This is the second in a two-post series on the top 10 reasons to rent vs buy a home. The topic of homeownership is fiercely defended and opinions on the rent vs buy debate are strong, but here’s my take on the reasons that renting beats buying. I plan to follow up in the near future with another two-post series outlining the situations when buying a home may be better than renting.
If you missed the post with steps 1-5, get caught up here: Top 10 Reasons to Rent vs. Buy a Home – Part 1
Today, I’ll cover reasons 6 through 10 of why renting may be better than buying a home:
- Lower insurance costs
- Lower utility costs
- Access to amenities
- No property tax bills
- Ability to afford to live in the city
Bonus: Real life example of renting vs buying in Washington DC
Many of these five items are “hidden” costs that may be included in your rent, but need to be recognized when comparing the costs of renting vs. buying. Many times people do not realize the extent to which costs paid separately for a standalone house are included indirectly in rent paid to a landlord.
6. Lower insurance costs
Renting usually results in much lower insurance costs as the value of what you are insuring is much lower. For instance, if you reside in an apartment building, you’re only insuring the contents of your apartment unit and some liability coverage but it is the landlord that carries the bulk of the insurance for the entire structure. Most recently, I paid about $100 per year for insurance on an apartment that rented for $2000 per month. This included $200,000 liability and $25,000 personal effects coverage. Now compare that to the average insurance cost for a comparable sized condominium next door to my apartment which is $300 per year, plus additional insurance cost is passed through in the HOA fee. In the case of the condominium, the insurance cost is being passed through in the HOA fee, in the apartment scenario the insurance cost is indirectly included in the rent price.
Standalone homes have a similar shifting of cost for insurance. Unless specified by the landlord, renting a standalone home would likely only require you to insure your personal belongings and liability coverage. However, the landlord will bear the cost of insurance on the structure itself, passing on the cost indirectly through the price of your rent. The national average difference in insurance costs between renting and buying is about $900.
Keep this in mind when comparing renting versus buying!
7. Lower utility costs
For apartments and condos, utility costs are almost always lower than those for a standalone house. However, this is another case where landlords may be indirectly including the cost of some utilities like water or gas into the rent. Another key to saving money on utilities is to look for newer construction since they are likely built to more energy-efficient standards.
8. Access to amenities
Apartments and condos tend to have more amenities than a standalone house. If you own a house, you may need to take into account how much you will spend on a gym membership, pool fees, etc. that will be baked into the rent of an apartment or condo with the same on-site amenities. At my most recent rental community, I had access to a two-story professional quality fitness facility, yoga studio, library, grilling areas, pool, cabanas, bocce ball court, etc. All of those things were included as part of my rent, whereas for a homeowner there would be additional membership costs at, potentially inconvenient, off-site locations.
9. No property tax bills
What many people don’t realize is that property tax is indirectly included in your rent since it is a cost your landlord is passing on to you. Many homeowners also don’t see the separate property tax costs if they have it included in an escrow account as part of their monthly mortgage payments. But for some homeowners, property tax bills arrive twice each year and require a significant lump sum payment. Renting removes this ongoing headache of twice per year multi-thousand dollar bills by indirectly rolling it into the rent payment.
10. Ability to afford to live in the city
One of my favorite perks of renting is it is much cheaper than buying in very expensive downtown neighborhoods of large cities. There are several financial benefits to living in the downtown core of a major city, the most significant of which is the ability to live without a personal vehicle. I have saved an enormous amount of money by eliminating a car from my budget by living downtown where I am within walking or biking distance of everything I could ever need – or can have it delivered in under two hours. Living in the city also offers a wide array of free or very inexpensive entertainment opportunities at numerous parks and other public spaces dotting the landscape.
