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The Renter’s Manifesto

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photo: Kelly Sims

“Stop throwing your money away on rent.” You see the phrase in Realtor junk mail and hear it from new homebuyers who are immersed in the nightmare of paperwork, points, and plastering.

The logic is simple: renting is just flushing money down the toilet; buying a house gives you a piece of something to call your own. You earn home equity and end up with something tangible to pass down to your heirs–or to sell or refinance when you retire.

There is a kernel of truth to all of this. But it’s mostly crap. I’ve been a renter all my adult life, and I have plenty of home equity. My home equity is called “cash,” and it’s the accumulated difference between what I pay in rent and what a comparable homeowner pays for their mortgage, maintenance, property taxes, and utilities. (Sure, I
pay for all of those things indirectly, but that’s the point: they’re rolled into my rent, and they’re not rolled into your mortgage.)

Unlike a homeowner, I can choose to invest my equity in something other than real estate. I can spend my equity without taking out a line of credit. I might squander my equity, but I’ll never be “underwater” due to the vagaries of the market. And I accumulate home equity more quickly than the average homeowner.

Yes, thirty years from now, when your mortgage is paid off, you will own a home, free and clear. You know what I’ll own? Enough money to pay cash for your home.

Sure, I’m making a big assumption: I’m assuming the value of your house won’t rise much faster than inflation (or, at least, not much faster than the performance of my investments). Harvard professor Ed Glaeser, writing on the New York Times’s Economix blog, thinks this is an excellent assumption:

Houses are assets, too, but it’s a mistake to expect them to offer a regular rise in price. Houses pay hefty dividends to their owners in the form of living space–that’s the real return on housing investment–and the basic economics of housing doesn’t point to perpetual price growth.

Indeed, the Case-Shiller index, the most respected measure of housing prices, shows that they’ve barely outpaced inflation since 1890.

I’m also assuming that I have the discipline to keep saving the money. So far so good. Homebuying is often lauded as a “compulsory saving scheme.” I guess that’s true: it’s a scheme that compels you to invest a large proportion of your money in real estate. How is this better than simply increasing your 401(k) contribution?

Two kinds of renters

We’re not so different, Joe Homeowner and me. I rent property from a landlord. He rents money from a bank.

Every month, I write my landlord a check. The money gets spent on orthodontia for the landlord’s kids, and I will never see it again.

Every month, Joe writes his banker a check. The interest portion of the payment–for Joe, that’s well over half the payment, more than I spend on rent for a similar home–gets spent on polishing the banker’s yacht, and Joe will never see it again.

For this analogy, I’m indebted to David Crook of the Wall Street Journal, who wrote a landmark 2007 column on the topic:

Mortgage interest is rent that you pay to your lender for the use of its money rather than to a landlord for the use of his house…most of your monthly payment neither builds equity nor is deductible. It just goes down the same black hole that sucks up any other renter’s money. And it takes 20 years before a typical borrower pays more principal each month than interest.

Oh, but what about the mortgage interest deduction? It’s not for Joe. It’s for my landlord and Joe’s banker. Only half of homeowners take it–the rest are better off with the standard deduction–and the average tax savings for those who do is $2000, according to Roger Lowenstein of the New York Times. (The big winners in the mortgage interest deduction game are homeowners who make over $250,000 a year but not so much that they can afford to buy a home with cash.)

Trapped in the closet

Home ownership, it has long been said, leads to financial and community stability. The last three years should have taught everyone that “owning” (that is, financing) a home is no protection against financial upheaval.

As for community stability, be careful what you wish for. If you lose your job, the worst place to find yourself is trapped in an underwater house. I could move with two weeks notice and get my security deposit back.

This isn’t just anecdote. As Tim Harford reported in Slate:

English economist Andrew Oswald has shown that across European countries, and across U.S. states, high levels of home ownership are correlated with high levels of unemployment…. Renting your home and staying flexible do wonders for your chances of always finding an interesting job to do.

As for high levels of homeownership creating community, I’m not sure how you would measure that. All I know is that my family lives in one of the safest and most desirable census tracts in Seattle; as of the 2000 census, it consisted of 85% renters.

Why buy?

Am I saying nobody should buy a house? Of course not. There are plenty of situations where you would want to do so:

* You live in a place where the total monthly cost of renting is similar to borrowing. This is true in a lot of non-housing-bubbly places, outside of big cities and off the coasts. In that case, sure, why not?

* You really want to be able to renovate. Yes, this requires ownership. But be careful: renovation costs are almost never recouped when a house is sold. Also, people talk about the ability to customize as if this should be important to everyone. I just don’t care to get my hands dirty.

* The kind of house you want in the neighborhood you want isn’t available for rent. (This is unlikely to be the case in the present market, however).

* There’s a specific house you want, and you can afford to buy it with a big down payment and a boring 15- or 30-year fixed-rate mortgage.

Just because a house isn’t a good investment, in most cases, doesn’t mean you shouldn’t buy one. A steak isn’t a good investment, either. The problem is, houses cost more than steaks, and a lot of people are convinced that everyone should own one, whether they can afford it or not. If you can’t afford to buy real estate, or just don’t want to, don’t. It’s okay. You’re still a grownup.

Me? There isn’t anything I want out of my financial, social, or family life that requires me to own real estate. So I rent.

