Forget the American Dream—Renting, Not Homeownership, is the Path to Financial Freedom

by | BiggerPockets.com

Conventional wisdom isn’t always wise.

The conventional wisdom in 2007 was to buy a home before prices shot up even further. How’d that work out for those homebuyers?

For as long as anyone can remember, buying a home has been a dream for most Americans and Canadians. And buying a home has its perks, from equity building to the freedom to knock down walls or paint those walls bubble-gum pink. But just because a strategy has advantages doesn’t mean it’s the best strategy out there.

I’ve been a homeowner, and I’ve been a renter. I’ve been a landlord since I was 24, long before I became a homeowner. And I’m a renter once again.

Goals and dreams are great, but let’s get more creative with them. Here’s why financial independence makes for a better dream than homeownership—and why you shouldn’t assume renting is the slower route to get there.

Flexibility to Move & Pursue Jobs, Opportunities, & Mates

When you buy a home, you take an initial loss. That’s because it costs thousands of dollars in closing costs to buy a home, and when you go to sell, it will cost thousands more.

Over time, most homes appreciate in value, while the principal value slowly ticks downward. After a period of years, homeowners usually reach a breakeven point, where if they sold the property, their net payout would cover all the of the costs they’ve incurred (each round of closing costs, maintenance costs, etc.).

But what happens if six months after buying a home, you get a job offer that pays double what you’re earning now—in another city? Or if your spouse gets such an offer? Or what if you meet the man or woman of your dreams, but they live in another state? Perhaps you have children, and a new report comes out showing that the local schools are far worse than previously reported?

What happens if you find yourself expecting another child (surprise!) that you weren’t, well, expecting? Maybe that 2-bedroom home isn’t big enough after all, and you’ll have to move in a year or two.

The point is that it’s hard to predict your wants and needs in two, five, 10 years from now. Our realities are constantly shifting, so tying ourselves to one home for a period of years is dangerous. The ability to move to pursue our dreams has very real value.

rental-property-pros

Related: Liability or Asset: Is Owning the House You Live in a Wise Financial Decision?

Real Estate Benefits Without Being Tied to One Home

I own 15 properties in the U.S., but I live in Abu Dhabi. Why? For the heck of it. My wife took a job over here so we left the United States and started traveling.

As a landlord, I can capitalize on the benefits of real estate ownership without being tied to one place. I have all the tax benefits (and then some) that homeowners have, I have a hedge against inflation, and I benefit from appreciation. But I spent a month living in Italy last summer and didn’t have to pay a mortgage at home while I did so.

And I get it—not everyone wants to be a digital nomad. Consider a closer-to-home example: Let’s say that it’s expensive to buy a home in the neighborhood you want to live in. But rents in that neighborhood aren’t outrageous. You can move in for a year or two, enjoy living there, and then move again at your leisure.

Some markets make sense to buy into, while others don’t. But if you buy as an investor rather than as a homebuyer, you separate your financial interests in real estate from your personal, emotional interests about where you want to live.

More Balanced Net Worth Allocation

For most American homeowners, the vast majority of their net worth is made up of their home equity. That’s a problem.

Homes are illiquid and cost money rather than earn money on a monthly basis. Why have so much of your net worth comprising an “asset” that you can’t sell quickly or cheaply and that costs money every month?

And is your home even an asset?

Your Home Is (Almost) Always a Liability, Not an Asset

I agree with Robert Kiyosaki on this one: An asset brings in money every month, while a liability costs money.

We all need a roof over our heads; it’s a necessary expense. But that doesn’t mean it’s an asset. I need food, but that doesn’t mean that a loaf of bread in my pantry is an asset.

Whether you rent or own, you spend a certain amount of money for the right to live somewhere. Sure, many homes appreciate in value over time and might provide a payout one day in the indefinite future. But we don’t live in the indefinite future; we live in the here and now, where your home costs you money that may or may not ever come back to you.

The one exception: If you “house hack” and buy a multi-unit building, where other residents pay for your mortgage plus some cash flow.

Related: Forget Everything You’ve Read: Buying a House is NOT For Suckers

Don’t Ignore Opportunity Costs

Imagine having $50,000 in cash, which you could use for a down payment on a home or a down payment on a multifamily building.

Even if we set aside the flexibility issues already raised, tying up so much of your capital in a liability rather than an asset is problematic. If you take the $50,000 to buy a home, that’s money you can’t invest elsewhere, in a real asset.

In contrast, if you rent, you’re free to invest that $50,000 in an income-producing building. Perhaps you leverage that $50,000 to buy a $250,000 five-unit building, borrowing the other $200,000 and earning $1,500/month in cash flow?

So yes, you might spend a few more dollars each month on a rent payment rather than a mortgage payment for a comparable property. But does the $50/month savings justify missing out on $1,500/month passive income?

