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
$5459.58/monthAnd that’s not including my other expenses, home insurance, condo fees (if any), backyard stuff, appliances, furnishings… you 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.
Hmm.
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 saved250 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.
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 
In the US, you also have to pay property taxes if you own, but *not* if you rent. Now in some places, like Pittsburgh, property taxes for, say, a 3-bedroom house in a not-too-fancy neighbourhood are under 2 grand a year. (Housing prices there are ridiculously low, too — my friend got a nice house for under $50k.)
But I think most of the time, once you take property taxes into account, you’re not really ‘throwing away’ as much money if you rent.
I live in the UK and we have to pay council tax whether we rent or not. But the housing prices here are so crazy. We can rent a much, much nicer house than we could afford to buy and the rent is much lower than a mortgage payment would be. Since we invest our savings, we’re making money on that where we wouldn’t if we owned (since we wouldn’t have that savings — and if we did, it would be offset by the interest on the mortgage anyway). A lot of people still do not understand why we choose to rent and not buy, but our reasons are pretty much the same as yours. I love that we can just pick up and move anywhere (with 2 months notice) if we want to! ;D
Sorry but your Math doesn’t add up… As a Realtor I’m sure you’re “not” renting a $500,000 property for $500.00/month unless it’s family owned. So you’re not comparing apples to apples!
It’s true that with the fall of the housing market a lot of people are upside down in their mortgages so taking a short term view of this picture does give some credibility to your essay but property ownership is considered a long term investment and twenty years from now this picture can and should be quite different!
Historically home ownership is the safest equity investment a person can make, check publications like the WSJ if you don’t want to take my word for it. Not only does it offer you an opportunity to develope personal wealth with strategic planning, you’ll have pride in ownership, privacy, the ability to live as you choose within your property and even some tax benefits.
To make it plain and simple: At he end of a thirty year period if you rented all that time you would have expensed XXXXX dollars and end up with ZERO to show for it.
In owning property you would accumulate equity to sell…
Right and tell me again what your rate of REAL (not nominal) return has been in the past 10-20 years in the housing market?
My oldest brother who owns a house, did the math and told me that unfortunately, he has had 0% REAL rate of return on owning his home (not nominal), and unless you want a home for personal reasons, you’re better off not buying it, and renting instead.
Regardless, just because history says something is HISTORICALLY going to go up, it doesn’t mean it will. That’s why it’s called “history”, so I can acknowledge that buying a home MAY generate good returns (see: Singaporean housing market from the past 20 years), but you are pretty much making a statement that it is a GUARANTEED investment and you are building your equity with it.
I’m trying to say you can do the same thing by building equity in the stock market too.
It’s a crapshoot whether you rent and invest on the stock market or buy a home. You cannot tell me that if I buy a home i am guaranteed to have a higher rate of return than if I were to put my money on the stock market instead….especially taking into consideration how much it costs to maintain a home in Canada, as they are all pretty much made out of chipboard and wood.
There is no such thing as a guaranteed investment, and housing is no different. Period.
Im 27 years old. I bought a house last summer for 115,000 in foreclosure. It is a 2200sqft home with 6 bedrooms and 3 bathrooms in a decent neighborhood of Atlanta, GA. I put down 20% and used the rest of my home improvement loan to renovate the house to my specs. I am handy, and have friends that helped, so I understand that this is not for everyone. Yes there was some start up costs: furniture, garden hose and a grill… but thanks to craigslist I got it all for pennies on the dollar. Prior to this purchase I was wasting my money at $550 per month in rent; today my 15-year mortgage and loan payments are about $1350 per month. Yes it is higher but I don’t live alone.
Now the fun part… my girlfriend and I currently live for FREE as I rent a few of the rooms at $500 each. This covers all my expenses and positive cash flow. Although, living with housemates has its challenges, it is not permanent. In one year I plan to move out, rent the room I currently occupy for $600 and buy a new home with the money I am saving now and use the extra rent to pay part of my new mortgage. Now THAT is how you build equity!When it comes down to it you are either ready to buy a house, or you are not. And this is both in terms of what you have saved, and the lifestyle you are ready to have… BUT don’t think for a second that there is only one way to own property. If there is a will there is a way. And with a little ingenuity and some sweat anyone with half a brain can and SHOULD own a home.-Zach
I agree with what you say. Are you seriously renting a $500,000 place for $575? If not, perhaps you should adjust your comparison to be inline with rental costs for a $500,000 house. My experience is this ranges about $2000-$3000 per month depending on area.
