When Renting Makes More Sense Than Buying

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2:33I'm about to tell you about one of my least favorite opinions in personal finance. Renting is just throwing money down the drain. I want to roll my eyes every single time I hear that. You might have heard me debate Paul Mark Morris, the real estate investor, about this on the show, but I wanted to do an entire episode because there is honestly so much to dig into. And it's a question where you really need to follow the money trail and you can't just trust what's being told to you as gospel. And if you're just listening to this episode, I would highly encourage you to please watch on Spotify or on YouTube.

3:05We are animating this episode up with pretty graphics and actually showing you the math, which I always think is easier to follow. Before we dig into this, I just want to give you a heads up up front that I don't think buying a house is the right financial move for everyone. It could be, but it's not for everyone. And in fact, in this economy, I think buying a house is actually the wrong financial move for a lot of people. But I will be fair, and I'll start with some cases for buying a home. The big one is equity. The logic goes instead of handing rent money over to a landlord every month, you buy a home and you build wealth through ownership.

3:39In theory, this makes perfect sense. Each mortgage payment you make chips away at the loan balance, and over time you own more and more of your home. And then after 30 years or whenever your mortgage ends, you own your home. The end. Happily ever after. No more mortgage. No more monthly payments for your home. Then you've got this big, valuable asset that you can borrow against. You could pass it down or you could sell, hopefully, for a profit. It's also pretty cool that the interest on your mortgage is tax deductible. I do love a tax deduction where I can get it. And if you do have a fixed rate mortgage, your monthly costs will be constant.

4:17If you're renting, your landlord might be able to raise your rent annually or just keep pace with inflation. With a mortgage, your monthly payments won't rise with inflation, and we love that. But that is only half of the story. Let's talk about the other side of equity. You don't get all your money back when you sell your house, a.k.a. you do throw some money away when you buy a house, too. There are closing costs when you buy and when you sell, which can run 6 to 10 percent of the home's value. You've got property taxes, homeowners insurance, and interest on your mortgage, which is heavily front-loaded.

4:53There's also repairs, maintenance, maybe HOA fees that you never get back. The interest on the mortgage is a piece of all of this that blows my mind the most. If you buy a$500 ,000 home and you put 20 % down, with the current average interest rates, you're going to be paying over$400 ,000 on interest alone. So your$500 ,000 house will actually cost you more like$900 ,000. And like I said, interest on your mortgage is tax deductible. And that is a beautiful, beautiful thing. But that does not make it free money. In fact, it's really freaking expensive. And the interest factor will throw a wrench in your whole equity building thing because in the first year of your mortgage, the interest is front loaded.

5:38So using the same example of the$500 ,000 home, After five years, you'll spend more than$133 ,000 in interest alone, but you'll only pay down$26 ,000 in principal. So despite writing checks for five whole years, you've actually built very little equity. So if you had a dream of this$500 ,000 home being something you could flip really quickly and turn a profit on in a few years, I'm so sorry, but the math there is not mathing. But let's just say you became disenchanted with this entire thing and you decide to invest your savings instead. If you took that 100K that you would have put toward the down payment and invested it in the market at the historical 10 % annual rate of return, it could be worth$160 ,000 in five years.

6:25Let's follow the money trail here even deeper because we just talked about how stocks appreciate, but real estate appreciates too. And lately, wow, it has totally been true. I cannot and will not deny it. I've seen people build real wealth from their homes over the last five years. But historically, U.S. home prices only appreciate about 4.5 % per year. That's good, but it's not S &P 500 good. The S &P 500 has averaged around 10 % per year over the long run. And that difference adds up big time. Let's just do a simple side-by-side comparison here. Let's say you're deciding between renting and buying in LA.

7:05The average monthly rent in Los Angeles is$3 ,000 a month. The average monthly mortgage in Los Angeles is$5 ,000 a month. So let's say you rent. You're saving$2 ,000 a month by paying the average rent instead of the average mortgage. So you decide you'll invest that monthly and you'll invest that$100K down payment. After 30 years, you'll have$5.7 million. Meanwhile, if you bought a$500 ,000 home after your 30-year mortgage is paid off, your home will appreciate to about$1.9 million, which is awesome. Good for you. But again, with interest, you'll have paid over$900 ,000 for your mortgage, which means that your margin is a lot lower than if you would have invested.

7:50You'll have profited around a million bucks. In the case of investing$2K a month and renting, you'll have spent$820 ,000 but made$4.9 million in profit. So what would you rather have,$4.9 million or$1 million? Don't get me wrong, I'm not saying that buying is always a bad idea. Buying can make sense if you plan to stay in the home for a long time, at least 5 to 7 years, ideally longer. Or if your total monthly cost of ownership is close to or less than rent. or if you're in a market where rent is rising sharply and buying locks in stability. Or lastly, if you just want to buy a home and you can afford it, if it gives you the feeling of stability, that can be priceless.

8:34Buying a home is not just a financial decision. It's a lifestyle decision. There's value in stability and having control over your space and painting the walls whatever color you want. But let's also be thoughtful about the opportunity cost and also just retire the renting is throwing away money argument. Because really, renting buys you a lot. Shelter, for one. Safety. Flexibility. No surprise repair bills. No new roof to replace. No foundation cracks to worry about. No property taxes. And often lower insurance premiums. Those are all your landlord's problems. Renter's insurance is a lot less than homeowner's insurance.

9:11We don't say that we're throwing away money when we buy groceries, right? Rent is paying for a service, the service of having a place to live without a long-term commitment and usually a lower financial burden. Just know that renting is not a failure. It's not a phase you grow out of. It's a valid financial strategy. Homeowners don't just pay a mortgage. They pay for property tax, insurance, repairs, appliances that break, landscaping, and so much more. Renters skip all that. And that means they have more money to invest and grow if they stay consistent with it. Renting is not wasting money. It's buying you options.

9:48And in finance, optionality is very powerful.

10:07Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening. and for investing in yourself, which is the most important investment you can make.