Buy Your Freedom By Renting Versus Owning A Home

Is renting a wise decision? Isn’t renting just throwing your money away?

Let’s say you dream of traveling for 3-6 months each year and spending the other months living out of a home-based location.

Or, you have decided to live in two locations, like snowbirds do—winters in warmer climates, summers in cooler ones.

Renting a place versus owning may be right for you.

Or, you may want to go full nomad and live in an RV, van, or boat, in Airbnbs, hotels, or even out of your car so you can travel full time.

Being a pure nomad is a different lifestyle, which we’ll discuss in later posts, but you may also want to consider what we’ll discuss in this article.

Another part of your dream lifestyle is to be financially free to enable this travel.

Smart decision. You could pull it off without being fully FIRE, but financial freedom makes it easier. Renting a place versus owning one may also help you get to FIRE more quickly.

I can relate to these dream lifestyle ideas.

For a long time, I had a dream of wanting to ride a bike across the USA. I finally prepared for this, but soon realized it was best to wait until I achieved complete financial freedom.

Soon after, I got an idea to split my time between two locations. Summers would be in the PNW, and winters down south.

Fast forward, I discovered a city I loved, and decided to buy a place there as a 2nd home. That would make a snowbird lifestyle possible.

I found a place costing about $400,000, made an accepted offer, and I was going to pay cash at closing.

Thankfully, the deal fell through.

 Afterwards, I realized that renting would be cheaper than owning a place. Renting was also a better solution than owning in so many other ways, too, at least in this case.

Home Ownership? All It Is Cracked Up to Be?

J L Collins has already done a great job of explaining why home ownership is not always the best option. See his popular blog post on the subject at this link.

https://jlcollinsnh.com/2023/03/02/why-your-house-is-a-terrible-investment/

I’m Only Wanting to discuss why renting could be key to creating your fun in the sun, financially free future.

You and I are consistently sent messages that eventually a person will want to own their own home, and the sooner the better.

Some of the most common ideas we are given as to why are:

-       Renting is like throwing your money away – this is not true in all cases, my situation being one of those cases.

-       Owning allows you to build equity and net worth – yes, but you can’t cashflow your equity without securing debt or choosing to rent out the property in some way.

 -       Buy as much house as you can afford; you’ll grow into it as you make more money – this would be a big mistake…do not do this. Set a percentage (%) target of your annual net income that you WILL spend on housing and stick to it. I recommend keeping it below 25%, and certainly not over 33%

-       Real estate always goes up in value – it is considered an appreciable asset, and over time, it has increased in value, in most cases. However, so does the stock market, with a better return on investment.  Even bonds can often give you a better return than your house. There have been three real estate downturns in my lifetime, and they have created much financial strife for many people

-       Get into a place with the least MONEY DOWN you can. this is a “what payment” can you afford mentality that drives many people into debt overload and being house-poor.

-       Don’t worry about the interest rate, you can always refinance later – in some cases, perhaps refinancing is the best thing to do. STILL, every time you refinance, you also reset the compound interest equation in the lender’s favor. Banks and mortgage companies love to sell the “we can get you a lower monthly payment” idea when they try to get you to refinance.

-       Only buy a house if you plan to live there for at least five years -  This is excellent advice in most cases, because purchasing the home is easier and less expensive than selling the house. Get out your checkbook/credit card when you are ready to sell… it will cost you way more than you imagine!

There has also been peer pressure when it comes to renting versus owning. Some people pick up a subtle message that only “losers” rent and successful people buy/own. This peer pressure has decreased in the last few years, but a stigma still influences some people.

Look, I am not saying owning a home is a terrible decision. However, you may not need to or choose not to, so you can better facilitate your dream lifestyle.

For some people, owning their own home is key to their happiness. I appreciate and support that idea, and if I sell the place I currently own and go full rental mode, I can imagine a time when I would decide to repurchase a home base.

Additionally, some people are interested in owning rental properties, and/or are perfectly fine, capable, and allowed to do so by their local zoning ordinances, in turning their home into an Airbnb or VRBO-type unit. That’s not for me. I’ve run the numbers and considered the risks. Nope, not worth it for me. You may see things differently, which is excellent, and I am sure you will succeed on your terms.

The Numbers Tell The Rest of the Story

As stated earlier, I was planning on paying cash for the place. If I had financed, I would have had to pay principal and interest each month. I would have also followed Dave Ramsey’s advice and gotten a 15-year mortgage (and would probably have paid it off early, too).

At a 7% mortgage rate, it’s a wash. The costs are somewhat equal.

What would I have gotten with this purchase? What would I not have gotten with this purchase?

It was a three-story, 2-bedroom, 2 & ½ bathroom, newly built townhouse, with two balconies and a partial view (but not that great; it overlooked many of the neighbors’ balconies).

It was located in a part of town that is being re-gentrified. There was no assigned parking or covered parking, let alone a garage.