While I can agree that there are pros to renting over buying a house, there are some SERIOUS flaws with the math and the astronomical numbers in this article…including a 20 year mortgage, plus PMI, etc. at $5459.58/month (that is completely insane) and then saying you’d save that over 40 years (not 20) by being in an apartment instead. You don’t pay PMI unless you are stupid and buying something banks don’t think you can afford (and if you can only put 5% down, yep, you should not buy a house now, you should save longer). You don’t pay PMI for the length of the loan either (20 years, in this scenario)…and $1250 PER MONTH for house maintenance? It’d be MUCH more reasonable to show something logical (you can adjust numbers as you see fit) along the lines of:
$2775/month mortgage (with 20% down) including taxes, maintenance, etc. minus $575/month for rent = $2300 / month difference.
$2300 * 12 * 20 = $552,000 savings over 20 years…but then presuming you’re going to buy a house to live in the rest of your life, vs. renting the rest of your life, you have to factor in the rent FOR THE REST OF YOUR LIFE and not for just 20 years like your mortgage (yes, you pay taxes, maintenance, etc. forever in your house too)…meaning for the remaining 50 years you live (buy house at 30, pay off in 20 years, you’re 50, live another 50 years or so) you are paying more in rent than maint & taxes…maybe $300/month:
$300 * 12 * 50 = $180,000 extra costs (presuming rent never goes up, etc.).
Then you have to decide if you think the house will be worth that $372,000 difference (plus interest, compounding, all that good stuff) 70 years from now…
It is certainly not $17,000,000 different…I am sure there are some flaws here (as I wrote this off the cuff) but it should point out some of the concerns above.
Are you talking about Dallas, TX?
If so, then yes, housing is more reasonable, but be careful, “nice” homes close to everything even in Dallas are expensive. I know because I just moved from there. I moved there specifically for the cost of living. 🙂
I am a house owner in Northern Virginia since 2002, and I REGRET it!!!!! I am stuck with a
$3000/month mortgage, $400/month utilities $200/month HOA fee & lawn maintanance, add in basic living such as food, gas, etc. .. .you get the picture.
I grew up believing in the American dream that to own a house is a symbol of self independence and success. Someone mentions that "you are alway in debt until you own your own home .. ." WRONG!!!! Unless you pay off your house the instant you buy it, it's a huge debt/mortgage. You are basically renting from your bank with the luxury of MAINTAINING it yourself that's all!
Try not paying rent for several months, and the bank (aka landlord) will kick you out.
So FB, you don't have to explain yourself, I am so on the same boat with you about renting,
You are very smart at a young age, keep living your life style, not many people can have your kind of lifestyle, and we envy you.
I am working on selling my house, but it's a tough market. . . .
The thing about most people but especially true about Americans is that they are, looking at negative saving rates, incapable of saving money. That and the lack of knowledge and distrust that many people have in intangibles like the stock market means that buying a house and paying mortgage is probably the only way for the them to build any kind of wealth.
However, I noticed that when people rent, they tend to “live below their means”, like in a small apartment, but once they decide to buy, they oftentimes buy a mansion that’s bigger than what they need and thus stretch their finances.
My quick rule of thumb – if rent is more than interest + property tax + maintenance, buy; otherwise put your surplus income into the stock market.
You know what, that’s a really good point.
I hadn’t taken the psychology into account of going from renting > buying.
What you’ve said is absolutely true from my own observations. Many friends who have rented for many years, scrimping and saving, splurged on a huge home.
Others, don’t save much at all, but are (as you’ve said) forced to save into a home via a mortgage.
I wonder what we’d do if we were to buy a home — I am not sure that we will, but I am also not going to rule out that we won’t.
All good food for thought. Thank you so much!!
I still doubt your numbers, however I’ll not dispute them as I’m sure you know your area far better than I do.
I’ll say that if you’re paying $575 monthly ($6900/year) for a place valued at half a million, you’re getting an insane deal. In most places it (6.9k/500k=1.38%) wouldn’t be enough to pay for property tax alone, not to mention maintenance and mortgage.
No problem. A lot of this stuff is quite subjective, because it’s what you take out of the numbers — what you put on as a value for a home versus renting and so on.
At one point, the market was at $350,000 at its low point, but now it’s picking back up — all of these are not set-in-stone numbers, but it’s the average price of the area.
Then you factor in what each city/county/country will charge you in mortgage interest, maintenance and so on.. and the numbers are flexible enough to go either way, no matter how many calculations you do.
