Is Renting A Waste Of Money?

We're told we need to buy a home. But do we really?

I went through this exercise myself after realizing a reasonable amount of career 'success' – according to commonly held definitions.

But mainly because others were telling me I should have my own place. Asking me why on Earth I was in my early 30s, working a solid career, living in New York City – and still living with a roommate?

So much so that I started thinking to myself:

Maybe I should buy my own place?
Why do I have a roommate still?
All my friends are buying their own place. Shouldn't I do it too?

Until I ran through what owning my home meant for ME – financially, physically, and mentally.

And I came to a conclusion that was best for ME. And these are the reasons I decided to continue renting.

So when you hear someone say that you should own your home to build equity. Because you need a place to live. Or whatever other reason they've clung to 'conventional wisdom' – be sure to consider these other things. For YOU. And YOUR situation.

Here we go..

...

Is Renting A Waste Of Money?

Table of Contents: 

• Reason #1. Keeps your savings intact
• Reason #2. Enjoy lower monthly expenses
• Reason #3. That 'I'm debt-free!' feeling and cushion
• Reason #4: Down payment keeps working for you
• Reason #5: Easily access your cash
• Reason #6: Save repair costs AND time
• Reason #7: Flexibility
• Reason #8: Resistant to golden handcuffs

Reason #1. Keeps your savings intact

When I was looking to buy a simple studio or 1-bedroom apartment in Manhattan, it was NOT cheap. Most places in the areas I wanted to live were in the $500,000 range.

At that time, the average down payment was 20-25%. So in some cases, up to $125,000 down to get approved for a mortgage.

I realized that if I did this, I'd be back at square one. Like I was when I first started working. Zero savings, living paycheck to paycheck.

I'd been there before. And while I knew I could handle the mental stress – I didn't want to go there again. It felt much nicer spending as I wanted to, not worried about making my rent payment. And even if I did splurge one month, I had plenty of savings to fall back on. I felt safe with the cushion. Especially because I know living paycheck to paycheck was for my parents.

And this came into play even more when I started working on my own business. Having a savings cushion was comforting. Knowing I could cover my expenses for 2 years if my new business didn't work – gave me the confidence to take a risk. And go all-in on my new venture. 
 

That big risk – and a sharp increase in monthly expenses from a nice big mortgage though? May have been much difficult to take the leap on bet on my new business. And myself.

Reason #2. Enjoy lower monthly expenses

This will vary depending on rent, mortgage rates, location, among other things.

But I urge you to do this math for yourself to determine is buying is right for you.

When I lived in New York City, I had a roommate in a 2-bedroom apartment, paying around $1,700 per month.

Homes in New York City are not cheap. Some of the most expensive real estate in the US. If I bought one, my monthly living expenses would have increased by 2.5x. At least.

Because on top of my new mortgate, I'd also have 'shared' fees for the building. And insurance. Things you don't pay when renting.

I abhorred the thought of increasing my expenses that much. Especially after draining my savings on a down payment. This would have left me in an uncomfortable financial position:

Living paycheck to paycheck again with little to no margin of safety.

But being comfortable – and being able to sleep at night – was much more appealing than my own apartment.

Reason #3. That "I'm debt-free" feeling and cushion

I graduated college $45,000 in debt. From tuition, to living expenses. And a bunch of credit card debt that I used to fund my college 'lifestyle' (read: partying).

I didn't play it that safe. If I didn't land a job out of college, I would have been in trouble. Luckily, it all worked out.

But I'll never forget that feeling I had when I made my last payment and eliminated all my debt. Freed myself from the financial burden of a few monthly payments I thought I'd have forever. I know many people who are in the 30s and 40s – still making student loan payments.

I remember sitting in my cubicle, pushing 'Pay Now' and throwing my hands in the air in triumph. Free at last!

The last thing I wanted after finally freeing myself:

Locking myself into another massive, decades-long financial burden.

A debt that large felt like I was up to my neck in dirt, shoveling myself out, one spoonful at a time. And I could see it all playing out in my head. Having to stay in this job forever because otherwise – how the hell else would I afford this every month?

The weight and pressure of that feeling was something I never again wanted to experience. Being debt-free allows me to weather storms.

There are so many people who buy so much house they become 'house poor'. Their home expense eats up a majority of their income. And they can hardly afford anything else. An emergency expense of $1,000 or more is financially devastating. And the amount of people in this position is mind-boggling to me. And downright scary.

They're one transmission failure of refrigerator breakdown from crisis mode.

This doesn't make it easy to sleep at night. And like I mentioned early.. I want to sleep.

Reason #4. Down payment keeps working for you

Your house is the biggest investment you'll ever make.

This statement couldn't possibly be more incorrect. For one simple reason:

Your house is NOT an investment. By any definition. Not even close. Especially if you live in it.

It's an expense. It doesn't throw off returns. It doesn't provide you with cash flow (in fact, if you ask any homeowner – it's quite the opposite). It's actually hard to turn into cash again with a lengthy, costly process to sell it.

People think it's an investment. They buy it at one price, and years later, if they bought in a good area, the value of their home will increase. But this is vastly different than it earning a return (and I could write a whole other post on it).

We hear it ALL the time:

Someone bought their 10 years ago and can now sell it for double. 100% return, right?

Wrong. This doesn't take into account a lot of things. Cash outlays like taxes, insurance, maintenance, repairs, interest, home association fees, selling costs.

