There’s No Shame in Renting
We will be renting for the foreseeable future. We don’t have a down payment, the mortgage payment alone for homes in our area is twice what we pay for rent each month, and that’s before taking into account other home related expenses.
We’ve developed a good relationship with our landlord. He lets us do what we want with the yard, and he’s agreed to let me paint the interior of the house, too.
Because we rent, we don’t have to spend a lot of time on little maintenance projects. We do what we can, but for anything big, we call the landlord. When the tree fell over in our yard a few years ago, it was nice to not have to figure out what to do with it. And if something like this ever happened to us, the landlord would have to deal with it. Not dealing with routine maintenance gives us the freedom to spend more time together as a family on weekends.
Will we ever buy a home? I don’t know. If we have a huge down payment and can get a good fixed rate mortgage that we will someday be able to pay off in full, I suppose it’s possible.
For now, though, we’re going to enjoy renting. And who knows? We may rent forever. Though there are definite benefits to owning a house, renting has it’s own set of benefits. Whether to rent or buy is a highly personal decision, based on your own priorities in life.
I think the "you’re throwing your money away if you rent" argument is a little overrated. Perhaps you’re not gaining equity in your home, but you might be gaining more in investing income, more in your family time, and more in life energy, to borrow a term from Your Money or Your Life.
For the time being, I’m going to buck the trend and be a proud renter.
Do you rent or own your home? If you rent, do you ever feel pressure to buy? If you own your home, was it the right choice for you?
Photo by Editor B.
Great thread. My husband and I sold our home in 2006 and never looked back. We are happy as clams renting! Anyone considering buying should do a search for the excellent, thorough NY Times rent vs. buy calculator. You’ll be surprised at the results. People who think they are going to get returns of more than 4% over the long term are living in a fantasy land. Better to put your money in other investments, and, if you must, invest in something like a Vanguard REIT to have real estate exposure.
I am so glad that my husband rent, because the economy is so bad in my area. I work two jobs, to pay rent and extras. My rent is $445 a month and this includes gas heat, electric, water, sewage, garbage, the only thing we pay is for phone and internet, we cannot afford tv right now.
We live in a 1 bedroom with a living, bedroom, kitchen and bath. It has a/c and lots of windows to open for ventilation.
We bought a house 6 years ago when my husband used to work. But right when we bought it he had his first heart attack at age 30 and he eventually lost his job and now he can nolonger work and has been denied SS disability for 4 years now. We lost our house.
I just read my post from a year ago this time – I remember how ANGRY people were at us for not buying last year…and re-reading this is interesting in hindsight a year later. BEST thing we ever did. I’m so glad we waited. We do still put that money into an account…
Whew! What a year.
We own (have a mortgage) but sometimes we wish we had continued to rent. My husband calls our house the “thorn in his side” (Bible reference) and much like Paul he wishes God would remove it! :) A tree fell on our house 1 1/2 months after we moved in. When we moved in the phone line didn’t work and within 2 weeks the plumbing stopped up. It’s a little ridiculous but when you have 2 kids and are pregnant you start to look for something with more room. Our mortgage is still lower than renting a 3 bedroom apartment. But it’s no fun when you are the “landlord” so you have to take care of everything. I agree with your points, there can be financial advantages to renting. I think most people look at home equity as a *guaranteed savings* – as in you don’t have to send $ anywhere or allocate for it (like you would investing in the stock market) so it’s sort of a no brainer. But today’s house market is proving that nothing is a sure deal! :)
I would like to put a piece of advice out there – if you’re a first-time buyer and think a home warranty will cover *any house issue* for the 1st year, you’re wrong. Ours didn’t cover beyond the foundation (tree roots in sewer line) and of course the tree wasn’t covered. Insurance took care of the tree *after* we paid the deductible (ouch). Also, the home warranty has deductibles too! (We didn’t know that either.) :)
I totally agree — right now we’re renting in a city that we could not have afforded to have purchased in when we moved here a little over a year ago. It was not the right time to buy (obviously, as houses that we looked at were in the 700k range when we moved and they are now around 500k) and we’re not willing to buy until we have that 20% downpayment. I have several friends who did a 0% downpayment and I just think that’s insane. Thanks for a great post, I’m definitely subscribing to your feed.leslie
i’ve always thought home ownership was over rated. people buy a home for so many wrong reasons compared to their ability to pay. at least it’s been this way the past 5-10 years. what is so shameful about renting? it doesn’t make you a lesser person, doesn’t mean you haven’t arrived, doesn’t mean a lot of things that people seem to feel that homeownership means. i never understood any of the arguments about home ownership over renting.
