I’m not a big fan of blog posts that expose myths and realities. I think it’s kind of a lame writing crutch. So please understand that I’m not going to start dispelling all sorts of home-ownership myths. I am, however, going to address what I find to be the stupidest popular sentiment ever construed. “Renting is throwing your money away.” Just like Justin Bieber, I’ve heard it 10 million times, and I just want it to go away. It’s an ugly phrase that has been passed down from Baby Boomers who don’t know what they are talking about. And I’m drawing a line in the sand.
Renting makes a tremendous amount of sense in many different situations. And I’ll go even further to tell you that it might make sense for you if you are currently “buying” a home you can’t afford. You see, affording a home (in terms of buying it) isn’t as simple as affording the payment. This is usually where the problem begins. Most people think that if you can move into a house and pay a mortgage equal to your current rent payment, then you should do it. And frankly, this is where years of inter-generational advice has gone awry. It’s quite sad actually. You’re telling me that our parents never learned that owning a home is a hell of a lot harder than just affording a mortgage payment?
We all know that married couple that never should have gotten married. I know, that’s kinda rude. But it’s true. They tried to solve their relationship problem by getting married. That doesn’t make sense. And neither does buying a home you can barely afford, because you feel like you are missing out on home ownership. Squeezing your way into a mortgage is a bad idea. Barely affording a pair of shoes is bad enough, barely affording a car or a house can ruin your financial life for a decade.
Renting isn’t second place. Renting isn’t a consolation prize. Renting isn’t unAmerican. Renting is wise and controlled. Renting is disciplined and measured. Renting is throwing your money away…into an awesome bucket. Sick of living in an apartment? Then rent a house. Sick of renting a house that you are currently living in? Then rent another house. Do you see my point? You should take advantage of renting until you can truly afford a house. Several homebuilders that were in the business of “selling homes to people that could barely afford them” are now out of business. And it’s not because they gave everybody such a great deal. When the economy collapsed, the ability to sell homes to people that couldn’t afford collapsed too. But that practice will rise again. And you need to be prepared.
So, how do you know if you can truly afford a home (the way Pete the Planner means affording a home (man, that third person reference was a little much))? Well, affording the payment is certainly part of it. Your mortgage payment (including tax and insurance) should not exceed 25% of your net (take home pay) household income. And now for the magic number: you need 10% for a down payment. Yes, I realize that you don’t have to technically have 10% for a down payment. And yes, I realize that a 20% down payment allows you to avoid PMI (Private Mortgage Insurance). But my number is 10%, and here’s why. If you can’t afford to scrap together 10% of the value of the home you are considering purchasing, then frankly you can’t (truly) afford to own the home. The proven ability to save money is an invaluable step in home ownership. Dishwasher goes out: you need money. Property taxes go up: you need money. Don’t want your house to have awful looking landscaping: you need money. My 10% home equity requirement isn’t about home equity. It’s about proving that you have the ability to save significant money on a regular basis.
Renting is not throwing away money. Your parents are wrong. I have had to try to clean up the pieces of hundreds of financial situations that are the result of buying instead of renting. There always is the exception to the rule. But you know what? The rule isn’t “renting is throwing your money away.”
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.
Pete you nailed it, years of misinformation, bad advice and good old fashioned pride created the financial crisis.
Yes the Baby Boomer generation mishandled finances, got spoiled by pensions and employer paid healthcare and passed on the recklessness to their kids.
Great advice on renting.
Thank you!
For the first time in yrs. I don’t feel guilty about not wanting to own a home I can’t afford! I love renting and having extra income. If I bought a house I would be house poor for sure!
Me likey this blog entry. I rent and have for a while. I have worked under contract and never knew where I would end up at the end of each contract. Also I am single and love the thought that I can move at anytime if the right opportunity should arise. I recently thought I wanted to buy and settle down in this city. But then the single me says “who knows what tomorrow will bring.”. Now that’s some freedom!
Great post and so true. So, if you add in all the maintanence, insurance, etc. to the 25% number, what do you think the “real” number should be? I think it is around 40%. But I’m just guessing.
I bought a house because I was getting killed on taxes in California as a single person. I rented a house when I moved to Indiana and then bought one. Big mistake. Once I had my (surprise) baby as a single person, I was house poor. I’m considering selling this one and renting another in order to have more disposable income.