It's also not cash on cash. More likely than not, the owner didn't buy the home in cash. And hopefully used one the biggest benefits of home purchase: leverage. (it's the only reason I wish I could get comfortable with buying property).

Few other markets allow you to buy an asset for 5x or more the cash you use.

All that considered, it's not as easy as others make it seem to determine the return on your home investment.

On the other hand, investing in broad market index funds is very straight forward. And letting an amount equal to a down payment take advantage of the 8th wonder of the world – compound interest – could return a massive nest egg in 30 years' time.

$150,000 invested in a broad market index fund (i.e., VOO and SWPPX are some examples), returning 8% annually, with no further investment – would amount to over $1.5 million in 30 years. Now, I'm not saying your home couldn't equate to an asset of the same value. It can. But you will NOT have spent anything on upkeep of your index funds ;)

And you could simply press a button when you want to sell – which brings us to our next reason...

Reason #5. Easily access your cash

Or being 'liquid'. The ease with which you can convert an asset into cash is known as liquidity.

Clicking a button to sell an asset and have the cash in your account in minutes – that's highly liquid. An example would be a stock or index fund.

But, having to hire a person to sell your asset. Then pay them a hefty commission. And wait weeks, months, or even years for the cash to hit your account – that's a highly illiquid asset.

An example? You guessed it – a home.
For some, this won't matter.

You need a place to live, regardless. So why do I care if I can convert my home into cash quickly?

It's unlikely you'll ever need to. But not impossible.

And when taken in context with all the reasons I shunned home ownership, this one also made sense for me.

And the point of this post – is to provide you with things to think about to see if purchasing makes sense for you.

Reason #6. Save repairs costs AND time

I never have to pay for repairs. Ever.

Something breaks in my apartment, I call the landlord. They send their people out and fix it within a few days. Without me having to lift a finger.

The more important savings for me though: time.

I see so many people spending countless hours on home improvement projects. Remodeling a room. Doing yard work. Cutting grass.

Maybe this is fun for them. But it's just not how I want to spend my time. At least not now.

Reason #7. Flexibility

If you're content with where you live and prefer the stability, purchasing a home may be the right move for you. At least checks one box amongst many others you should review.

If you want to move:

If you're in an area you don't want to live in for at least 10 years, tying yourself down to one location makes little sense.

Sure, you can rent it out if you want to move. But that is not without its headaches too. Finding tenants, handling repairs, and managing regular maintenance are potential worries. Unless you wish to hire a property manager.

And that's assuming the tenant pays because that can open up a whole different set of worries. Because regardless of whether they pay – YOU still need to cover the mortgage.

If you want to travel:

There's nothing like tossing all you own in a backpack, booking a flight, and heading off for a trip. For any amount of time you want. Without worrying who's going to live in your new home. And cover all your expenses.

I left New York in a rental car with 2 boxes and 2 backpacks. After living there 14 years, I knew it was time to go. It was sad. I peered down my street through the rearview mirror with teary eyes. But it was relieving to know I was taking everything I owned with me. Nothing left behind to worry about.

Even more relieving? Knowing I had a savings cushion that would allow me to travel – without worry of income – for at least 2 years.

If you want to try a new career:

I knew I wasn't happy in my job. I wanted to start something on my own and take a shot at working for myself. My friend and I decided to open a fitness studio. And what made this decision easier (besides getting fired ha!) was having a savings cushion to cover me for a couple years.

Knowing I didn't have a mortgaged-sized financial burden made it easier to avoid looking for a new job. I didn't need to abandon the fitness studio idea and get another banking job. I knew I had the time and financial runway – to take a bet on myself.

If you're considering any of these things, this logic will be appealing.

It's a costly and timely process to sell if you decide you want this flexibility. Be sure to put in all the upfront analyzing before pulling the trigger.

Reason #8. Resistant to 'golden handcuffs'

How many times have you seen this scenario play out:

A friend's been working for 10 years. Gets a nice promotion and pay raise. And immediately upgrades their home.

The home price is slightly above budget. They know it's a stretch. They emptied their savings for a big down payment to make the monthly payment affordable. But their new mortgage payment still eats up 2/3 of their monthly income. And they have little to no savings now.

They're quite uncomfortable.

They can't afford a payroll disruption. They dread any kind of large expense if something goes wrong with their house. Or car.

Or worse – a layoff.

These are the people you see happy with marginal annual raises. Pleased with any small 'benefit' a company gives to appear caring. This company can do nothing to make them happy, but they still won't leave.

They can't. They've locked themselves into this income level. Tightened up the golden handcuffs. And threw away the key.

But you? No company can keep you locked in. Because with your cash cushion – you know you don't need them. And can act accordingly at work.

Final Thoughts

Remember – you don't NEED to own your home. That's old school thinking.

I'm not saying you shouldn't buy home. What I am saying:

Be sure to do the homework required to make sure purchasing a home is for YOU.

These are the things I took as major benefits to not owning a home. I'm sharing so you can justify not purchasing a home IF that is what you decide.

Because there's a lot of people out there who will say you should always buy your home. No matter what. And they preach it as gospel. Conventional wisdom. Something that works for everyone. And thinking one thing works for everyone? That's just stupid.

But not as stupid as accepting 'conventional' wisdom – without doing your own analysis.

Think you're ready to make a career switch – and go out on your own? 

I created a FREE 5-day email course to help you start your own 1-person business by walking you through how to: 

•  Finding your business idea
•  Clarifying the problem you solve
•  Attracting those you solve it for 
•  Laying out a CLEAR PATH to landing your first client

You can get it here.