–
Hungry Monkey out now: http://hungrymonkeybook.com/

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  1. Jason McGrath
    670 days ago

    I could have used this kind of advice 3 years ago.

  2. anonymous
    670 days ago

    Wait a second:

    1. Deducting property taxes, which in addition to mortgage interest deductions, tends to push people over the standard deduction in high tax areas. Also, you may be eligible for a tax abatement in less desirable ones.

    2. Being able to rent out your home for more than the mortgage and enjoy a stream of passive income. I’ve been doing this in Washington, DC for twenty years and have never paid a dime of ‘my own money’ on the house I own and rent out. Granted, this only really works in highly desirable places to live. But, if you bought in (or buy in) when they weren’t so desirable, you can make money hand over fist. In desirable areas, this also eliminates your criticism that home ownership stymies mobility. It would take me less than a week to have a management company take over my house, on my terms, turn it into a rental, and direct deposit into my bank account every month.

    3. Getting to live where you do for half as much your renting neighbors pay. In your words, instead of paying rent to a landowner, you pay rent to a bank. Yes, and that may not be such a good deal if you treat home ownership like an investment. But if you fully expect to sell your home after x years of living there for the same price you paid + x years of inflation, then all you’ve really been paying is the interest on the loan to live where you do. That’s a pretty good deal, particularly in areas where it costs more to rent than it does to own (most major cities). If my mortgage is $1700 a month and I sell at cost + inflation, then I’ve been paying 850 a month to live in the same neighborhood as renters who are paying 1800 a month to live there. In the long run, I make out better, not you. When you own a condo that includes fees to maintain your apartment as part of the mortgage, you still are only paying 2/3 of what everyone else is paying to rent. Considering that you’d have been better off putting your money in a savings account over the past 10 years than putting it in the stock market, we’re at best breaking even.

    Your argument is most defensible where there are no real rental options – i.e., suburbia and exurbia. In major cities, home ownership can be highly beneficial.

    • VectorSigma
      669 days ago

      1. Only if you borrowed so much that it pushes you over. Whether that’s good or bad depends on many factors. I personally think if you’ve borrowed THAT much money, you probably borrowed too much anyway.

  3. Matthew Amster-Burton
    670 days ago

    Hey, anonymous, thanks for the comment.

    1. Only about half of homeowners itemize. Possibly some who don’t itemize should, and some are eligible for state tax breaks that I didn’t mention. But the mortgage interest deduction and property tax deduction go hand-in-hand: they provide the greatest benefit to the wealthiest homeowners and very little if anything to middle-class homeowners.

    2. What are you paying the management company? Sure, if you bought years ago in an area that happened to become highly desirable (and stayed that way during the housing bust), then you made a good investment–in the same sense that if I’d bought into the Microsoft IPO, that would have been a good investment. But this is gambling–and a lot of people in the last few years gambled on their house going up and lost big. Gambling with some extra investment cash? Fine. Gambling with your primary residence? Dumb. You’re also miscalculating the way mortgage interest payments work or figuring an unusually large down payment.

    3. I conceded that this is correct in some markets, although I doubt you can find one where it’s literally half as cheap to buy. Where I live (Seattle), the buy/rent ratio is still huge.

    • anonymous
      670 days ago

      1. Yes, but don’t forget that you can only deduct the interest on up to one million dollars of mortgage. While there are very few people living in million dollar homes, that does prevent the wealthy from disproportionately benefiting from a tax break by buying a 10 million dollar house or whatever.

      2. In my situation, I pay the management company 14 pct of the monthly rent and the rent is 20 percent higher than what my mortgage is (was, actually). The mortgage includes property taxes in escrow. While you are right that buying a home in a problem area in the hopes of gentrification is a gamble, it is not as much of a gamble as buying stock. If you bought in a city with a subway system 10 years ago and you don’t live in Miami or Detroit, you’re doing great right now. Those are better odds than picking the next Microsoft or Google.

      3. Good point.

  4. Melissa
    670 days ago

    In my region at least it’s just a cheap if not cheaper to buy than it is to rent.

    I pay thirty dollars less on my morgage than my mother in law does to rent a smaller house than mine two blocks away (100 sq. feet difference). This may not always be the case, but my mortgage is very clearly less than her rent and they are responsible for all of their utilities, etc. For me buying was definitely a better decision than renting. For three hundred dollars less than I pay for my four bed house with a yard, I could rent a one bed apartment. BUT, I rent out one of the three extra rooms for $300/month and make up that difference easily.

    • Hugo
      670 days ago

      I think you’re missing one of his points. It’s not just your mortgage payment versus rent, but your mortgage interest + property taxes + repairs & maintenance + homeowners insurance less your tax shield. If you simply compare your mortgage payment versus rent you’re not taking into account the total cost of ownership.

  5. Marvel
    670 days ago

    Melissa, what about property taxes, home owner’s association fees, maintenance costs, the closing costs to purchase your home, and your downpayment amount? When you factor all that in, is it still thirty dollars less?

  6. Ron
    670 days ago

    Brilliant blog! I have been telling this to friends and family members since 2003, which I first started my venture into economics.

