Renting Forever

[venkol]

Hi,

I'm a 31 year old guy with a long term GF with a good job and saving about 20% of my income into retirement accounts (401K and Roth) and and another 20% into general savings.  Now these higher than median American savings rates have only been going on for the last few months as I've been unemployed and anti mustachian in the past and raked up a decent amount of death that I've worked to kill off but that leaves me with very little cash on hand.  I live in a high cost of living area (Washington DC) where a decent (as in not in a terrible area, not a money pit) will run at least $400K for a townhome or about $300K + Fees for a condo. 

in the DC, I could expect to pay at least $1500-$1700 a month rent while a home ownership after a 20% downpayment would still be closer to $2000 a month plus maintenance, taxes, etc.  With how unstable our economy in the country is, I feel like I will have to move for different jobs multiple times in the next 30 some odd years of my career, so my question is what do mustachians think about renting for the rest of ones life, i.e. never owning a home.  I understand rent tends to increase long term, but so do taxes and maintenance fees as long as you own a house!  Does renting for potentially the next 50 years of my life make sense when compared to buying a house with a mortgage for the next 15-30?  By the time i'm even in a position to buy (20% downpayment, Closing cost and emergency fund saved) I imagine the prices around here will be closer to $500K! 

[Another Reader]

Buying a house is for people with stable jobs/incomes, a reason to own, and a solid down payment.  Rent until you have a reason and the means not to.

[rtrnow]

I remember reading a comparison that showed renting can actually put you ahead finically vs buying over the course of a lifetime. It of course focused on investing the saved money from renting vs mortgage payments/maintenance in those first 20+ years. It was also not from a mustachian viewpoint so now sure what that would change.

Partly out of dumb luck, I feel I have a pretty perfect situation. I have an affordable rental property that generates income for me and is fairly easy (it's a condo) to manage from afar. I then rent my residence.

[venkol]

Buying a house is for people with stable jobs/incomes, a reason to own, and a solid down payment.  Rent until you have a reason and the means not to.

But what exactly is a stable job these days? 

[arebelspy]

Buying a house is for people with stable jobs/incomes, a reason to own, and a solid down payment.  Rent until you have a reason and the means not to.

But what exactly is a stable job these days?

A job in which you have reasonable job security.

Government positions, or other positions with tenure, for example.  Certain industries that don't outsource.  Etc.

If your company has been going through rounds of layoffs, you may not feel as secure.  But there are obviously jobs more stable than others.

[Ozstache]

The main benefit of buying versus renting is that, although your repayments + overheads may initially be higher than rent for an equivalent house, those repayments get progressively devalued by inflation whereas rents generally track up with inflation. Eventually, the house gets paid off and you are just left with the overheads. When you are retired, wouldn't you rather pay a couple of thousand a year in house upkeep than 10's of thousands in ever-inflating rent?

The following rent versus buy calculator can be useful in illustrating this point: http://www.nytimes.com/interactive/business/buy-rent-calculator.html

[marty998]

I share Ozstaches' view. Take the hit now and when you are FI you won't have to budget for that rental expense.

However, if you do decide to rent, if you invest the extra cashflow now it should compound enough to buy a house outright given enough time.

My unscientific theory is that the rent vs buy should be equivalent in the long run. Otherwise everyone would rent or everyone would buy.

[capital]

The main benefit of buying versus renting is that, although your repayments + overheads may initially be higher than rent for an equivalent house, those repayments get progressively devalued by inflation whereas rents generally track up with inflation. Eventually, the house gets paid off and you are just left with the overheads. When you are retired, wouldn't you rather pay a couple of thousand a year in house upkeep than 10's of thousands in ever-inflating rent?

Only if inflation-adjusted housing prices go up, which, as we've all learned lately, isn't guaranteed. This is the 115-year history of existing housing prices in the US:


There are also hefty transaction costs on real estate, so it's a lot harder to move to better opportunities, and plenty of other issues. Basically, owning a house can be a good decision if you plan on living in it for a very long time, but there are no guarantees. Moreover, putting a significant portion of your net worth into one house in one neighborhood, with housing prices dependent on the same labor market you need for your income, is the opposite of diversification.

