Despite declarations by nearly every modern U.S. President that owning a home lies at the heart of the American dream, homeownership might not be for everyone. Depending on your personal aspirations, lifestyle choices and investment outlook, there may be more ways to save as a renter than to save as an owner.
At first, this save-as-a-renter-concept may be hard to embrace because the homeownership dream is so ingrained in the American psyche — a deep, long-held sentiment that tells us we’re somehow not properly patriotic or we’ll become rudderless and rootless second-class citizens because we would rather rent than own.
But, even though homeownership conveys many privileges — no renters above or below us to tell us to turn down the music at midnight — and is indeed subsidized by the U.S. government in the form of tax deductions, renting may represent a better savings and investment vehicle for certain kinds of people.
Let’s examine more closely some of the reasons and arguments that renters are advancing to champion their rent-to-save cause and how hey might be putting that “saved” money to work:
Owning is too risky
Many wealth and investment advisors counsel never to invest more than 10 percent of your money in any one asset. Many down payments routinely start at 20 percent, significantly tying up funds that could stay invested in higher-yielding investments. For a $500,000 home, a 20 percent down payment is $100,000, a sum of money that will become immediately illiquid when you become a homeowner. And with each new mortgage payment, your investment in your home becomes more lopsided, violating the first principle of investing: diversify your assets. Use the handy MBT savings calculator to see how you could grow that same $100,000 with alternative investments, returning, say, five, eight or 10 percent annually.
In a way, buying a house is like buying stocks on margin. If the value of the home falls, the buyer can easily lose his or her entire stake. And don’t think it can’t happen. At the peak of the housing bubble (2005-07), about 22 million Americans bought homes. After the bubble burst, about half of them owed more on their homes than they were worth.
Home maintenance leaves less for savings and investments
Physics tells us that houses break down or come apart (entropy) like any other physical object. Roofs, floors, windows, plumbing, air-conditioning, etc., wear out over time. Replacement and repairs cost money and drain money away from other investments. Why do you think Home Depot, the stock of the nation’s leading home and hardware store has appreciated a whopping 230 percent the last five years! Things in houses break all the time, and if you’re not handy or a do-it-yourselfer, you’ll pay even more to fix and maintain your investment.
Of course, if you rent, you simply call your landlord to fix what’s not working. When the water heater blows or the roof starts leaking, your out-of-pocket expense is absolutely zero. With the money you’re not investing in your home, you could use it to pay down your credit card debt or student loans, boost the contribution to your 401(k), or start a college fund for your kids.
Property taxes siphon away more savings
Do the math. Property taxes at one percent a year on a $500,000 house is $5,000 a year. That’s a $416.67 a month, on top of your mortgage. And in some places, that’s monthly rent for some people. The monthly savings you would realize also would make a pretty good monthly car payment.
With renting, it costs less to insure your living space
Homeowners insurance costs more than renters insurance. A homeowner’s insurance policy can run up to $2,000 a year (or $167 a month) in some states. By contrast, renters insurance costs between $15 and $30 a month, depending on where you live. If your apartment goes up in smoke, that’s your landlord’s problem. If you own a home, it’s your problem, hence, the reason you need homeowners’ insurance. Indeed, your lender won’t give you a loan without it.
Bottom line, by renting, you’ve just given yourself a $137 pay raise, money you can use to start an emergency fund or open a savings account.
Costly commutes further drain the budget
Many homeowners elect to buy in the suburbs where homes are less expensive to buy. But if you have to commute to downtown to make a living, your transportation costs can add up quickly. According to the American Automobile Association, it costs about $9,000 to own, operate and insure a car. Spread over a year, that’s $750 each month. If you were renting in downtown, you might be able to walk or bike to work or catch the bus to your appointment. Ask yourself in this age of $4-a-gallon gas, what you could do with an extra $750 a month. Let your imagination run wild!
Renting is more accommodating for today’s mobile job seeker
If you rent, you’ll be less beholden to the cruel, creative destructive vagaries of our capitalistic economy. Should jobs suddenly dry up in Los Angeles, as they did a few years back when the aerospace industry was consolidating, you can quickly pull up stakes and move to Texas or North Dakota, where the energy sector is booming.
If you were a homeowner, you’re movement would likely be constrained for however long it took you to prepare your home for sale and then actually sell it. Furthermore, if you had to sell in a market with declining prices, you could be a big financial loser.
Again, by renting, you’re keeping your financial powder dry for seizing the best opportunity in today’s constantly shifting, regionally driven job market.
Ask yourself the big question
There may be no place like home or no feeling quite like owning a home. But you have to compare those feelings and put them down on paper to see if they truly pencil out for the kind of person you are today and the person you expect to be five or 10 years down the road.
If you like you’re investments to be both highly liquid or not too heavily concentrated in one asset, if there’s still wanderlust in your heart or you don’t plan on settling down in any one place for very long (usually a minimum of five years), if you’re uncertain about the job market where you live, if want to limit you’re commuting costs and your carbon emissions, if you don’t want to be a handy-dandy around the house and spending all your weekends there feeling trapped and obligated to fix things, you just might save as a renter, not to mention have more money to invest, than if you were an owner.
Indeed, if you have enough saved up right now for a down payment, closing costs, property taxes, insurances, association fees and other costs associated with homeownership, ask yourself one final time if owning a home is where your heart is and it truly represents the current best use of your substantial savings that you worked so hard to build.
If the answer is yes, buy. If the answer is no, rent.