Renters Are Deluding Themselves – Here’s Why

by Darwin on August 16, 2011


It’s en vogue now to be “anti-homeownership” given the recent crash in home prices and all the shenanigans the mortgage companies, banks and Wall street firms pulled over the past several years.  People tend to use the recency effect and confirmation bias to formulate their opinions which dictate important lifestyle and financial decisions. Before you jump all over me for this thesis, let me clarify a few things:

a) Many people CAN’T own – that’s a fact of life.  If owning a home isn’t an option for you for numerous reasons ranging from finances to career, then making a choice between renting and owning isn’t something that mandates weighing the options.
b) Many people SHOULDN’T own – perhaps during the days of easy credit or even today, you have the funds to buy a home, but there might be some factors that would make this a poor choice.  Perhaps you need to relocate every couple years due to your line of work, perhaps you’re in the middle of a divorce or child custody battle or perhaps your income is quite variable.  It might make sense for you to rent until there’s more stability in your financial situation.
c) Many people COULD own, but don’t.  That’s the target audience.

Long-time renters often cite all the negatives of home ownership, and there are some to be sure.  But many of these oft-cited reasons have a valid counterargument OR these old paradigms are no longer accurate:

  • It’s More Expensive to Own Than to Rent – This is probably the biggest myths out there that many proponents of renting continue to propogate.  Primarily, at this point in time, with home prices having crashed and interest rates at record lows (insanely low mortgage rate list after Treasury Yields just crashed) the rent-to-buy ratio is favoring “buy” in many parts of the country moreso than at any point in recent history.  Now this isn’t just a rah-rah “buy a home” post and I would concede it is totally plausible that home prices continue to decline for several more years.  But if you’re not buying to sell, but rather, buying to live, it is MUCH more economically efficient to own over rent, especially at this time.  These are the data (rent vs buy favors buy in 75% of US cities), aside from the other intangibles listed below.

     Let me repeat:  It is becoming cheaper to own and it is becoming more expensive to rent. 

This trend will continue for years.

Why?  First off, the Fed’s policy has been to reward debt holders and punish savors with the unprecedented a) zero interest rate policy and b) projecting out through 2013 that rates will stay low.  This in turn, is pushing up gold prices, equities prices and investors are pricing in future inflation.  This bodes well for landlords, and poorly for renters.  See, this interest rate/inflation phenomena mixed with the new ratio of renters over owners is flooding the market with renters and starving the market for buyers.  This makes homes more affordable, while landlords are embarking on higher annual rent increases.

Which end do you want to be on?  The winning or losing end?  

  • Homeowners Have to Pay to Maintain a Home Instead of the Landlord – Here’s another big misnomer.  Primarily, you get what you pay for.  Put aside the premium you might pay if you got in a bidding war over a home or made some upgrades to your home that weren’t necessary.  Just baseline the same property and look at renting versus owning it.  Everything you pay for as a homeowner, the landlord has to pay for as well.  Who do you think pays for that?  You think the landlord pays for snow removal, replacing carpets, fixing leaks and a new roof every 15 years out of the goodness of their heart?  No – you pay for it!  It’s all priced in over long-term rent trends.  Landlords are in this business to make money and if they weren’t making money they wouldn’t be landlords.  You are paying to put their kids through college and for their Caribbean vacations.

Basic economics dictate that over a long period of time, you are losing money by renting, not just because you’re not building any equity, getting a mortgage tax deduction, etc., but because you are paying for the upkeep, depreciation expense and maintenance of the home in your rent – PLUS a tidy profit to the landlord.

Many renters are convinced they’re “beating the system” because they don’t have to pay for these things, but they are – it’s just not itemized out in tidy fashion for them.  It’s all in the rent.  This is logic – and reality.

  • Renting Provides for Much More Flexibility to Move – This is a major (and legitimate) reason NOT to own.  After all, closing costs, transfer taxes, realtor fees and such are nothing to sneeze at.  However, what a lot of renters end up doing is deciding to rent instead of own, but then they never move!  They end up renting for years on end when they could have owned.  And that flexibility?  Well, the landlord also has the flexibility to keep increasing prices year over year at whatever rate they so choose – which is a calculus on your end as how much of an increase makes it worth moving out to just rent somewhere else.  Additionally, you’re often locked into an annual lease (which isn’t very flexible), they can sell the home or put new tenants in each lease cycle (which isn’t very flexible), and you can’t do many things to the place you live in without their permission or at all (not very flexible).  So, you’re trading the mobility flexibility for a lack of flexibility in virtually everything else that the landlord controls.

To reiterate, if you’re a current renter, you may feel this article is critical of your situation.  It’s not.  It’s an economic reality that many Americans never have, or never will have the economic means to be a homeowner.  This is a mathematical certainty.  The point here is to get people thinking who DO have the means to save for a down payment, would be better off financially as owners than renters, but continue to muddle along in complacency because they’ve convinced themselves that homeowners get screwed and renters have all the perks.  I’ve laid out what I believe to be valid arguments to the contrary.

Disclosure: I’ve been a renter, an owner and I’m about to be a landlord.

I’m Interested In Your Thoughts.  

{ 15 comments… read them below or add one }

Financial Samurai August 16, 2011 at 10:46 pm

It’s important we have lots of renters b/c owning rental property is one of the best asset classes around. We need renters to care for our properties and pay our mortgages. In return, they get a place to live. It’s just business!


