This is the summary of Episode 50 of our Roaming Returns Podcast.
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Podcast Summary
Because so many people tell us that they don’t have money to invest, we’ve come up with 3 ways that don’t require you to cut out expenses.
Last episode we talked about cash back rewards and tax returns. Today is all about choosing the cheaper housing expense of renting or buying a house.
The Data
First of all, the data that we uncovered during our research is based on the average numbers in each category. That’s what was available. Yes, that’s limiting, so we used our condo as a real life example.
You should definitely do your own calculations for your specific situation for the best accuracy, like here’s ours.
Most studies were very bias either one direction or the other. We tried to remain neutral and just focus on the numbers.
Our Intensions
Our goal for this episode was to compile all the relevant information on the differences between buying and renting a house.
Many articles cherry pick certain info to paint the picture they want you to see. We want you to have ALL the data so you can make an informed decision that’s best for YOU.
We aren’t trying to talk you into or out of anything you really want to do. But you can still create a better situation if you know all the facts and what you can do to swing things more into your favor.
Conditioned To Own
Ever since you’re born, you’re conditioned in your family, school, and society that home ownership is the American dream. Some messaging has gone so far as to shame people for not wanting to buy a house.
That explains why there’s such a high national homeownership rate of 66%. That equates to ~90 million people owning their home versus the remaining 34% renting in the US.
People are still jonesing to buy even with high interest rates significantly increasing the cost of mortgages. Right now, the average interest rates are around 7% versus the 3-4% rates we saw over the last decade.
Cost To Own Versus Rent
The median rent in America is about $1,850 per month.
The median mortgage payment is about $2,700 per month.
Based on those numbers, the difference is a whopping $850 a month which is 30% cheaper to rent. That’s the greatest gap between renting and buying we’ve ever seen in U.S. history!
That means you could save $10,200 a year if you rented. But that doesn’t factor in a variety of other costs and hidden considerations.
Additional Costs Of Owning A Home
There are a lot of things you don’t think of or don’t know about until after you’ve bought a house. The main categories and average costs are as follows:
- $3,890 for home improvements
- $4,283 for home maintenance
- $4,975 for utilities
You get $13,148 when you add these up.
That brings the difference between renting and buying up to $23,348 a year.
Utilities
We’re assuming that the numbers from the studies we found are the additional utilities that you’d be responsible for when you own a house (but we could be wrong, so again do your own calculations).
Most renters don’t have to worry about things like trash, sewer and association fees.
Home Improvements And Maintenance
Maintenance = upkeep and minor repairs
Improvements = full replacement
An easy difference would be the maintenance of fixing a leaky faucet versus the need to replace an old faucet with a new one. New appliances aren’t cheap and older ones seem to hold up longer than the fancy new ones.
Tim was shocked about it being the homeowner’s responsibility for the sewer and water pipes halfway through the yard.
Carmela has had extensive repair issues because of failed water pipes. This created an extensive home renovation.
If you’re renting, your landlord is responsible for pretty much all the maintenance and repairs. Not just the cost, but the time and effort too.
Obligations Of Home Ownership
Speaking of time and effort, you really should factor that in too because the average homeowner spends 205 hours on maintenance every year. That’s the equivalent of 25.6 working days at a 9-5 job.
Skipping these tasks isn’t advisable, as neglecting maintenance today could mean more work later or possibly bigger problems like fines and damage.
We think this number is low. Or we could be confusing that with the extra time spent doing improvements since this number is for maintenance only.
More Hidden Home Costs
Circling back to the montage number again, that $2,700 number doesn’t include property tax or homeowner’s insurance. Most mortgage payments escrow that in.
It’s very misleading (and probably intentional) that none of the data we found included those costs into their mortgage calculations.
Property taxes are about $2,795 and insurance is about $1,516 per year.
So the above average mortgage payment of $2,700 jumps to $3,060 once these costs are included. That increases the amount saved renting to $27,668 per year. That’s $2,306 per month difference between renting and owning.
Building Equity
For Homeowners
The biggest argument for owning a home is that you own something and you’re building equity, so if you sell it you get a bunch of money.
However, there’s a problem with that. Mortgage loans are interest heavy up front. And because the average time a homeowner lives in their home is only 13.2 years before they sell/move, your mortgage payments mostly go to interest, no principle.
Say you bought a house for 2023’s median home price of $495,100 and made normal mortgage payments for 13 years.