Real Life Example of Renting an Apartment vs. Buying a Condo in Washington DC
A relevant comparison of renting and buying in my neighborhood can be done because the building next door is a nearly identical offering of condos to my building full of apartments. Average rent for a one-bedroom apartment in my building is $2,300 per month and this includes all amenities, but excludes utilities and optional parking. New renters can also get a month of free rent for signing a lease as well. An identical 1 bedroom condominium (without a parking space) in the building next door just sold for $850,000. Assuming you have the $170,000 down payment, you would end up with a mortgage payment of about $3,000/month at 3.25%. But wait, there’s more! In addition to the mortgage payment, you are responsible for an HOA fee of $750/month and property taxes of $500 per month. That brings the total mortgage+HOA+tax cost to $4,250 per month, versus $2,300 per month for an identically appointed apartment with equal amenities.
That means an identical home is $4,250/month to purchase or $2,300/month to rent in downtown Washington DC. Now people will say that paying rent is just burning money and having a mortgage means you’re building equity, so let’s take a look at the amortization schedule for the $680,000 mortgage. It turns out only $1,120/month of the $3,000 mortgage payment is going toward principal, the rest goes to interest or “burning money” to some people. So let’s add up all the non-principal payments and we get $1,880 (3000-1120) + 750 + 500 = $3,130/month. We are still $830/month higher as a condo buyer than an apartment renter for identical units, without even factoring in the opportunity cost of the $170,000 down payment.
What about price appreciation!?
Well, let’s have a look at the recent sale prices of this condo. It sold brand new in 2018 for $795,000. That’s appreciation of $55,000 in three years of ownership or just under 7%. The broker fees to sell the condo are 6% of the new sales price of $850,000 which is $51,000. So after deducting sales commissions, the owners made a total profit of $4,000 for their 2018 purchase. Add in their principal payments on their mortgage for three years and that would equal about $38,000 so they will walk away with $42,000 plus their original 20% down payment in 2018 of $159,000.
Let’s look at how they’d end up as a renter instead.
In 2018, one bedroom apartments were going for under $2,300/month in my building, but let’s just assume they paid $2,300/month for three years. Their original mortgage of approximately $636,000 (20% down on original purchase price of $795,000 in 2018) means a payment of $2,767/month. Add in the HOA and taxes and we end up with a total monthly payment of $4017/month but we will round down to $4,000. Over three years the condo buyer would have paid out $144,000 in mortgage, HOA, and taxes. I’m being generous and assuming that the condo insurance and rental insurance are equal. The renter would have paid $82,000 over three years. That means the buyer paid almost double over the course of three years than the renter. But let’s give credit for the $4,000 profit and $42,000 in principal payments they made during that time, bringing their net cost down to $98,000 over three years.
Even before accounting for the opportunity cost of the $170,000 down payment and the $1,700 monthly savings from renting, if they’d chosen to rent in 2018 they would have saved $16,000 (98,000 – 82,000)!
Now let’s calculate the opportunity cost of that $170,000 down payment.
For simplicity sake, let’s assume an 8% annual return on invested capital, or an extra $44,151 had they just rented and invested the down payment in the stock market. This now makes renting better by more than $60,000 (16,000 + 44,151) over three years!
What about the gains on the $1,700/month difference in renting vs. buying that could have been invested? That adds another $8,500 in investment gains over the three years. Now we are up to $68,500 in savings over three years by renting a comparable unit instead of buying.
Other costs that are not even considered in this analysis are repairs and maintenance in the condo that are the responsibility of the owner, versus an apartment renter who is not responsible for those repairs. In fact, my apartment had a water leak in the ceiling and the repair required drilling into concrete and putting in new pipe. I didn’t have to make a claim on my insurance and the landlord took care of the entire repair and put me up in a hotel for the duration. If I was an owner, I would have had to make an insurance claim and get reimbursed, after paying a deductible and likely seeing my renewal rate increase because of a claim.
If anyone tells you buying is always better than renting, it’s bullshit. There are many instances where renting is much more fiscally advantageous than buying and this real-life example is just one of them. This is why it is so important to do your research on a local area and the entirety of your financial situation and future plans before making the decision to rent or buy.
Now that I’ve poked the hornets nest of renting being better than buying, I’ll do a similar analysis of the situations when buying makes more sense than renting! Stay tuned.