True or False: Renting is Throwing Your Money Away

Analyzing some of the worst home ownership advice out there

True or False: “Renting is throwing your money away.” You’ve heard it dozens of times, and now it’s time to analyze the truth of this statement. (Scroll down for the answer.)

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False.

There is nothing wrong with owning your own home. I will do so eventually. But only at the right time, for the right price, and with the right information.

When buying a home is done well, it is wise. When done poorly, home ownership is sad. It leaves the homeowners house poor, meaning they have very little cashflow for other responsibilities.

It bums me out to see people get the big house of their dreams only for it to become a a ball and chain, holding them back from more important goals. (This is also why I can’t be happy for people who buy a brand new car they can’t afford.)

I’ll even go as far as to say this: If you aren’t sure you are ready to buy a house, you should rent (cheaply) by default.

If you rent for a season, you can learn the area, save up for a big down payment, and fully understand the cost of home ownership.

Not sold? Keep reading.

Look at the statement again: “Renting is throwing your money.”

This broad, subjective statement relies on key assumptions:

  • Rent costs much more than the monthly house payment
  • You can make a big down payment
  • You get a low interest rate on the mortgage
  • You will stay in the same spot for 7 to 10 years (This is the point where buying becomes cheaper than renting, if all other variables are equal.)
  • You can afford the payment every month for the next 15 or 30 years

Those are bold assumptions! Yet people make fun of renting constantly. And plenty of those very people end up in foreclosure. Ouch.

To be fair, there are times when renting really is throwing you money away:

  • Rent is very expensive for your area
  • Renting in the same location for decades without any sizable retirement, investments, or savings to show for it

Now let’s discuss the hidden costs of home ownership:

  • PITI: house payments, which are made of Principal, Interest, Taxes, and Insurance
  • Landscaping: yard work
  • Maintenance: prevention, or fixing whatever breaks
  • Big expenses: water heater, A/C, septic tank, and a new roof every X years
  • Your long-term investment asset is tied up in an illiquid liability (as discussed in the book Rich Dad, Poor Dad)
  • Unable to move without months to prepare and sell the home (which assumes you are not underwater and it does actually sell)

You won’t get the full story when you talk to your friends who own homes. Or real estate agents. Or banks. You have to dig to find out what expenses await the new homeowner.

When you rent, find something small and cheap. This way you can put aside money for getting out of debt, retirement, your baby on the way, a business idea, or your future home.

If you got nothing else out of this, at least remember one thing.

“Renting is throwing your money away” is a myth in many circumstances. This saying leads people astray and encourages them to make a big, expensive, uninformed decision.

You’re still welcome to enjoy your nice home — by all means! However, let’s quit saying this and let people enjoy renting.

Have you ever made a decision due to peer pressure? Were your friends right? Did it turn out well?

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Categories: Money, Perspective
  • Andrew.Gage

    Andrew R., You must never have rented in Los Angeles. lol. LA landlords don’t replace appliances. They expect their tenants to provide their own refrigerators and stoves, on top of astronomical rents. This has been going on since the 90’s. If a place comes with one of those items it’s probably because a former tenant left it behind.

    I agree though, money from rent that COULD go into supporting a variety of businesses goes into the hands of a few certain industries within a local economy.

    Back in the 70’s and 80’s the recommended rent “norm” was 25% of your income. Now it’s 30%, although that is only a recommendation. More than half of renters spend upward of 35% in today’s market. Finding a “better deal” isn’t as easy as it sounds where the rent vs wage ratio is high. The increases in minimum wage over the next 5 years may help ease the burden a bit, but I strongly suspect that rents won’t hold at current rates long enough to bring that 25% figure back. A study published by the National Low Income Housing Coalition earlier this summer showed that there is no longer any state in the US where a minimum wage earner can afford a one bedroom apartment on his/her own (based on averages across each state). That’s just plain un-American!

  • Andrew.Gage

    Renting may not be “throwing your money away” however it can be handing your economic power over to someone else and keeping local economic growth from taking off, depending on where you live. An example I like to use is this: Let’s say a landlord rents out 24 units. And let’s say that the 24 tenants he rents to are paying more than the 30% of their income recommended by the government (which most people are these days). The tenants have less buying power because more of their spendable income is going to the landlord. The landlord does not then return that money to the marketplace the way his tenants would – ie: twelve of his tenants might like to buy a new TV and the other twelve want to buy a new car. Is that landlord going to buy 12 televisions and cars with the income he takes from his tenants? Most likely not. So in that respect, renting can harm the overall economy by shifting the buying power out of the hands of many into the hands of the few, whose needs are less than the many.

    By the same token, if, as many people insist, mortgage payments are cheaper than renting, the homeowner has greater spending power in the marketplace, which is good for the economy.

    As a lifetime renter with no potential to buy in the foreseeable future, I can say that renting used to be a fine way to live when it was affordable across the boards. But with landlords continually pushing rents up faster than income growth – and in some areas, offering fewer amenities for the increase in cost – renting sucks.

    • With a high percentage of income going to rent, the renter definitely has fewer options. But to be even more conservative, rent should never exceed 25% of your take-home pay each month. 30% is crippling, whether renting or owning.

      Renting hurts the economy? Though I see what you mean about the landlord and returning money to the marketplace, it stops short. The landlord will spend money in other ways by maintaining his building, replacing appliances, paying contractors to repair the roof, and so on. This spending places the money back in the hands of the “few.”

      But back to renting. When default renting options are too expensive, keep looking.

  • Johnny V

    Exactly why I’m still renting.