Increasing Demand for Rental Housing

The homeownership rate in the U.S. clocked in at 63.5% at the end of 2016, a far cry from 2004’s peak of 69.2%.

Indeed, Trulia ran a report last year, finding that older Millennials, men, Hispanics and the upper-middle classes are particularly leaving homeownership behind in favor of becoming renters.

If demand is rising for rental housing, then what’s a better investment for that imaginary $50,000 of yours: a multifamily apartment building or a single-family home?

Buying Wholesale vs. Buying Retail

When you buy a home for yourself, competing with other homebuyers, you’re buying at retail prices.

When you buy a multifamily investment property, you’re competing against other investors. In other words, you’re buying at wholesale prices.

The per-unit costs of multifamily buildings are far lower than single-family homes or even than condos priced to sell retail. House-hacking by buying a multifamily building and moving in means not just having renters pay your mortgage but also a lower price for your own housing unit.

If you know you’ll live in a specific home for 15 years, by all means, buy. But for the rest of us who have trouble glimpsing more than a year or two into the future, consider renting instead and investing your cash in rental properties. You’ll still get all the benefits of owning real estate, without tying yourself indefinitely to one specific residence.

Is homeownership the dream, or is living the exact life you want the real dream? That perfect life might change over time, so aim for financial independence, rather than thoughtlessly settling for other people’s dreams.

[Editor’s Note: We’re republishing this article to help out our newer members.]

Thoughts? Opinions? Outrage?

It’s a contrarian stance, no question. Let’s hear where you weigh in on the subject!

About Author

Brian Davis

Brian is a rental investor with 15 income properties, who provides free video training to help everyday people start earning passive income at SnapLandlord.com. He's also the co-founder of SparkRental.com, which provides free services & education for landlords. His rental management is almost completely automated by now, allowing him to travel the world (his current home base: Abu Dhabi).

81 Comments

    • yusef alexander

      Great post. I am a seasoned real estate investor giving an opinion from years of being active in the multi-family space while owning and renting personal real estate. My opinion for a 20-27 year old in a stable sub market is to rent, save and invest. It doesn’t matter if you save and invest in stocks, real estate or your own business. Just follow that discipline and you’ll be ahead as time continues. 27 – 37 year olds that are specializing in a field or developing expertise in their business. Take a moment to consider the landscape of the market, do you have a family? are you planning for school years? Remember, there’s no rush to buy a home but if you do you still have time to adjust if things change. 37 – 47 year olds, you are now comfortable with yourselves and hopefully are not making decisions for external reasons. My encouragement is to again, rent, save and invest. The rent, save and invest plan may be different than in your 20’s but can still fit your updated lifestyle. It may be that you rent a home in a nicer area. You may save and invest in areas you’ve already established or it can be in a newly found enterprise including real estate. I come across many people that question renting versus owning. It is a personal choice that fits a specific financial path. It bothers me when I hear that someone is buying a home to solve a problem that home ownership will not fix. i.e. paying someone else’s mortgage. When you go to the local store and purchase goods you are paying the store owner’s mortgage, or owning a home is forced savings. Forced savings can simply be solved with automatic debits from your income to your savings or investment accounts. Yes, homeownership can address various financial matters but, the way that many home buyers interpret the benefits are not exact reality.

      Let’s not forget, if we considering real estate investing separate from home ownership, I say do it sooner than later, if you can. There are many investment benefits we can propose in another post.

      Great blog subject. Great feedback from the audience. Keep the discussion alive and look within your own conditions for the best direction to take.

      Cheers,

  1. Mike McKinzie

    Hmm. Counter Argument: Current Home: Would rent for $3,000 a month. Current mortgage: ZERO. Property Taxes: $1,200 a year. Insurance: $800 a year. How much did I pay for it? ZERO. (My parents paid $15,000 for it back in 1960. But let’s say my parents were to rent at $200 a month. They would have paid for the house in just 75 months and lived RENT FREE from 1967 until the present. 50 years of living RENT FREE and MORTGAGE FREE isn’t too high of a price to pay for BUYING a house.) AND, it is NOT ‘dead equity”. The equity in this house has purchased a minimum of 10 other rentals, which are mortgage free as well. We currently have a HELOC on it that BUYS OTHER RENTALS!!!! So while we technically do have a HELOC (in first position), it is being paid by rental property income. BUT, if you were to buy my house today, would it be better to rent? That would be a whole other set of numbers, but an argument could be made either way.

    • Ryan Walsh

      I am really not following the logic here. $15,000 dollars in 1960 is equivalent to about $120,000 today and $200 a month in 1960 is equivalent to about $1,600 per month today. It sounds cheap to look back at those numbers but it’s really not that cheap.

      Also, paying $200 per month for 75 months would get you to 15,000 without any interest factored in.

      Am i missing something?

