Renting is Throwing Away Money, Really?
Break the myth that renting is throwing money away
Surely you’ve heard that renting is throwing money away. It’s one of the most overused mantras when it comes to renting versus buying a home and also one of the most powerful.
By force of repetition, you may even feel guilty about living to rent and not being able to fulfill your obligation to buy a home. The only problem with this statement that living in rent is burning money is that it is not true.
By the same general rule, eating at a restaurant would be throwing money away, and so would paying to go to a gym while you can train at home. However, most will not see it that way. Do you want to know why? In both cases, we realize that we are paying to receive something of value.
The same is not true with rental housing.
Why Do We Think Renting Is Throwing Away Money?
Understanding what is behind the myth that living in rentals is wasting your money is the first step to understanding the reality behind renting versus buying a home.
These are the main motives of those who say that renting is a waste of money:
You Have Heard For A Lifetime That The Right Decision Is To Buy A House
You’ve heard for a lifetime that the right decision is to buy a house and that renting is only for losers. From your parents to friends who bought a house and need to justify themselves, and of course the media.
It’s not that the media wants you to buy a house, but it’s that there is a big real estate lobby that wants it, as well as some administrations to collect taxes. Also, we have internalized so much that renting is a temporary thing and that we should buy a house that is new that works well and attracts views.
There are all kinds, from when is the best age to buy a house to those who talk directly about rising housing prices to those who suggest that buying a house is the best investment.
Do you want to know the truth? Buying a home is an investment, but it doesn’t have to be the best.
The Idea That Someone Else Wins Because of You
We like to win, but most of all we hate to lose. This bias is part of our DNA and can be explained in many ways. One of them, according to game theory, is that we will be able to sacrifice a win or profit if we think that our opponent will win more than us.
Basically, that we don’t like to feel used or that we are making someone else rich off our thing (although that is how the job market works).
In renting, all this is reflected in an “if you buy it, it may cost more, but at least you’re not paying money to someone else”. In other words, the banal “in the end the house will be yours”. The key, as always, is in the cost. Yes, you will have it, but at what price?
If you don’t see it clearly, go back to the restaurant example. Surely you don’t hate to eat in a restaurant you love just because you are paying the rent and making money. Why with the rent do you?
You Don’t Know The Real Impact Of Hidden Costs
Do you know how much it costs to own a house? You may have a general idea, but just like calculating how much you will need to retire, it is easy to underestimate some expenses.
The most common are those to do with home maintenance and community leaks, but they are not the only ones. Here you can see how much it really costs to own a home.
And the same thing happens when you want to look at housing as an investment. A house that you buy for $200,000 and sell for $350,000 will have generated a profit of $150,000. Is that really so? Regrettably no. That’s the gross benefit that doesn’t include additional costs like taxes you save on rent, maintenance, and other expenses that impact the return on investment.
And all this without evaluating other issues such as the opportunity cost of allocating all your savings to buy a house.
You Are Going Other People’s Way, Not Your Own
Buying a house was a great decision for your parents, but it doesn’t have to be for you.
The world has changed a lot since then. Today there are many other investment alternatives that didn’t exist back then, such as passive investing through index funds.
Following a roadmap from the past may not be the best solution, especially if the person who recommended you buy (your parents) knows it worked for them, although not why.
Final Thoughts
What should you do then? Is it better to rent or buy? The decision is so important and will have such a big impact on your life that you can’t make it just “because everyone else does it” or because “it’s the right thing to do”.
What you do will depend on, among other things:
The city you live in (and your plans to always live in the same place or travel).
The reasons why you want to buy a house (to live in, and then rent, as an investment, just because you want to…).
How much it will cost for you to buy (both the price and the financing).
The best advice? Do the numbers first. Then think about the intangibles of each option and finally decide. But never, ever say that you are throwing money away by living for rent.