Renting is cheaper

By Philip Brewer on 4 September 2007 (Updated 23 April 2010) 46 comments

Everybody has seen a rent-versus-buy analysis. On one side you add up the mortgage, taxes, insurance, and maintenance costs (being sure to adjust for the tax write-off of the mortgage interest). On the other side you add up, well, just the rent, really. Then, at the end of 30 years the homeowner has a house and the renter has... nothing. Here's a different way to look at it.

What's the value of a house owned free-and-clear? Market value is one aspect, but market value has been kind of wonky just lately. Wanting to find another way to come at the value, I figured I could value the house by calculating how much extra the renter has to pay each month, once the mortgage is paid off. Then I could compare that stream of (avoided) payments to the value of an investment that would provide an equivalent stream of income. The value of the house would be the same as the value of that hypothetical investment.

For example, if the homeowner's taxes, insurance, and maintenance comes to $300 a month when rent was $500 a month, then ownership is saving the owner $200 a month--and $200 a month is worth at least $48,000 and quite possibly as much as $60,000. (That is, you could invest $60,000 in a diversified portfolio and pull out $200 a month, probably forever. If you only had $48,000 invested and you pulled out $200 a month, it would last a long time, but maybe not as long as a house.)

So, I was doing that analysis recently, but trying to be a bit more comprehensive--including all the extra expenses of homeownership, and making it specific to my own situation, which I knew would tilt things a bit toward the renting side of the comparison, because I've got a great apartment with certain amenities included in the rent.

So, in my analysis, I put these things in the cost-of-owning column:

  • property taxes
  • maintenance
  • insurance (after subtracting what I pay for renter's insurance)
  • water
  • sewer
  • garbage
  • heat (included in the rent here)
  • basic cable (also included in the rent here)
  • recycling fee (paid by homeowners but not renters around here)

(Homeowning friends kept mentioning other expenses that one or another of them paid, such as lawn mowing, snow plowing, and burgler alarm service, but I didn't include those because I figured I'd generally do those things for myself (or do without them), rather than pay cash.)

After talking to friends and relations to get estimates for those costs and then adding them all up, I was shocked to discover that you could give me a house for free and I couldn't live in it as cheaply as I can live in my apartment.

Now, maybe some of my estimates were on the high side. In particular, my estimate for maintenance of $2000 a year is probably higher than most people would estimate--but I was trying to include not just fixing things but also each year's share of the major expenses (new roof, new windows, new doors, new garage door, new furnace, new air conditioner, new appliances, repainting, refinishing floors) that you might have to pay only once every 15 or 20 years.

Of course, a house might well be a nicer place to live. A house will almost certainly be bigger than our apartment, have a yard, a place for a garden, probably a garage--all things we don't have. And we realize that we've been really lucky--sane landlord, few noisy neighbors, good maintenance, well-kept grounds--all things that could change at any time. (Of course neighborhoods can change around a homeowner, too. And while if things go downhill here we can just move, a homeowner might find himself stuck trying to sell a house in a neighborhood that has gone downhill.)

If you can afford to live in a house, and you want to, then by all means buy a house. (Especially if you can't find an apartment that's both excellent and cheap like ours.) But take a close look at the relative costs, not just a simple-minded rent-versus-buy analysis.

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Guest's picture
Rue

A house is an ASSET. Even if your monthly outgo is the same or higher than your rent, at the end of that I have something solid to leave to my children or to borrow against if things get ugly. Moreover, it works kind of like an enforced savings plan; the money I am paying for maintenance and such ends up in the bottom line value of my house. To keep up you would need to save every penny of the difference between your rent and my mortgage, including the maintenance costs, and get a decent rate on it the entire time to boot.

Your analysis above seems to leave out the value of the house itself once you pay it off. it's value is more than just the lack of rent you have to pay; it is an asset in and of itself.

In the end though, it comes down to what your goal is. if the goal is immediate cash flow and/or low maintenance, than renting is better. If the goal is long-term net worth, than buying is almost always a better choice.