The final point is that I just don’t put a lot of stock into owning a home, but I can see why others do.
The reader asked me why I didn’t want a home, and she framed it in such a “but it’s the only way to build any kind of wealth” sort of way that it made me feel compelled to answer from a financial point of view with those numbers to (hopefully) gently challenge those “tried & true PF truths”.
Perhaps if I move to a cheaper area, such as in a small town, rather than staying in the city It’d be a lot cheaper to buy a home, even with taxes, maintenance and mortgage interest rates.
You have some valid points, but, seriously, comparing a smaller $575 monthly ($6900/year) rental unit to half a million home purchase? Location seems like it’s comparable, but how about other factors, specifically apartment size?
In my case, I’m going from a $1050/month rental in Manhattan to $140,000 1br coop in Queens (NYC). Putting 20% down, maintenance is $350/month and mortgage is ~ 750/month for 15 year fixed @ 4.5% interest. So total monthly cost is $1100, and after 15 years it drops down to $350.
Commute is, tops, 15 minutes more per trip (30 min/day)
It’s the neighbourhood I live in. The homes here are half a million, and apparently that’s a big thing that people take into account — the area they live in being safe, full of people who make a good income and so on.
If I can live in that same neighbourhood for much cheaper than buying the house, then why not post that comparison?
Even if you want to downgrade that to a $300,000 neighbourhood area, it is still cheaper to rent.
This is awesome for me to read right now. I am just getting ready to rent and I debated the buying vs renting for a long time. In the end rent just made more sense, because: A: I don't know where I will be in a year's time. B: Rent is $500/month including utilities C: Down payment issue
I preferred the freedom of renting to buying, especially at my age.
That’s exactly why I rent. I may rent forever.. it makes more sense for me, economically speaking.
I agree with your insights. It’s far better to buy a home, instead of renting it. Foreclosure deals are increasing in Canada?
Noah: My insights are to NOT buy a home, actually. 🙂 I'd rather rent an apartment.
I am not an average 9-5 working Jane but that’s beside the point.
And actually you’re right. My calculations are off. I don’t know what I was using as numbers… I didn’t make a note of it.
I must have been using numbers from somewhere else.. or just mentally blanked.
So let’s do it again:
Let’s pretend I work 50 weeks in the year.
5 days x 1 hour a day x 50 weeks = 250 hours a year, saved
250 hours a year = 10.41 days a year
10.41 days x 40 years = 416.67 days or 1.14 years saved.
Thanks for the catch. And no one else catches it because no one does the numbers 😉
Very cool post.. and I’m liking the articles the more I read them.
Lots of info, sister, and it takes a little thinking to get through this piece, for sure.. however, by the time you get to discussing the commute time to/fro work, and ‘saving’ an HOUR a day because you rent instead of buying—you appear to have stumbled over some numbers!
Personally, I’d like to know how you came up with saving 40 hours a year in commuting after all of your other in-depth calculations?!
“…saving 30 minutes a day, means 20 hours a year” (—or, because of the return trip, 1 hour a day, 40 hours a year, you say…) That means basically, you only work a bit over 3 days in a month? (40hours/12 months is 3.33~ otherwise 3hours/month.. 1 hour saved per trip to/from work…) Maybe I’m wrong..
If you were the average 9-5 working Jane, and you worked approximately 20 days/month, then sister, you’d save 240 commuting hours a year (240 hours x 40 years is 9600 hours or 400 days!)
And how does 40 hours/year end up being 80 days in 40 years?!
–> 40 hours/year x 40 years is 1600 hours OR (1600/24 is 66.67 days)!!!
Yes, yes.. it’s late where I’m reading this, and I’m bored. But why didn’t anyone else catch this?!
.-= Chelsea´s last blog ..Spreading the Word: New Daegu Magazine, Valentine’s Day Treat & New Website Look Coming SOOOON! =-.
FB,
I’m glad that you do your own thinking, rather than blindly following advice. I’m renting too, for reasons similar to yours. One day I’ll buy a house, when the pros outweigh the cons for me, which is also what you say.