    There is a vested interest for Americans to own homes. Prior to the collapse, it was a 24 Trillion Dollar tax base for the government, or which 50% to 60% of that 24 Trillion were still in mortgage. If you own a home you also have to increase your purchases and are likely to stay in one location (makes the Census data more normalized over time).
    Plus, the perceived gain of writing off your interest on the Mortgage is only put-off with what you owe in property tax. And when you home is paid off, you now have NOTHING to write off and yet still owe those ever creeping property taxes (not to mention the new roof, water heater, cracked foundation, paint, storm windows, oh crap there goes to washer, etc).

    Cash-Shiller has shown that the real-rate of return for the past 150 years on a home is less than 1%, whereas over that same period of time you could have dumped that money into a market-based index fund for a real-return of ~7%.

    The math just makes clear sense! I think more Americans need to be talking about this!!!

    Like I said, GREAT Blog!

  7. Scraps
    670 days ago

    I prefer to rent at rates comparable to a mortgage because I have no desire to foot the repair bill when something goes awry, cough up property taxes once a year or build equity that I’d more than likely need to tap merely to make said repairs and improvements.

    Granted, I’m in my 30s with a live-in partner and no kids–if that were different I might see buying as a form of stability for a family unit, until then? I’ll happily rent.

  8. Hugo
    670 days ago

    A couple of points that often get raised by home ownership promoters is that #1 your rent can go up but your mortgage payment stays flat, and #2 you could get kicked out of your rental house / apartment.

    As for #1, as we’re finding out now, rent can also go down (mine did). Mortgage payments being flat is not always such a good thing when house prices and rents are plunging.

    Regarding #2, I wonder how common that really is. Most landlords I know want to keep long-term renters. I’ve rarely heard of someone being asked to leave an apartment or house that they rent. I’m not saying it doesn’t happen, but that it’s probably more rare than people think.

    • Erica Douglass
      670 days ago

      I agree. The third one I hear is “But you can’t paint the walls in a rental!” #1 I’ve never had a huge desire to paint the walls (I hang art instead), but #2 I can most definitely paint the walls in my rental–I just have to paint them back before I move.

      I save over $4,000/month by renting, and that’s not including the opportunity cost of throwing a huge chunk of cash at a declining asset. I put that money into investments which are currently earning over 11%. Will they always earn 11%? No, but neither did houses. ;)

      -Erica

    • Evan
      670 days ago

      I was booted out of my apartment early last year. Why? Because the guy who owns the house was going bankrupt. I guess he should have listened to you — he shouldn’t have bought a house he couldn’t afford to buy. He should have just rented.

    • Fawad
      669 days ago

      In regards to Hugo’s point #2 – I agree it’s unlikely that you’ll be kicked out of an apartment. But what about if you have a family and are renting a house and the owner decides to sell the house? Having to relocate your family and move away from neighbors you’ve become close with after X years is not something I would look forward to.

      I’m currently a renter and for the most part don’t completely buy the economic arguments for ownership vs renting, but the above scenario is what would make me opt for buying in a few years in order to ensure stability for my family.

      Thoughts?

  9. Matthew Amster-Burton
    670 days ago

    Ron, I was trying to be controversial. Work with me here!

    Just kidding. Thanks.

  10. Jeremy
    670 days ago

    Thank you so much for this article. Last night my roommate decided he was going to move out when our lease comes up in early June. I began to look at places to rent and then decided maybe it was time to buy (even though I don’t have much in the means of a down payment and my job could very easily move me in the next 1-2 years to a different location). I was thinking about how I was throwing my money away with rent, etc. But for me, in my financial and mobility situation it doesn’t make sense to tie myself down to anything that large or expensive.

    I had already talked myself out of the ownership thoughts before I read this post, but it only goes to reinforce my pursuit of a kick-ass place to rent in downtown Denver. Thanks.

  11. Jose H. Caraballo
    670 days ago

    I like the points you make and the arguments. I would like to point to some of the less obvious points here.

    1. It’s true not everyone could or should purchase a home. let’s face it some people are just not good, responsible homeowners. The capacity to upkeep your home and sustain homeownership is more difficult than it seems and too many people are not up to the task. (I will let the foreclosure stats speak for themselves)

    2. As far as the renter’s go: Unfortunately, I know VERY few renter’s that actually save or put aside the difference between what they pay in rent and what they would pay (supposedly more expensive) mortgage. Where does that leave you? in an apartment, living paycheck to paycheck with no money in the bank to purchase if you wanted to.

    Discipline with the use of your money is the name of the game. Without this yo won’t have a house, a home or any other type of wealth at all.

    Purchase a home or not, where is your “other” money going when you have disposable income? If you don’t have any, you have already made a “grave” mistake.

    Thanks and keep up the good work.

  12. Matthew Amster-Burton
    670 days ago

    Jose, good points. As for #2, the way the argument usually sounds to me is: you don’t have enough discipline to be responsible and save money, so you should take on a “forced savings plan” in the form of real estate, which–as you said–requires a lot more discipline and responsibility. It doesn’t make a whole lot of sense.

    Renters who save a reasonable percentage of their income toward retirement, if all goes well, will have enough savings to continue paying their bills in retirement–same as homeowners. Homeowners who count their house as part of their retirement package bet their golden years on something risky.