Guest's picture
Guest

Are you going to be homeless after you sell your asset (house) or just use the money to buy another house?

Guest's picture
Poe

Did you in any way add in the possibility of appreciation into your calculations for home ownership? Did you factor in that over 30 years a house payment never goes up while rents surely do? Did you calculate savings you get every year on auto insurance and life insurance as a homeowner vs. a renter? Then their are the much harder to define, in terms of dollars, standard of life issues. Renting sucks in so many ways its almost impossible to count. How do you place a dollar and cents value on every single day of your life being better in a house than in an apartment?

Guest's picture
Guest

But what if the neighborhood takes a dive and along with it goes your home value? You can still get multi-policy discounts with auto, life, renters insurance too you know - you don't have to own a home to get that discount.

I appreciate your opinion as to homeownership is better than renting, but not everyone feels that way. What about the folks who rent a HOUSE?? Things are not always in black and white.

Guest's picture
Kitty

I had contentedly lived in my home for 26 years. I got up the next morning and the neighborhood had gone to hell. Literally. I suppose it took about 5-6 years to get that way, but all of us just hoped it would reverse again. It has not and, frankly, it just keeps getting worse. Nine years ago, my house appraised for $145,900. Today, I'd be lucky to get $67,000. The tide can turn in an instant.

Guest's picture
Anne

You are comparing apples to oranges. If you really want a fair comparison you should compare the cost of renting an apartment to the cost of owning a comparable condominium unit, or compare the cost of renting a house to the cost of owning a comparable house.

Philip Brewer's picture

At the point where the house is paid off it is an asset with two possible uses--you can sell it or you can live in it. (Actually, of course, there's also the possibility of renting it out, but that really amounts to doing business as a landlord and I'm not dealing with that here.)

If you sell your house, its value is whatever you can sell it for.

If you live in your house, its value is the amount by which it reduces your expenses versus what it would cost to rent instead. Now this is obviously a complex calculation--every place is different and each person has to make their own adjustments, whether for the "equivalent" rental or the place they actually do rent.

But let's put aside for a minute the "quality of life" aspects of home ownership versus renting. (Not because they're not important, but because they're not really economic. Let's do the economic part of the analysis first, and then do the quality of life analysis after.)

My fundamental point is that the economic result is the same, whether you own a "house" or whether you own some hypothetical investment with a return equal to the cost savings of owning versus renting. If the cost difference is large, then the equivalent investment is large. If the cost difference grows, then the equivalent investment needs to grow too.

(As an aside--rent will generally go up, but so generally will property taxes, insurance costs, and home maintenance. Only time will tell which will go up faster, but I think simply assuming that they'll go up about the same is a reasonable first guess.)

So I think my analysis does cover the "home appreciation" part of the question. Just as you might be able to sell your house at a profit, you might also be able to see the hypothetical investment at a profit.

If you do this analysis for your house, you may well find that the hypothetical investment has a value that is much lower than the value of the actual house. If the house a nicer place to live than the rental that you're using for comparison, then that explains part of the difference. (Do the analysis with a larger apartment or a rental house, rather than a small apartment, and you'll see that the hypothetical investment becomes more valuable.)

You may well find, though, that the economic value of your house plus the adjustment that you want to make for the higher standard of living that comes from living in a house, doesn't explain the whole difference in value between your house's market value and the value of the equivalent hypothetical investment. Feel free to make other adjustments (or simply to assign an arbitrarily high value to the benefits of living in that particular house), but let me gently suggest that the market value of such a house is not justified by its actual economic value.

Guest's picture

I did something similar and found renting to be much more valuable. What those of you who think buying a house is better are forgetting is that the renter can invest the difference between rent and the cost of the mortgage. If you add in the value of your investments over 30 years, the net worth is much higher for someone who has rented (in most cases, depending on appreciation rates etc...).

I put a spreadsheet together that you can use to check out the net worth under different interest rates and assumptions. You can find it here: http://tinyurl.com/2q9nc6.