So well said! It took my bf and I quite some time to figure this out… When we moved to Washington, DC we found a beautiful condo-turned-apartment building with brand new apartments, totally modern, etc. It is perfect for us. We can’t even afford a condo like the apartment we have- which is ridiculous since the apartment was supposed to BE a condo! We have been looking on Zillow.com and Redfin.com to see prices in other areas and realized the best thing we could do is rent here in DC and wait to buy until the economy and jobs-situation improves and we could move. Even Miami has more affordable homes than here in DC. What is funny is that all those reasons people used to give for buying homes “painting walls, pools, etc” came with our apartment- they painted the walls whatever color we wanted BEFORE we moved in (we didn’t even have to paint it ourselves), there’s a pool, gym, even a free shuttle to the metro. We could NEVER afford a home like this!
Bravo for your post!
I needed to read this post! Wonderfully written. I live in New York City so I know EXACTLY what you are talking about.
Thank you for posting this. I have had so many people make the argument that renting is just “throwing” your money away. And it really isn’t. I have a place to live, I don’t have to worry about fixing the roof if it leaks or the foundation if it sinks. If I hate where I live or get a job somewhere else I can leave, no questions asked. On top of the fact that, as you pointed out, houses ARE more expensive if you do them in a way that keeps you out of trouble in the long run. (i.e. saving for housing repairs, insurance, good loans)
Thanks for the post, I’m going to forward it to some people who I think need a very comprehensive look at the alternatives to buying a home.
3% down here on an FHA loan. Worked out fine for us, as the mortgage insurance isn’t high for us.
No offense to Sharon, but her question/comment lacks any sort of logic.
I don’t want to own a home. I get to live right near the beach and near a gorgeous little downtown area for $1500/month (half of that, actually, since I live with my fiance). CONDOS are going for $1.5 million just down the street from where I live; a house would be 2 or 3 times that much. Instead, I get to live where I want without worrying about maintenance or even some of my utilities. When I decide I want to move, I have to give 30 days notice.
As far as not being able to say you’re not in debt, I don’t think that means what you think it means. With a house you have a mortgage on, you can’t say you have no debt and you can’t say you OWN it either since until you pay it off completely, it belongs to the bank.
Not to mention that a lot of people just can’t afford to buy a house right now. I saved 50% of my income last year, and even I would need a few years to save up a down payment!
Everyone’s making really great points.
Livina Almost Large (LAL) has a blog post today about why she thought buying her home was a poor financial decision.
I want to see if anyone who has purchased with 5% down will comment about whether they are happy with their decision and how it’s working out for them.
It’s my dream to own my own house. I’m definitely not rushing it though. I could buy one right now (if it weren’t for my credit) for what I’m paying monthly in rent, but I want to wait until I can afford to have some breathing room with maintenance and the mortgage and all. I also want to wait until I’m out of school and have a great job, and I want to travel a bit for a while before settling down in one place forever.
I totally agree with the house buying versus renting thing. We rent and I wouldn’t have it any other way at the moment, even though we can well afford to get a mortgage.
I love the freedom that comes with renting, and in the current property market, we aren’t even missing out on capital growth, as property prices are falling. To be honest, I secretly question why buying property is so many people’s ultimate dream. Is it really, or just conditioned by society to think that because the property market drives so much of the economy? Here in the UK buying a house wasn’t so much of a big deal until the Thatcher government – which was a thoroughly capitalist government. These are just some thoughts, but I cringe when I see people who cannot afford it stretch to buy property – and then have to deal with the consequences. Hello sub-prime mortgage debacle? Do it if it’s right for you, but otherwise, question why you want to buy a home so badly.
I hear you on this. I live in Manhattan and renting makes much more sense for me than buying. Most mortgages and maintenance fees combined would cost me much more than my rent. Plus I really like being able to just call my super (who is the best super I’ve ever had) whenever something needs to be repaired (rather than having to foot the cost myself).
Could post! Couldn’t agree more!
By the way – one more thing that I think people often forget:
Young people who borrow to get the downpayment, then take on a big mortgage, are living so close to the wire that when something happens – someone loses a job or a paycheque, or they have a tenant who can’t pay-up, or they have unexpected repairs, or a car breaks down – they find themselves over their heads.
So what do they do? Reach for their credit cards to make ends meet.
And that racks up more debt with higher interest rates.
So – you really want to make sure that when you buy a house, you still have enough for repairs, for unexpected expenses, for an emergency fund, and a little left over so if something unexpected happens, you’re not totally screwed.
Most young people in Toronto have been borrowing up to their eyeballs from everyone they know.
I was going to post a similar topic today.
Owning a house is not easy. In the past 3 months I’ve had to learn how to paint, install trim, remove and replace drywall, spackle, fix minor plumbing issues, install a cable jack, install a home network, put down carpet, install blinds/curtains… Granted not everyone will buy a foreclosure like us, but there’s no landlord to call when the pipes break at 2am.
