'Renting Is Throwing Money Away' Is Completely False

'Renting Is Throwing Money Away' Is Completely False

You might have heard the old adage "renting is throwing money away." It seems like common sense. You don't buy anything when you rent, but you keep to keep the house you buy. However, nothing could be further from the truth. Photo by Charleston's The Digital.

As personal finance blog Afford Anything breaks down in massive, incredible detail, buying a home is a lot more complicated than "Rent, except you get to keep it". Not only are there major additional costs that you'll be paying for the rest of your life (like repairs, renovations, and property tax), but for the first several years of your mortgage, you're barely even gaining any equity!

Should you keep renting? Is renting better than buying? Or should you purchase a home? Is buying the better choice? Your answer is going to depend on a massive number of factors, including:

  • The local price-to-rent ratio.
  • How long you'll live there.
  • Your alternative investment options.
  • Your assumptions about inflation and investment gains.
  • Maintenance, repair, insurance, property tax and capital expense costs.
  • The rate at which rents rise.
  • Et cetera, etc., etc.

You get the picture. My goal is to impress upon you -- once and for all -- that this myth that "renting is throwing money away" is wrongheaded. In fact, it's dangerous. It oversimplifies a life-changing, six-figure decision. It's probably caused thousands (or millions) of people to buy houses they later regret.

The entire piece is long, but should be mandatory reading before making the decision to buy versus rent. While it's true that you're buying an asset when you purchase a house, it's an asset that barely keeps pace with inflation, and you lose the opportunity to make other investments. Not to mention, renting is underrated. Even if you think you've considered this topic top to bottom before, you'll likely find some information you hadn't thought of before (like a detailed explainer on the price-to-rent ratio) that you hadn't thought of before.

Renting is Throwing Money Away … Right? [Afford Anything via Rockstar Finance]


Comments

    The premise in this ill-informed article is missing a number of important points. Because we were able to own our home quite early in life entirely through hard work and saving, we were able to retire young(ish) and enjoy life. Do you not understand that when you outright own your principle place of residence, you are getting free accommodation for life other than your land and water rates or taxes? This frees up a substantial portion of your income for other investments, luxury purchases, holidays, helping your children, and of course an early, well earned retirement. When you pay rent you are buying someone else's dream at the expense of yours. Rent or a mortgage is an unfortunate necessity when young people are starting out but please don't do it for too long if you want to be financially secure. Pay off your house now whilst your earning power is strong!

    If you're 35 and don't have a property, I ain't dating you.

    The truth is, you're renting, not because your money working harder in other investments. But because you have pissed it away on fags and booz and partying all the time.

    It might make sense for a minority of people to follow the advice of the article. But the majority of people just aren't sophisticated enough

      that's a bit narrow minded. I'm in my 40's and don't own property. I have two fantastic kids that have had the chance to do any extra curricular activity they wanted - it was a choice to put our money into their education and experience. Added to that we are a single income family with a huge amount of medical bills (pat, present and future) we really don't have the opportunity to buy something.
      Out initial plan (before the medical issues hit us) was to buy something when the kids finished school, but you look around now and tell me where I can buy a house within 20km of Sydney that has a yard + aircon + 4 bedrooms that would only cost $600/week? Because that's what I pay in rent right now.

        Perhaps you should look at your criteria for a house. Does it have to be 4br within 20km from city? Dual income an option?

        "Investing" money in children may be good for society, but not the best for personal finances.

        Financial security doesn't rank very high in welfare states. Why worry about making good choices when the government will take care of you.

          On the contrary, investing in children is what will drive our future. If we decide bricks and mortar are more important than health and education then we can only expect things to get worse.
          And I don't believe the welfare state argument, all systems have abusers but that doesn't mean the system is bad.

    Oh I don't know, if you are on a variable interest mortgage, once you get it down enough, the rent comparison drops away. Towards the end of our mortgage, we were paying far less than the average rent for a similar property. Mind, we were lucky that interest rates weren't as high as during the Hawk/Keating period. Still, we aren't long out of our fifties and having no mortgage has lifted our standard of living measurably I think the biggest issue these days, is actually being able to get the deposit together. The banks want ridiculous money these days and it's making it near impossible if you're paying rent and trying to save.

    Last edited 10/12/15 6:56 pm

      This is it. Deposit is what holds many back. That being said. Putting a tidy deposit isn't a bad idea especially when interest rates increase.

    The moment interest and the other owner-only expenses are less than rent, you're starting to win.

    My wife and I have owned our house outright for eight years. We've saved about 20-25k per annum over that period not having to pay rent.

    I guess the key point is that everyone needs to be able to sit down with Excel and plot their own destiny. Spreadsheeting and budgeting are the new survival skills.

      Yep spreadsheets for the win, especially when you and your wife both have gmail accounts and you can share a google drive version of your spreadsheet that can be viewed and updated in the cloud.

    Even if mortgage payments are more than rent (they will drop and as others have mentioned eventually be less than rent) BUT at the end of it all you have an asset worth a large amount of money.
    Yes there are other overheads, etc. but providing interest rates are fairly low, you're going to be better off in the long run owning rather than renting.
    It's not completely false - it *can* be under certain circumstances - but generally it's true.

    Im 27, single and renting.
    I come from a long history of moving homes when I was younger and since moving out on my own I have no intentions to Buy.
    I have moved houses roughly 30 times due to family and work commitments and I enjoy moving to a new house / city very frequently.
    Im not attached to a single area and because of that I dont like a single area enough to invest half a million dollars.
    Rent is 1/5th my wages giving me ample room to save and spend as I have no debts.
    Im not saying I will never buy, but depending on the future (marriage, kids, work, family etc...) will depend on what I do.
    My savings is strong enough I can apply for a loan strait away, but I dont want to.

      Buying an investment home isn't that crazy an idea though.

      You're going to consider buying a house later depending on marriage (money sink), children (money sink), family (money sink)?

      probably be a better idea to get the house now before you have no money left.

    Renting is fine while you're still undecided in life, or moving around for work.

    But eventually it's preferable to buy. Per a previous article/discussion on the subject, it sucks not being able to put your own mark/style on your home. And being at the whim of a landlord is a constant Sword of Damocles.

    Some of this depends on the mortgage type, especially if it's offset. This effectively reduces the mortgage payments even though that money is available as cash.

    The biggest thing for me is the forced saving that comes with a mortgage. I see that big debt and the interest bill as a big motivator. I want to pay that out ASAP and get a warm fuzzy feeling watching my mandatory interest repayments shrink. I don't think I would be as consistent if I was putting that money into other investment types.

    That said I do both, I own a property and rent it out while staying in another shared rental. The shared rent I pay is much less than what i'm getting from my tenants and I can claim most property ownership expenses on tax.

    Last edited 11/12/15 1:51 pm

    "As with all articles on Afford Anything, these high-level concepts can be applied anywhere. But specifics about laws, taxes, inflation, etc., are geared at a United States audience."

    TLDR: US article with bottom line of most of mortgage payment goes to interest so why bother. You can do better lifehacker.

    Short Aussie version: if you are going to move within 3 years, rent. 3-5 years it depends. 5+ years then buy.

    The US article does not factor in stamp duty which is a significant impediment to changing properties. What to buy can be more important than when to buy. A 4br house is not the most appropriate choice for most people.

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