-DS

Andrea Karim's picture

There are so many factors to take into consideration. I crunched the numbers a couple of weeks ago and found that it could go either way depending on the markets. And since rental AND housing markets are rather unpredictable, there's no way to no for sure (do try the above spreadsheet - it's great).

The important thing to consider is that a house may be less of an asset than we all seem to think it is. I've always been told that you can never go wrong if you invest in real estate - but it seems like you can do pretty well if you just rent and save a whole lot of money, too. Then again, since it's impossible to tell how the markets will be acting in 30 years, assumptions are tough to make.

Guest's picture
girliegirl

I've owned 3 homes and lived in an apt and I'm about to sell the house and get a condo. For what it's worth, there are sooooooo many little things (maintenance primarily) that add up considerably, when it comes to home ownership...this year alone: 1) an asphalt driveway (at least yearly) has to be maintained, power-washing, fertilizer, weed killin' crap, perennials and annuals, lawn/garden bags, shovels, gardening tools, more gardening tools, carpet cleaning, new parts for the sink and tub, dryer repair, new tile, new carpet, deck maintenance--it freaking never ends. I'm going to try somewhere in the middle---at least with a condo I can minimize some of the outdoor expenses!

Guest's picture
Cherrone

I have owned houses and also rented. But I would never own a condo for reasons as follows..

1. You only own the inside or your (hypothetical) four walls.
-Because of this it is very difficult to have an informative inspection - it will never show the structural report like a single home would. This might lead to a lot of surprises down the road.

2. The condo market for the past thirty years has always been over-built, leaving many empty or non-owner units.

3. As an owner you become responsible for maintaining common areas , roof, driveway, hallway, carpets, landscaping, etc. - add to this list any amenities that might be present. (pool, tennis courts, club house, etc.)

--If you neighbors roof leaks seven units down - guess what? you are assessed. If you are in a new building where there is only 20 or 30% ownership which has happened in this last RE crash, any assessments are split between the present owners. which can be more expensive than putting a new roof on a single home.

Because of the inventory that is always available in the condo market, values tend not to apreciate as well as single family homes (all factors being equal, or course).

If you are still determined to own a condo - I urge you , no matter how daunting the task - to read the covenants and association (BOOK) packet, and then have your lawyer read it.
And then read it again!

This information can be requested before you take the plunge or plunk down any monies. If you are denied this information look elsewhere they are obviously hiding something. You should also know the percentage of both owned and owner-occupied. Good luck!

Philip Brewer's picture

Yes, my own experience with unexpected maintenance expenses was an important factor in my calculation. I know people who estimate their maintenance expenses at just a few hundred dollars a year--and in many years that may be accurate. But I think a realistic estimate that covers a period of decades needs to be several times that.

Guest's picture
Gehst

I love seeing articles like this. It's a take that many people do not want to hear. Of course, like everything, it depends on the individual. But in my case, renting is definitely cheaper.

I rent a 1100sq apartment for $1000, and reside a 10 minute walk from my place of work. If I were to buy a condo of similar size in the Seattle area, I'd be lucky to find one for $400K. By "lucky" I mean, don't even bother. But just for fun, let's run the numbers. My local credit union has a 30yr fixed rate mortgage at 6.4%. For a $400,000 condo, that's monthly payments of $2500 for 30 years. Tack on home owner's fees, insurance, taxes, maintenance, the gas it would take to commute to work, car maintenance, etc, and I'd be looking at at least $3500/mo out of pocket for that condo. I'd end up with a condo that I paid $1,260,000 for. It would have to triple in value to be worth it to me. And only then is it worth anything if I sell it or rent it out.

If I kept my $1000 apartment and invested just HALF of the leftover ($1250) at an average 8% annual return, after 30 years I'd have a tidy $1,863,039.84. Subtract the $360,000 that I pay in rent and I'd have a net of $1,503,039.84.

And I don't want to hear anyone mention the tax deduction on the mortgage interest. You're only saving 25% of the applicable interest costs. You're spending $1 to get back a quarter. Not a good financial move in my opinion.

But like I said, it depends on the individual situation and needs. But for me (childless, married) it's a no-brainer.