    • Alden Simpson

      The American dream has changed drastically since 1960. People are not expected to stay in the same house, job and town. More people are moving all over the world, country for a different quality of life. Also the market was not the same as it is now. At that time purchasing a house was an investment. It also seems that you have benefited from taking advantage of the boom in renting compared to buying home.

  2. Bo Wagner

    I think this is well-thought and applies well to your life (and many others) but I think it might be a bit too general in nature. For you, or someone younger/single, this does seem to make sense on the surface. Maybe it’s due to what I do for a living (closings!) or being the kid of a builder, but it just seems too contrarian to me to pay someone else’s mortgage. In my earlier life (when I was single/younger) I took a ‘stair step’ path to home ownership when I moved to ATL. I rented a basement apartment with friends; then bought a 2BR/1BA condo; took those TAX FREE sale proceeds and put that into my 2BR/2BA Townhome with 2-car garage; took those TAX FREE proceeds and moved on to a 3BR/2BA home with basement, etc. If I was ‘starting over’ again, I would do more or less the same thing but schedule it out to buy a place, live there/fix it up, sell it in 2 years and on to the next; wash, rinse, repeat! But I do understand the concept of being ‘free’ and get that it appeals to you and many others. Perhaps I got lucky with my purchases/sales and keeping my life here in ATL area (e.g. typically strong market, other than 2006-2010) but again, I don’t want to pay someone else’s mortgage. I am happy to own my own home!

    • Brian Davis

      I will be a homeowner again in the future as well, but like I did last time around, I’ll make sure I can rent out my home with reasonable cash flow when I’m ready to move out. I still own my old home, it’s just a rental now, that pays a pretty penny for me. That way, buyers get the benefits of homeownership with the flexibility to move whenever is convenient. Best of both worlds.

      • So what do you do when the drains clog, or the hot water heater goes out, or the stove stops working.— or they decide to save water and stop watering the landscaping. ( my next door neighbors ) There are just as many headaches when renting out, as when you own and occupy your home. It seems none of you take that into account. People keep saying to me, “go move where you want to, and just rent your house out”. My parents always warned me about becoming “a landlord”. One just has to look at my neighborhood to see what “investment” brings. Yards piled with junk, lawns covered in litter, run down looking houses. Maybe there is such a thing as a “good tenant” but in many places that just is not the norm.

        • Norma Galindo

          Casey replied that a property manager would handle all of the problems with tenants’ clogged drains, yard neglect and so on. Does the property manager really take care of all those problems? Property managers usually charge a percentage of the rent, don’t they? I am sure they will hire out plumbers or other workers to handle some issues, but they will not be as cost conscious as the actual owner. How is that negotiated?

  3. Jay C.

    Ok..I will bite. The whole article is slanted for a twenty something crowd. Suggesting they can move closer to friends..job turnover ect. No one likes to be tied down when they are young. The problem with renting is the landlord can raise the rent any time he likes. If your on a fixed income that may make you move. Yes you have freedom with renting but little peace of mind of dependability. I do suggest young people rent just like I suggest young people go to college to get smarter. But when your tired of clubbing and have good job…buy a house and stop throwing your money away to make some landlords house payment….make your own.

  4. tim boehm

    If you are a jetsetter with a huge income then fine. But the new worth of homeowners speaks for itself. I own 7 homes free and clear and live well off my rents. A home to most people is a forced savings account that pays a modest interest (appreciation). Most renters don’t put their money into stocks and bonds they spend it, reason homeowners have a 10 times higher net worth. Your premise is idiotic, because your not looking at the facts.

      • tim boehm

        Well James I have always advised people in their best finical interests not mine. I have had tenants that were great kept the property looking good and took care of small matters and I advised them not to waste their money paying me when they could buy a house for the same as their rent.

        • Jay C.

          I appreciate your honesty Tim. This is a no brainer subject and I as well treat my tenents with the respect to move on when they can.. Speaking of subjects I dont post much on this site anymore cause not much substance here any longer. It all a rehash of I bought 3000 units for no money down garbage and you can too articles or like the ones above. Picking out anything worthwhile on here anymore is a needle in the haystack.

  5. George Compton-Craig

    Great article. I always like hearing both sides of the argument, especially contrarian views. It gives perspective, and perspective is so valuable in investing. Every point mentioned in the article is a valid one and is more or less spot on true at one point or another in every market cycle. Huge problems occur when ‘the crowd’ has a one track mind, like in 2007 when home buying was all the craze.

    • Brian Davis

      Thanks George! I think the best thing any of us can do is think analytically, question the prevailing opinions of the day, and make a thoughtful decision based on our own needs and goals. And like you said, we all have to be careful when “the crowd” starts having a one-track mind – often when everyone is scrambling to buy stocks for example, that’s a good time to raise an eyebrow and sell.