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Another factor to consider is how long you are really going to live in that house. I know many people who purchased a home to “not throw money away” when they were only going to live there for a year or two. When the housing market fluctuated, they were stuck with a house that they couldn’t sell or were selling it for half of what they paid for it. I wonder how many people have driven themselves into bankruptcy because of this buying vs. renting myth.
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Good points. There are even more compelling issues but they are hard to communicate such as transaction costs, opportunity costs, intangible benefits. The intangible benefits can work both ways – if your joy in life in maintaining a massive garden (and the community garden does not do it for you), then owning a home is more readily justified (maybe buy with 8% down instead of 10%).
I wish I could beat the following groups with the stupid bat:
1. Those sucked into home ownership by HGTV and magazines
2. Those who buy because they believe it is a great investment (see note about transaction costs)
3. Those who buy before they are ready (to maintain the property, to enjoy, to afford).
4. Those you buy a dump because they plan to keep it when they buy a grown up house so they can rent the dump out…
Good words. I’ve personally never rented and have always been in home ownership situations that we could afford with financial margin. However, we’ve had lots of friends purchase homes immediately out of college or upon moving to a new city and end up stuck before knowing the best neighborhoods to live in, etc.
Well what happens when your 60 and living on a shitty pension and can’t afford to rent? I rent for. 3 years and it is throwing money not into a bucket like u say . But down a drain mate . I’m moving back home to save money for a few years to buy our own house . I have children and will be hard to move home . But if rather do that then pay someone else’s morgage . In the long run my kids will need security and so will I . I’m 28. When I’m over 50 I don’t want my kids to ask why I just blew my money to let someone else own the house. It’s daft . In fact it’s the most stupidest thing ever . I have friends who don’t have kids who move out and rent because they have no deposit and I say they should just stay home and save . It’s harder for me with kids . Also I don’t have the bonus of having a mum and dad who own their own home so their is no hand me out money to come in the future like most people who live off their parents or relatives .
Here is my general ballpark guidance to people on the “all-in” costs. They are admittedly imperfect, but ought to get the wheels turning and get you close. Adjust yourself as needed, but be sure to consider all of them. In addition to your mortgage payments:
1.5% of home value on R.E. taxes (varies widely by state)
0.5% of home value per year on insurance. A $300k home = $1,500 for insurance. If you live in a flood plain, near the coasts or a fault line, it is going to be more. Rural areas…probably less.
1% – 1.5% of home value per year on maintenance / repairs (depending on age of the home). This comes in bunches…you may have $0 for two years, then have to replace the A/C and furnace. Nothing for a few more, then a roof, new windows, siding, an association assessment, etc. Nothing again, then you need new appliances. If you average it out over 5-7 years, it is extremely accurate. Create a separate savings account and allocate 1% to it. You won’t regret it and you will most certainly use it.
1.5% of home value for water, sewer, garbage, heat, electric, condo / townhome association fees, etc.
This is completely separate from any plans to remodel, do landscaping projects, etc.
Look, ownership is great when you are ready…no leases, you can (almost) do whatever you want to the property without landlord permission, etc. But it is a lifestyle choice more than a financial choice. When people talk about “making money” via ownership, they almost universally ignore the carrying costs. They tell you they bought it for “x” and sold it for “y”. That is only a small part of the reality.
Is there a point where it becomes the better financial choice to buy rather than rent? For example, you are financially solid and can easily afford a home, are settled in an area, but just don’t want to bother with the stress of ownership. (Asking from pure financial standpoint – regardless of personal life preferences and choices). Thank you!
At some point, it absolutely makes sense to buy a home. If you prefer not to do a ton of maintenance, maybe a condo or townhouse is the better option.
It would have been nice if you illustrated all those other expenses that renting takes care of vs. what a homeowner has to pay for out of pocket. After all, for my $1000 a month, I get access to a pool, a clubhouse, and a gym (and my water/sewage bill is paid in full, regardless of my usage). Grass gets mowed without me even having to call someone. Repairs are done without me being charged. Trim gets painted without me even having to call someone. If a major kitchen appliance breaks–repaired without me paying for it. Roofing? Don’t even have to call someone. Sidewalk shoveling? Done for me. Plumbing fails? Landlord pays the plumber. Same for furnace. They even change the porch light for me at no cost. If a package arrives and I’m not there, it can be left at an office and I can pick it up at my convenience. Add all that up and subtract from $1000. How much is left over a month for a mortgage?