Rent Rant

It sometimes amazes me what passes for economic common sense. My pet peeve is the oft-repeated "throwing money away on rent" argument. It's often followed by something like "You could be putting that money towards equity!"

The idea that one is wasting money by paying rent is absurd. Has no one heard of Opportunity Cost? Buying a given house might be a good investment, but living in that house isn't necessarily a good idea. A good investment is a good investment. A good place for one to live might be somewhere else. They don't necessarily coincide.

If I find a super-bargain of a house, that's something I can be happy about. Maybe I'm the only one who spotted it. Maybe I jumped on an opportunity as soon as it appeared, and the seller didn't appreciated how much it was truly worth. Maybe I got away with paying pennies on the dollar. That's great for me.

Having found that great investment, however, what should I do? It's a mansion worth millions, but somehow I only paid $500,000 (by taking out a mortgage). I'm used to living in a small apartment with few amenities, so I could feel satisfied with myself and enjoy living in the mansion, quite comfortably, for the rest of my life. "I'm not throwing money away on rent" I might say.

But let's be real. One could argue that I'm "throwing rent away on lifestyle". If I really could be happy still living in that small apartment I was used to, I could rent-out the mansion for big bucks, and spend the income on something else I value - like traveling, or charity. I have to live somewhere, but maybe I don't have such an expensive taste in housing. I might be happy staying in that small apartment I was used to. Even if I'd be "throwing money away on rent" for a small apartment, at least I'd be raking in lots of cash renting-out the mansion.

Bottom line: by moving out of my mansion, I'd let someone else throw away his money on rent to me. My renter would build lots of equity for me in that mansion, while I'd build a little equity for my landlord.

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I agree completely. But the

I agree completely. But the claim that it is better to own than to rent is partly based on the mortgage interest deduction. This leads to a socially inefficient consumption of housing -- it is too high. Let's get rid of that deduction and let rationality rule. That would reduce sprawl, reduce construction waste, reduce traffic.... and free up resources for tax cuts or some other better use of potential government tax revenue.

The argument doesn't always

The argument doesn't always take the mortgage interest deduction into account, because it rarely mentions the fact that the interest you're paying (after taking the deduction into account) is essentially thrown away just like rent. And most of your mortgage payment is interest.

My suspicion is that this bit of "economic common sense" originated from the real estate industry. Much like how the rule of thumb of "you MUST buy a diamond engagement ring worth two months salary" originated from the DeBeers diamond cartel. Nothing but marketing via meme.

Sure, it's not axiomatic.

Sure, it's not axiomatic. There are certainly counterexamples explaining why it's better to rent than own. That doesn't make the general statement any less true.

For most people, owning a home is the first step to building real, actual wealth. However, there are a lot of situations where it might not be worthwhile. If, say, you're very old, you may want to sell your house and rent it back, because you can use the equity you've cashed in to improve your lifestyle while you're still kicking. Likewise, if you're only going to be somewhere for a short time, it doesn't make sense to purchase.

But at the same time, I consider renting an apartment to be the rough equivalent of staying in a hotel without room service or a maid. (It's cheaper to restock the minibar though). Living in a hotel, to most people, would not be an intelligent economic decision, although it would be to some. For some people, renting is a better economic decision. But for the vast majority of people, purchasing a house as a primary residence is a better economic decision than renting.

For most people, owning a

For most people, owning a home is the first step to building real, actual wealth.

It is, but it's a really bad way to do it, so that is merely a side-effect of our lack of savings and fixation on status symbols. A home is far less preferable to a diversified portfolio in terms of stability, growth, income, and liquidity.

Fling, But you forget one

But you forget one thing. As people, we need a place to live. If I have the choice between rent of $1000/month, and a mortgage of $1100/month, would you not agree that the mortgage would be a better option? The marginal decrease of other savings potential (at $100/month) would likely be offset by the equity growth of ownership and appreciation of the house.

The decision between investing money or buying a house is more clear-cut if you have the option of living at home rent-free with parents. But in a comparison of renting vs. owning, the effect of not investing that money is largely diminished.

My cost-benefit analysis

My cost-benefit analysis includes all the upkeep and liability costs associated with home ownership. I'd have to mow and water the lawn, fix things, repair or replace the water heater/AC/dishwasher/garage doors, etc. I consider that all of these things are included in my monthly rent bill (which I pay in six-month chunks because the benefit of just getting rent off the books and out of mind is greater than the benefit I would receive from holding the money in a money market account and accruing interest).

And then I'd have to figure out what to put in all those extra rooms.

If I have the choice between

If I have the choice between rent of $1000/month, and a mortgage of $1100/month, would you not agree that the mortgage would be a better option?

It still depends. Not if you think it's very possible that there's a housing bubble. Definitely not if you have no other savings to offset that risk (not to mention the risk of assuming that much debt). Definitely not if you're not already maxing out your 401(k) and Roth IRA contributions each year, if eligible ($100 a month is not a bad start for a savings plan, and the tax advantages of retirement accounts outweighs that of the mortgage deduction). And definitely not if your job situation is not completely stable or if you might move within a few years.

But otherwise, yes, that's probably a pretty good deal, and I sure took it. Of course, I've maxed out my retirement accounts (and then some) ever since I was out of college. And besides, in most other areas, the mortgage payments would be a lot higher than rent.

brad, your numbers are way

brad, your numbers are way too close. the spread is ridiculous when you really examine it. there's no apples to apples comparison between renting and owning. buying grossly over priced assets(housing in 90% of america) is never a winning strategy, no matter how 'common sensical' it may seem in the present phony low interest rate environment.
linear extrapolations of the future have killed more peoples wealth...

But at the same time, I

But at the same time, I consider renting an apartment to be the rough equivalent of staying in a hotel without room service or a maid.

Sort of, but there are different levels of service. For some people, it's more profitable to specialize in the career of their choosing, and not have to become more knowledgeable in heating systems and repair, roofing, painting, etc. Housing maintenance is a career in itself. There's something to be said for division of labor.

If I have the choice between rent of $1000/month, and a mortgage of $1100/month, would you not agree that the mortgage would be a better option?

Wow. If it were truly worth $1000/month rent. It certainly could be worth $1100/month mortgage. I wish I had that kind of comparisons in my area.

I'm not trying to make any blanket statements. I'm trying to point out that nothing is as no-brainer as it seems.

There was a heated argument

There was a heated argument over this on a while back, with people on each side accusing the other of being idiots, liars, etc., whereas in fact they were each seeing conditions in different markets. On average, it's probably a wash, but depending on local conditions (major factory just opened or closed, for example) it could come down strongly on one side or the other.

All things being equal (square feet, location, amenities) the renter and the owner are both paying for maintenance, upkeep, taxes, etc. one way or another, in addition to which the renter is providing the landlord with an income. The problem is, equivalent comparisons are very hard to identify.

I bought a house.

While I agree with the

While I agree with the previous post that said a well diversified portfolio is a much better investment vehicle than a house (in most markets), when discussing this topic (especially when giving others advice on the subject), it is important to consider that many people will not have the self-discipline to invest the difference between rent and mortgage payments. For most families, a mortgage is essentially a forced savings program. It is similar to the argument about tax refunds. Sure, ideally it is better not to give the government an interest-free loan all year, but in the final analysis, overpaying their taxes helps many families save.