On a daily basis, I speak to people who are caught up in living the “American Dream.”
The storyline goes something like this:
- Finish college
- Find a well paying 9-5 job
- Get married
- Buy a highly leveraged house
- Have kids
- Find a better paying 9-5 job
- Up-size to a bigger house and bigger mortgage
- Send kids to college
- Down-size to a smaller property
- Hopefully live and enjoy life for another 20 years without having a mortgage forcing you to get out of bed every morning
Does this sound like you and your future plans?
In this article, I would like to challenge the above status quo.
Food, clothing, and shelter are the three basic requirements of human beings. After food and clothing have been looked after, most of you start looking for a house to call your own. There’s no question that buying a house makes sense for some people, but it’s certainly not for everyone. Owning a house gives you stability. That’s what people say, at least.
So, when you’re looking for a place to live, a lot of people will tell you about the many reasons why you should buy your own house. However, some people would say that home ownership as a path to wealth generation is nothing but a marketing ploy of the real estate industry. And they do have a pretty good case.
With that thought in mind, renting habits have changed in the last few years, as many people consider this as a viable option. Financially speaking, owning a house is not always the best bet. I’d go even further and tell you that if you’re looking to make money, buying a house to live in is a terrible waste.
Let’s look at the four best reasons why renting is better than owning a property.
Why Renting & Investing Beats Buying & Owning
1. You don’t have to get a mortgage.
This one is the most obvious but often misunderstood. Although some people are able to just buy a property with savings they have ready to spend, for most, a mortgage is considered the only way to buy a home. Most people don’t have all that money just laying around, and getting a mortgage is the best way to attain it.
So, even when a property is more than what the buyer has in his bank account, they can still spend it on a home of their own. It’s easy to think of a mortgage as a safe option to consider since it gives people the ability to spread that huge cost over a period of say, 25 years.
And that makes it easy, right? All you have to do is make a monthly payment, pay the bank a little extra on top of the original cost, and you’re done.
That small percentage you have to pay in addition to the original sum adds up to a pretty huge amount over this long period in spite of a mortgage interest deduction. Taking the interest into account, it’s easy to have paid twice the amount of the original purchase after 25 years. But all that is pretty well understood.
There’s one thing that’s always forgotten, though. A mortgage is a debt.
So what? You’re making your monthly payments, and they’re possibly even lower than what you would be paying for rent. But rent is an expense and not a debt. And that’s the one thing that makes all the difference.
Buying a house against a mortgage will only increase the debt to the income ratio you already have. This has one major consequence: If you need to borrow money for other essential things like, say, a student loan or a car loan, you’ll find it way harder to get one.
This means that all that money you had access to for your home is just sitting there and costing you more money. There’s nothing you can do with that money, and you definitely can’t use it to invest and earn more money.
Owning a home will usually cost you more per month than renting anyway. To this day, I still rent and use all of my personal funds for investment purposes.
I like to joke around by calling my personal funds “little soldiers.” They are always out fighting and making me more money instead of being stuck in a bunker (mortgage) and not able to move anywhere.
2. People borrow more than they can afford.
When you’re out to buy something, you simply look at the price attached to it and depending on how much you can spend, you’ll buy it or you won’t. What you can spend in this case is usually whatever you have in your wallet or on your bank account. However, when you’re getting ready to buy your own house, things change. By getting a mortgage, a slight increase in monthly cost can get you a tremendous increase in budget. It’s easy to go too far and get lured into paying more than what you should.
Many folks who are associated with getting you across the line with purchasing a property, like your real estate agent and mortgage broker, can play on your emotions and get you to commit to something that you really shouldn’t. And in any case, you think it’s a good investment, right? Well, reality presents a different picture. Currently more than 10 million homeowners in the US are under mortgages worth more than the actual values of their houses. And they continue repaying these mortgages for years and years. I’m guessing these people no longer think they made a good investment.
With renting, you know what you’ll be paying next month, and you don’t have to worry about paying too much for a property. If for whatever reason you can’t afford to pay the rent anymore, you can find another property with cheaper rent as soon as your lease is up. Another benefit is that the lease is fixed as long as the lease is still active, and if a landlord decides to increase the rent, they’ll have to give you notice. So, no surprises and no headaches.
3. You’re no longer mobile.
With globalization, people have become more mobile. But even when you’re not leaving the country, people shift jobs a lot more than in the past. This is even more the case for the latest generation that has hit the workforce. With all these people switching jobs comes a whole lot of relocating. Many people choose a specific area simply because of how close it is to either the workplace or to the children’s school. If you’re one of those people, it makes a lot of sense to remain flexible with where you live. If you buy a home, that mobility is gone.
This is certainly not the case when you rent. You’re almost as mobile as you want and that has its advantages, probably more so for the younger generations. When you want to make the most out of your life, you need to be able to seize every opportunity you can. When you’re tied down to a home you own, you’ll have to pass on a lot of possibilities. When you’re renting, a whole world of opportunities just lies there for the taking. Look at me, for example. I packed my bags and left Sydney, Australia to move to Kansas City. All this happened within two weeks after making a few minor arrangements.
4. Houses have operating costs and maintenance.
While the value of a house increases over a certain time period, the life of the equipment present in the house does not. Since properties are valuable assets, the owners try their best to keep their houses well-maintained. That means that owners will spend money on repair, modification, redecoration or annual common service fees in order to keep that property value up.
The cost of ownership is usually something that is overlooked, but it adds up to a considerable sum. A leaky roof, frozen pipes, a pool to take care of or just simple home improvements are some of the expenses that are always on the homeowner’s mind. Apart from this, owners also have to pay annual property taxes and a variety of other miscellaneous expenses.
Now, don’t forget that if you become a landlord and put your little soldiers (money) to good use, you will still get hit with all kinds of expenses, but in this scenario, the properties you own will be tenanted and should be producing large sums of cash flow. In return, paying for expenses shouldn’t have a direct effect on you, as they will be covered by the rent you have received from your tenants.
Despite all this, it is still very common for people to push you to buy instead of rent. Here’s a good way of looking at it. If you’re planning to stay where you are right now and if you’re not looking for financial growth and more freedom, then buying a house might be for you. Everyone else should really reconsider—because owning a home might be costing you way more than your monthly mortgage payment.
And don’t forget about those little green soldiers marching and fighting day and night for you.
Do you agree or disagree? Why?
Leave a comment and let’s discuss!