  13. Money Funk
    670 days ago

    I would love to agree with this article. Unfortunately for me, I have had shady landlords. One who didn’t fix anything when necessary. Another who fixed problems ‘temporarily’ until I took him to court. We made it a game about who owes who and what needs to be done. Fought until we got to the court doors, where we finally came to an agreement (right at the foot of the court doors 1 minute prior to our meeting).

    And with the 2nds many landlords have taken out, renter’s are paying more than homeowners.

    I love to see renter vs landlord agruments. And if I had great landlords in the past, I would probably agree. :)

    • Matthew Amster-Burton
      670 days ago

      I’ve been there. But this is as much an argument in favor of finding a good landlord as it is an argument in favor of buying a house. And you’re ducking the question of cost. Yes, there are annoying things about renting that you can buy your way out of. How much are you willing to pay to avoid those things–while buying into new annoyances that only homeowners have to deal with?

      Where are renters paying more than homeowners? It’s highly implausible, but I’d be interested to hear more.

  14. dg
    670 days ago

    Missed a few things:

    1) You can deduct property tax even if you don’t itemize ($500 single, $1000 married).

    2) When you sell your main house the first $250,000 in gains are tax-free (they would otherwise be taxed at 15%).

    • 3609034908
      670 days ago

      1) You wrote that homeowner’s pay 15% tax on something. If you have the cash, you don’t pay any tax on it. So that point doesn’t hold water.

      2) Being able to deduct property tax is nice, but you don’t have to worry about property tax if you have the cash.

    • dale
      669 days ago

      dg,

      the tax code is a variable beast and can change at any time. The addition of property taxes to the standard deduction is scheduled to disappear in 2010.

      Cheers!

  15. Tim
    670 days ago

    Home under $250K in Raleigh, NC have a very good Rent/Own ratio. In my experience it is about dead even between mortgage and rent. However, the mortgagee gets to deduct the interest coming out ahead. But then again he has to pay repair costs.

    I calculated it out, and in Raleigh, you will break even at about 2-3 years buying a house. If you stay there longer as an owner you will gain versus renting. But if you move in a year, you blow what you paid in transactional costs.

  16. Conor
    670 days ago

    I wrote on this extensively last year…love this topic. Location is currently the biggest issue in the entire formula. In Los Angeles, the rent versus own ratio is still in the 50-70% range. In other words, renting costs roughly 50-70% as much as it does to own. Other cities are the complete opposite. Supply…demand.

    http://www.greentaxi.com/the-rent-versus-own-article/

    http://www.greentaxi.com/update-buy-versus-rent/

    http://www.greentaxi.com/owning-versus-renting/

  17. Mikey
    670 days ago

    Thanks a bunch. Finally, a “rent vs. buy” article written by somebody that can do arithmetic.

  18. Kinglink
    670 days ago

    AMEN!

    I started a job in Illinois (Champaign area) about 3 years ago, and I decided to rent until I felt comfortable with the job.

    That was three years ago. This year, I smiled as I watched everyone get completely screwed on their homes they bought back then as the housing bubble burst and all those houses now were worth a fraction of the original price.

    I on the other hand have had a nice apartment for 3 years. A decent amount of my salary does go to renting. But now that I believe I’ll be getting another job, there’s not a huge mortgage over my head.. Personally if you KNOW you’ll stay somewhere for 10 years, yeah own a home.. even at five years it’s worth it. However many people don’t have the luxury of knowing where they will be in 5 years and personally I’m not willing to take a bath in the housing market.

  19. steevs
    670 days ago

    I used to believe this… I lived in cheap apartments w/ roomates. During this time I put all my savings into a high yield savings account (I would say I saved maybe $300/month by renting instead of buying a 1br condo). After 3 years, I had saved up a sizeable down payment and bought a 3 flat. Now I live for practically free and have renters pay my mort, taxes, and insurance. If I were to move out, I would be about $1,000/month cash flow positive.

    That positive cash flow once I move out, is going to help me pay the mortgage on my next building once I save up enough of a down payment to buy again.

  20. Jason
    670 days ago

    I don’t know about you, but here in rural America, buying is the way to go. I paid $72,000 for my house. That’s the price you city folk pay for two of your cars. And guess what I got for $72,000. A nice little house with no problems and four garages. A nice size back yard and a shared border with the local school. Since we’re in rural America, the crime rate is 0. Our front page is usually about some farmer’s prized pig or local school sports.

    So no crime.
    Great location.
    Less paid out to mortgage than you city renter types.
    The best part is that my salary is almost $50k/year. That’s almost the cost of my house!

  21. Charles U. Farley
    670 days ago

    For the last 15 years I would have agreed with you. I don’t have kids, never will, never married, never will. I got no reason to have a house and pay a mortgage when I can rent for cheap. However, now it’s a different story. things have changed and the rent is no longer affordable. I can buy a house and pay less in mortgage payments than I pay in rent. In 30 years I’ll be of a certain age and can get a reverse mortgage to allow me to live out the latter days of my life with some money. At this point it makes sense. before this? Never. I would prefer to rent, honestly, there’s a bit less hassle involved. But somehow, strangely, it just makes more sense to buy.

  22. Dom
    670 days ago

    In essence, you should rent for your primary residence, invest into 4 rental properties that will cover not only the mortgage, taxes, plus a cushion for repairs. Then you sit back collecting 4 monthly paychecks a month while, you have the ability to move when living conditions become sub-par. All the while saving money and being able to invest into a 5th followed by a 6th unit. Eventually making it pointless to go into a 40 hour work week, and allow yourself to enjoy life.

