buying a home

Why ‘Rent vs. Buy’ Is the Wrong Question

The equation for owning a home or renting isn’t as straightforward as it may first appear. The deciding factor for you could come down to something other than money.

In the world of personal finance, there are a handful of disputes that may never get resolved. There’s the question of whether credit cards are dangerous, or whether they’re valuable tools we can all benefit from. And I don’t know about you, but I’ve also read countless stories on whether it makes sense to pay off your mortgage early, invest instead, or diversify and try to do some of both.

Another big question in the world of personal finance is whether it makes more sense to rent or buy a home. In one corner, you’ll find people who claim to have turned enormous profits on homes they’ve bought, lived in, and sold. In the other, you’ll find lifetime renters who say that owning a home is a huge waste of money.

Of course, you’ll also find experts who waffle in between, or perhaps even see where either argument might be correct depending on the situation.

Should You Rent or Buy a Home?

I recently interviewed Jeremy Schneider on the Stay Wealthy Retirement Podcast to debate this topic. We sparred over which choice typically leads to a better financial outcome, as well as what consumers need to think over before they commit either way.

We also talked over how the rent vs. buy conundrum might affect people who are nearing retirement or already in retirement. When you’re no longer raising children or working a 9-5, will it still make sense to own, or will renting lead to greater flexibility and better finances?

Schneider runs a wildly popular personal finance Instagram account and investing community known as Personal Finance Club. At age 34, he sold his first business for $5 million and made work optional. After renting a garage apartment from a friend for more than five years, he confided in me that he recently bought a home. However, he doesn’t think that “rent vs. buy” is the right question at all.

“People get so focused on which one is financially better that they’re missing the big issue,” he said. The right question to be asking yourself is, “How much are you spending and saving in each scenario?”

For example, let’s say you buy a very modest home with cash, keep your expenses low, and invest every extra cent you can get your hands on for the next 20 years. In that kind of scenario, there’s a good chance you’ll approach retirement with a healthy nest egg since you kept your expenses low and invested the rest.

Now let’s imagine you buy a luxury home in a gated community where it is impossible to keep costs down. You had to take out a mortgage, so you’re paying interest every month, and you’re forking over huge sums of money for landscaping, upkeep and HOA fees. You have less money to invest as a result and more money tied up into a home once it’s paid off. It’s not hard to imagine why this homeownership scenario would leave you with some regrets.

While these examples show how you could be smart or wasteful as a homeowner, the same can be said for renting. Are you renting an affordable garage apartment like Schneider once did, or are you splurging for a luxury rental with amazing bay views, a doorman and a Whole Foods in the building? You can save money by renting, but you can also waste a ton of money if you rent the wrong place.

At the end of the day, renting or buying matters less than how much you’re spending on housing overall. Not only that, but are you investing the extra money you have each month? Those factors can make a bigger difference than anything else, says Schneider.

The Ugly Math of Owning a Home

As we continued talking over the pros and cons of renting vs. buying, Schneider and I also dug into the math of both options. And both of us agreed that the math involved in owning a home is not really that great.

You always hear people say things like, “I bought my home for $400,000 20 years ago, and now it’s worth $800,000. I doubled my money!”

While it may appear that way if you didn’t dive into the details, the reality is that people who think of owning a home this way don’t track their expenses year over year. They focus on the purchase price of their home and the price they could potentially sell for, but they completely ignore what they paid for updates, repairs, landscaping, property taxes and everything else they wouldn’t be paying for if they had rented instead.

As Schneider and I talked over these numbers, he shared an example with me that he says might provide people with a different perspective.

In 1989, the average home cost around $100,000. In 2019, the average home sold for around $278,000. (Keep in mind that these figures are only for general purposes, so they don’t include variations in the size of the homes or real estate price differences around the country, and they aren’t adjusted for inflation.)

With this very basic example, you can see that a home purchased in 1989 almost tripled in value. But when you think of all the expenses someone would pay on their home over 30 years, the math isn’t so rosy.

On a $100,000 home loan, they might make $200,000+ in mortgage payments, depending on their interest rate. They might also pay close to $30,000 in homeowners insurance and $100,000 for maintenance, repairs and updates. After all, 30 years is a long time to own a home, and you would have to do a lot of work to get full resale value.

On top of those expenses, this homeowner might pay an average of $56,000 in property taxes, and around $18,000 in Realtor fees to sell their home.

In the end, that means they paid over $400,000 for a home they can sell for $278,000. This person’s home provided them with a place to live during that time, but their home was not a good investment at all. In fact, they lost money on their investment!