[mm31]

I'm thinking about a home but am in  no hurry. I estimate that it will take me about 7 years to save for a 20% down payment  (about 50-100k). There are several reasons I've made the process so long: I don't live in a state I want to settle in, I like to travel abroad a lot, etc.

[tylerherman]

I don't understand why people live in such expensive parts of the country, especially because D.C. is kinda a shithole.

There are lots of nicer cheaper parts of the country. I'd move. Problem solved.

[venkol]

I should add that i don't plan on ever having children and my current girlfriend feels the same way.  I probably wouldn't date/marry someone who wants children.  With that in mind, a stable house with nice schools is not part of my equation which pushes my rent/buy question further to rent.

[Another Reader]

Schools should be part of your decision-making process, because they are going to be part of the process when potential buyers of your property are considering it.  Bad schools equal a deteriorating neighborhood, fewer buyers, and a lower price when it's time to sell.

[KGZotU]

The main benefit of buying versus renting is that, although your repayments + overheads may initially be higher than rent for an equivalent house, those repayments get progressively devalued by inflation whereas rents generally track up with inflation. Eventually, the house gets paid off and you are just left with the overheads. When you are retired, wouldn't you rather pay a couple of thousand a year in house upkeep than 10's of thousands in ever-inflating rent?

If your rent costs start off lower, then you can put the difference into savings, and that difference will grow itself faster than inflation.

[Phoebe]

I've thought about renting forever myself.  We pay $8100 currently for a 2 bedroom apartment (half of a duplex home) and when I look at purchasing a home (we're going to do so in cash) the taxes, repairs and higher utilities are at least that much.

But to get a home big enough for the future kids we want to have we would be paying more in rent, and purchasing a home may be more economical.  In the end, I think home ownership is largely an emotional decision.  We want to own a home, have land, etc. so we'll buy one eventually but after our kids are grown I think we may decide to be perpetual renters so we can move around quite a bit, we won't have the maintenance concerns, and with just the two of us we'll need very little space again.

But who knows! :)

[anastrophe]

If your rent costs start off lower, then you can put the difference into savings, and that difference will grow itself faster than inflation.

I would like to see some models to substantiate this with different scenarios. I think it should be true, and it just doesn't happen to most people because many/most renters do not have enough income to also invest.

I value my mobility and the ability to escape declining neighborhoods, chase opportunities, etc, but this is a difficult thing to quantify, whereas it's easy to know what will happen with your mortgage in 20 years.

[smalllife]

I should add that i don't plan on ever having children and my current girlfriend feels the same way.  I probably wouldn't date/marry someone who wants children.  With that in mind, a stable house with nice schools is not part of my equation which pushes my rent/buy question further to rent.

I am the same way (not having kids), but ended up buying a house in a great elementary school district.  The only reason I did was for rent-ability, resale, and because it was the area I wanted to live in anyway.  It all depends on your time frame and intentions for the house.  If you plan to live in a house the rest of your life - not rent out or resell - then schools absolutely don't matter.

[Crash87]

If home ownership comes out on top on a rent v buy calculator, don't forget to consider the value of being mobile.

Luckily for me renting is the most economic choice so I don't have to put a dollar amount on the value of mobility.

[JohnGalt]

Hi,

I'm a 31 year old guy with a long term GF with a good job and saving about 20% of my income into retirement accounts (401K and Roth) and and another 20% into general savings.  Now these higher than median American savings rates have only been going on for the last few months as I've been unemployed and anti mustachian in the past and raked up a decent amount of death that I've worked to kill off but that leaves me with very little cash on hand.  I live in a high cost of living area (Washington DC) where a decent (as in not in a terrible area, not a money pit) will run at least $400K for a townhome or about $300K + Fees for a condo. 

