Was this written by a landlord?
That was one reader’s reaction to a recent discussion about whether renting a home can make more financial sense than buying one.
I’ve been a real estate investor and landlord for nearly 40 years. You might expect me to tell you that renting is throwing your money away and that everyone should own a home.
I won’t.
For some, renting is better than buying.
I’m not saying never buy a house. I’m trying to crack the shell of an idea many of us grew up believing: Renting is bad. Buying is good.
It’s not that simple.
Homeownership has costs people conveniently leave out of the calculation. Property taxes, insurance, repairs, updates. A new furnace. A new roof. The water heater that decides to die at precisely the wrong time.
And then there’s the opportunity cost of your down payment and other money tied up in the house.
In theory, someone who rents for less and consistently invests the difference could accumulate more wealth than the homeowner.
There’s just one little problem.
Most people won’t invest the difference.
They’ll spend it.
That’s one reason homeownership has been such an effective wealth-building vehicle. Every month, the mortgage payment forces you to put some money toward an asset. Eventually, you may own something substantial.
But don’t confuse that with proof that buying is always the superior investment.
Homeowners and renters aren’t identical populations. Homeowners tend to be older, higher-income and more financially established. So statistics showing homeowners with dramatically higher net worth don’t prove that the house itself created the entire difference.
And then there are all the things that don’t fit neatly into a spreadsheet.
You can’t live in your stock portfolio.
Owning a home gives you control. Want a different kitchen? Remodel it. Want a finished basement for the kids? Build it. Want to know that nobody can decide not to renew your lease next year? That’s worth something.
A finished basement might be a lousy “investment” measured strictly by resale value and absolutely priceless to a family that uses it every day.
Renting buys something too: flexibility.
You’re not tied to one property. A major repair is generally somebody else’s problem. If a job opportunity arises across the country, you don’t have to sell a house first. And you may be able to occupy a home or neighborhood that would be prohibitively expensive to buy into.
So which is better?
Wrong question.
Buying a home is one of those major life decisions that has enormous financial consequences without necessarily being primarily a financial decision.
Run the numbers. Understand the hidden costs. Be realistic about whether you’ll actually invest the money you supposedly save by renting.
Then ask yourself what kind of life you want.
Maybe you want the house, the yard, the finished basement and the certainty that it’s yours.
Maybe you’d rather have flexibility, liquidity and somebody else worrying about the furnace.
Neither choice makes you financially sophisticated.
Understanding what you’re really buying does.
Reality Face Punch: A home can be a great investment. That doesn’t mean buying one is always a great decision.