By Dr. Erik Hofmeister, Guest Writer
My wife and I achieved our goal of Financial Independence (FI) this summer in our early 40s. We are both professional academics and are currently renting, and will continue to rent until we retire, at which time we will move into one of our current investment properties. I’m often struck by people’s obsession with owning a home. We have owned a home for 15 years and it has been a wonderful experience for that time in our life. But owning a home shouldn’t be universally synonymous with financial success.
Here are seven reasons why renting can be so much better than owning. The residents, in particular, are attentive.
#1 Owning a house is very expensive
Everyone thinks that renting is “throwing money down the drain” compared to owning. You know what throws money away? Buying over $10,000 of “stuff” the first few months of owning my first house, which quickly depreciated. Lawn mower, tool set, dining table, new paint, hedge trimmers. It was ridiculous. Many people simply look at the mortgage rate per month and compare it to the rental rate. Obviously, you have to add taxes and insurance. And then all the other “stuff”.
There’s a reason investment property owners tend to assume that around 45% of rent will go to expenses. There are many expenses associated with owning a home separate from mortgage, taxes and insurance. New AC unit, new fridge, deal with flooding. There’s always something wrong with owning a home. When we sold our first house, it was an incredible relief. I was constantly worried that something bad was going to happen that would be expensive to fix.
#2 Renting can be better financially
This is different from #1 because it depends on the market. We currently live in a college town that also has an amazing school district. This means that buying a house is quite expensive because all the teachers want to be within the city limits so that their children can go to a good school. At the same time, renting is relatively inexpensive, as the student population keeps rental prices low.
There are many markets like this all over the country (and the world). The Bay Area, Toronto, New York and Seattle come to mind. In fact, it is better to rent and invest the savings. It’s just too expensive to buy a house.
#3 Less complicated rental
Not only do you not have to buy the tool set if you rent, but you don’t have to do the work! Just call the rental company and you’re done. On a site where people regularly discuss the cost of something that saves them time (hiring landscapers, cleaners, etc.), I’m surprised people don’t calculate the value of the time they spend on s take care of their home. Maybe they rent those things too.
What is your experience with hiring a contractor to do a $50 job? Mine sucks. They rarely appear and then you have to check them to make sure it’s done right. I don’t even have to be home for maintenance from the rental company to come and take care of anything. It was literally life changing not having to personally deal with home maintenance and repairs. I hated mowing the grass (to the tune of two hours) and the cost of paying someone else was way more than I thought. I might have been able to find a neighborhood kid, but I would still need to buy fuel for the lawnmower and do some maintenance on it. In my rental, that’s right. . . all taken care of.
#4 Location, location, location
I really like to walk to work. I’ve been doing it regularly for three years and I can’t imagine living again in a place where I couldn’t walk to work. You know what isn’t within walking distance of my current workplace? Single-family homes or townhouses. There are a few small condos, lots of mobile homes, and a few swanky student apartments. So if I want to walk, I rent or buy something that I don’t really want.
Maybe being on the water is your thing. Maybe it’s having a swimming pool that you don’t need to maintain. I loved living in apartments in Phoenix and still having access to a pool that I didn’t need to think about maintaining. Maybe it’s around people (or away from people). There are dozens of reasons why a certain location might be better to rent than to buy.
#5 Transaction costs
Everyone seems to be waving. Yeah, yeah, you have to own it for more than five years because of “transaction costs”. But think about the math on this. The real estate agent takes 6% of the gross sale. You usually have to pay for a lawyer and many small fees like title search. However, there are potentially other transaction costs.
Paying double rent (or a mortgage)
Depending on your situation, you may move into your new home before you can sell your old one. You will have to pay for both locations. While it’s possible if you’re a renter (it’s happened to me twice), it’s usually much easier to leave a rental than to sell a house.
Improve the house
Some homes may be sold “as is”, but you should expect to receive a lower offer if you do. You may need to do some painting and other cosmetic repairs. You may need to hunt vermin from your attic or under your porch (armadillos are surprisingly pernicious). You can DIY, save money but cost you time and hassle. Or you can hire others, often at exorbitant rates. (Guess how much you’ll have to pay to get rid of an armadillo. Triple that and you might be close to right.)
#6 Limited Downside
One of the key principles of successful money management is to limit your downside, i.e. how much you could lose in a trade. There’s a reason the term “money pit” exists for homes. Almost every house has hidden problems that can turn into serious disasters. If you are the owner, you are responsible for everything that happens. If you are renting, the worst they can do is take your deposit and possibly charge you for any damages you caused (eg replacing the carpet due to cat urine). There is much less risk to your finances if you rent rather than own.
For a blog dedicated to financially free people, I’m curious why so many people are excited about the idea of being housebound. I guess you could theoretically walk away and stop paying the mortgage, but that has significant consequences. If you leave your tenancy, the worst thing that can happen is that you pay rent until the lease expires. More importantly, you have a lease. You KNOW when you can get out. When planning for early retirement, it’s good to know that we can plan our transition away from this home at exactly the same time we leave work.
More information here:
When to rent or buy a house
Owning a home can sometimes be a good thing. I tell the vet students I teach personal finance to that if they really want to dig up the garden and fill it with rocks, yes, you have to own a house. If they want to tear down walls and install a walk-in shower, they have to own it. But there are a lot of advantages to renting and I think everyone assumes that once your finances are established you should buy. I’m here to tell you: you can be FI but still be perfectly happy renting.
If you include it in your retirement budget, it can be just like health insurance, food, travel, or any other expense. Analyze the numbers, consider the intangibles, and don’t let anyone else tell you what to do with your home.
Do you agree? What other benefits have you experienced from renting instead of buying during your residency? Comments below!
[Editor’s Note: Dr. Erik Hofmeister is a Professor of Veterinary Anesthesia at Auburn University and blogs about veterinary academics at vetducator.com. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]