And then there’s the cost of new appliances (if needed), furniture, any paint/carpet/flooring you need to replace, any repairs to be done…
With our rent rising at a rate of 10-15% a year, it made sense for us because the prices of houses radically dropped by more than that around here. Our base mortgage is the same as our old rent, but then there’s another $750 in taxes/utilities/etc. We figure in ~5 years it will pretty much even out.
No one should buy just for the sake of buying. It’s not a smart investment unless you plan to live in the house for 10+ years and you buy in a buyers market.
-Frugal Urbanite
LAL: Can’t wait to read it.
I agree with most of your comments about it being a personal decision.
And I like the idea of owning a place, painting it, having it be my own and caring about what a light fixture looks like… but not right now.
Owning isn’t right for everyone. I love being able to change my house the way I want and no landlord to tell me I can’t have a cat and that makes it worth it for the extra money and hassle of ownership. But I didn’t buy til I knew where I wanted to settle, and a tiny bit of me misses the notion of being able to pack up and take off whenever. If I didn’t have a superhandy BF I probably wouldn’t have bought a super charming old house. You do what is right for you.
Great way to dissect the issue of owning property. It’s good for us new(er) to PF to read posts that looks at the whole rent vs. buy picture.
Like you, I rent at the moment and it works for meI plan to own a home eventually, but I want to be able to do it right – that is, to have the appropriate buffers in place and for it to make financial sense.
Late last year, it seemed I was on that road – my landlord wanted to sell. Sadly, negotiations broke down when he wouldn’t accept the book value of the flat following the houseprice fall.
I’m with you FB! I wrote a post with a bunch of reasons why I rent rather than own, and those were reasons that didn’t even include the math you listed here. But, when it gets right down to it, I can’t AFFORD a home right now. I don’t have a down payment saved up so I would already start behind the curve. I don’t make enough to cover rent plus the 2-3% I’d have to save for maintenance as I would have to take care of that myself. Don’t forget the PMI because I didn’t have 20%. I do have a little grace in that Texas real estate is comparatively cheap to other places, but the fact of the matter is that I am simply not ready to be a homeowner.
I got all kinds of comments on my post about how my reasons were ridiculous and owning a home was a smart investment. If I recall, one commenter even said I was lazy – which in part is true. I don’t want to take care of a home, that’s why I rent. But, owning a home doesn’t fit where I currently am in my life. I’m not opposed to owning, just like you, but I do think the timing has to be right for the individual. I certainly applaud those who have bought their homes and done well for themselves. But I don’t want to be in the line of people who foreclosed because they got into something they couldn’t afford. I find it ironic that with the real estate situation being what it is that someone would suggest I need to buy when I’ve already expressed I can’t afford it. That attitude got us where we are today. Buying a home for the implicit purpose of gaining equity and thus increasing my net worth is not worth it to me at this point. That isn’t to say I won’t ever buy, because I will. But, like you, it has to make sense to me.
Kristy
http://www.masteryourcard.com/blog
Tomorrow I’m posting about my home mistake.
Great post! My rent=lower than yours so I totally get your reasoning here. 😉
I want a house like nobodies business but I’m not willing to pay 3x what I’m paying now + expenses. That just doesn’t make sound financial sense.
I think that I’m pretty happy renting. I pay $525 for my share of the apartment we live in. I like that I can move around, rather than being held down in a mortgage (although we’ve stayed here for 3 years!)
And I agree, there’s no way I could buy a place at this point in my career…I don’t have enough money saved up, and I’m not really ready to settle down.
Totally awesome! You have concisely reasoned out (with numbers) the reasons my man and I don’t want to own our own home.
We’re happy renting a townhouse for under $1000 a month ($1450 a month if you count utilities–comes to $475/mth each between The Man, the Roomie and myself), and not having to shovel the sidewalk, repair anything, or worry about the housing market moving up or down.
😀
I really liked this post. I’m moving to Austin in June, and I’m already tempted to start looking at properties to buy. My boyfriend and I could potentially have a down payment ready by the time we get there or shortly after. I keep trying to remind myself, though, that I need to work on getting out of debt first. What fun is a house when all my extra money will be going towards debt?? Anyway, great post. You gave an excellent view on why mortgages aren’t the end-all-be-all of a person’s financial life!