Guest's picture
Guest

The 1-bedroom, 1 bathroom apartment we used to own cost us $757.00 a month (with notice that the cost of rent would be rising in a few months). This was one of the cheapest complexes we could find in our city, most likely because of its sketchy location.

Now, our mortgage is $620.00 a month at an interest rate of 4.00%... (as opposed to the $1500 our next door neighbor was paying to rent his similar sized home) and we live in a much safer and nicer area of our city. We rent out our spare bedrooms for $500 a month, and I also board dogs in other parts of my home for around $1,500-$2,000 extra a month. I could not do any of these things (well, at least not legally or easily) in our apartment. We like in Florida, where staying cool is essential, and have found that it is much easier to keep our much larger home cool than our tiny apartment. After reviewing our past bills (which are entered into a spreadsheet), we have found that our electricity bill is $50 to $100 cheaper a month. My husband is a handyman and is able to do most repairs and maintenance for free or super cheap.

In any event, we have found our home to be of have great value - much greater value than our apartment. Of course, not all people will utilize their house in the manner that we have. I know of several cities where it would make much more sense to rent than own. I just don't think it is as black and white as everyone likes to make it out to be. I hate having actual conversations about this topic because people are so defensive about what they believe to be best (which is usually whatever they are doing at that moment) and come to the table with their conclusions already established...

We just love owning and are on our way to owning our home by the time we are 35 (if not sooner). Then we will take our $2k maintenance bills (we have never paid anything close to this amount) in stride... especially if we keep earning that much or more a month from putting our house to work for us....

Guest's picture
Heresyoftruth

We just sold a double wide trailer we lived in. Why? Same thing. The costs of owning and maintaining it, in a park no less, were more than renting a one bedroom apartment.

It was only a 25K trailer, that we got more out of then we paid for. It sold in a week, with fighting bidders.

In all, we spent a lot more on upkeep than I would have thought. I had to fix the loose roof tiles, redo the porch stairs. I had to replace the stove, washer, and dryer. I had to replump the back bathroom, when the old pipes gave out.

That doesn't even include the cosmetic upgrades I did.

We found it is so much cheaper, and easier to live in an apartment. No grass to mow, no upkeep. If something breaks, they fix it. I have a lot more play money now.

Guest's picture
Mary

The freedom of mobility when renting is a big plus for me. If I find a different place that suits my needs better, I can just give my notice, clean out and move. I don't have children or a spouse, but I can see those as being potential motivating factors to have a stable, concrete place to become attached to. Moving can be expensive, but it's much more expensive if you have to sell your home rather than just give it a good cleaning. Plus, all this is assuming that the home won't see any major damages during the course of ownership. I bet a lot of people in the midwest recovering from the recent floods are wishing they had put their money into something other than their homes, upon discovering that some insurance policies do not cover damage due to floods or "acts of god".

Guest's picture

You are forgetting a key thing which is the inflation rates. Inflation and the values of homes affects the prices of rent.. so you cannot just calculate the rent today multiplied by 20 or 40 years, you have to take into account the average 5% inflation rate... on the contrary when you buy a house your mortgage (unless refinanced) is going to be the same regardless of the value of the house and the inflation rates.

Thus, real estate ownership is an obviously wise investment. Sure there are some drops in values in some areas but in general values of homes go up and you just have to find the right cities to invest, such as growing economies like Phoenix and North Carolina where more and more businesses are moving.

Guest's picture
PjEvans

A Home is not an Asset; assets generate real income (e.g.,vending machines, businesses,...). If you were to lease it to a tenant, then it would become an asset. My 2 cents.

Myscha Theriault's picture

Overall, I'm thinking this could go either way depending on your priorities and preferred lifestyle. But one more thing you can do with the equity Philip (if you're comfortable with this and are extremely savvy about finding the right opportunities, that is) is leverage it for a hard money lending opportunity and make your money on the point spread. This would definitely put it into the income producing asset category that the other person was commenting on. We've been doing hard money lending a bit in the last couple of years. We're still learning, so we haven't used equity for it yet. However, we can both see a time in the relatively near future when we will feel secure enough with our skill set and range of opportunities to go ahead and do the point spread investment thing.