in the DC, I could expect to pay at least $1500-$1700 a month rent while a home ownership after a 20% downpayment would still be closer to $2000 a month plus maintenance, taxes, etc.  With how unstable our economy in the country is, I feel like I will have to move for different jobs multiple times in the next 30 some odd years of my career, so my question is what do mustachians think about renting for the rest of ones life, i.e. never owning a home.  I understand rent tends to increase long term, but so do taxes and maintenance fees as long as you own a house!  Does renting for potentially the next 50 years of my life make sense when compared to buying a house with a mortgage for the next 15-30?  By the time i'm even in a position to buy (20% downpayment, Closing cost and emergency fund saved) I imagine the prices around here will be closer to $500K!

This is a very situational dependent question. 

Just take some of the numbers you've thrown out.  Say you had the $400k up front to pay cash for a house right now.  You could do that and have 0 rent to pay, but would need to pay property taxes, maintenance, and insurance. Instead, you could invest the $400k (let's assume a 4% SWR) and get $1333 / mo (pre-tax).  You'll need to come up with a couple hundred dollars a month to cover the difference between this and the rent.  How does that compare to the property taxes, maintenance, and insurance you'd be paying on a house? Will the home appreciate in value (over the long term, homes typically do not appreciate in real terms, the pre-housing crash time period was a historical anomaly).
That's a simplified version of the economic differences.  You'll also need to add in how you value the other aspects of rent vs buy - like liquidity/mobility vs being able to do what you want to your home.  I'd imagine that, in most cases, the economic differences are small enough that it really doesn't make enough of a difference to over come the other aspects. 

I bought 3 years ago (basically thinking it was the most economic thing to do - pretty sure I was very wrong on that front, but even if I wasn't, I've found that I really dislike being a homeowner between dealing with maintaining it and the lost liquidity/mobility) and will be selling this summer to, very happily, return to renting.  I might buy again someday, but it would probably only be to either become a landlord or to have the land to do things on that would be much more difficult as a renter.

[The_Dude]

If your rent costs start off lower, then you can put the difference into savings, and that difference will grow itself faster than inflation.

I would like to see some models to substantiate this with different scenarios. I think it should be true, and it just doesn't happen to most people because many/most renters do not have enough income to also invest.

I value my mobility and the ability to escape declining neighborhoods, chase opportunities, etc, but this is a difficult thing to quantify, whereas it's easy to know what will happen with your mortgage in 20 years.

The NY Times calculator above accounts for this.  You can plug in your expected investment return and it will assume you invest the difference between annual housing costs and annual rental costs.

[KGZotU]

If your rent costs start off lower, then you can put the difference into savings, and that difference will grow itself faster than inflation.

I would like to see some models to substantiate this with different scenarios. I think it should be true, and it just doesn't happen to most people because many/most renters do not have enough income to also invest.

The NY Times calculator above accounts for this.  You can plug in your expected investment return and it will assume you invest the difference between annual housing costs and annual rental costs.

Found that hiding under the "Advanced Settings", "Other". I wonder if that's real or nominal returns. The default was 4%.

[NICE!]

I don't understand why people live in such expensive parts of the country, especially because D.C. is kinda a shithole.

There are lots of nicer cheaper parts of the country. I'd move. Problem solved.

Disagreed on #1. Thanks for your input, but a lot of people like the district. It has a ton going for it. Have you lived there? If no, your opinion holds less weight.

#2 - good point.

[Dee18]

I loved living in DC, for seven years.  It is my favorite city in the U.S. I lived in the District and my friends who did the same also loved it.  Friends who lived in northern Va tended to be much less thrilled with it.  This was a while ago, though, and rents were way below purchase costs.  One reason to rent:  you can rent a small place very close to where you work, or to a metro stop.  When you buy, there is an understandable tendency to be sure you are buying something you will like long term, which raises the standards a bit.  (One factor unique to D.C.'s housing costs:  when the Democrats win the presidency prices in the District go up;when the Republicans win prices in the District go down and prices in Va go up.) 