I actually live around 6 hours from Dallas and homes here are WAY cheaper. You can own a home for less than rent in a lot of cases. Our house is worth much more than we paid for it 7 years ago even with the market dropping. That being said, there are many days that I wish we just rented. Lawn care, household repairs, general maintenance can just be so. much. work and time. Not to mention having more space equaled us buying more “stuff” to fill up our house. We are actually thinking once our kids are grown (they’re 11 and 10 now) that we’ll sell the house, invest the money and rent. Let someone else fix things and later it will make the kids’ inheritance that much easier to split up. I definitely disagree that all renting is “throwing away your money.” Great post!
Wow! I love how detailed you are about your finances….exactly how I hope to be 1 day, lol.
I'm getting better though…& I'm learning alot from your posts. 🙂
I am like you. I want a home in the future but for now it just doesn’t make sense for me.
I never looked into this in detail but I remember that Canada’s Office of Consumer Affairs has a rent or buy calculator: http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca01821.html
Pretty sure real estate agents invented the phrase “renting is throwing your money away!” and shouted at us all through the early 2000s!
In some cities, renting is far better than buying. And renting for the past few years versus buying a house at the top of the US bubble… WAY WAY better. Financially speaking, that is.
As for other motivations for buying, you can’t really argue which is better, it is a personal choice. I currently love renting, and will ONLY buy when it is a better deal financially. And when I’m ready to be tied down.
Thanks for this great post. I am sick of all the hating on renting.
The NY Times has this great “Is it better to Buy or Rent?” calculator…
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html
It seems that you have to live in a house almost 16 years before it is better to own (or hope for an housing bubble to grow).
My husband and I live in an awesome 1 bdrm apartment for a fraction of what it would cost us to own a comparable condo. A great thing is we are never tempted to replace an unstylish light fixture or upgrade the appliances or get a pet (all costs that add huge amounts to home “ownership”). Being from southern California, I have seen the worst of the housing downturn. People are now owned by their homes.
The best part about renting… we can move whenever we like! No worrying about getting a good price or finding a buyer.
This is really smart- I don’t think most people think about all of this before jumping into buying a home
Personally – I HATE the argument people make for buying homes being a solid investment, as opposed to rent being a way of throwing away your money.
I rent because I can’t afford a house. Period. Even if I could afford a mortgage, I need a down payment. Plus homes always need work. I don’t have a credit card to throw home repairs on, never mind renos or re-decorating. I also can’t afford lawn care, property taxes, etc.
I rent so I don’t have to worry about cutting lawns, shoveling snow, broken hot water tanks, etc.
Rent is a great way to have a place to live while avoiding all the extra stuff that really sucks the life out of your budget.
I have to agree that renting is not all that bad. If you need to leave for any reason, you’re not stuck with either a mortgage or a house that may not sell right away.
Buying a home is a very personal decision and I applaud your reasona for NOT owning. It really isn’t for everyone and even though you do want to, your decisions for not buying now are very reasonable. Again, it’s “want” vs “need” in many cases, because all your friends do, etc. I rent because I simply cannot afford to buy something right now, even with the prices tumbling. Never mind down payments, closing costs, lawyer’s fees; it’s the carrying costs that would kill me!
I’d love to own my own home, but right now, it’s more cost effective for me to rent and save.
Thanks for the post!
Great post! I am also currently renting rather than buying a home. I agree that a home isn’t a surefire must have ‘investment’. Buy a home because you want a home. That’s reason enough. And I’ll buy when I’m good and ready, so back off people! 🙂
I would love to buy just to be able to paint the walls! But I’m not going to do it until the time is right and I’m in a position that I can comfortably afford to buy what I want, because I only plan on doing it once!
Frugal: Wow, thanks!
I totally support people who buy homes and love them. But I have done a lot of thinking about it, and it just isn’t in the cards right now.
And I’d love to have my own home too, but I don’t feel like this city is it, and it’s too permanent and hard to move when you own a physical property.
I am going to get a home soon, but after things (like I’ve noted) settle down for me.
I should also note that my examples of people who rushed into buying homes when they didn't have the money has made me a tad skittish.
Read The Idiot & His Wife under FB Saver.
This post is really well done! I applaud on always doing an insane amount of homework!!! I own a condo. I absolutely love it. I cant be bothered with waiting around for a landlord to fix an issue. I can make any improvements I want and do anything I like to it. Its a little pricey given the sh*t real estate market but I really dont care. I still save my money in other ways and invest accordingly. You have a very good reason for renting but to me, the feeling of having my very own place is special.