Darwin August 16, 2011 at 11:33 pm

Sure, that’s the landlord’s perspective. How about the perspective of the renter? Not so beneficial IF they have the option to buy…


Terry January 20, 2012 at 4:01 am

Yeah, you want renters to pay their landlords’ mortgages and then pay a RENTERS TAX on top of that? What’s up with that?


David Neylan August 16, 2011 at 11:35 pm

In my opinion, much of the decision comes down to where you live. It probably makes sense to own if you live in one of the 75% of US cities referenced in the article. But, if you live in an area where sales prices are still high, it may not make sense. I live in San Diego. I have been a home owner and while I rent now, I still have rental properties that I rent out. The reason is simple. I have a coupe of children and the cost for me to rent a house with 4-5 bedrooms in an area of San Diego that provides good schools, nice amenities, and a decent proximity to where I work is tough. It makes more sense to rent. I can afford more house and be smart with the difference I can save. Essentially I invest it. My rentals gain a positive cash glow but they are smaller properties that would not work for my family. So, for me, I have property as a part of my portfolio while renting a larger home and investing the difference. I believe this makes the most sense at the moment.


Darwin August 16, 2011 at 11:45 pm

Yes, good point; living in Manhattan and other high-cost areas would make buying a massive life-altering investment and often shifts the equation quite a bit. Conceptually, I’m thinking about people who have the means or are on the fringe but don’t make it happen for the wrong reasons.


Jeff @ Sustainable Life Blog August 17, 2011 at 12:40 pm

I’d have to say that I agree with this statement. I’ve been out of school for about 2 years, and have been renting ever since, getting my finances in order and considering buying a house. People really started pushing me when the 8k break came out, but I held fast and waited, and now interest rates are even lower than they were then, and are looking to stay that way.
My dad told me that during a crisis, the irresponsible get a gov bailout, and the responsible have options coming out their ears. I could probably buy more house than I would have been able to 2 years ago, and get a shorter loan term with a better rate. Renting is working for me now, but Im on the path to buy.


Darwin August 17, 2011 at 11:05 pm

The ironic thing on the homebuyer tax credit… as soon as it expired, average ask prices dropped by several thousand bucks. Basically, the govt had artificially inflated home prices and we, as taxpayers subsidized every home bought under the program, but it didn’t necessarily entice people to buy homes who wouldn’t have otherwise (like you for instance).


Eric August 17, 2011 at 2:47 pm

The key thing you said is, “First off, the Fed’s policy has been to reward debt holders…”

For much of our recent history, the Gov and the Fed has rewarded debt holders. We’ve inflated our economy to unsustainable levels due to our policy decisions to encourage people to take on more debt, i.e. Cash for clunkers, First-time home Buyers, super low prime rate. Our economy is now unhealthy because we are so dependent on citizens mortgaging their future to banks through all types of loans. And what about all this consumption? If debt allows us to consume more than our income allows than how does that affect the environment?

Yes, you are right it makes complete short term financial cents to save up a small 20% down payment and mortgage our living space.

But for some, the long term effects of all this debt consumption does not bode well with some people’s conscious. “As for [them] and [their] house”, they will stay away from this destructive economic system and live a more simple life. If that means renting a smaller place and pocketing the difference for something better, than that is ok for them.



Chris August 17, 2011 at 6:16 pm

Congrats on becoming a landlord!

My wife and I just did the math and decided that given the current state of the housing market, now is the time to buy a home. When we can own for the same amount or less than our rent, it’s time to buy. We just purchased a brand new home for what I consider a steal.


Darwin August 17, 2011 at 11:45 pm

Congrats to you! It’s an exciting time!


Ron August 17, 2011 at 6:35 pm

A well thought out and reasoned article. Your analysis of the cost of maintenance mirrors my personal thoughts on corporate taxes. Who do you REALLY think pays corporate taxes?

With today’s rates at such ridiculous lows, and given the tax incentives with having a mortgage, it just makes good sense to buy rather than rent, even with the negatives of home ownership factored in.


Ben August 17, 2011 at 8:32 pm

I’m an owner and landlord (doesn’t that name sound curiously grand??). I think people do buy too soon though with little downpayment. Sure start investing as soon as your 12 but don’t be in a rush to “put down roots”. I think you should wait until you have kids because you’ll think differently than you did when your were 21. I bought an iner city appartment when i was 25. Then moved to the burbs to get some lawn but now I’m thinking of moving again to get in a good school catchment area. You priorities change and moving houses if you own can be expensive


cashflowmantra August 18, 2011 at 5:47 am

Hard to believe that logic can escape so many people. Granted the cost of ownership may be upside down in some locales, but that is a result of the bubble and is why prices will continue to fall in those areas. Eventually the market will sort itself out and real estate will be purchased for cash flow instead of speculation and capital gains.

Do you really think that as a landlord, I am going to charge you $700 per month when my mortgage is $750? No, I am going to charge $900-$1000 just like all the other landlords in the area. And do you think that when the property is paid off, I am going to lower your rent to the cost of taxes and insurance? Ha! Think again! Logic, duh!


Martin August 18, 2011 at 4:12 pm

I didn’t buy a home or a house, I bought an inflation protection shelter!


Karen Bryan October 2, 2011 at 5:49 pm

The fact that we owned our home outright meant that my husband was able to take early retirement. If we still had to pay rent or make mortgage payments we wouldn’t have enough money to live on. I think this is something for people to consider in their retirement planning.


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