  6. Jerry W.

    If you buy your house with a little due diligence you can rent it out when you move out of it. Most places I have been you can buy for less per month than you can rent for. Many folks in the military do just that. When you are done renting you have exactly zero in your pocket, when you buy you build equity every month. Those who rent are called tenants, those who buy are called landlords. Sure there are times to rent, like when you don’t know the market or are broke and cannot figure out how to buy a property.

    • Deanna Opgenort

      I rent in a market I can’t afford to buy in (the interest alone on houses in my neighborhood is @ $3k/mos). I own in a rural area with few job opportunities. My rural rental is “buying itself” for me while I am making a living in the big city.

  7. As a homeowner, I have nothing against renters. What I do object to, is the number of “investors” at least in this part of the country, who buy up vacated houses and rent them out. My neighborhood in particular, has seen home values drop because of this. They buy these derelict houses, do a few cheap repairs and rent them out, as is! No landscaping, leaky roofs, you name it. They only care that someone will be willing to pay them rent. I don’t know about other parts of the country, but here in Pasco County, Florida it is epidemic!

  8. Jim Stanton

    A few comments here do seem a bit hostile which I think is completely unnecessary and if you don’t like the sites content then don’t look at it. Problem solved.

    Regardless, I this article certainly brings up some valid points.

    My fiancé and I just sold our last flip and are currently renting. We’ve realized after flipping two different houses in the Boston area that living in a house while working on it proved too difficult and made the time to get the project done too long. We moved out last October 1st from our last flip which still took two months to complete. We went on the market at the beginning of December and had an accepted Offer the next evening. That closed at the end of January. We were fortunate enough to make enough money to cover both the mortgage and the rent and still make a decent profit.

    While finishing our last flip we started to discuss our next move and have decided that staying renting where we are is our best move. We feel that the market, though maybe not at its peak, may be very close and we don’t want to buy near or at the top of the market like those who did back in 2006-2007. We also have kids to consider and bouncing them from school to school, we feel isn’t a good idea. This also allows us to stay flexible while looking for our next project which is going to be a multi-family to generate cash flow.

    We’re going to sit tight where we are for a little while and see where the economy goes with our new President and the Fed scheduled to raise rates as much as three or four times this year. In our opinion it’s always a good time to buy income property but not always to buy your own home.

    • Senthil N.

      It’s not about being hostile, but about opinion. In fact I would say, the same for your Jim – if you don’t like the content then please don’t look at it, problem solved! In this case the author is so waaaay off, it’s just laughable. Have a title that says, “sometimes” there are benefits to renting and get upvotes.

  9. Rob Burns

    Or you can do what I did and purchase a duplex as owner occupied, y tenant paid my entire mortgage and I got to tax deduct repairs. Afterward I moved out purchased another larger home with an income apartment and used the first property rental income and my inlaw apartment toward my main house. I think people forget they can buy up to 4 unit buildings as owner occupied.

  10. Kaye Stewart

    I completely agree with you. If I bought a home I would be paying down for a mortgage, property taxes etc. It is a liability. Instead of buying I chose to invest in Real Estate. So every month I have passive income coming through. This income can pay my rent, support my lifestyle etc. I just keep buying investment properties every time I can.
    For people who are super wealthy this wouldn’t pertain to you because they can afford to buy and also invest. I am not there yet but I love the idea of passive income coming to me every month.
    Great article. My mentor Grant Cardone agrees homeownership is a bad idea.

    • Angelo Mart

      It’s so true especially here in NJ. The property taxes in my county are the Highest in USA. Now add All of the PITI and its out the window. That’s why I took my hard earned savings and invested in Casflowing property

    • Erik Whiting

      Question: you cite paying property taxes as an expense you pay when buying a home. Isn’t that cost “baked in” to the cost of your rent as well as the other things: insurance, maintenance, etc.?

      I’m not against your concept, but I wonder if this is truly and apples to apples comparison. Many renters say things like “I can’t handle paying for taxes, insurance, maintenance, etc.” I accept their rent but don’t bother to advise them that they are, in fact, paying them via their monthly rent. So many renters forget that their rent goes to other costs–same costs as homeowners have.

    • Brian Davis

      Great tool Sam, thanks for sharing. That’s the right idea – that some markets make sense to buy in, and others make sense to rent in, but whether you buy or rent your own home doesn’t mean you can’t buy property in more favorable markets.

  11. Glen E

    With a caveat for certain markets (especially really expensive ones like New York, San Francisco), I would argue that in most markets, long term it is better to buy a house than to rent that same house. Starting with the obvious, if you buy, eventually the mortgage will be paid and you’ll own the house outright, but if you keep paying rent, you’ll still be paying rent at age 85. The counter argument usually brings up hidden costs like taxes, insurance, and maintenance. But if you are renting, your landlord is paying all those things, and if he is making a reasonable profit, then somehow these things aren’t bankrupting him and they wouldn’t bankrupt you either if you had to pay them. So in most markets, I think it’s better to buy a house than to rent that same house.