Schneider says that people tend to gloss over their expenses and the real math involved in buying a home. Beyond that, they also gloss over the opportunity cost involved in not investing the extra money they’re spending on homeownership.

Further, they forget that, if you want to invest in real estate, you don’t have to do so through the home you actually live in. You can buy into real estate investment trusts, or REITs, or you could even invest into rental real estate you don’t actually live in.

Of course, it’s also important to recognize that the math can quickly change in different situations. “Get a few roommates or buy a triplex and rent out the other units, and you could have the best of both worlds,” says Schneider.

Consider Buying a Home Anyway

Interestingly, Schneider and I had this conversation and pored over all the numbers and bad math of homeownership, yet both of us still own homes. Schneider says he moved out of a garage apartment into a condo because he wanted to improve his lifestyle. His new condo is close to the beach, he says, and he has an extra bedroom for any guests that want to stay.

My wife and I also bought a home in the San Diego area several years ago. We were planning a family and we decided we wanted to lay down roots despite the financial costs. Overall, I’m very happy with our decision. I always tell my clients they should “rent for flexibility and buy for stability,” and that’s exactly what we did.

The reality is that, regardless of math, there are plenty of reasons buying a home makes sense. If you want to nest and paint walls and be the King or Queen of your castle, then it can make sense to purchase a home, provided you don’t plan on moving for at least five to 10 years.

Just don’t assume that owning is always the right move, because, many times, it’s not. And sometimes, it makes sense to just rent so you can live a lower-key lifestyle and invest or save the money you would normally be paying someone to mow your grass, or for a new water heater or HVAC system when yours breaks down.

And while it’s easy to think the rent-vs.-buy debate only applies to young people, this is definitely not the case. Schneider also points out that this is true for young people and older folks inching toward retirement. Regardless of whether renting feels like a “step down,” it might be nice to get away from housework and maintenance once you reach retirement age.

At the end of the day, you should do what makes sense for how you want to live now and later on. The rent-vs.-buy argument may never be settled for everyone, but you have the power to decide what you really want.

About the Author

Taylor Schulte, CFP

Founder and CEO, Define Financial

Taylor Schulte, CFP®, is founder and CEO of Define Financial, a fee-only wealth management firm in San Diego. In addition, Schulte hosts The Stay Wealthy Retirement Podcast, teaching people how to reduce taxes, invest smarter, and make work optional. He has been recognized as a top 40 Under 40 adviser by InvestmentNews and one of the top 100 most influential advisers by Investopedia.

Most Popular

11 Good Reasons to Cancel Amazon Prime
Budgeting

11 Good Reasons to Cancel Amazon Prime

You probably aren't using most of the perks tucked into that $119 annual fee -- which you don't need to pay to get the free Amazon shipping you crave.
April 13, 2021
Who Should Return Their Third Stimulus Check to the IRS?
Coronavirus and Your Money

Who Should Return Their Third Stimulus Check to the IRS?

Some people who receive a third stimulus check are required to send it back to the IRS. Others can return it voluntarily.
April 12, 2021
2021 Child Tax Credit Calculator
Tax Breaks

2021 Child Tax Credit Calculator

See how much money you'll get in advance under the new child tax credit rules for 2021.
April 14, 2021

Recommended

Financial Planning Lessons Regular Folks Can Learn from Professional Athletes
personal finance

Financial Planning Lessons Regular Folks Can Learn from Professional Athletes

The image we have of lucrative contracts and lavish lifestyles for baseball players and other pro athletes can be pretty far off base. In fact, these …
April 15, 2021
Uh-Oh: My Kid Wants to Be a ‘Social Media Influencer’ … What Are the Legal Risks?
careers

Uh-Oh: My Kid Wants to Be a ‘Social Media Influencer’ … What Are the Legal Risks?

Teenagers and their parents need to know there are plenty of legal consequences for this new breed of marketers, according to attorney Christy L. Fole…
April 15, 2021
What NOT to Do with Your TSP: 8 Thrift Savings Plan Mistakes to Avoid
retirement planning

What NOT to Do with Your TSP: 8 Thrift Savings Plan Mistakes to Avoid

Many federal workers saving for retirement in TSPs get tripped up by these common pitfalls. To help maximize your own savings, make sure you steer cle…
April 14, 2021
COVID-19 Super Savers Need to Carefully Navigate in a Post-Pandemic World
personal finance

COVID-19 Super Savers Need to Carefully Navigate in a Post-Pandemic World

The pandemic has turned many people into saving machines, which is great, but that comes with its own set of risks. These frugal folks need to be extr…
April 13, 2021