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Smart FI Sprint EP 007: To Rent or to Own? That is the Question
in Assets, Investing, Personal Finance, Podcast, Real Estate
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Sorry it has been over two months since my last podcast guys! Things have been super busy around here, what with getting married, getting furniture, my new wife’s birthday…Pokemon Go came out…it has been crazy! However, I’m back, and today we’re going to discuss renting versus buying the place you live. What you think is right for you actually might not be the right choice. Give the podcast a listen to get some help in making the decision.

Show Notes

  • Main Content
    • Time to put on those analytical thinking caps, my friends, for today we discuss when you should keep on rentin’ that apartment, and when you should be looking for that house with the white picket fence
    • Renting vs. Owning a house/apartment/condo/etc. There is typically a lot of debate around this topic, and for good reason
    • Let’s start with some basic pros and cons for some food for thought:
      • Renting Pros:
        • You can pick up and leave relatively easily
        • You don’t have to pay or take the time for any repairs (with some obvious exceptions), maintenance, or upkeep of the property
          • Including no mowing, no electrical work, no roof repair, etc.
        • You aren’t on the hook for a mortgage, the taxes, insurance, or the interest the mortgage carries
          • Depending on the house/value your rent could be cheaper every month than a mortgage payment and everything that comes with it
        • Renting Cons:
          • No investment or appreciation of an asset
          • Missing out on tax breaks
          • Have to deal with landlord/company
          • There are many regulations to apartment living
          • Having bad neighbors
          • Noise
        • Owning Pros:
          • You get some big tax deductions for owning a property/home like:
            • Mortgage Interest deduction
            • Property Tax deductions
            • Points deductions
            • And on…and on
          • Appreciation of the property (in theory)
          • Build-up of equity as the mortgage is paid off
          • A home equity line of credit or HELOC
          • You actually own land and can do with it as you see fit
          • You can decide how close to be to other people, e.g. out in BFE vs. living in a subdivision
          • If you buy a multi-family property, such as a duplex, you can rent half of it out, affectively having someone else pay your mortgage for you.
            • The same goes for bigger properties
            • NOTE: This is more than just owning your home, a lot of extra responsibility and work comes with being a landlord
        • Owning Cons:
          • You’re on the hook for all repairs, maintenance, and upkeep (which can be very costly)
          • Moving is laborious, tedious, and requires much more effort in general
            • You may not be able to move very quickly if your area/city begins to decline or you lose your job
          • There is always a risk your investment can drop in value, and potentially quite significantly (see The Great Recession)
          • You may have to live in the suburbs or further away from your job than you would if you lived in an apartment
        • That right there should be able to help a lot of people decide what is for them. However, there literally dozens, if not hundreds, of other considerations that can or should be made when deciding to own your own property, but here are some major ones
          • Is your job mobile, or is your job secure? If not, deciding to own might not be the right move.
            • To add to this, think about the direction the job market is going right now. The “Sharing Economy” many jobs are going contract or “self-employed”, like Uber and the multitudes of recruiting/contracting companies out there right now. Those jobs tend to be pretty unsafe since they already have a defined end date
              • Even I was a contractor at my first job
              • And unfortunately, this seems to be the way the economy is going right now, which makes owning riskier
            • Example time!
              • So, I want to start with a caveat. A lot of this depends on where you work, live, if you commute, if you don’t, etc., etc. There is a lot of gray area when it comes to the rent vs. buy debate. Like I’ve stated previously, there are plenty of arguments for and against each option. So, because of this, I am going to provide two situations: one where renting makes a lot more sense, and one where buying makes a lot more sense. Here we go!
              • Example 1:
                • You’re trying to decide what will be the most cost effective way to live in Indianapolis. There are multiple suburban areas, such as Avon, Fischers, Zionsville, Carmel, Greenwood, and on and on, that you can choose to try and find a house in.
                • There are also lots of apartments downtown and even houses to rent close to downtown or in the surrounding area.
                • You check apartments close to downtown. Those suckers must be expensive. However, you take five minutes to google it.
                  • Looking at apartments.com, apartmentlist.com, apartmentsearch.com, and padmapper.com, we can find an awesome downtown Indy apartment with 2 beds and 1 bath for about $2000.
                    • This would be a yearly rent cost of $24,000
                  • If this downtown apartment were a 5 minute walk from your place of work, which would add up to $5/day of your time you would spend commuting to your job, which adds up to $1205 of your time you spend walking to work every day for a working year.
                  • Renter’s insurance comes in cheap at around $140/year.
                • You look at houses, and think a suburban lifestyle would suit your family best. From the suburbs, you would have an average commute time of 1 hour/ 30 miles to the heart of downtown.