I rent, and have rented for most of my adult life (or lived with family), and I’ve also been a homeowner, and each has its benefits and its drawbacks.
I think what makes either one a good or a bad experience depends on two factors:
1. Whether you have enough money, and
2. Whether whoever is responsible for maintenance does a good job.
I have had bad maintenance issues in both owning and renting. I have had to suffer the consequences of not having enough money in both owning and renting. But I have also rented places I could afford which were also nicer, and I have lived in rentals where the maintenance department was worth more than the oxygen it used up.
Just not right now. But I don’t see ownership as the solution, either, not unless I had a huge financial windfall. Instead I’m hoping to get into a better apartment this year.
I am happy to be a renter also. I don’t have time to get into the reasons why, but let me just say this- we were going to buy a house in our area. Then, we found out the property taxes alone were 8K a year. We pay $9060 a year for rent for our apartment. You do the math. I no longer strive to be a homeowner. I have learned too many negative things about it.
Well Lynnae, like you we have done both. The bad part of renting is that YOU have NO control. If your rent goes up, you move or pay. If the owner wants to sell, you get out. However, you have none of the maintenence cost, which is great.
Where we live, rent is more expensive than owning. At a 30 year fixed, you could buy a median house for around $1000, but you would have to rent it for $1200-$1400. So it just makes sense to buy if you can.
From an investment point of view, we bought our first house for $68000 and sold it for $143000! You can’t tell me that wasn’t worth it!! :) Then we hunted for a deal and bought our current home for $212000 and it is valued at $246000. By making wise choices, buying can be a great idea!!
Thanks so muchfor the encouraging article. If I hear “You’re just throwing your money away by renting” I think I will scream! We made horrible money mistakes in our younger years but by God’s mercy we are learning better ways and teaching better ways to our children. By renting I’ve been able to stay home with our four children and live in a home large enough for us and safe enough for us. This is the first year that my husband has made enough so that we aren’t paying over half our salery in rent. I thank God that in the midst of our mistakes He has blessed us with a nice home and is teaching us a better way. Living within your means is never a waste of money. I would love to own a home someday but it would be foolish to sacrifice everything just for some acheivement standard of the worlds making. The Lord has given me so many blessings I didn’t deserve. If having those means I’ll never own a home then it was all worth it and my hope is that our children will learn from us and then stand on our shoulders to do even more with what they have been given.
Great post, we are a military family and have always rented when we did not live on base. We don’t plan on buying until we are out of the military and have at least 20% down, but hopefully more than that. Where we live currently it is significantly cheaper to rent. You can rent for about $1700, whereas a mortgage on the same property would be about $2500, not to mention the outrageous taxes.
AMEN! EXCEPT that it takes a great deal of discipline to put your money faithfully into an account when you’re not forced to put it into a house. A house has been a forced “savings” plan. If you look at statistics there is a landslide of a difference between the average networth of homeowners vs those who don’t. A homeowner is less likely to default on accounts or file bankruptcy whereas a non-homeowner has the majority of their net ownership wrapped up in their car. Those statisics can be found here:
So beware that – renting is good as long as you can be discplined to put your savings into an interest bearing account. We save $1200 a month by renting a house instead of owning the same house. We’ve even talked to financial advisors who sold their house at the top of the market here and our currently renting until the market settles down again. This is the first time in 50 yrs that financial advisors are saying – renting is pretty smart. I think people are having a hard time understanding why since for 60 years it’s always been buy buy buy. You’ll even hear people say, the market always bounces back, but I think this is different. This is not about housing, so to say…this is 60 years of the credit market finally reaching it’s peak. Housing in some locations of California has dropped by 40%. That was a greater slide in 3 months than in 6 YEARS in the mid to late 90s. This is different. And every financial advisor I’ve polled has said, it will be at least another year before it’ll level out. The market is correcting itself.
I care too much about social issues these days…I don’t know.
God blessed me with the opportunity to buy a house almost 10 years ago before prices went through the roof in CA. Then I met my husband and he moved in after we were married. We have refied twice to get lower rates, always at a fixed rate, and this house has allowed me to stay home with our three kids. Our mortgage is less than half what we would pay in rent for a similar house (I call it “rent control”), plus the interest is tax-deductible, not to mention the equity. I know that timing doesn’t work out for everyone, but in our case, we count it a real blessing that we own a home.