  23. Francis Barragan
    670 days ago

    Don’t forget that some people might also consider that this helps them “save money” by actually forcing them to put money into their house, creating this equity, rather than being unable to put the extra money over rent into an investment account. Some people need to trick themselves into such things.

  24. Owner
    670 days ago

    What everyone knows ( or thinks they know) is not worth a penny. You are glorifying anti home ownership because it is fashionable to do that right now, right after people abused a good system to run priices up, only to see them crash. In the long run owning is much better than renting, but is it cool, and trendy and fashionable right now to slam it. Have fun doing that, and feeling smug, but smart money say buy low and sell high.

    If you bought high ( in the last 5-7 years ) sure you are upside down, but right now may be a good buying opportunity. BTW- IF you buy ….. get a 15 year mortgage. If you can not afford that, then rent. If you can afford that, DO IT …Now as the rats flee thship may be the best time.

    FYI – I am NOT a realotor or banker or anything like that, I am just a guy who has owned a house for 17 years. There are several side to all stories, that is why I am posting this advice. There is no home like one you got, cuz that home belongs to you.

  25. john gannon
    670 days ago

    Wow, this article screams ignorance. You do realize house values rise? Right, you get that part of it too? It’s not just the fact that your house is “paid off for” it’s also the fact that it’s worth $100k more now than 10 years ago.

    Now I’m sure with all the macho bravado found in this article you can easily make any amount, but you do realize many people make a significant amount over what they paid making real estate a whole lot better of an investment than your cash.

    How’s the value of the American dollar holding up?

  26. Jordan
    670 days ago

    Every situation is different. As a renter, I was able to save a bunch of cash to buy a home. I put 20% down. Most others, probably 5%-10%. I spend more in a week now, than I did in a month renting. Your advice is not wrong to save your cash, most don’t have the discipline, and spend what they make. Likeiwse, the housing bubble experienced in the last 3 years, mostly due to not enough dawn payment, people were leveraged to the max, if they were approved for $500,000, they bought $495,000, and left no wiggle room. Glad to hear, cause one day, I hope to have a tenant like you to pay off an investment property for me. So in your eyes, we both win.

  27. DNA
    670 days ago

    Two years ago I bought my second home. My first home is being paid for by a renter. I am laughing my ass off at the stupidity of the author of this article! YES, PLEASE KEEP RENTING. IT’S BETTER FOR YOU AND ESPECIALLY ME FOR PEOPLE TO RENT. BWAHAHAHAHAHAHAHAHA

  28. Jason
    670 days ago

    Where I live in LA, it costs $1400/mo to rent a one bedroom apt. To buy a 1 bedroom condo is $600-700k. That’s a mortgage payment of over $3000/mo. The association fees for some are as high as $900/mo. Needless to say, in my situation, I’m definitely staying a renter.

    Owning a house would be nice though, just not in the cards.

  29. Scott
    670 days ago

    This is a really good article. It is nice that you point out the main advantage of owning a home is that… you own a home. I can do whatever I like with my home (within building codes of course) without having to hassle with any management.

    What I would like to say, is that over the 30 year period of an average mortgage a renters rent will go up dramatically. Whereas a homeowner will be paying the same mortgage with only an increase in property taxes.

    Additionally, the wisest thing a homeowner can do is to pay off their home loan early. This seems to have fallen out of favor with homeowners as everyone was out to get some free money as quickly as possible. If you look at an amortization table, you will see on most home loans you are paying about double over the life time.

    So I guess what I am saying is live below your means and not above them. If you pay off your home (lets say in less than 10 years) you will be well off.

    Just to clarify, I get paid poorly, live in Seattle, and definitely don’t live above my means!

  30. Ted
    669 days ago

    I think the blog simplifies the situation too much. Sure, there are cases where buying a house isn’t a better “investment” than renting, but there are other cases where buying a house does do better in the long run, and it’s not just cases where renting and owning costs the same.

    There are a lot of numbers to be thrown around, but some things to think about are:
    Rent will generally go up (especially after a 30 year period) for the same amount of housing so less and less will go into the 401k account
    The money in the 401k will be taxed when it comes out (but it being tax deferred is nice)
    After the house is paid off, the difference between the taxes and the rental cost will now go into the 401k, so the amount of money in the account will potentially start to swing the other way

    With little changes to the numbers (such as inflationary rate, interest earned with the 401k, etc), it can drastically change the outcome after 30 years. Everyone will need to take a look at their own market and make a decision on their own, and not take a statement from an individual that is from a renter friendly neighborhood and apply it universally. (I understand that you do list exceptions, but those aren’t the only exceptions and everyone should do their own math).

  31. tim
    669 days ago

    renters assume their job is going to last forever and when theyre 50 theyll still have the same job security as they did when they were young to bring in the rent…

    along with that, this article fundamentally assumes people are GOOD at saving the rent / morgage difference.. most are plainly NOT and will pilfer it away on drugs/alcohol/women/ frivolous travel and then they will be 60 and still copping pineapples from the boss and trying to cover their rent…. what is the value of peace of mind and not having to crap your pants everytime there’s a gfc and your boss might sack you and you cant find the rent?

    too pay the rent on my house i now own outright would be at least 450$ a week, vs $40 a week for land tax/rates…. when the boss gives me the pips do i worry? nope seeya later…

    they’re are many peace of mind non-financial benefits to owning your own home too and thats value is way beyond dollars and cents….

