Renting is Better Than Owning

The housing market is exploding in certain areas of the country. My area is one of them. We’ve seen price increases of 15%+ over the last two months! Everyone and their mother is moving here, and even the people that lived here are just now starting to look for a house. Meanwhile, I’m completely content with renting a house for the foreseeable future.

Out of the 25 people that work in my office, one bought a house 1 year ago, two bought a house 6 months ago, and two more just closed last week. 20% of the people in my office closed on a house within the last year.

One of these coworkers had quite the journey to closing on his house.

My coworkers story

He started looking six months ago, but couldn’t find anything affordable. Every time he put out a bid, someone else came in with a higher bid. One house he bid on was asking for $475,000. He was overbid by someone that offered “something in the sixes.”

The houses here are going for $125,000 over the asking price.

When that happened, he had a conversation with his wife. They decided to take a break from trying to find a house.

And then, they started looking again–this time, with a higher budget. They bid, and they got shot down. They bid some more, and got denied some more.

22 bids later, they finally closed on a place $150,000 over their original budget. They bought the house for $589,000.

After this whole experience, I figured he’d be relieved that it’s finally done–and he is–but there’s something new to him now. The stress of looking for a house was replaced by the stress of trying to afford a house above his budget.

He and his wife were so anxious to buy a house that they jumped into one they can barely afford. They are at serious risk of being house poor. Luckily, they already have furniture, and the house doesn’t need any major upgrades. But they can say goodbye to any vacations or minor luxuries for the next several years while they save up again.

But that’s the decision they’ve made, and they’re prepared to live with it for the next 30 years.

I have a different approach.

Buying a house for me

Since I’m an analysis nerd, I had to run the numbers to see the best solution for me.

If I bought a house this month, it would likely cost $500,000 or more. 4 years ago, it would’ve been $350,000–and people were saying then that it was overpriced.

With 5% down on a 30-year 3.25% mortgage of $500,000, the payment would be $2,067 per month. Add on home insurance ($108 per month), PMI until I own 20% equity (1% of home value per year), and repair and maintenance costs (1% of home value per year) to get to a total monthly payment of $3,009. The down payment and closing costs add another $35,000.

Adding up the total payments for the life of the 30-year loan, I’d end up paying $1,003,619 for this house. If the house appreciates by 3% per year (which is a stretch since it’s already up 15% compared to last year), the house would be worth $1,140,813 in 30 years (net of 6% commission to sell).

That’s a relative gain of $137,194 by choosing to buy a house. Pretty good deal.

What about renting?

My current rent is $1,750, but I’ll add on an additional $50 for renters insurance for a total payment of $1,800. I usually sign 15 month leases to save money, so I assume a 3% increase to rent payments every 15 months.

The total payments over 30 years comes out to be $929,515. All that goes out the door with no equity in return.

“See!! Renting a house is just throwing money away!!”

Ah, not so fast. I need to account for my investments as well.

If I could afford to pay $3,009 per month with a $35,000 lump sum at the start of buying a house, I could invest that extra money if I decide to rent.

Since there is no down payment or closing costs to renting, I can invest the entire bundle right away. I can also invest the excess each month ($1,209 the first year). When the rent payments start to exceed the homeowner’s payments, I assume that I will draw from my investments to cover it.

Assuming an 8% return on my investments, my portfolio will be $1,178,484 after 30 years.

That brings the total value gained from renting to $248,969!

Compared to buying a house, renting gives me an additional $111,775 over 30 years.

By paying a lower monthly payment and avoiding a lump sum payment, I can afford to invest much more.

More than money

Renting allows me to supercharge my investments. That makes it the best financial choice for me. That could be completely different for you.

When looking into buying a rental house, the rule of thumb is that monthly rent should be 1% of the home value or more. That’s how you know if it’s affordable or not.

The rent in my area is 0.4% of value. That is a big reason why renting is better for me.

Renting also gives me something that a mortgage never could: freedom to move.

If you want to move when you own a house, it could be months before you are able to. When you rent a house, you can leave today if you want (provided you pay some fees to terminate).

Even if this analysis favored buying a house, I’d likely stick with renting anyway. Some things are worth more than money. I will do whatever I can to get more freedom.

If you’re interested in seeing the details or doing this analysis yourself, check out this excel file.

Thanks for reading!

Featured photo source: Tierra Mallorca on Unsplash

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