    But notice I said (more than once), “that same house”. That’s where the problem is for many people.

    When an investor buys a house to rent out, he’s looking for a “deal” – a distressed sale, a fixer-upper, something like that. (The article talked about buying a multi-family building “at wholesale prices”. But investors look for such prices for single family houses too.) But when a couple buys a primary home, cost might be an issue, but it’s one issue of many. They are more concerned about the kitchen and bathroom and master bedroom and yard and neighborhood all being “just so”. Imperfections they would tolerate in a rental, they won’t tolerate in the home they are buying. Especially if they previously bought a starter home and are now looking for their “dream home”.

    Thus, if the couple has been renting a house, they could buy the average house just like it for $200k, or look for a “deal” on a similar house in the range $150k. But instead, they go buy a newer, bigger, better “dream home” for $300k, $400k, $500k (these numbers are just examples but hopefully you get the idea) – whatever their income will allow – often it’s as expensive a house/mortgage as they can qualify for on a 30 yr mortgage. Thus, all the extra money they could have had for other saving/investing is tied up in the bigger house payment. This is what really makes their house a liability instead of an asset.

  12. Angelo Mart

    I completely agree with you on this topic. I RENT a condo where the maintenance fees and property taxes are so HIGh that owning it would be a complete waist as very little Principle debt would ever be paid down. Few towns away I can be Cash flowing multi family homes. It is not worth owning in NJ that’s for sure

    • Brian Davis

      Thanks Angelo, and it’s so true that where you want to live is not necessarily the best place to buy and own real estate. And, as you pointed out, that doesn’t mean you can’t own property, it just means you should reconsider owning the property where you live.

  13. Scott Schultz

    Why not live in one of your rentals you purchased at a discount, and keep the spread? I could live in any of my rental properties. why if you are maintaining an apartment rent, own it and save the couple hundred positive you would be otherwise charging a tenant, and if you want to move, place a tenant, no concerns about breaking a lease, it should cost you less than rent because you purchased below market, and hen you go, you add another cash flowing asset.and if you couldnt live in your rentals, you need to either stop being a slumlord, or get over yourself. just my 2 cents.

  14. Michael Woodward

    Brian, I think the push-back you’re getting here is mostly because of the article title. Saying that renting is better than owning doesn’t leave any room for the counter-viewpoint. In fact, it appears that you’re intentionally leaving out many of the details of homeownership that would prove it to be a better investment in some situations. The truth is that either owning or renting can be the “best” method for anyone depending on how it’s done and how they want to live. I paid $85,000 for my first house when I took a job out of state. I did some work to the house in my spare time over the next 18 months which really improved its value. The company I was working for closed so I sold the house (in a matter of a couple weeks… not illiquid) for $125,000 and moved back to my home state. I cleared at least $20,000 after all renovations and commissions. If I had rented instead, I would have lost at least $15,000 over the same period. That’s a $35,000 difference!! That’s HUGE!!

    To be fair to your readers, it would be good to balance your title next time. Maybe start out by saying that you like rentals and this is why you think it’s better than owning instead of negating the opposing view by leaving out the opposing facts.

    • Michael, that is one unique example where becoming a landlord might not be the best choice. It\’s had to do renovations to increase equity when you work fulltime and/or have tenants in the house. But that is a pretty unique situation. Most people buy property that don\’t need that much work, and they have the issue of high upfront costs with possibility of having to move for higher wages. I would consider the need to spend 18 months renovating to brake even to be very illiquid.

      In just 18 months, you would probably would have to bring money to the table to sell if it weren\’t for the improvements that you made. The vast majority of people in your situation would have had to rent out that house to move back to their hometown or would have lost a lot of money because they have to pay the realtors 6%. I\’m sure you paid a lot of money to realtors moving back and forth like that. Becoming a landlord is one option to avoid paying so many 6% fees on a highly leveraged asset even if it means you have to rent the home that you live in.

      • Michael Woodward

        Geno, I would like to be able to respond to all your comments but I’m having a hard time following your point(s). The profit I stated was very conservative and included all of the fees and costs you mentioned (i.e. net profit). It would have taken many years of renting this property to make the same profit….. and I would have had to manage it from another state….. so what I did was by far the best option for me.

    • Brian Davis

      Thanks for the thoughtful response Michael. It’s worth mentioning that I actually don’t set the titles for my articles, BP does. I don’t mean to dodge responsibility, because I did certainly intend to cause a little controversy and push people’s comfort zones. And hey, if the goal was to get people reading and get their emotions stirred up, I can’t say I blame BP for getting aggressive with article titles, right?