                  • Your hourly wage is $30/hour
                  • The cost of driving a mid-size sedan in stop and go traffic would be about a dollar $0.27/mile according to the wonderful Mustache Calc.
                  • Taking those two things into consideration, your daily commute would cost you about $76.20
                  • That is about $18,364.20/year
                    • Dayum!
                    • The daily commute costs almost as much as the average rent of a downtown apartment every year!
                  • Now, let’s assume you want the very best for your family, and you decide living in the Carmel suburb is the best
                  • Now, let’s throw the home price into the mix
                    • An average home in Carmel will run you about $330,000
                    • Now, let’s say you’re able to make a down payment of 10%, or $33,000
                    • That means you’ll still owe $297,000 with a monthly payment of about $1900, which includes principal, interest, property tax, home insurance, and mortgage insurance.
                    • This total monthly payment is almost as expensive as the average monthly rent of a downtown apartment!
                  • Doing some basic math, yearly cost of living…
                    • In that American Dream house with the white picket fence, yard, and room for the dogs to run around will cost you around $41,000/year in monthly mortgage costs and commuting alone
                    • The downtown apartment would cost you $25,345/year in commuting and rental costs
                    • So, by buying and living in an expensive, All-American home in the suburbs, you’ll be paying an extra $15,655/year
                      • I dunno about you, but that is a lot of scratch
                    • However, you may be saying, “Don, I know 16 grand is a lot of dough, but for my kids to go to the best schools possible and have a nice lifestyle, that extra money is worth it.”
                    • Whoa, whoa, whoa. Slow down there, fella. I’m not trying to bash your idea of the perfect life. I’m just trying to show you some logical reasoning for why that decision might not truly be the best. So, let’s take a closer look at what else that suburban life may be costing you.
                      • Looking at the various pros and cons of each, we can see the following:
                      • The house will require maintenance, and who really knows how many hours you will have to put in or how much you will have to pay. After going to work for probably a minimum of 8 hours a day and commuting for 2, the last thing that sounds appealing to me is house work.
                        • You’ll be responsible for landscaping, e.g. mowing the yard, trimming hedges, etc.
                        • If you have children in addition to all of the above, you can probably almost forget about any hobbies or alone time. Working out and keeping healthy would probably also take a backseat to all of these important activities.
                        • What would happen if you were able to invest the down payment of the house and all of that extra money every year instead? From the above example, that would be a total of $189,550 over ten years that you could invest just based on the simple math alone, and including returns, that would be something like a loss of $301,200.11 over 10 years, that’s just one decade! You would have gained that much money if you would have invested it and lived in the downtown apartment instead
                        • With an apartment, especially a decent downtown one, you will probably have many amenities provided for you, such as a gym and a garden area – who needs a backyard when you’ve got an amazing garden or gathering area right behind your apartment? Plus with an apartment, you can more-or-less pick up on a whim and be completely mobile in the case of job loss, the area degenerates, or something else unfortunate occurs.
                      • At this point, it might appear that I am in large favor of renting, but I assure you that is not the case. The whole debate around renting vs. buying can be truly preposterous because there is so much gray area. Like, what if the downtown apartments had absolutely no good schooling areas for your children? Obviously it wouldn’t make sense. What if the downtown apartments are less safe or have a large young adult population that goes out Thursday through Sunday? Maybe all of the apartments are owned by shady landlords who have dealings with a mafia family.
                      • There are just so many factors, that everyone’s situation will really be different. So, you have to truly evaluate where you stand and what is the best decision for you. However, I want to encourage everyone to keep a FIRE mindset when looking at your current, or new, living conditions because you may realize the house you’re buying is a McMansion and is way over the top for your needs, or that the apartment you’re living in is a terrible choice with your current long-term company outlook and housing market investment potential. Plan, plan, plan, and then do what makes the most sense.
                      • There are several calculators which attempt to help you in the decision to buy or rent, and here are some of the following I’ve found to be moderately to extremely informative and helpful:
                        • trulia.com
                        • realtor.com
                        • zillow.com
                        • The New York Times
                          • This is far and away the best calculator I have been able to locate due to the great detail it considers. Anything from the initial purchase costs to closing costs and even the cost of maintenance on the house.
                          • This is the calculator I recommend you go with when trying to figure out what makes the most sense for you




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