Why Renting is becoming a better financial strategy than owning
Today is becoming a huge struggle for young people to decide if they are going to make the biggest purchase of their lives or stay the course with where they are at. This post is designed to break down the mold of the “American Dream” your parents and grandparents have been lied to about for decades, encouraging young investors to make their own financial decisions and to really run the numbers before deciding to buy a home rather than renting one.
Your father has just decided to sell off his father’s home that he inherited, which grandpa purchased in 1949 for $20,000. He sells the home for $700,000. He believes that he has made $680,000 over 75 years and is trying to convince his kids and grandchildren that buying a house is the smartest way for them to build equity.
Grandpa and your father have failed to think about the cost of the dollar increasing by 3% every year since 1949. So, his 20,000 is really worth $264,958 in today’s numbers. He didn’t factor in closing costs on the house, as well as all the maintenance involved in maintaining the house’s “equity”. The roof had to be replaced twice in his lifetime, the appliances needed to be replaced about 4 times since 1949.
The message of this story is to RUN THE NUMBERS. Remember that rent is the maximum you will pay, but a mortgage is the minimum you will pay. There are plenty of phantom costs never factored into the real “equity” of a house.
Let’s use a more modern example. Let’s say there is a house you really like up for sale and one right across the street with the same square footage but is for rent that you also are considering. The house cost is $400,000. The rent cost is $2,500 per month. You are able to successfully drain your savings and put a 20% downpayment on the house- $80,000- and take out a mortgage loan for the rest. A 30-yr fixed mortgage at 7.375% interest for a $320,000 mortgage is a monthly payment of $2,210. Factor in the down payment on the home, the interest paid to the bank, maintenance on the home, and the opportunity cost of buying a home as opposed to investing in other ways, I would add 50% per month to the cost of owning a home, so $3,315 per month. This doesn’t include groceries, utilities, and other common monthly expenses that are like renting, so we will factor them out.
If you invested the difference between owning vs. renting, 3,315 – 2,500, you invest $815 per month over 30 years. If that’s invested aggressively in the stock market and you get a 7% return after inflation, you will have $930,000. If you factor inflation of the dollar increasing by only 3% on the $400,000 home equity value, you will have $970,000 after 30 years, and all maintenance costs must be subtracted from that.
These numbers seem the same, but I promise you, with the right investment mentality and good fund managers, you will have much less stress with the investing route than you will doing all the house repairs over 30 years.
Another point I should make is to know why you want to buy rather than rent. If you plan on staying in the house for more than 10 years and can depreciate the large closing costs, downpayment, and phantom costs over 10 years it will be better. If you have children and want to raise them in a certain neighborhood or school district, then it makes sense if renting isn’t available.
I encourage everyone to run their own numbers, know the opportunity cost to owning vs. renting and investing the difference, and break the generational mindset that the “American Dream” and “success” is only achieved if you buy a house.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.