The square footage was advertised as 1300, but my measurements showed it was 1065.

Oops. Was that a typo in the listing? My measurements were accurate…it’s not hard to do. But the builder refused to provide me with detailed architectural drawings with the actual measurements to compare with my own.

Buyer beware, right? Right.

The place was about 1.5 miles from a part of town that I wanted to live in (an area that is more bike and walk-friendly). There were no coffee shops, a few fast food places, a good diner with limited hours, and one restaurant.

On the plus side was a new grocery store about ½ mile away. Also, I could get on the riverfront trail in a few blocks, which takes you into more walkable city areas. However, that would be a 2.5-mile walk or bike ride.

The area, only 1.5 miles away, required walking through a pedestrian-unfriendly part of town, also rough around the edges. Walking during the daytime is one thing, but it was not a great place to walk home after dark.

Here is what I priced out as the total monthly cost of ownership of the Townhome:

-       Mortgage (principal & interest) = $2319.40

-       Property Taxes = $320.83

-       HOA - $130.00

-       Insurance - $70.00

-       Utilities - $300.00

-       Maintenance - $0 (first 5 years)

-       Home Furnishings - $1000.00 (1st year) to $100.00

-       Repairs, Remodel, Appliances - $0 (in the first 5 years)

Total Monthly Cost: $4,140.23 (1st year) to $3240.23 (years 2-5)

Total Annual Cost: $49,682.76 (1st year) to $38,882.76 (years 2-5)

Zillow has done research showing that the hidden costs of owning a median-priced home, above mortgage payment (principal and interest), can easily average $15,000 per year, and in some areas can be over $20,000 per year.

https://www.zillow.com/research/hidden-costs-homeownership-2023-32723/

Given that this was a new build, and a townhouse versus a single-family home, I would avoid some of these costs in the first five years, but eventually I would be paying some of them as the place aged or when I put it on the market to sell.

What did I do instead?

I rented a 2-bedroom, 2-bath apartment in a luxury complex. It has 1100 sq ft of living space. I am on the complex's top floor, with fantastic city and mountain views from all windows and the balcony.

The complex is relatively new (6 years old), so the interior space and fixtures look new and fresh. It’s a charming, new-looking place.

The complex has a covered parking garage. There is a heated pool and a large courtyard for gatherings. There is a “clubhouse” that has wall-mounted TVs, a pool table, business center work stations, computers, and printers. You can also rent a work space office and/or storage unit for additional money if you desire or need it.

The complex is 1-3 blocks from several good restaurants, coffee shops, retail stores, brew pubs, and other entertainment centers. There is also a grocery store next door to the complex. It is a walker’s paradise.

Easy living.

Here is what the apartment costs per month:

-       Rent - $1900

-       Renter’s Insurance - $10

-       Parking - $100

-       Utilities - $200

-       Home Furnishings - $500 (1st year) to $0

Total Monthly Cost: $2710 (1st year) to $2210 (years 2-5)

Total Annual Cost: $32,520 (1st year) to $26,520 (years 2-5)

Already, I am ahead.

The apartment is in a better and more walkable location. It’s a larger place that offers one-level living, much better views, and great amenities. Plus, there are zero property taxes, zero HOA fees, Zero Repair/Remodel costs, and much lower insurance costs.

And I get all this for $1,430.23 less per month in the first year (a $17,162.76 annual savings).

But, get this, there is more. This is the real kicker.

I was planning on paying cash for the $400,000 townhome.  

Over the last 10 years, I have consistently earned about an 11% annualized return on my investments (a little more, but rounding down).

That $400,000 invested would produce about $44,000 per year in growth.

After the first year of higher costs (to furnish the place), I only need to have about $240,000 invested to cover the annual APARTMENT COSTS.

This means the additional $160,000 that would have been tied up in the townhome can now stay invested and grow at approximately $17,600 more annually.

This represents the “opportunity cost” of owning versus renting.

I am saving $35,000 in costs (real and opportunity) by renting versus owning the townhome.

Yeah, but what about rent inflation?

Yes, a rent increase is very likely in the future, but I have a long-term lease that locks me in at these rates.

Given that all of the $400,000 of cash remains invested and is growing, I expect to be able to cover the new costs easily.

Plus, I can move to a new complex at the end of the current lease, which gives me some negotiating leverage and bargaining power when the new lease comes due.

What about the “equity” I would build if I owned the townhome?

 First of all, there is the square footage discrepancy. But let’s put that issue aside and accept that the seller’s claim of 1300 didn’t/doesn’t matter.

Nevertheless, two years later, Zillow now shows an estimate of $60,000 less than the original purchase price of the townhome!!

If I were to sell the townhome this year, I would net about $310,000 after paying real estate commissions and other fees related to selling.

That is $90,000 LESS than I would have paid (and others have paid!) for the place.

Oh joy!

Yeah, in this case…

Renting Made Way More Sense.

What about your dream lifestyle?

Could renting be part of the solution for you, too?