Not everyone is comfortable with this, and it's far from standard advice, so it's definitely not something you would want to jump into without lots of security, information, and backup. But it is an option.

Also, what about basement, garage and attic apartments as additional income streams for a house / asset? No one has really mentioned that yet. I'm not saying you're wrong about your renting thing, though. If you are not comfortable with certain situations and strategies for home use, than renting can be better for your particular situation. Some people value their independence in decisions more, while other people value the mobility and lack of owner responsibility more. Just depends what you want. Hope these comments are of help to people.

Great choice of topic, as usual. Very interesting conversation going on here. Lots of great points.

Philip Brewer's picture

@Myscha:

Good reminder that there's actually a whole continuum shy of being a full-fledged landlord, including having a roommate, taking in a border, or renting out part of a house as an apartment. Of course, some of those options are available to renters as well.

It's also true that home equity has historically been a lot more commonly used as collateral than other assets, although I don't think there's anything fundamental about it: The renter with the hypothetical investment could pledge that, instead of the house. That sort of borrowing, called a margin loan, does have downsides that home equity loans don't have, including getting sold out if the value of the collateral drops.

Guest's picture
Lazy Man

I wanted to respond to the comment left by PjEvans. I believe that a home is an asset. If I create a robot that saves me time, it is an asset. I can use that time saved to advance my business. If I lose that robot, my business drops off and I make less money.

A home is very similar. Instead of saving time it saves money, which means I can focus other money on money making ventures, investing and the like. Most directionaries would describe it as an asset as well. They use words like it being "a resource" or "something of value".

If you don't believe that a home is an asset feel free to give me one for free :-).

Guest's picture
Cris H

If my husband and I didn't have pets, we would be in an apt right now. Where we live, there are some very attractive units. Plus, they include amenities such as a pool and an exercise room--things we couldn't afford on our own.

A friend of mine used to move apts every year. She was single, lived in a big city, and there were new apartments being built all the time. So, she'd move to the next new complex and have a brand new space every year. I've seen some apartments offer a month free rent to move into one of their units.

Another point to consider, if you own a home and consider it an asset, is this: many people are acquiring home equity loans to do anything from pay off debt, to make home improvements like putting in a pool. I know people who have done this, and I also know a couple who got such a loan for a (gasp!) big screen tv. If someone is borrowing against their equity, up to the point that they owe 100% of their home's value, they obviously now have a larger house payment. So, I guess what I'm getting at is that yes, the homeowner's payments may not increase--if they don't get another loan. It seems so common to cash out the equity in one's home, or even refinance to get cash. If someone was going to treat their house as an asset, they would need to resist the temptation to borrow against the equity.

Guest's picture
Jon Daley

It seems that some of the people are assuming that the monthly rent is cheaper than the monthly payments for a house.

That is not true everywhere, say, for instance, where I live in Pittsburgh. My wife and I rented an apartment when we were first married for $650/month (heat/water/sewer included). It was a "two" bedroom apartment, where I called it a living room and a bedroom, and then a decently sized kitchen/dining room (for a one floor apartment).

We bought a house a year later, and the payment on the mortgage (15 year) was $379. Taxes and insurance brought it up to $479. I'll guess a little on the utilities, but I think our current monthly average is $50/electric, $100/gas and $40/water/sewer. Electricity wasn't included in our rent, so the house payment comes in less than the rent. We haven't had any significant maintenance issues, though we have only been here 5 years. The house is now paid off, so we now pay very little per month.

And if you believe the real estate estimates (and other house sales in the area) the house has gone up quite a bit in value (new hospital in the area).

We aren't planning on sell if/when we move, but will likely rent it out, since renting an entire house should probably provide a decent income.

Talking to a friend in Seattle, she said the rental rates were about the same, but the house costs were 2 to 3 times higher, so I guess it depends on what area of the country you are in.