    “Everybody needs a place to rest, everybody wants to have a home, don’t make no difference what nobody says” – bruce springsteen

  32. Noah
    669 days ago

    RENTING OR BUYING ARE NOT THE ONLY OPTIONS!!!

    My question is why don’t more people live in Cooperatives. I have lived in different Coops my entire life. Currently I live in a Chicago Coop located in an incredible neighborhood- My carrying charges are a fraction of what any of my friends pay towards rent or on mortgage/other costs. I grew up in a Cooperative that was like any other neighborhood except more affordable and diverse.

    I have all the benefits of being a home owner along with the flexibility of a renter. Renting and Buying are not the only options!

    Explore Cooperative Living if you are fortunate enough to have that option. Sadly most of you do not and this won’t apply to 99% of you…

  33. Brian
    669 days ago

    I know I was always told that as soon as you could, you should buy a house. It was the right financial move, no question. But thankfully, once I was in a position to do so, I realized it wasn’t the right decision for me at all.

    I’m not saying it doesn’t make sense in certain situations to buy instead of rent. But it is not always the right move. This is another example of how you really need to think the “conventional wisdom” through. It may be right for you, and it might not, but at least spend a while considering it.

  34. Chris
    669 days ago

    I have been renting a house in the neighborhood i plan on buying in for less than a year now. I pay roughly 2000 per month, my friends say I’m crazy but looking over a mortgage calculator and how much is applied to principal of a 400k loan I would be cry to bought a year ago. The amount of money the homes in the area have lost way out way the amount I’m putting into rent so when i do buy ill come out way ahead of the game.

    My advise… Don’t buy just yet. Watch the home prices drop for another 6 months or so (hopefully not) but the shoal argument of lossing obey to rent isn’t valid right now. Buy now and you could stand to lose a lot more in your home value in the next year

  35. Benny
    669 days ago

    A well written argument for renting. I did enjoy not having to pay out property tax and most of my utilities when I was renting. There were two problems that my lady and I ran into while in rental units. The issue I ran into was that I needed room to store my toys – misc. PWC, motorcycles and arcade machines, and I wouldn’t be able to find anything with suficient space. She wanted to have a place we could paint, redo and make our own, which couldn’t happen in a rental. We enjoy doing the maintanance and modifications, as a result don’t pay for other people’s labor to get what we want, saving a surprising ammount of money. We picked up the house we own for aproximately 60% of its value (in post housing bubble prices) due to someone else getting in over their heads. Thanks to making a timely purchase, even with the morgtage, taxes and utilities, we’re coming out a fair bit ahead of what we’d be paying for a similar rental unit. We also make extra payments toward the principal on our loan, which will signifigantly reduce what we will ultimately pay out in interest.
    Granted, this isn’t always the case. If a person doesn’t have (too many) large toys, they don’t need the storage space. Maybe they need to be able to move frequently and don’t want to deal with the hassle of selling when they move. (anyone that has dealt with military life would know about that one) Some people just like to leave the upkeep of the property to someone else and simply live there. A great deal on the purchase price might not be available at the moment. It’s all a matter of what a person wants out of where they live, and what they can afford.

  36. Chad
    669 days ago

    I have been renting for 5 years and saving money. We have finally spotted a 3/2 house with one acre of land in beautiful neighborhood in Jupiter, Florida for only $197,000. With insurance, taxes, and the mortgage my payments are $1,114.00. My rent for a 2/2 is $850. I believe we waited till the right time to buy. Interest rates are going to go back up and we have a 5.1 fixed 30 year. When the market was booming this house was going for $300,000.

    • Chad
      669 days ago

      I forgot to mention that the house is move in ready. Their is no damage to the house or property.

  37. Mike
    669 days ago

    I think one thing that isn’t mentioned here is that the value, or increased value of the property, shouldn’t be directly compared to the total price of the property but how much you’ve actually invested into it over the period of ownership.

    In my case we put 20% down on a $250,000 mortgage ($50K) and the value of the property is now worth closer to $300,000 which in reality is a 100% ROI over the period of time (3 years so about 33%/yr) – in this case it was a pre-build condo, and we haven’t had to pay any mortgage up to this point so it is a bit more advantageous, but the idea is still the same. If the value of the house increases by 7-10% per year (which is just ahead of inflation and is about right for the trend in our Metroploitan city), we gain on the total value of the home and not the amount we’ve invested in it. There is no reason that we have to see the property through until we pay it all off – it’s true that the comparable returns on this become less and less as you get closer to paying off the mortgage – but we only pay a nominal fee for terminating the mortgage early (in our case it works out to about $1100), if we simply sell the place and don’t carry the mortgage over to another property.

    Even with a monthly cost of about $1200 (including all taxes fees etc.) we’re competitive at easily a 80-85% ratio (given the amenities and age of comparable buildings). Which means the $250 extra we’re spending a month (which given our current interest rate is less than our monthly payment on the principle) returns a far higher ROI than any comparable investment over the same period of time.