      • Michael Woodward

        I understand the desire to get a spirited conversation going but you have to be careful how it’s done. A lot (maybe most) of BP readers are highly experienced in real estate and will see through the smoke of articles that don’t make sense or are slanted too far in one direction. It usually means that the person either doesn’t have the experience to make the statements they’re making or they’re trying to manipulate the emotions of the readers for personal gain. Neither of those scenarios end well for the author. I think you’ll get a better quality comment session and keep more of your credibility if you balance the topic rather than steering so hard toward one side.

  15. Erik Whiting

    I like the way the article is structured to give a counter-point to the old mantra, “everyone should own a home.” Obviously, there are some folks who will probably never take that step, nor should they. I also like that it promoted renters: I can always use more good renters!

    That said, I think this article is aimed at those age mid-30s or younger. Millennials’ views on this are largely colored by 2008-2010, and I think they’ve jumped past the lessons of reasonable caution those years should have taught us and have an irrational fear of home ownership. Homes are pretty basic items, and if you buy in a reasonably good market you should recoup your costs vs. a rent in about 2-3 years. If you’re job hopping / soul-mate finding more often than that, then sure…rent. But the issue I see with many of these happy-go-lucky folks is they don’t save much, or invest much. They took the wrong lesson on the stock market as well as real estate.

    Taxes, insurance, maintenance? All of those costs apply to renters as well as home owners. The only difference is the land lord should includes those costs as part of the monthly rent if they plan on staying in the rental business more than a year or so. Every year taxes and insurance goes up: so I raise rents every year to compensate. It’s a wash unless a renter is fortunate enough to find a land lord who has very low or no debt on their properties and can afford to undercut the market to keep vacancies low.

    Moving costs? For the truck and movers, it’s the same for a renter as a home owner. The only exception is the realtor fee for a home sellers. But if we’re going to “house hack”, why not just keep your primary residence as a rental (at that rock bottom APR and 30-year fixed term only owner occupied residences qualify for!) and turn it over to a property manager, then go buy another house? Rent can be counted as income (up to 75%, I believe), so what I’m saying here is selling costs can be made almost a non-factor. Will your new job / soul-mate wait for you 11 months if you just resigned your lease? Terminating a lease early has a cost too. Probably not as expensive as selling a house, but to be fair that cost should be discussed.

    Also, home owners can write off the portion of their mortgage payment that is interest. Renters cannot write off any of their rent payment. Imagine renting a home for $1000. Playing with the numbers, let’s pretend $450 of that covers the land lord’s debt payment. About $250 of that $450 is the interest portion, or about $3000/year. The land lord writes that off. The renter just pays the rent. If the renters is in a 25% tax bracket he/she misses out on approximately $750 of savings. Over 5 years of renting, the savings is considerable.

    Let’s talk about market rents vs. house costs. I assume (I know, dangerous!) that anyone reading this article on BP is reasonably real estate savvy. Rents tend to follow market trends, so unless you are an expert at finding land lords who are clueless about how much their house should rent for, you will be paying market rent or close to it. Can’t we savvy investors find and buy houses and BELOW MARKET, thereby enjoying a significant savings in the cost of home ownership? I would guess, and this is a GUESS, that rents tend to stick closer to the market rate in most areas, and rents rarely take a huge dive for more than a brief period. Dunno…this is kind of begging the issue a bit, but something to keep in mind. Let’s image a hypothetical scenario where you can save either 20% off your rent or off your purchase price of a house. Same $1000 a month rental as above. If you find a below market rental ($800/month) that is very nice, but if I can buy a house that retails for $100,000 for $80,000, I have instant $20,000 equity. It would take take a long time paying $200 less for an under market rent to make up that difference (8.3 years, says my calculator). And since it’s my primary residence, I pay no tax on the $20K profit when I sell as long as I stay put 2 years.

    This article has value as a contrarian POV, and I did enjoy it. Could be expanded to cover some other areas. As always, individual results may vary, do what makes sense for your personal situation.

  16. Great points, Brian! What you\’ve failed to address is the instability of the rental pricing market and possibility of being ousted from an area when you cannot renew your lease. If you have children in schools, moving within rentals can pose a major obstacle in trying to not change their schools constantly. Rentals do not provide security for you to establish your family within a community and guarantee you can stay there. In OC, CA, where I am, I\’ve watched housing prices increase $25k+ a quarter for the past few years while rental prices climb higher as well (2 bedroom apt was $1500 in 2013, same apt is now $2400). Demand is up, inventory is low, and the ceiling just keeps raising. I would love to buy a multi family unit to house hack, but each unit is sold separately here for a cool half million each. As an agent, I see no clients able to afford to buy unless they recently sold at market peak. I agree with much of what you have to say, yet the instability (and other cons) should be addressed in the article to give it realistic balance rather than a sales, we rental, pitch! ?

    • Brian Davis

      Haha, well I don’t disagree Amber. But locking in housing payments by buying only makes sense if you’ll be somewhere long-term, that you want to be locked into. I’m guessing that as a Realtor, you are quite committed to that area, so buying makes sense.
      Homeownership definitely has its advantages, I would never argue otherwise. But it’s good to challenge the prevailing wisdom sometimes, and look at the other side of the coin.

