Why We Rent Our Apartment

Doug and I are both in our 30′s. Doug has a successful job. We have a kid. We have good credit and money for the 20% down payment. According to most social standards, we should have bought a home a couple of years ago. Why would we still rent?

Not a week goes by that Doug or I don’t hear at least one of the following:

  • “You’re just throwing money away.”
  • “You’re paying someone else’s mortgage.”
  • “A house builds equity and appreciates in value.”
  • “You’re missing out on the tax breaks.”

What these well-meaning friends don’t realize is that we save a lot of money by renting, and then we invest those savings into dividend-paying stocks that appreciate in value. Here is how I calculate the savings:

Monthly costs to rent our apartment:

Rent $800
Renter’s insurance: $15
Average utilities: $140
Total monthly cost to rent: $955
   

We really like our neighborhood, and the location is convenient for Doug’s work, so we want to stay in this area. To make this comparison fair, I’ll use the cost to buy one of the townhomes for sale next to our apartment. There are two townhomes for sale that are similar in size and scope to our apartment. One is listed at $239,900 and the other is $249,900. We think they will be lucky to get $200,000 from a buyer, so I will use $200,000 in my example.

Monthly costs to buy similar townhome:

Terms are a selling price of $200,000 with a 30-year fixed mortgage at 6% interest and a 20% down payment (to avoid paying PMI).

Mortgage: $959
HOA dues (includes some utilities and yard service): $240
Property insurance: $40
Average utilities: $100
Property taxes (2.5%): $417
Minus the tax rebate for interest and property taxes, above the standard deduction: (average from first year, assuming 25% income tax rate and a standard deduction of $10,700 for married filing jointly) - $80
Total monthly cost to buy: $1676
   

Monthly savings by renting: $721
Annual savings for the first year: $8,652

This is just a monthly example for the first year, and it does not even include the huge expense of fees and commissions when you buy and sell a home. It also does not include having to pay for maintenance or repairs.

Only $164 of the $1676 for the townhome goes to principal each month for the first year. A payment of $1592 per month goes to interest, taxes, and fees, and then you get $303 back in taxes. A renter on the other hand would get $223 back in taxes just by taking the standard deduction, so the tax advantage for owning is really only $80.

After the first year, it gets complicated with appreciation and inflation rates, so I used this online calculator to model it. According to the charts, after thirty years the townhome appreciates to $461,000 — more than double. The invested rent savings have grown to over $2.4 million! The equity in the townhome will never be able to catch up to the value of the invested rent savings for this scenario.

True, a home can appreciate in value, but if you sell it, where will you live? Would you really take the money as cash and buy a cheaper home? Most people tend to trade up, not down. On the other hand, the stock investments (using the $40,000 down payment and monthly rent savings) continue to grow in value, and we can sell them at any time.

Some will say that over the long term, buying a home is a better deal, because the mortgage is fixed and the rent will rise. Maybe, but our rent has not risen as fast as the property tax would each year. And I really don’t want to spend an extra $721 per month just to say that I saved $80 in tax breaks.

I would like to live in my own home one day, so I hope that the market will change and bring a balance in rent versus price of ownership.

I am not saying that renting is the best way for everyone. I am suggesting that each family measure the costs for their personal situation and market region, and then compare it for themselves. Don’t just take my word for it, or your realtor’s.

About Rachel

I write about practical tips that will help you simplify at home. Connect with me on Pinterest and Twitter.

Comments

  1. Thanks for the read! Very informative.

  2. Doug Meeks says:

    Ah…..

    I do love this woman very much (I married her to my great benifit). One thing that helps us is that both of our hearts are together on this issue…we are 100% in agreement. I can’t tell you how great it feels to be together on issues that are this important. I thank the Lord for the unity we have in our home.

    I will add to this discussion that, quite often people fail to understand the value of capital. Somewhere in the renting/saving process some amazing things start to happen. At a point far earlier than the end of any standard or average mortage…. a person will be able to pay cash for a house! Or the income from solid investments could make a mortage payment….and once the savings are extended over a little more time…….a house starts to look pretty cheap…for instance if a person had 2.4 mil…..that will cover a home or two or put out a conservative (before taxes) 240K in income.

    So please remember people…….capital is better than debt. A home is a wonderful thing, but it fits better in the category of liablity than in the asset category. If you need to be trained in that area, you probably need to return to Yahoo Finance where you will be told what you want to hear.

    Much love to all.

  3. berrymomma says:

    That is very interesting. My dh is a builder, so we’ve built and sold 2 homes already. Now, in our third home, after trading up like you said, we’re ready to sell and build something smaller. When we sell here, if we sell, then we could pay off the mortgage and build again and be debt free or nearly so. But I can deffinately see your point. It sure did feel nice to rent and be free of the deathgrip of a mortgage for those times we were building. I’m going to have my dh read this tomorrow.
    Thanks!

  4. Well put! Owning a home is like having kids…an assumption of what one does when grown….no one investigates the notion much.

    Helps to have a flexible landlord who will allow some customization like paint…but I’m in agreement!