    I totally agree that perhaps you taking all of your capital and buying a house outright and hoping that it will somehow outpace the market is a bad risk (or overpaying on your down payment to the point of undervaluing you leverage advantage), but if you take a properly calculated approach to understanding how your levels of capital can be leveraged you stand to do quite well.

  38. dale
    669 days ago

    Good article! I had to produce an financial analysis of rent vs own for an MBA course back in the early 90′s and this article brings back the memory. :)

    A couple of points to consider.

    1. As a homeowner I decide when to renovate, upgrade or repair. As a tenant I’m dependent upon the landlord.

    2. As a homeowner with a fixed rate mortgage, my variable ownership costs are taxes, insurance and repairs, as a tenant I am at the mercy of the landlord at the end of every lease period. I also have the variable cost of renters insurance.

    3. The landlord can decide my future by refusing to renew my lease, or pricing the lease to a point that I can not afford, or do not wish to pay.

    4. Even if I pay my rent on time, if my landlord does not pay the mortgage I can end up on the street.

    5. My credit score is higher as a homeowner which can reduce my borrowing costs and my insurance expense.

    6. You never really “own” property. There is always an expensive involved whether it’s repairs, taxes or insurance.

    It’s not easy to determine which is better, ownership or renting, in many cases it’s individual circumstances that are the deciding factor. In my case, I’ve owned my home for 12 years and my PITI is less than any 2 bedroom apartment in my area.

    Cheers!

  39. Ken
    669 days ago

    When you realize just how much money is involved in transacting real estate (about 9-13% of sales price) it becomes clear why owning a house is the “American Dream”. That is, it is the dream of all Americans who are mortgage brokers, lenders, real estate agents, title officers, home inspectors, state tax adjusters and the like.

    Fact is most people, especially younger people, move too frequently to make owning a house a sane investment. The transaction costs will eat you alive.

    In some cases, in higher paying jobs especially, you can have some of these transaction costs absorbed as part of a moving package with your new employer. Of course, if you are savvy and take the time to ask you could likely convert some of that into a signing bonus if you are a renter…

    We’ve owned one home, for about 3.5 yrs. Loved living there, not the type of place you could rent. We were very fortunate with market timing, got in while prices were rising 10-15% per year and got out just as the market was turning south. Mortgage was at 5%. Just about the perfect situation. Not anything to do with us being clever, it is just how the job prospects worked out. Standard response from folks was, “Boy you must have done great on that house”. Well yes, we appeared to make quite a bit in equity. In the end though, when you ran the numbers, what really happened was we paid rent. For us it ended up being pretty cheap rent for such a nice house, but the housing expense was not dramatically less than renting. And this was with anomalous increases in housing prices, with more normal appreciation rates (say 2-3%) we would have been eaten alive by transaction costs. If we had bought and sold two years later on the other side of the curve…

    I’ll also add that selling a house is a royal pain. Buying it is easy. Selling it is trouble – getting things upgraded, fresh paint, hiding all your junk, staging the dang thing every morning before going to work. It is like trying to live in a hotel lobby the whole time the house is on the market (and it is like trying to live in a hotel lobby that is under construction for awhile before the house is on the market).

    In our new location we decided to rent while we saw how the jobs and location were. Needless to say the money we “threw away” on rent is just a fraction of the losses taken in real estate values in the past two years. Again, nothing super clever on our part, just lucky timing on when jobs changed and our decision to wait a few years to see if we were going to stay.

    And now we are just about to close on a house. We expect to be here at least 7 years. Interest rates are insanely low. Housing prices are more sane, I wouldn’t say bargains, but at least in the area we are buying in make some amount of sense. Nonetheless, we expect very little equity growth over the coming years and understand that in 7 years we will have effectively paid rent. We are taking a risk of a significant hit in transaction costs if we have to move sooner than that.

    Buy a house if it makes sense, but go in with your eyes wide open and realize just how many people out there have a vested interest in you buying real estate.

  40. Jared
    669 days ago

    I agree, renting is definitely a good option for many. I’m a home owner because I’m married with young kids and I wanted a yard to quickly get myself and them out of the house to play. A basement is a nice escape place as well and I’ve got a workout area and game area down there. I save money vs a gym and some entertainment. Plus, here in Des Moines, I can’t find a big enough rented living space for my family for what i’m paying in mortgage. I was a renter once and neighbors were loud…I can’t have people waking up my 7 month old daughter after it took me 30 minutes to get her to sleep! So various conveniences. My new plan is a 5 year fixed loan from ING at 3.75%. I’ve lived in my home 3 years and still owe $135k. My plan is to pay off the remaining loan in those additional 5 years. I’ll be plowing a ton of money into my home for those 5 years. But I’ll still be maxing out company 401k match and my emergency fund will be in tact. So won’t be sacrificing too much financially and then when housing costs are all paid up, I can really have some freedom with money. If I thought returns would be 8-10% after inflation and taxes over next 5 years, maybe I’d change to saving. I feel market will be pretty stagnant.

  41. Me
    669 days ago

    That money you have in the bank is called savings.

  42. David
    669 days ago

    I deduct 100% of my mortgage interest on my rental property on the schedule E, it has nothing to do with itemizing or not…?