Philip Brewer's picture

It's certainly not a universal law that renting is cheaper--it all depends on what the rent actually is, and on what other costs are included in the rent.

Guest's picture
Guest

Well, a fascinating discussion.

To me, when all the other numbers are crunched, mashed together and spat out at the other side, the real hidden cost of home ownership/purchasing is the human egoic need to show off.

This is where every home owner comes out second best over the person who chooses renting. As soon as home owners start renovating, doing-up, re-modeling and supposedly improving the property he/she is going backwards.

I make a living in the home restoration market, and people are just throwing money away left, right and centre on totally unneccessary renovation expenses, all in the attempt to try and impress other people. My work is sanding and polishing timber floors, and much of the work I do is pulling out perfectly good carpet or tiles and then polishing the floors underneath. Unless the tiles and carpet are ruined, doing this is just a total waste of money and has very little, if any, bearing on the eventual re-sale value of the property. In most cases, I find that they are only doing it to try and impress someone else, or to give the impression that they are well off. To make matters worse, is they more often than not use borrowed money to do these unneccessary renovations, which only serves to send them further behind the eight ball. Quite comical really, however I play their game, as it suits me perfectly.

So, at the end of the day, renting verses buying, either way it doesn't matter, as it really is just somewhere to store our stuff and somewhere warm to sleep at night. But when you start spending money, that you have borrowed and must payback with interest, in an attempt to try and make your house look like you are richer than what your paypacket suggests, to me, this is nothing short of maddness.
But, hey, don't tell too many people 'cause it might stop my phone from ringing off the hook each day. (*_~)

Take it easy,
Clint

Guest's picture
Guest

The average person will NOT invest the difference between rent and mortgage. If they do, MOST will touch all or part of it due to a life change (loss of job, illness, loan to parent or sibling, etc.).

In theory renting can be cheaper as many pointed out. But few renters can say they got 8 percent and left it to gain over 30 years.

Dusty

Guest's picture
Guest

Inflation is a given. Where we live (on the coast of New England), the cost of renting has gone up dramatically in the last 10 years, along with the prices of houses.

When you buy you lock in your rates. You're going to be paying the same monthly for the rest of the term, and then you can turn around and sell or rent it out.

Yes, taxes do go up, but depending on your area they might not be assessed at the true value of your property or else infrequently.

We've seen friends of ours who have rented for decades with nothing to show for it - no fat bank account, no solid assets, nothing. Human nature is lazy. If you don't save the difference and invest it, there is no savings. For most of us, having to pay the monthly nut on a mortgage is an easy way to save.

Not to mention that you can't even rent the same quality houses here ... as the demand for real estate increases, all the good rentals are being turned into single families. Now our non-homeowning friends are renting places that are less and less desirable every year. So every few years their monthly expenses go up, their options for rentals becomes fewer, and their bank account remains on empty. No thanks.

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Myscha Theriault's picture

Yes, that has happened occasionally, and I know admin is working on it. I'll email them and let them know guests are having an issue this week. Thanks for letting us know.

Guest's picture
Debbie

Interesting--I guess apartments cost a lot less to buy and maintain than houses do; otherwise landlords couldn't make any money.

I really like this analysis and find it much more realistic for people like me who would live in their house indefinitely rather than sell it off.

Of course I was hoping to find a different answer for my situation since I bought a house. Here are some of my (very rough) numbers.

RENT
I'm looking at a 700 sq ft 1-1 in my old apartments
Rent: $540/month
Utilities: $100
Total: $640

BUY
It's not exactly fair, but it's not so easy to buy a large 1/1, so I went for a small (1000 sq ft) 2/1.
Taxes + insurance: 300
Repair and upkeep: 150
Utilities: 200
Total: $650

It's shockingly the same. Other things are different, and here are some of them, in order of importance to me:

1) I can be as loud as I want. I can play the piano after midnight, and I can jump around dancing without bothering anyone. I love, love, love this.
2) I haven't moved in years. I love that.
3) It's easier to have a roommate now, so I usually do. This cuts the price in half. I mostly prefer having a roommate to living alone. (Note: A comparable 2-1 apartment is $650 + utilities, so renting would cost slightly more)
4) I have to take care of the lawn. It turns out I hate this. Bugs! Invasive weeds! Trees falling over! Having to become a vicious plant killer because billions of the same ones are everywhere. (etc.)
5) The neighborhood changed on me. Some of it was good (better stores, no airport), some bad (they ripped up all the nearby highway entrance and exit ramps! and they moved the airport). On the other hand, my old apartments got a new and worse manager. Of course it's easier to switch apartments than to switch houses.
6) I don't have to call in about a leaking roof every year. The repairs I make (or have made) are of much higher quality. And my appliances are of much higher quality. On the other hand, repairs are a much bigger pain in the neck. I can't just report the problem; I have to do research. I have to take vacation time from work if I call workmen over.
7) I don't like my neighborhood association. All they care about is eyesores. It's all about hating your neighbor and making them bend to your will. Ick. And I've heard of much worse neighborhood associations.
8) I don't have to pull everything out of my cabinets periodically so they can spray for bugs. I just use Combat.
9) I can repaint things however I want. Of course I'm used to having all white walls, so my stuff goes with white walls. Most things work fine and do not need to be replaced, repainted, etc. When I do replace things, though, I do get to make better decisions about durability, environmental sustainability, etc. (Note: many people spend loads of money on this that they would never spend if they were renting.)
10) I have no swimming pool. It turns out I never used the pool anyway.

The main thing is I have more freedom and more responsibility and I'm more stuck. It's pretty much a wash except that it feels like I'm diversifying my investments. I could get a reverse mortgage or sell the house and move someplace cheaper (if there were such a place in which I would want to live). Otherwise, all my money would be in stocks and my government pension plan. This way I have my eggs in three baskets instead of two. Definitely if my taxes get too high for me to be able to afford, that means the house is valuable and can be sold for a nice profit.

I'm not always sure I made the best decision, and this helps explain why.

Guest's picture
Ariston

Uhoh, family emergency...I need money...Home Equity Line of Credit...

Can't do that as a renter...

---
Refinance to get a lower interest rate, thereby lowering my mortgage payments. I've never heard of rent going down.
---
Your family has 5 kids...trying doing that in a 2 or 3 bedroom apartment rather than having the possibility of a 5 bedroom house.
---
Having a big party...finding parking in an apartment complex is insane. I have a large driveway at my house with plenty of parking.
---
I don't live in an association, if I want to change the color of my house or anything in it I can do so with no repercussions.
---
I have a pair of 100+ lb dogs...I don't even want to know about a "pet deposit" or even if they are allowed in the complex
---
I can pay off a house payment...can't do that when you're renting.

Far too many things you can do when you own a house than you can when you rent an apartment or condo.

Guest's picture
krylenko

I've read a lot of these analyses, and I often see a statement like "Renting means not having to fix anything! When your refrigerator starts leaking slime, it's the landlord's job, not yours."

Which is true -- if your landlord 1) fixes things quickly, 2) fixes them correctly and/or 3) cares at all.

As a homeowner, you may not fix every problem right away, but you'll definitely do something about a flooding basement or gaping hole in the roof -- and not all landlords will.

Sure, you have legal and other recourses, but they all cost time and/or money to pursue. And sure, you can get out of a lease, but a landlord who's too cheap to make proper repairs isn't likely to be gracious about break-lease fees.

The bottom line is that renting from a landlord who doesn't properly handle problems costs both money and peace of mind. It's also not exactly rare, but I rarely see people account for it.

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PjEvans

@Lazyman @Philip Brewer

Good point Lazyman, I see your view, but your equity is only paper. If you buy a house for 1million in 1986, and you sell it for 6million in 2007. In order to buy a comparable home, it's going to cost you around 6million (the market value) or more. That's taking into account cost of ownership, maintenance, increased building materials, etc; but that's opening up a whole new can of worms. That's all I have to say about that. But anyway, let get to the point. I'm not questioning whether buying a house is a smart purchase, because I believe it is; but I think its a matter of timing based on the market. The New York Times has an excellent rent vs buy calculator, check it out and you'll see what I mean (you will need to register for free account to see it, sorry).

