Don’t be afraid to Rent
“You need to buy a house so you’re not throwing money away on rent every month.”
I can’t remember how many times I’ve heard this or silimar statements, my wife and I rented until we were well into our 30’s and our bank account was the better for it. During this period in our lives we moved around a bunch and each time we moved out transaction cost was near zero. With a house it would have been thousands of dollars.
We’ve been in a boom market in residential real estate for the past 5 years or so. I can imagine it’s even tougher now for the renters seeing housing prices rocket through the roof over the last several years. If you are trying to save for the classic 20% downpayment, which I strongly recommend, you’ve been losing ground at like 10-20% a year as price of housing keeps climbing. No matter what current prices are doing it makes little sense to buy a house just because a bunch of other people have made money. The same way “everyone” was making a killing in the stock market in 1999 everyone is making a killing in Real Estate today. Buying a house today is a bit like investing in Internet Stocks in late 1999.
Back in the early 90s I watched several of my landlords take a beating because they bought property at the top of the market and there was a lack of tenants out there. So their rent would not even cover their cost every month. Some were even upside down on their mortgage. You think being upside down on your car is bad, try it on something as expensive as a house! When you only put 5% down you can easily get stuck if prices don’t rise and you have to sell. Remember that your real estate agent wants their 6% no matter what. If you put less than 6% down then you are already upside down on your house.
As to this argument that rent is throwing money away, and house payments are not, well that’s just silly. First only about 5-10% of your mortgage payment goes to paying down the principle the rest is interest. That money is exactly as gone as your rent payment. In addition things like homeowners insurance, repairs, and property taxes are all costs above and beyond your monthly mortgage payment. But the real thing that kills you owning a house is the combination of owning the wrong size property, and the transaction costs to sell.
First the issue of owning the wrong size property. Back when I was renting I had a place to live that was in exactly the right place and exactly the right size. If at the end of the year it was not in the right place or too small then I just dumped that apartment and got a new one with better attributes. So when my then girlfriend moved in we got a bigger apartment to share. When we had our first child we got a larger apartment for the baby. With our second child we got a slightly bigger place. Each time we were paying for exactly as much apartment as we needed, where we wanted. If we had bought a house we would have either gotten something much bigger than we needed, or had to eat the transaction costs of several houses.
Second is the transaction costs. To sell one house and buy another is going to run you at least the 6% broker commission, plus two or three thousand for a new mortgage. All of these costs are things renters never have to deal with. You are also beholden to the current state of the housing market. If things are moving slow and you have to move you could end up paying for a house you don’t live in anymore, that can get very expensive very quickly.
So let’s hear it for renting. It’s not the right thing for everyone, but contrary to popular belief it’s not the wrong thing either. And when you own there is no one to come fix that leaky water heater, you have to pay for the plumber yourself!
Full Disclosure: I now own my home, but by saving money by renting in my 20’s and early 30’s I was able to put 20% down and be in a good financial situation before I bought a house.