  43. James Taylor
    669 days ago

    Wow, for the past three and a half years I have been pretty down on “throwing money away” by renting an apartment, and this totally made my day!

  44. Mike
    669 days ago

    The whole article is based on the premise that renting costs half as much as owning, which is simply not true for most of the country.

    It also doesn’t take inflation into account, which is arguably the most important reason to own a home. Your dwelling will always be your largest expense, so to have inflation hedged is enormous. Keep in mind that in 40 years, when you are paying $140,000 per year for your apartment (which you will be), that the homeowner has been paid off for a decade. Have you factored in that $100k-$200k per year when doing your retirement calculations?

    There are many reasons a person should choose renting over buying, but this article misses the mark on several very important fronts.

  45. Matthew Amster-Burton
    669 days ago

    Wow, that’s a lot of comments. Thanks, everyone. I can’t respond to everything, but a couple of quick points.

    1. Yes, I know house values sometimes rise. They sometimes fall. Sometimes they rise a lot and then fall. On average, they do slightly better than inflation. (And that slightly better gets eaten by transaction costs and other ownership costs.) If you made a ton of money on your house, either you got lucky or you are a savvy real estate investor. It’s like if you put all your money in the stock market in January 2009; you are feeling pretty smug right now. Good for you, but that doesn’t mean everybody should put all their money in the stock market.

    2. Arguments about buying and renting always attract comments from landlords. To the landlords here: it’s a tough job, isn’t it? Some of my friends are landlords, and I’ve heard the full litany of problems that they’ve run into, and these are very simple rental situations. (They’re just renting out single-family houses.) Saying you get your house free because you rent out a couple of other houses is like me saying I get my apartment free because it’s covered by wages from my job. Yes, I am standing up for the landlords here. You work hard. It’s Miller time.

    3. If you buy a house with a big down payment, live in it for 30 years, and avoid the siren song of major renovation, you will come out financially ahead of most renters. But I’m describing a vanishingly rare situation. How many people here have lived in the same house for more than ten years? I’ve never lived in one place that long, and I wasn’t an Army brat or anything.

    4. Mike, the word you’re looking for here is “leverage.” Buying real estate on leverage, like buying anything on leverage, is risky, and the more leverage you take, the riskier it is. This is what took several well-known financial services companies to the dump in 2008. You’re suggesting I buy a house on leverage that I just *know* will go up in value so I can cash out in a few years and take all the gains? Would you like to hear about some of my hot stock picks?

    5. Ken, great story. I love it. Thanks for sharing–you nailed the key point, which is that neither buyers or renters are “throwing away money” if they are receiving something of value (a nice place to live) in exchange for it.

    This is fun–keep it coming.

  46. jon
    669 days ago

    Good article.

    However, from the pure investing side it does not take into consideration the typical leverage on home ownership. Suppose you put down $50K on a $500,000 house. This implies you are 10 to 1 leveraged on your home investment. If your home is appreciating at around 3% per year this implies you have to be making 30% per year on your other investments just to keep up (with the same initial $50K and assuming you are not leveraged in your non-home ownership investments).

    Furthermore, for those willing to take additional risk you could have put less of a down payment (hence be more leveraged on your home) and continue to invest in the stock market with what you would have put into your home.

  47. lee
    669 days ago

    “Yes, thirty years from now, when your mortgage is paid off, you will own a home, free and clear. You know what I’ll own? Enough money to pay cash for your home.”

    Umm, no. You will have enough money to pay for the home 30 Years Ago. Assuming you could save $10k per year, every year, for 30 years, (not bloody likely) to come up with a $300k nest egg to buy a property for cash, take a look at how 30 years of inflation will reduce the buying power of your dollars.

    • Lyss
      669 days ago

      … you wouldn’t have a $300k nest egg, you’d have 30 years of invested money with all that lovely compound interest.

  48. A~
    669 days ago

    I got lucky and bought a place for the same price the previous owners paid 7 years ago thanks to the downturn in the market. And now I pay the same amount (including taxes, etc) as I was for rent on a 15 year mortgage but I own it.

    I’m the kind of person who likes to upgrade, not for the selling points, but just for my own state of mind. And when we sell, yes, we may not make money, but we won’t have lost that money. And for a young newlywed couple that’s a great start to our lives together. It was the right choice for us, but it’s not the right choice for everyone for a LOT of different reasons.

    Just wanted to say I’m a happy homeowner who understands renting.

  49. Yacine
    669 days ago

    I think this as a great topic and as evidenced by the comments, a hotly debated one. I think one point that you have missed is that owning a house drastically changes your investment profile and heavily weights your portfolio (on a total level) toward real estate. The cash saved on renting can theoretically be diversified across multiple asset classes. However, owning a home employs a highly leveraged position in real estate. In some cases, 80-90% of one’s equity value can be allocated to one single property. That’s a lot of risk!

  50. Jordan
    669 days ago

    I would think that the argument is very location-dependent.

    As I see it, it is a question of whether it’s worthwhile to put all your eggs in the “housing” basket. If housing is cheap but increasing in value, it probably makes more sense to buy. If housing is bubbly and is at or near its peak value (as it is here in Canada at the moment), it probably makes more sense to pay someone else’s cheap mortgage than to take on your own (expensive) one.

    Of course, predicting the highs and lows of the market is an art in itself.

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