Why do you rent instead of paying for a home?

Sharon asked a really great question via email about why I’m still renting instead of buying a home.

i am wondering why you haven’t bought any property at any stage? To me, owning your own home is the ultimate and paying rent is just pouring money into someone ELSE’s pocket – something i thought would be abhorrent to you!!

to me, until you own your own dwelling you can’t ever say you’re not in debt because you’re either going to rent forever and never own a property or you’re going to rent and then eventually have a mortgage anyway so you’re going to be in debt for a while!

I replied that I thought it was a great question, but it was a farce that renting is worse than owning your home.

See, that’s a real American dream – to own your own home, fix it up the way you want, and come home to something that you can call equity.

But renting can get you there as well, and buying a home only makes sense in certain circumstances, and it has not made sense to me yet.

Don’t think of me as throwing money away, or putting it in someone else’s pocket.

Think about it like me paying rent to someone to take care of things I don’t want the responsibility of just yet.

A little background, first:

Take into account a couple of situations that have happened lately, because we now know in hindsight that the continually rising value of a home is not for certain as previously believed by many homeowners.

First Situation:

Even here in Montreal, homes are going for close to their appraisal value for where I live. 2 years ago, they were double that.

So a house that was appraised by the government was worth $150,000, easily sold for $300,000 on the market.

Now, you can pick it up for $170,000.

Those homeowners that bought it for $300,000 thinking that the value of the home would stay at $300,000 were mistaken. Sure, it could reach those heights again but nothing is for certain.

Second Situation:

Then you have to think about those doe-eyed subprime mortgage homeowners who thought that buying a home was a good way to store their money in something physical and solid (bricks, not clicks!), and ended up buying more house than they could chew off.

Also, I want you to think about the fact that if the above happened to you, and your home value fell for less than what you borrowed as a mortgage, you’re on the hook for that, and you’re left dreaming that you could get $450,000 for something that you bought for $300,00 that is now worth $175,000 (real-life example, by the way).

And if for some sudden reason, you need to sell, you don’t want to sell below what you bought it for (the horror!) you want to sell it at par, or preferably, above par of what you bought it for because you still have to pay the real estate agent.

From my perspective:

See, I live(d) in expensive cities most of my life, and paying $575/month in rent is a lot better than paying $2000/month in a mortgage, plus maintenance (2% of the home’s value saved in a fund), plus home accessories and furniture, appliances… you get the picture.

The one thing I always keep in mind is that the cost of the home is not just the mortgage.

When you buy a home, you incur a lot of unforeseen costs, like buying a hose for the garden in the back, or buying a shed to store your tools, or even buying patio furniture.

It all seems like little things, and you can certainly live without them, but if you’re in the smack dab middle of summer and are craving a juicy grilled summer steak, you’re going to head out to get a BBQ of some sort because… damn it, you have a home!

Where I believe you ARE throwing your money away is in small towns where nice homes in good areas are $150,000 – $200,000.

But where I live, homes in good areas start at $350,000 (and it’s on “sale” now because of the economy), but realistically I’d be looking at half a million to start.

Let’s see some numbers to back up this crazy talk:

Keep in mind, I am renting at $575 right now each month with no condo fees or maintenance fees.

To get the home that I want (let’s assume the worst at half a million):

  • $25,000 down payment (5%) — what I can afford without killing my savings
  • 5% mortgage interest rate — reasonable for now
  • Amortized over 20 years — within my “frame”

My monthly mortgage payment is: $3121 each month (not including other fees like condo fees, etc)

I’d have to buy a mortgage loan insurance premium at $13,063 owed in a lump sum or in monthly payments, which is $1088.58 each month.

And to do ‘er right, they say you have to save 2-3% in a house maintenance fund each year, which would be $1250 each month.

Putting it all together:

$3121 – Mortgage
+ $1088.58 – Mortgage Insurance (since I put down less than 20% as a down payment)
+ $1250 – House Maintenance Fund

And that’s not including my other expenses, home insurance, condo fees (if any), backyard stuff, appliances, furnishingsyou name it.

Compared to the $575 in rent I pay now, with some utilities once in a while, it’s a deal, and totally worth it to me.

To take it one more step further:

Let’s assume I had $5459.58 to spend on housing each month, let’s take the amount of rent out of there ($575) and you get:

$5459.58 – $575 = $4884.58 that can be used for savings or investing.

40 years @ 3% high interest savings account = $4,534,720.25

…versus a half a million dollar home with unforeseen expenses.


Okay, let’s say it isn’t a 3% high interest savings fund, but..

40 years @ 8% in the stock market (index funds, natch) = $17,165,787.75

NOW, it’s $17 MILLION versus a half a million dollar home with unforeseen expenses.

The point I am trying to make here, is that if you want assets, equity, money, cash, positive worth, whatever you want to call it, it shouldn’t matter what form it takes as long as you have it, right?

If I gave you $4 million or $17 million dollars in your savings or retirement portfolio or a half a million dollar home aged 40 more years.. what would you rather have?

Sure, your half a million dollar home could be worth 3 million, or maybe 5 million 40 years later, but like everything else, it is not for certain. Owning a home is like being in the stock market.

You’ve got a good position if you have a great location for your home, but it’s never for certain.

And I want to do careful calculations and hedge my risks but not buying when it doesn’t make sense for me and my lifestyle at the moment.

Okay, but half a million for a home is stupid, FB! You can get something cheaper.

