Priya Malani is the co-founder of Stash Wealth, a modern financial firm for H.E.N.R.Y.s™ [High Earners, Not Rich Yet]. In 2009, she left her job on Wall Street to become a financial resource for our generation. For almost five years, Stash has been changing the way 20-somethings and 30-somethings think about their money—whether they’re saving for a vacation or thinking of buying an apartment.
Homeownership is at the heart of the American dream. Most of us are mildly obsessed with HGTV and waiting for the day that we can bring our Pinterest “dream home” board to life. But with outrageous prices and massive student loan burdens to pay off, it can feel like we are going to be at the mercy of a landlord until death do us part.
If you’re part of the “will I ever be able to afford to buy a home?” camp, I’m here to tell you that, at least from a numbers stand-point, it’s not all it’s cracked up to be. In fact, renting may be the smarter decision in the end. But what about the tax deduction, building equity, ending the cycle of throwing away money on rent, you ask? While it’s not possible to explain away the emotionally and socially-ingrained benefits of home ownership, the argument that rent is throwing money away is a myth that should be busted.
Here are a few thoughts that may help ease your anxiety around wasting your hard-earned dollars on rent.
1. Your home isn’t necessarily your best investment.
Buying real estate requires a huge chunk of cash. Breaking news, I know. So when you buy a home, you’re banking on the fact it’s going to be a great, if not your best, investment. It’s like going to Vegas with $5,000 and heading straight to the roulette table and putting it all on red. You’re using all your money to make a single bet.
Now I know what you’re thinking: “Real estate values always go up so why do you make it sound so risky?” This may come as a shock, but a recent study quoted in an article by the New York Times showed that home values across America rose an average of 0.37 percent per year over the past 126 years. This study was looking at home prices outside of bubble markets, so this doesn’t hold true volatile areas like New York or San Francisco, but in most of the country, home prices have held steady.
2. You’re getting something for your money.
When you rent a place you’re not wasting your money, you’re exchanging it for something of value: namely a place to keep all your stuff. Renting provides a level of flexibility that is often underrated and undervalued in the rent versus buy argument.
If you want to take a new area for a test drive, renting is a great option. If you are traveling for work and need temporary housing for a couple months, renting is the answer. If you need time to build up a down payment and you don’t want to live at home with your parents; renting is the way to go.
3. You need time to save up a down payment.
In a perfect world, it would grow on trees, but we live in the real world and that kind of money doesn’t accumulate overnight. Saving up tens of thousands, and some cases hundreds of thousands, of dollars is no small feat. You need a strategy, discipline and more than anything, you need time. The size of your down payment needs will vary on how large your mortgage is and the purchase price.
Take New York City, for example, where a shoebox-sized apartment starts around $250,000 and the median price of a home in Manhattan hovers around $980,000. That’s a $196,000 down payment at 20 percent down. Not to mention closing costs and money to furnish the place. It takes time to build up that kind of cash.
4. Homeownership has a bunch of costs you’re forgetting about.
Talk to any homeowner and they will warn you that owning a home is a never ending cycle of upkeep and maintenance. Even if your home is brand new, and you swear you’ll cut the grass yourself, there are a whole host of other costs that need to be taken into consideration.
I’m not just talking about interest, taxes, and insurance—which make up the bulk of your mortgage payment in the early years. Most amortization calculators can help uncover the unfortunate truth, which is that for the first 10 to 20 years of home ownership, you’re “throwing away” about 80 percent of your monthly mortgage payment because only 20 percent goes toward building that holy grail of equity. And then there’s the homeowner association dues—make sure you’re making use of all the amenities (when was the last time you used the pool table in the club house?).
If you’ve ever done a basic mortgage calculation online and walked away thinking “for what I’m paying in rent, I could get so much more if I owned!”, I promise you didn’t find some hidden arbitrage in the real estate market, and I would I urge you to take some more time to talk to a professional about the costs involved. If it’s too good to be true, it probably is.
Renting is really not so bad when you sit down and do the math. And if math is not your thing, it’s okay, we’ve done it for you. All variables considered, the emotional ones are the best reason to buy your primary residence. You have to love it, want to stay put in it for a very long time, and continually reinvest in it to see a payoff in the end. If you’re not ready for that kind of commitment—newsflash—you’re not falling behind by renting.