  17. Mario Dimacias

    Great Article Brian, thank you. I wanted to ask you when, where and how you got started and and did you use your own money or OPM. I hear from different sources that right now in CA it’s hard to get into the rental business because of the rental profit margins, and that it doesn’t make sense. Do you have any suggestions, please advise. Thank you.

    • Brian Davis

      Hi Mario, I got started when I was in my early 20s, in Baltimore. I used leverage and OPM as much as possible for most of my properties.
      I would do some things differently today. I would not invest in a city with such tenant-friendly laws, and with such an antagonistic renter population. I also didn’t calculate in nearly enough money for repairs and vacancies, in my youth, when forecasting cash flow calculations.

  18. This is a great article and definitely a new perspective. I can agree that we seem to be entering the sharing economy. I do hope that this may be the case as well. I remember reading the intelligent investor, they showed that home ownerships isn’t really an investment. In the past 100 years, it averaged between 1%-3% if I remember correctly (after adjusting for inflation). Cash Flow is king, so I totally agree on the passive income strategy! Great article.

  19. Kenya Teague

    Hi Brian, I totally understand where you’re coming from. Working in IT as a contractor and moving multiple times for jobs in different states left me feeling like I would never be a homeowner. The only home that would have benefited me was a tiny house that I could tow from state to state when I took a new job. Right now, I’m on a perm job but I see myself house hacking a multi-family unit rather than buying my own SFH. If I did buy a SFH I’d make sure it had a basement to use as a rental and I could rent the upper floor if I decided to move one day. I love the area of town where I live now, but it’s super expensive to buy in this area, so I choose to rent.

    • Brian Davis

      Nope. I don’t trust the legal system here. “Rule of law” is more like “guidelines we follow sometimes, when we feel like it.” But besides, I’m only planning on living here for another year or so before moving on to the next adventure.

  20. Gianni Laverde

    Great post Brian, I really enjoyed it and you bring a different perspective. Renting over owning certainly could be advantageous for those who have to move often, Agree that a primary house that doesn’t provide you cash flow can be some sort of liability. Looking to soon house hack into my next deal so that i can reduce my housing expenses close to zero or even positive cash flow!

    Thanks
    Gianni

  21. John Murray

    There are many factors to determine buy or rent. I have 8 houses and rent out 7 of them. I invested the initial $500K of my money and refinance to clear $50K on each house. I buy 20-30% below market and BRRR for profit. I’m journey level skilled so the reno is a minimal cost. Clear $65K per year in rent profit and another $200K in appreciation. I stay in each house for 2 years and sell paying zero capital gains. For me it does not make any sense to rent I would give up about $250K per year almost tax free.

  22. Michael Swan

    Right on!!

    I live in San Diego, have 27 more years on my 30 year loan and pay about $2,000.00 a month in a mortgage. I could rent a nicer place than I own for about $500.00-$1,000 more per month, get another bathroom, instead of one bathroom, 500 to 800 more square feet and pocket about $180,000.00 tax free.

    I already have 78 front doors (6 apartment complexes and 9 single family in NE Ohio and one 2br 1ba rental in San Diego) and counting. I could purchase another cash flowing apartment complex and get another $1,000-$2,000 cash flow per month, depending on using a yield or a value play or hybrid.

    The difficulty is talking your spouse into moving. Moving is a big pain in the bottom!!!

    Swanny

  23. Nancy Roth

    Well, you clearly wrote this to be provocative, and you succeeded, my friend! No argument you made in this post holds up in my market (Washington DC), nor would it work in any fast-appreciating area. I’m a little surprised you barely touched on the appreciation factor in your discussion of value. Or the value of the mortgage interest tax deduction, year after year.

    Also, you didn’t mention something less tangible but very real: the difference in the quality of life in a neighborhood of homeowners, who are invested for the long term in the community, the schools, the civil and cultural institutions, the libraries, the relationships, etc. Versus living in a neighborhood of renters, who come and go.

    But let’s just talk about the money. Rents in DC are through the roof, and even the stratospheric prices of homes for sale are a bargain by comparison. I bought my house almost seven years ago, and at that time my PITI payment was roughly seven hundred dollars lower than the rent I’d been paying (in a “nice” but unfriendly neighborhood where parking was a huge hassle). The rent at that time was modest compared with rent in today’s market, which can get into the five figures in some parts of DC, so if I’d continued renting, I’d be broke, have no interest deduction, have no control over my environment, have no ability to remodel anything in my living space to my liking, and, by the way, have no equity to show for the rent money spent. As it is the equity value of my house is well up, to not-quite-double what I paid in October 2010.