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jimi

Interesting, I was always led to believe that owning was far superior to renting. Tax savings, value increase, leverage but after reading your article it has really given me a moment to pause and give serious considerations to the value of renting. thanks for the insight jimir

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I'm sure you are right on this, but to me there is something special about owning. Plus it's an investment that can be turned into cash if necessary.

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Kris

In talking with several friends who have rental properties, every last one of them has said that the amount that they receive in the rent does not cover the mortgage. However, the property is appreciating and when the property sells, they will come out ahead...

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Guest

Property doesn't always appreciate. If you're thinking of buying a home, scout out the surrounding neighborhoods. If the one you're going into and the surrounding areas are all nice, eg: newly built, older but well-maintained, or "historic district" type of places that are constantly being renovated and kept up, then chances are your property values will go up. But, if a block or two away you end up in ghetto-land ... chances are you're buying a house on the verge of becoming the next ghetto in 5 years. You roll in at $200k for the house hoping it will appreciate to $250 in 10 years or so, then realize it's worth $150k after 5 years as the neighbors start getting seedy. Look at how many "for sale" signs are up around the neighborhood. If tons of folks are selling in the neighborhood you're moving into ... that's a huge red flag. Means there's a high turnover, and/or folks are realizing it's turning ghetto, so get out while they can still recoup the money they sunk in. As much as folks want to think of a house as an asset, it's not. A house is a piece of tangible goods, like a car. It can appreciate, but it still degrades over time. You can maintain it, upkeep it, renovate it, but that doesn't mean it will always gain value. If you go in primarily buying it as a place to live or rent out, then you will have realistic expections. If you go in expecting it to increase in value to cash out later, then you need to be a little more grounded in your expectations.

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Julie

Just wanted to add why I love owning a house compared to my experience renting for 12 years. One time I was told after renting a place for four years that the owner was selling and I had to move (very stressful!) and another time I was told the owner might be selling, they would let us know. I found it stressful not knowing if we could stay where we were, because I wasn't sure if I could find a reasonably priced rental on 30 days notice.

I like knowing that our mortgage is the same every month for 30 (now 25) years, and I love that no one can kick us out for any reason! It is true what everyone has posted about all the additional costs of ownership, we pay $2000 a year in taxes, also we budget $2000 for home repair (savings set aside for big things like roof, etc, included), and $600 for insurance (fire and earthquake [California]). It all adds up! I do like knowing, though, that no one can come tell me I have to move. Good luck to all people who are thinking of buying, make sure you run realistic numbers, because you can't compare rent amount to home loan payment amount, there are WAY more expenses owning a home.

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jack chen

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Joe

It is better for the environment if your a renter. A renter takes up less space on the planet and uses less resources.

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matt

Living in a priced out market like the sf bay area, I can't really justify owning a home over renting. But then again, I am lazy when it comes to investing so tough choice for me.

Rent or Buy Calculator

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hobo with a rolex

i am now slightly less intelligent of a human being for having read this article. the half @ss attempt at an analysis is laughable.

also this comment is beyond comprehension:
"It is better for the environment if your a renter. A renter takes up less space on the planet and uses less resources."

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jeff in pdx

your blog should be grounded for even suggesting that.

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Andrew

RE Message #38: "this comment is beyond comprehension:
'It is better for the environment if your a renter. A renter takes up less space on the planet and uses less resources.'"

I use to live in a 3,800 sq ft house with a heated pool, but decided to sell and rent a condo closer to work instead. My natural gas bills and C02 emissions are substantially reduced. Now I don't have a long commute to work or need a car to pick up something at a corner store.

Renting a smaller place uses less resources has a direct impact on the environment.

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Guest

The commenter didn't mention renting a "smaller place." That would make sense. I know someone who rents a 7,000 sq foot home. Is he saving the environment by renting?