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Photo by Tierra Mallorca on Unsplash
It’s like burning money. You must pay someone else’s mortgage. Why waste money on rent when you can acquire a mortgage and own a property in 30 years?
To be honest, this is incorrect logic, even if we believe owning a property is cheaper in the long run. Renting an apartment is not a waste of money.
Your efforts are rewarded. You don’t get an Uber when you order one. You don’t get the driver or any information about the company; you just get a service.
Whereas an uber will get you from A to B, a house rental will do the same.
In most circumstances, a house is rented to offer a roof over one’s head rather than a place to live.
Most people still think renting is a waste of money, especially when you can buy a property for the same price as renting.
And this is when the confusion begins.
Most people don’t examine all of the expenditures involved in buying a property, instead focusing on the price and comparing it to the cost of renting.
This post will show you how renting instead of buying can save you millions.
To be clear, we are not talking about buying a home to sell for a profit.
Consider the following scenario: your friend will get a mortgage on his own because his parents told him that renting is a waste of money, while you will continue to rent.
Find out what your net worth would be in 30 years if nothing else changed. A $300,000 residence can be rented for around $1800 per month. However, even at pre-pandemic mortgage rates, a 30-year mortgage would cost $1216 per month, making it the world’s most expensive home.
That’s the principal plus interest.
Renting is clearly a waste of money based on these two figures alone. Regrettably, this is not the complete storey.
When you add in other costs, things start to look a little different. Insurance and property taxes total around $1707 dollars.
Even now, it appears that buying rather than renting is the superior option, and I wholeheartedly agree.
But let’s be realistic and factor in the extra costs of homeownership. Maintaining a home might cost more than buying it, especially if it will be owned for more than 30 years.
While the worth of the earth beneath your feet rises, everything else falls. A new kitchen may be required every 10, 15, or 20 years.
A piece of furniture cannot last a lifetime; the couch will not last 30 years.
Your roof needs to be replaced every 10 to 15 years.
The manufacturer recommends updating the bathroom every X years. If you have ever bought a home, you know that homeownership is not cheap!
Renting eliminates all of these fees! The annual cost of maintaining a home ranges from 1 to 5% of the purchase price.
Let’s say 2.5 percent.
Our monthly maintenance fees would be $625. To round it up to the next dollar over 30 years, $625 is a realistic figure, and in some cases, it may be greater.
A monthly cost of ownership of $2332 versus $1800 for renting. Even with these data, buying appears to be a better deal overall.
In 30 years you will have a house worth tens of thousands if not millions of dollars, while your friend who has been renting will have nothing.
But first, the numbers.
Assuming a 3% annual rise in value, your home would be valued $728,179 after 30 years. Anything more is speculative, as housing prices may fall as well as grow in the future. Only the opportunity cost is missing from this computation.
A 20% downpayment on a mortgage was required, which amounted to $60,000 at the time. The money may be used to build a business, a corner store, or anything else that generates revenue, but let’s imagine you’d use it to invest in the stock market.
Given that the S&P500 had an average annual return of 10% over the same 30 year period, it is realistic to assume at least an 8% return.
Your monthly mortgage payment is $2332, yet renting a comparable house is $1800, resulting in a $532 opportunity cost.
Assume you’ll invest in the same venture. Compounding at 8% annually, a $60,000 investment would rise to $1,353,108 in 30 years.
In the end, your friend who has been renting and investing the difference has 1.3 million dollars, while you have a house worth $728,000.
Which do you value more: 1.3 million dollars in cash or a 728 thousand dollar house? Everything changes when viewed from this angle. Even these calculations aren’t exact because we didn’t account for a 2% annual rent rise.
Your maintenance costs would rise in lockstep with inflation. Home maintenance can be kept to a minimal, costing only 1% of the home’s value.
We also ignored the interest deduction that comes with homeownership. You may also need home renovations but lack funds to do so. As a result, you may be obliged to pay for them with a credit card, resulting in high-interest rates.
It’s important to remember that owning a house isn’t always the best investment, and renting isn’t necessarily a waste of money either, because it allows you to spend elsewhere, which is important if you just want to live there for a few years.
Even with today’s low-interest rates, taking out a mortgage will cost you money. If your mortgage is adjustable, your interest rate will likely rise in a year or two when things return to normal.
It may be fixed, but the market is inflated, as we said previously. This means that in a few years, your net worth may fall below $728,000.
And if interest rates fall further in the future, which appears to be the case in the long run, you won’t be able to benefit from the reduced rates.
Thirty years is a long time.
The epidemic shows that a lot can happen in 30 years. I can’t imagine my life in 30 years. During this time period, tenants who could work from home might downsize to a more affordable city and save thousands on rent, while homeowners were forced to stay put.
Living in a static world isn’t always the greatest option. Even more so given that we have better tools to acquire money than our parents, such the opportunity to invest in the stock market from your smartphone for free.
That doesn’t mean you shouldn’t buy a house; in your case, it may be the better option given your goals.
So, purchase or rent?
It depends on your scenario.