    I don’t really follow your reasoning about the mobility factor either. Lots of people I know have jobs that take them out of the country on multi-year assignments. They rent out their homes to pay the mortgage and when they get back, their home is waiting for them. What’s waiting for you when you’re ready to come back?

    I’m glad you are having fun and enjoying your life, truly. It sounds like a great adventure. Myself, though, I wouldn’t thrive in that situation for very long. I’d start feeling rootless and missing the friends and community back home (not to mention food, language, entertainment, and cultural mores). Different strokes, I guess. Best of luck to you.

  24. Chris Field

    As a landlord I love articles like this.

    But it’s written for a nomad lifestyle I don’t embrace. My home is my cradle and grave. I was born in my city, I’m making my fortune here and I’ll die here.

    I think a lot of nomads love renting because they lack the ties to an area. Moving every two years sounds like hell.

    But I can’t complain I’m making a good living off of it.

  25. Whitney Tutt

    Very interesting article! I do know of people who chose not to buy due to the fact they weren’t sure if they wanted to stay living here (Atlanta) or relocate. So I completely understand that. I also definitely agree that it depends on your market and what you can afford. I purchased my first home when I was 26 and it was a great investment. The home values in my area continue to appreciate by a great percentage each year. Also, the amount I was paying for rent compared to what I pay in mortgage is crazy! Especially considering how large my house is.

    However, I knew I did not want to relocate nor did I want to continue wasting money by renting. Thankfully, I am able to own and am still able to invest in real estate. The only thing I wish I would have done differently is start off by house hacking back in college. Such a great idea! But unfortunately I was not into real estate back then.

    All in all, based off my life style and the market I live in, owning is by far the best option, no questions asked. I spend very little money annually on repairs and being a homeowner along with owning a small business has always generated a nice tax refund. So the small repairs I do annually (always under $1K and on average under $500 annually) are not a concern at all.

    So all in all – to each his own.

  26. Senthil N.

    Nothing makes sense “always” Brian. But home ownership makes sense in the majority. So writing up an article should at least show this is better than average not to buy a home. I don’t think it shows that. And can you not rent your home if you decide to move to Mars for example? Duh!

  27. JP Larcheveque

    Articles like this are for click baiting and it works…
    Leverage and taxes – that’s it.
    You mentioned stocks… Good, will your broker lend you at 2% fixed over 30 years at 80% LTV to buy some stocks???
    When you sell your stocks are you exempt from CGT?
    Are you able to deduct interest payments on the leverage you took with your broker?

    You mentioned the 2007 crisis – if you buy assets yielding 1% or in an area that is experience industrial flight. Yes – I agree buying a home there is not ideal, but renting and living in area that is depreciating is not good either.

    If you can achieve 3% gross yield (almost everywhere except for San Fran and NY) leveraging that to 80% will give you a sub 8% yield. Can you tell me of some stocks that will guarantee you this???

    The argument for the millennialist not to buy is a bullshit argument. Home ownership is one of the last tax haven available for the middle class. Leverage against your home is again extremely advantageous especially when banks get the raw end of the stick in terms of suffering potentially early repayment while having locked a fixed rate.
    I move a lot, and when I move I rent my home. It’s not complicated. If you intend to buy and sell every month then yes your argument holds. Transaction taxes wil eat your profit, if you got half a brain you probably won’t be churning at a loss every year however.

  28. Todd Miller

    Interesting concept I never thought of. You are still a home owner though so the title is a little misleading. But I get the point using rentals as leverage. I have some friends who refuse to buy because they like their location. (Even though they never leave the house.) It would take 10 some years to break even compared to renting for them so they refuse to buy.

  29. Chad Olsen

    Seem’s many are on both sides of this coin. My wife and I regularly have this conversation. We live in the SF Bay, where aside from DC which i saw on this thread, few other markets are as “hot.” We discuss buying v. leaving a number of times a year. The complication is with our jobs, somewhat transferable, and our three kids, highly portable but needing roots as well. Renting is troubling because of the lack of reliability, the ever increasing rents and the diminished (somewhat) pride of ownership. That being said, we have 9 doors, which roughly cover our child care expenses, and have been making good strides in moving closer to financial independence. Having a house would be great to have some permanence, fixed monthly payment and all the rest. But coming up with 200-400k for a down payment it tough. And the opportunity costs of that money to sink in to a single house is just mind boggling to think about. The emotional side of home ownership and the rational, logical side of how to best increase your financial means are in constant competition on this one. I think that is why this is such a hot button topic for people. Everyone’s situation is different and thus the solution is different all the time.

    I had originally clicked this in hopes of finding some new way to analyze the problem and sway or be swayed one way or the other. Alas, it comes back to the original answer. It depends on your situation and what your spouse wants. I’ll quote my mentor in closing, “can you sleep at night knowing you made the right decision or not?” Peace of mind can be worth more than a profit. But it depends.

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