Sure, half a million sounds stupid when it’s just one person (me), and I could definitely go for a cheaper house just to get a house, but I am not willing to compromise on a couple of things, namely: transportation.

I could get a huge house by living on another island that isn’t Montreal but:

  • No public Montreal transportation system close by – I’d have to take ANOTHER train system to get to the main Montreal train system
  • Commuting like mad to clients who live on other islands (using bridges, it’s a mess)
  • Travelling a long time just to get to the Airport since I’m a consultant and I get sent away a lot

I don’t want to live like that! I’ve done that for too long, and I value my time more.

Where I live right now, I’m centrally located and with a car, my commutes are around 30 minutes or less, even with the bridges.

But those commutes change every time a client changes, so I still can’t really buy a home and call it permanent.

However if I purchased a home that’s going to be AT LEAST an extra hour a day in commuting no matter where I go since it is not centrally located, I’d cry.

Saving approximately hour a day, means a lot of time for me.

Thanks to Chelsea for catching this!

So let’s do the calculations again.

Let’s pretend I work 50 weeks in the year and save an hour a day in commuting.
5 days x 1 hour a day x 50 weeks = 250 hours a year saved

250 hours a year / 24 hours in a day = 10.41 days a year

10.41 days x 40 years = 416.67 days or 1.14 years saved.

No 20% downpayment

Not to mention that a decent down payment on a home (20% in my opinion), on $200,000 is $40,000!! I didn’t have that kind of cash lying around when I was up to my ears in education debt, having just graduated from b-school.

I could certainly have gotten a home on 5% of a down payment but not only did I not even have THAT lying around, I feel uncomfortable putting down such a small down payment.

Then I look at those subprimers who got caught in that spiral, and were on the hook for 95% of the home’s value and I feel almost relieved I didn’t do that, even if I would have been more reasonable and not have purchased a half a million dollar home on 5% (which is a measly $25,000 as a down payment).

But if I wanted to do it under my own terms of having a 20% down payment, on a $300,000 before, that’s a $60,000 down payment, or more than double what 5% would have been on a half a million dollar home!

I don’t have that saved, AT ALL. And if I were to wipe out my Emergency Fund of $36,000 just to pay for what I could, where would I be now?

I’ll tell you where – without a contract, no savings cushion or fund to live off on while I wait for another job, and stressed out because now I have a mortgage to pay that I can’t lower unless I sell my house for less what I paid for it, and move into a cheap apartment.

Not fun.

I was also in education loan debt from before of $60,000… so that wasn’t a good idea to take on MORE debt when I didn’t even have more than $1000 in savings to pay for even the 5% down payment on a $100,000 home.

To be, or not to be.. in debt?

It’s a good point that I’d be in debt anyway (debt to the landlord if I keep renting forever), but it’s a debt that spread over time, and it’s not a real debt in the sense that I owe THAT landlord money for 20 years, the same way you owe a bank a mortgage payment for 20 years.

I may not have anything physical to show for it in the end, but it offers a lot of benefits like being able to pack up and move at a moment’s notice for a job, or not having to deal with maintenance problems… and so on.

And with my calculations above with renting versus buying *shrug* you have to do the math to see which one makes more long-term financial sense (I do my calculations with 3% and 8% interest rates).

I do find that quite clinical to calculate what a home could mean to you emotionally in that manner, but I just wanted to explain why I thought renting was getting a bad rap for no reason.

In Dallas, prices seem reasonable, and I could definitely buy a nice home in a decent area for a good price and be able to clear it in 15-20 years. Los Angeles, on the other hand, might be a little steeper. Not to mention the fact that I would be responsible for any repairs, including finding the proper contractors to carry out those repairs. I don’t know about you, but finding a plumber in Los Angeles, Dallas, Montreal or wherever seems like a daunting endeavor of trial and error

If I lived in Toronto, Vancouver, Montreal or Manhattan?

Not so much. I am not willing to compromise on things that matter to me, like my time, or a safe neighbourhood and central locations.

I know it sounds like I’m really against buying a home, but I’m really not.

I’m against buying a home for the wrong reasons and in my humble opinion, buying a home because I think I’m throwing money away on rent is not a good enough reason.

I have to work out a couple of things like finding a city to settle down in (am hoping Dallas is it, but I have a good feeling that the U.S. is definitely going to be my home country).

I’d buy a home for sentimental reasons like the idea of being able to have a roof to call my own over my head, or to call it the family home.

But never solely to build equity.

I’ll definitely buy a home in the future but not now.…. and only if I could afford the following:

  • If I felt it was a reasonable price for what I was getting in terms of size/quality
  • Not having any outstanding consumer or student loan debt *personal preference
  • 20% down payment without crippling my emergency fund or savings
  • 15-20 year mortgage

It may sound unrealistic, but it’s what I want, and living in these expensive cities, I am never going to get that in a million years, unless I put in heavy sweat equity to fix up a lemon.

I may even buy a couple more homes in the future, just to rent them out, but again.. I’d do it if I had the means to do it and it wouldn’t hurt me financially if I lost more than 50% of its value or something really outrageous.

I’d rather have solid bird-in-the-hand financial security for the now, than the golden-two-birds-in-the-bush promise of future riches from being a landlord or owning a gorgeous piece of property that comes with big bills.

About the Author

Just a girl trying to find a balance between being a Shopaholic and a Saver. I cleared $60,000 in 18 months earning $65,000 gross/year. Now I am self-employed, and you can read more about my story here, or visit my other blog: The Everyday Minimalist.