I'm sure you will factor in taxes, repairs, increased insurance, etc. in comparing buying to renting.  There is also the "gut" feeling.  Right now, would you rather be a renter or a homeowner?

[DocCyane]

I've lived in Southern California the past 20 years and have rented the whole time. I grew up in Atlanta and felt the houses here in Cali were terribly constructed and greatly overpriced for what you get. And I still believe it.

Therefore I rented inexpensive places and usually shared the apartment. This allowed me to save a great deal more than I would have, considering I never made a great salary and completed two advanced degrees (paid cash).

Now I have an exit strategy to leave the state and buy a home in a lower cost of living area.

If I had it to do again, I would have loved to pick a city to live in for my whole life, buy a house and be done with it. But by renting, I had the option to move to different areas of So Cal and take different jobs. And what I wanted at 20 is not what I will want at 50. At 20 I wanted the California life. At 44 I want to get the heck out of here.

Renting is great if you keep it cheap and invest all the extra.

[Jaherman99]

Of course it's a personal decision.  For me it's about quality of life, not absolute dollars.

IMO, owning where you live is totally better than renting.  No landlord poking around, I can have my 100 pound dog if I want, and when I pay it off, there's no cheaper way to live possible.  It's a sellable, appreciating asset. 

You can't live your life worrying about curveballs that might make you want to move, or some imaginary depression.  True, you are less mobile, more tied down.  That's an acceptable tradeoff for me.

[Dee18]

Here's a nice post on the subject by another MMM reader (enjoyed your blog Phoebe!):

http://www.allyouneedisenough.com/2012/11/throwing-money-away-on-rent.html

She explains why renting is her best choice, while saving money to buy a house with cash.

[arebelspy]

Here's a nice post on the subject by another MMM reader (enjoyed your blog Phoebe!):

http://www.allyouneedisenough.com/2012/11/throwing-money-away-on-rent.html

She explains why renting is her best choice, while saving money to buy a house with cash.

Her "logic" is quite faulty there.

[Skyn_Flynt]

IMO, owning where you live is totally better than renting.  No landlord poking around, I can have my 100 pound dog if I want, and when I pay it off, there's no cheaper way to live possible.

Add to that, the landlord can't decide to live there *instead of you* ... or fail to make his payments on the mortgage causing the property to go into foreclosure. I've known people who had to put restraining orders on landlords who kept coming around to the property every day and checking up on things, being fussy busybodies.

When you own the property, you can take the reigns of responsibility and eliminate some of the drama and chuckle-headedness of landlords.

[Crash87]

IMO, owning where you live is totally better than renting.  No landlord poking around, I can have my 100 pound dog if I want, and when I pay it off, there's no cheaper way to live possible.

Add to that, the landlord can't decide to live there *instead of you* ... or fail to make his payments on the mortgage causing the property to go into foreclosure. I've known people who had to put restraining orders on landlords who kept coming around to the property every day and checking up on things, being fussy busybodies.

When you own the property, you can take the reigns of responsibility and eliminate some of the drama and chuckle-headedness of landlords.

Having a bad landlord would indeed be terrible, but you can always move. A huge advantage of renting is the mobility.

A paid off home may still be more expensive than renting. There are still repairs, property taxes, and higher utility bills.

[Zikoris]

A paid off home may still be more expensive than renting. There are still repairs, property taxes, and higher utility bills.

This is totally the case in Vancouver! You can very easily find a cheaper apartment for $600-$750 including utilities, and the cost of upkeep on any owned place is generally going to be at least that or higher when you look at property taxes, utilities, repairs, homeowners insurance(way way more expensive than renters), strata/homeowners fees, and god forbid a parking stall if you're someone who "needs" a car. There are a few small developments downtown that would basically break even in that regard, but one major repair bill would make it better to rent forever.

[cosmie]

I thought this post on perpetual renting was interesting. There were some things in it that seemed a bit off, but he brought up some valid points.

One assumption I didn't quite agree with was that of outsourcing maintenance and any potential renovations, which he uses to negate any potential monetary gain.