- Total amount paid = $421,504
- Amount that went to interest = $341,769
- Amount that went to principle = $79,735
After all this time and money spent, you’d still owe a whopping $316,342 on your house. If you put 20% down, the total equity accumulated through 13 years would only be $178,758!
If you paid extra principle over the years, your numbers would be significantly different. The bigger the principle contribution compared to the interest portion, the faster you pay your loan down.
But if you refinanced, you’d reset your loan to be interest heavy up front. This option looks good for your payments, but the downfalls are hidden in the long run math.
For Renters
Renters would have saved $359,864 over those 13 years. But if you factor a buyers equity in, renters are still up $181,106 in value had they put that money into a savings account.
Tip 1 – Always do the bare minimum as a down payment
If you have a lot of money to put down, only put down the bare minimum. Then use the rest of that money to make a huge additional principle payment when you make your first payment. You’ll knock years of interest off your loan.
Lenders won’t tell you this because they lose money.
Yes, you’ll probably have a little bit higher interest rate because of putting less down, but you’ll save significantly more interest in the long run.
Tip 2 Never get an FHA loan – Always go Conventional
FHA loans now include PMI insurance for the life of the loan in exchange for the home buyer’s peace of mind in the beginning due to more stringent home inspection requirements.
This insurance is to cover the bank’s ass, if you stop paying. We think they should be paying this, not us. That monthly extra cost adds up over the life of the loan.
There’s also the myth that you’re required to put a lot less down. Is it worth it if a $100 a month PMI cost would add up to $36,000 over 30 years? That’s a big fat no.
Tip 3 Buy full cash
Less feasible for most people, but the reason buying comes out so unfavorably is mainly because of the interest. Dave Ramsey might be onto something with his all cash home-buying strategy.
Renting And Investing The Difference
If you rented instead of taking out a mortgage to buy and put the $2,306 a month savings difference* into investments, you’d have $756,866 at the end of 13 years.
This assumes the average return of 10.26% per year, which is what the historic annualized average return of the S&P index is since its 1957 inception through the end of 2023. And very feasible using our investing strategy.
*NOTE – You have to intentionally set aside the difference saved from not buying verses spending it.
So now if you compare that figure to the home mortgager. They spend $592,428 on their mortgage and other added costs over 13 years to have $178,758 in equity which is a -43.5% return.
Being more realistic, we can increase in house value (18% over the last 13 years), add in the extra homeowner costs and subtract the baseline cost of renting.
When you factor it all in, it bumps your home profit up to $223,052, which is still a -37.7% return on investment.
So ask yourself this. Would you rather rent and have a 101.3% gain and $756,866 at the end of 13 years or own and have a -33.7% loss and $223,052?
It’s you’re choice, but it looks like renting and investing far outweighs buying a house with a mortgage. If you think these numbers seem big, so did we, so Carmela ran the numbers on the condo for a real world example.
Our Condo Example
Because averages don’t always illustrate reality, we decided to go over the numbers for our condo. Carmela bought back in March of 2013 for $105,000 with an interest rate of 3.875%.
We talked to the renters next door to see what they’re paying since they have an identical condo unit. They’re only responsible for the rent, water and electric.
Carmela’s mortgage was for a much lower home price than current valuations. Being locked in at such a low interest rate creates an almost break-even situation compared to the neighbors.
Using this calculator, buying at the current valuation of $193,000 with the same 3% down would be a different story. Using the original interest rate of 3.875% the monthly difference for owning would be $535. At the current interest rate of 7% the difference jumps to $900.
FYI this doesn’t even include the money needed for the down payment or closing costs. We weren’t sure how to prorate that out, so we left it off. Our maintenance and repairs were prorated based off the average numbers previously discussed.
Calculations For A New Loan At 7% Interest
Renting Versus Owning Cost Breakdown
Because Carmela paid an extra $500 a month for a while in the beginning of ownership, her mortgage balance is currently at about $54,000. This significantly decreased the amount of interest being paid.
If we sell at the current valuation, even after the closing costs, we’ll recoup the amount I would have saved renting in the equity from the sale.
You might think that’s awesome, but we would’ve rather saved the blood, sweat and tears from doing all the massive repair work.
A Mortgage Is Still Debt
The biggest realization from doing all these calculations is that all debt really is detrimental, even the highly toted mortgage to own a home.
