Is Renting Throwing Money Away?

Is renting throwing money away? I get this question all the time. The answer is a resounding no. Renting has many benefits to homeownership that many are ignoring. It isn’t as simple as, “$1,000 rent could have gotten you $1,000 mortgage payment and build equity at the same time”.

There are many people touting the benefits of homeownership. And for good reason. I mean, after all, there are many people who sold their houses six figures above asking for crying out loud! Or even the story of one couple who bought a house sight unseen only for the house to have been money pit.

So then what’s the benefit of rent? The $1,000 of rent payment could’ve gone to mortgage payments AND you’re forgetting that you can have appreciation benefits of the house as well. I mean, it’s a no brainer that you should be buying instead of renting, isn’t that right?

It doesn’t work that way. I’ve actually never owned a home and I don’t think I will own a home in the next couple of years, either. I’m waiting for the housing market to cool down and for people to stop bidding six figures above asking for houses. Then I can swoop in in the foreclosure market.

I’m not buying because I understand the answer to the question is renting throwing money away is a resounding and absolute no. There are many costs to homeownership that many people are ignoring. Things are good until the music stops.

Then everyone will be talking about how renting for a couple of years is a good decision.

Why People Think Renting is Throwing Money Away

The first objection to is renting throwing money away? is they often ask the question: “why pay $1,000 per month to the landlord when you can put $1,000 per month to the mortgage?” No. That’s not right. It’s not that simple.

If the costs of homeownership was only mortgage payments, then yes, this logic holds true.

However, the cost of homeownership is MUCH higher than that. First, we can’t forget maintenance costs. When you’re renting, you don’t pay to change the AC filter, change the AC, and/or replace the roof every so years. All you have to do is pay rent and the landlord takes care of the rest.

However, when you own a home, you have to pay taxes. You have to pay the maintenance fees of maintaining the yard, the AC, roof, depreciation, and the like. So a $1,000/month mortgage usually does not get you as much space as a $1,000/month rent.

Next, you have to think about opportunity cost. It’s not free money that you buy a house with. You have to put in a good 20% down payment on a house. Your money is locked up for the time being, you can’t access that money. It’s “trapped”.

Aside from the recent ridiculous pricing increases, housing prices usually increased 3-4% per year.

Much less than the 7 – 10% yearly returns from the stock market. And some houses still haven’t even recovered from the 2007-2009 financial crisis, even a decade+ later. That doesn’t even take into account that housing prices can even decline to where you’re underwater.

Is renting throwing money away? I think not.

Is Renting Throwing Money Away? Why It Isn’t

The first reason that renting is not throwing money away is that you can SMASH that social share button and post to your favorite social media! I was shocked when I first read the analysis on homeownership vs non-homeownership.

It made a lot of sense. It doesn’t make financial sense to be a homeowner versus a renter.

Let’s go over the reasons why!

1) Equivalent Housing Is More Expensive

I’m currently paying $1,400/mo for a 2bedroom/2bath house. An equivalent house in Austin would mean that I would have to buy a $160k house, with a 20% down payment, plus a 5% mortgage rate. These kinds of houses doesn’t exist in Austin. The equivalent housing to rent just doesn’t exist in most cities.

Plus, on top of that, the $160k house would only cover up to principal, interest, and taxes. It wouldn’t even cover any additional maintenance fees like insurance, AC filter changes, roof replacements, furniture replacements, and the like. It’s just much more expensive to buy a house outright than to rent.

The hidden costs of homeownership is something people rarely talk about. Is renting throwing money way? Not when you consider that you may just be buying the cheapest living space you could be buying in the city. It just doesn’t compare because rarely people talk about them.

As long as you’re following the how much should I spend on rent guide, everything works out.

2) You Keep the Down Payment

The opportunity cost to the downpayment is huge. A 20% downpayment on a $250,000 house means that’s $50k out your pocket. $50,000 is a lot of money if you put it in the stock market. That’s an additional ~$3,500 per year that you could be earning.

Sure, with a leveraged house, it may mean your $50k increases to $55k after 1 year.

However, over the long term, that difference in returns will catch up by the end. Compound returns rarely matter in the short term. They matter significantly in the long term. That’s why renting is not throwing money away. The hidden opportunity costs with the down payment are huge.

You get to keep the down payment and try to allocate that capital to where you get more than a 3 – 4% return per year. It may not work out every year but over the long term, it’s more likely that it will work out than not if you invest in the stock market. Renting is not as bad as how people think it is.

3) You Don’t Pay for Maintenance

When you’re renting an apartment, the landlord pays for the maintenance expenses. The last apartment I was in, there was a water leak with the A/C. I would guess the landlord paid a good $2,000 in order to fix the apartment. I didn’t pay a dime of that expense. And get this.

