“But honey, renting is like throwing your money away,” your mom says at the end of your birthday dinner. “Everyone knows this.”
Visions of the latest “White Lotus” season flash through your head and you laugh out loud a little.
“OK, mom. I know that’s what you think, but I disagree. I’m in my mid-30s now and have savings. I’m choosing not to buy on purpose.”
You see your parents melting with confusion in their chairs.
You give them some assurance that you’ve got a financial plan, and race out of their fully paid for home they bought for peanuts 30 years ago to your lovely townhouse rental a 25-minute Uber ride away.
Here’s the unpopular truth few financial advisers talk about — wealth can still be built as a renter. Yes, homeowners have historically created more wealth than renters, partly because paying off a mortgage builds equity over a very long time, and partly because house prices have risen so much.
I don’t have a crystal ball, nor do I know where the housing market is going. But I can tell you with 100 per cent certainty that wealth can still be created if you (or your kid) ends up renting.
But the home-ownership lobby is strong, and so are the personal finance “rules” that go along with it.
“Why throw your money away paying rent?”
“You’re only making your landlord wealthy … ”
… say friends, family — and a lot of financial advisers.
Yes, owning has some financial advantages in the long term, but financial security is achievable without owning. Here’s what you can do instead:
Save the difference between rent and the cost of home ownership
The cost of renting (including rent, utilities and tenant insurance) can be way less than the cost of home ownership (including mortgage, utilities, taxes, maintenance, repairs, insurance and incidentals) for a nearly identical place. Try running the numbers for yourself.
Say a condo costs $550,000, and you put 20 per cent down (a $110,000 down payment plus closing costs), the monthly mortgage payments could work out to about $2,500 per month at today’s rates.
If condo and home association fees are $500, taxes are $200, insurance is $100 and utilities are $100 (hydro is commonly paid even in condos), plus a small reserve fund for future repairs of $100, that’s another $1,000 in costs.
That will bring the total costs to run that property to $3,500 per month.
A comparable rental unit might cost $2,200 per month in total ($2,050 for rent and another $150 for utilities and insurance), and no one has to come up with a big down payment or additional closing costs.
If you’re running numbers alongside me, use real ones. Grab actual sample listings, and a digital mortgage payment calculator to help tally things up. Following this example, the math could reveal that the difference in cash flow for a renter could amount to an additional $1,300 a month.
The secret sauce to getting ahead financially is to save and invest as much of this difference as possible. That’s how you can build wealth over the long term that is near equivalent to owning a home.
Monthly cost of home ownership: $3,500.
Rental costs: $2,200.
Difference that can be saved and invested: $1,300.
Even if some of that savings gets used to fund adventures, travel, reduce debt, start a business or invest in more diverse options, but the majority is invested for the long term, you’ll still keep up. As an example, if you spent $300 for fun, then invested the $1,000 remaining for 25 years, at a six per cent rate of return, it would grow to just over $675,000 — wow, right?!
The wheels fall off this equation when renters don’t save, can’t save, or blow through their savings entirely. That’s when homeowners really do get ahead.
What about appreciation?
Being a renter means you don’t get to benefit from the appreciation of real estate value, if there happens to be any. But it also means you’re not exposed to the potential depreciation that can sometimes occur, too. Where financial growth comes from when renters sock away the savings between renting and the cost of ownership is the investment market. And yes, this exposes you to some investment risk, so extra vigilance investing this money is required.
This entails understanding the benchmark rate of return for your age and life stage (keeping in mind that the S&P 500 has appreciated over the long term at a seven per cent rate of return adjusted for inflation). It means understanding risk tolerance and keeping fees low.
The bottom line is renting isn’t throwing money away — not saving while renting is.