Depending on the numbers, the only time taking on debt make sense would be if you’re using it as a tool to generate more income than you’re spending.
Carmela has a rental property that’s income covers all expenses. In this case, the interest doesn’t matter because someone else is paying for her to acquire the home.
So basically if you’re buying to live in your house, you’re losing money. But if you’re buying to rent it out, it may make sense to take on the loan.
More Ways To Reduce Home Expenses
Get Cash Back For Renting
New Find!
Tim just got an email about a credit card that gives you cash back for money spent on rent without fees. This might be something to consider if you responsibly take advantage of credit card cash back.
BILT World Elite Mastercard®
Earn 1 point for every $1 spent on rent without paying transaction fees.
If you combine last episode’s cash back and tax refund strategy with the savings of renting, you’re looking at some serious effing gains in your investment portfolio.
After 13 years of investing the average money saved from renting, credit card rewards and tax refunds, your portfolio would be $99,004 for credit card rewards and tax refund; plus $756,866 saved renting versus mortgaging a home.
The grand total you could have in your future investing account would be $859,501 in only 13 years.
Then if you stopped saving and let the $859,501 compound for another 17 years (to bake a full 30 years), your portfolio would be worth over $4.5 million!
Do Short Term Rentals
Depending on your location, you might be able to bounce between different monthly rentals for less than a normal rental.
We did some poking around and found a $700 a month Airbnb near here that’s private, fully furnished and has all utilities included. You might find similar options on VRBO and Homestay.
Get A Roommate
Our neighbors split their rent between 2 people which decreases that $1,350 a month down to $625. You could easily find someone who wants to save money by splitting the costs of renting.
You could even reduce the expenses of owning with a roommate helping you pay the rent. But not everyone likes living with others especially when you have different expectations and conflicting habits.
Rent Out Your House
If you can convert your home into two living quarters, you can easily rent out a part of it to reduce your ownership expenses.
Our friend bought an older multi-level unit that has access to both floors. He’s able to rent the bottom out to completely cover his mortgage.
Another option would be to rent your home out on a more temporary basis as a vacation rental. This would be especially lucrative if you live in a tourist destination. You can rent a room out or your whole house.
Work For A Place To Stay
If you prefer to move around more and are willing to do a little work for a place to stay. There’s awesome services out there like Worldpackers.
This is a great way to travel for less money. We wish they had this or we knew about it back when we were younger.
Buy Cheap Trailers
The cheapest places to live are trailers, but the lot rent is what kills you. If you can get a small piece of land that allows trailers, you can find a used one in a trailer park and pay to move it.
Then instead of spending tons of money on repair work, you can exchange trailers out every 5-10 years. Most homes need large updates like the roof, plumbing, HVAC and even the electric every 10-15 years.
More Ways To Save
This episode isn’t focused on how to reduce your spending. But if you’re open to it, you can rack up a good chunk of change tweaking your expenses.
For those of you not averse to budgeting and finding creative ways to spend more wisely, check out the next episode. We touched on the biggest one below aside from your house.
Your Car
A car loan has the same setup as a home mortgage. They’re interest heavy up front. So the more you trade in for a new car/loan, the more money you lose. You also pay more in insurance when you have a loan.
Tim would never buy a new car again because he realized that a slightly less new ones is often 33% less money.
Carmela’s rule of thumb is for every $1,000 you spend, that’s how many years your car needs to last. She’s still driving her certified-used Toyota Camry with 223,000 miles because she paid $16,000 in 2006.
You get the most savings if you buy cars that are more than 7 years old because it’s harder to get lending. This is where you have the most haggle room with sellers.
Paying cash and owning your car is the greatest way to save money in this category. Save even more by learning some basic maintenance and repair skills or make friends with someone else who has them.
But if you’re the kind of person who HAS to get a new car every year or so, leasing is actually cheaper than buying.
We’d Do It Different
So many articles talk about how people can’t afford to buy houses. But people should be asking themselves why they want to own. We need to shed our conditioning. The best way to do that is to look at the data.
If your goal is to become FI to enjoy life, owning a house isn’t how you get there.
If we could go back, we’d rent a cheap room and sock money away into investments. But we can’t go back, so the next best option is reconfigure where you’re at. For us, that means selling a house with $119,000 in equity and investing it.
Stop paying lenders interest and start earning interest for yourself. Open a Worthy account, buy some bonds and watch the daily interest pile up. That’ll make you want to save and invest more.