My lease structure was such that the landlord paid for my cable, water, and utility expenses. What kind of a lease structure is this?! I couldn’t sign the lease fast enough, that was the deal of a lifetime. I didn’t abuse the utility payment but I still enjoyed the benefits.

Now, can you honestly say yes to the question is renting throwing money away? I don’t think so. Some lease structures are so favorable for the tenants that it’s just a no-brainer. On top of that, the landlord pays for any AC filter changes and pest control. Win-win.

4) Location

Near me, theres’s a grocery store, post office, restaurants, and more. All within a 10-minute walking distance. Not even a driving distance. You can’t find a great location property if you’re looking to buy. it just doesn’t happen. Not for the low rent price you’re paying, anyway.

You have to pay a premium for prime location real estate for homeownership. It’s incomparable to the options you have when you’re renting. Another place that I was renting had a grocery store 3 minute drive away with a Walgreens and a burger joint, all within walking distance.

I didn’t have to drive, all I had to do was walk. That kind of location is very hard to find. Many of my friend’s locations don’t have anything within walking distance. They have to buy everything by driving to a new place, whether it’s for groceries, go to a restaurant, or get a haircut.

Is renting throwing money away? Not from a location standpoint.

5) Is Renting Throwing Money Away? No, Housing Prices can Go Down

The 2 years of cheap money in 2020 – 2021 spoiled every homebuyers rotten. Many actually even bought a house and sold it for a 30% gain just one month later. Insanity! The past two years is not normal. It’s not normal to see housing prices increase in value by that much and that quickly.

The 2007-2009 crash is a misnomer. Housing prices were still going down even in 2010 and in 2011 as well. Until we hit the bottom in 2011 – 2012. Housing prices move up or down slowly. Imagine if you’re on the losing side of the housing price declines. Housing prices do not always go up.

That is negative equity. Real estate folks love to tout that “besides 2007-2009 crash, housing prices stayed intact”. Let’s see how the music unfolds.

That’s something that people do not understand. Is renting throwing money away? You have no need to protect anything of value after you pay rent. Your financial obligations are over after you pay that monthly rent. With housing, your financial obligations are still with you.

6) Mobility

It’s not so simple to move from a house. You have to find an agent, individually find a buyer, negotiate, and so on. It may take months before you’re able to sell a house. You are pretty much stuck in the house. You’re not that mobile. With renting, you are less mobile the more stuff you have, sure.

However, you don’t need to worry about the apartment itself when you move. It doesn’t stay with you. The mobility aspect of housing is something people ignore. Is renting money away? You could be looking at it as buying the right to be flexible and mobile.

It gets even more complicated if you want to sell the house and immediately buy another house to move into. You have to go through the process twice, all the while coordinating other things such as movers, getting your family on board, packing, etc. The moving costs are huge.

7) Real Estate Transaction Costs

When renters want to move into a new apartment, we get offered an incentive. Maybe they waive the first month’s rent or they waive the application fee. Whatever it is, landlords offer an incentive to renters. When it comes to home sellers, they don’t get offered anything.

They have to pay something like agent costs.

The real estate transaction costs are not insignificant. It adds up to five figures worth of costs in some instances. Is renting throwing money away? Not when you can save on so many other costs like transaction costs. The transaction costs can’t be ignored.

This is just a financial cost to a real estate transaction. This doesn’t even take into account the mental and time cost that goes into making a transaction happen. With renting, if you decide to walk away from a deal, you just have to either let go of the application fee or just walk away, unscathed.

Not a lot to lose.

Is Renting Throwing Money Away? Absolutely Not

Now you should be thoroughly convinced that the answer to “is renting throwing money away?” is an absolute no. Homeownership is not always better. It’s better in some cases but it’s not always better. There were people who owed more money on their mortgage than what their home was worth in the financial crisis.

The last recent years created homeowner millionaires. Some buyers were writing ridiculous offers with one offering to name her first born child after the seller. That also even came with a six figure increase offer from the asking price, as well. However, 2020 – 2021 is not representative of the entire picture.

Renting is not throwing money away because you don’t need to give up your unborn child’s name in order to get a place to live. Some people swear that “housing prices never go down”. Maybe, but that doesn’t mean that it will always be a slam dunk.

Even years of stagnant prices means you’re missing out on the opportunity cost of investing. Buying a home is more expensive than people understand or make it out to be. I am a happy renter who will continue to rent until I am in a good financial position to buy a house.

A house is one of the most expensive purchases that someone will make in their entire life. If that’s the case, it’s not a good idea to ignore the holistic costs of owning one. Is renting throwing money away? Analyze the opportunities well and then you will be able to answer on your own.

Is Renting Throwing Money Away? Shortlist

• Equivalent housing is more expensive
• You keep the down payment
• You don’t pay for maintenance
• Location
• Is renting throwing money away? No housing prices can go down
• Mobility
• Real estate transaction costs