  5. It’s interesting to hear your perspective on this. My wife and I purchased our first home a little over a year ago. It certainly is more expensive on an month-to-month basis, but it’s worth it to us to have the flexibility to do what we want with the house, plant flower and veggie gardens, etc.

    Also, one thing we did which adds more expense now, but which will cut down on the long-term cost of the home is to make extra payments on the mortgage. We bought a much less expensive house than the biggest we could afford. This has allowed us to make monthly payments of about 2.5 times the required amount. As a result, we should have the house paid off in about 5 years instead of 30 assuming we both continue working. The long-term advantage to this is that once the house is paid off, our living expenses will drop drastically.

    Admittedly, I haven’t compared this to the alternative of just investing the extra available money instead. However, having NEITHER rent nor a mortgage payment in a few years will provide us with a lot of financial flexibility… once we get there. :-)

  6. That’s a great strategy for a quick mortgage payoff, Mike. At some point when we decide it’s time for us to buy a house, we’d like to payoff the mortgage quickly too so we can have the flexibility like you said.

  7. I’m so glad to read something positive about renting. My husband and I rented a home for years while we kept hearing others, usually older folks, sayind renting was such a waste! Well, we felt it was no waste at all to have a roof over our heads. We had absolutely no extra to put back enough to buy a home, and knew no one who had enough money to even loan us for a down payment. We like owning our home now, but please don’t anyone degrade or put down people who are in positions of having to rent.
    It’s quite a put down.

  8. Karen (Scotland) says:

    No idea if you read comments on your older posts, Rachel, but I’ll just put my tuppence worth in here (working my wat steadily through your archives!).

    I second what Mike H says above except we don’t just make extra payments when we can, we shortened our mortgage term. Standard in Scotland is 25 years but we started with a 13 year mortgage at our old house, reduced it to 8 years when we moved here and then shaved another 3 years off last year. Just shaving off three years from our mortgage saves us about £20,000 over the whole mortgage term. The amounts each month are hefty but there’s no way we could pay rent on a house this size (no flats really in this town) and also save enough towards purchasing a house.

    It also provides us with a safety-net. If interest rates go up, Michel’s work changes or we feel we are pushing ourselves too much, we can always extend our mortgage term again.
    This suits us and the size of our family.

    On the other hand, and supporting what you are saying, one of our leading financial gurus in Britain (Martin Lewis of Money Saving Expert.com) keeps telling us to stop panicking about being on a property ladder. He says Britain has become obsessed with owning property and that there is a generation of people who can’t actually afford to be property owners who are now facing major maintenance – roofs, rewiring, etc – in their old age.

    Definitely interesting to read about this.
    Karen

  9. Very interesting perspective! I can’t wait to talk this over with my husband to see if moving out of ownership and into renting would make sense for our family. We’re getting out of owning a rental property we have because it’s such a brain drain of maintainence and stress. I wonder if this is more relevant now with the downturn in real estate than at the time of posting or if with the downturn in investments if it still makes sense. I’d love to learn more! What resources led you to this decision?

  10. Renting is the only practical option for us in this season…we could afford a house here, but unfortunately, it’s not an area we’d care to make a long term investment in. The return would be minimal if not nil, and we can’t predict how long we’ll be here. For now, renting is a better than good option for us. We live in a small, unmortgaged house (we checked, considering all the troubles renters are having with their landlords having properties foreclosed) owned by a friendly but business-minded landlord…we have on call maintenance service, no questions asked, and feel like we’ve won a prize by living here.

    And I have to admit, I like renting! Our home ownership experience was not a good one, since we foolishly bought a tear down that we insisted on propping up. We sold it just in the nick of time and did manage a profit, but we’ll never get the time and worry back. Net loss. There’s stuff I’d rather do than worry about saving for a new roof, etc, at least for a while. To date, it was just a “feeling”, so I really appreciate your analysis of the complete financial story…thank you!
    the cottage child´s last post…Veni- veni

  11. I love this post. My hubby and I bought our first (and only home) in 2006. We lost it 2 years later, in a short sale, because our house was valued for less than we owed, so we couldn’t refinance. We have been renting ever since. I love the freedom it gives us (we recently left a beautiful home because of noisy neighbors, and another home because my hubby’s job got transferred out of state.) We didn’t have the pressure of trying to sell our house, we just simply let the lease run out. We are in an apartment now, until we find another home to rent. Thanks for the wonderful post!!

  12. We were fine renting houses in the beginning. In one house that we liked, the owners suddenly decided to sell and we had to get out quickly, because we didn’t want to buy it at their price. We only had enough time to grab another rental, a new construction house, in the same area, whatever was available. Two years into that rental, the owner (the original builder) gave us exactly 30 days to either get out or buy that house, instead of renewing the lease. They could have notified us earlier, but chose not to. We had 2 young children and 3 cats, and thus had no options. We ended up buying it.

    So when we moved to Oregon with our kids and new baby, I felt I couldn’t handle the instability of renting. I don’t love home ownership, but at least no one can tell me to leave.