What’s the reason for not just renting housing till the end of time and dumping my excess savings into REITs? Is there a big difference in outcomes vs buying a home?
In: Economics
Mortgage payments can be less than rent payments, and after paying mortgage payments for twenty or thirty years you own property you can sell, whereas paying rent payments for twenty or thirty years you don’t.
Renting vs buying is really more of a personal decision than a financial one.
There are pros and cons to being a lifelong renter or homeowner.
Dont buy a house just because you’ XX years old and everyone else has; or your uncle says it’s the only way to build wealth
There is no guarantee renting is cheaper than home ownership; and rents tend to increase.
Investing the difference between rent and mortgage require good constant behavior which you may or may not have
Rent can be, and currently is, greatly variable. Start at $2K a month, and in 20 years, you’re up to $4K a month. Not true for your house payment.
It is a perfectly reasonable strategy. Particularly if you believe you might be moving often or would like to continually upgrade your living quarters. There is, of course, a balance of risk vs gain.
If the REIT gives relatively reasonable returns compared to home prices, then this might be a benefit. However balance this against the fact that mortgages give a huge leverage on home price appreciation.
Bank costs and transfer costs for real property are high. Even for a relatively modest property, expect that it might cost tens of thousands to buy and then sell a home. This usually works out if you live in the home for 7 years or more. (Less time if home prices appreciate faster) But if you intend to move every 2-3 years, renting is probably a better idea. This is especially true if you believe your income will rise rapidly in the next few years and you’ll outgrow what you can afford today.
Your own personal discipline is important. It is tempting to skimp on investing which can severely affect the final returns.
Real property can be expensive and time consuming to maintain. Property taxes, upgrading stuff, repairing stuff and all that “stuff” adds up. There are also the non-financial costs – expect to spend many weekends just doing things on the home. Some people love this and some people detest it.
Other benefits of owning are you get deductions on your taxes for the interest and taxes paid. If you’re renting, you pay the landlord who gets the benefits.
One negative of owning is that you have to deal with all the maintenance issues.
If the mortgage price is the same as your rent, why not do both? The main thing with a mortgage is that you’re leveraging someone else’s money. If the market exceeds your interest rate, you will be doing very well, and historically that has been the case.
Cons of renting:
1) Your rent money just disappears. Compared to owning where when you pay off the principle you can sell it and get that money back. Or take another mortgage out.
2) You have no control in rent. You might find your rent increases 20% when the lease expires whereas with a fixed interest rate loan, you always pay the same monthly bill when owning.
3) You have to deal with the landlord’s restrictions. That might be you can’t put your own appliances in, you might not be able to hang things on the wall, you can’t change that carpet you hate, color of the walls, whatever. You almost always won’t be able to get an extension to the house built or tear down a wall to combine two rooms! You might not be able to have a pet or put up a fence for the pet.
4) You might have to deal with a really bad land lord.
5) You have no guarantee your landlord will renew your lease and you might be forced to move.
Pros of renting:
1) You can generally move a lot quicker and more hassle free. You might have to pay a penalty for breaking the lease early, but you can at any point. You don’t have to worry about selling the house before moving or dealing with the hassle of doing so.
2) Most maintenance work is your landlords responsibility including replacing/fixing appliances. Honestly I could put this in the cons as well, as a bad landlord can be terrible at getting things fixed!
Yea that’s about all I can think of. In the end owning is a lot better especially if you are planning on staying in the same location for more than 5 years.
Real example (simplified). I needed a place in 2019. To rent a studio apt was $1100. Buying town home mortgage was $1350. I sold the home and upgraded at end of 2023 (4 years). Had I rented I would have saved the $250 I would have had $12,000 + interest. When I sold I made $98,000 after everything was paid and done. This is why owning is usually better.
There can be instances of where property’s are money sinks, covid definitely helped me make more money on the sale ect but yeah. That being said I had also refinanced in 2021 and actual mortgage was $1980 but what ever
I know someone who is a long term house renter. He gets to pay less than market because at this point he’s on good terms with the owner and he’s not a hassle.
30 years of property taxes, sewer/garbage fees, overall maintenance, the work you put into it, the emergency repairs, loan interest….
Financially speaking, the rent option is probably a small bit a loser. But you also get more of your own time, and if that’s what’s important to you, it’s not a bad way to go.
Among other things mentioned here, I’ll add in this caveat…
When you retire and are looking to lower your income for certain thresholds, having your house owned means you don’t have to liquidate as much of your invested assets to pay monthly bills since you don’t have rent to pay.
This could mean withdrawing extra money to pay rent could put you over the limits for certain subsidized services in retirement.
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