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Renting vs. Buying: The True Cost of Home Ownership

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Rent or buy? We’re about to choose a new home in a new location. So the question of renting vs. buying has come to the foreground for us again.

Whether you’re newlyweds starting out, a middle-age couple downsizing, or seniors contemplating retirement communities, you too will likely need to evaluate the economics of renting vs. buying at some point.

For decades, conventional wisdom ruled that buying was the smart choice. After all, when you rented you were just “throwing money away,” while when you bought you were “building equity.” But that traditional personal finance fiction was laid bare during the Great Recession, and is now dying a slow death.

Owning a home does not somehow make it free to live in. When you look at the numbers, which I will do shortly, you can see that notion is completely false. Home ownership has clear, quantifiable, ongoing costs, just like renting. For different people in different times and places, one approach or the other can make more sense.

Simple Analysis

So there is no longer a universal answer to the rent vs. buy question: you simply have to run the numbers.

But if you are after a precise answer, the rent vs. buy analysis can be quite complex. Mortgage costs and tax implications can be complicated. Other variables, such as interest rates or how long you will own a home, are essentially unpredictable.

But, as I’ve pointed out before, in the retirement calculator articles, if we treat this rent vs. buy calculation as just a “model” of the future, we can gain a useful understanding of the issues without pursuing the fiction of a precise numeric answer.

So what follows is my own simple approach to the rent vs. buy decision….

The Number

The first thing to observe is that we actually know how much renting costs: It’s just your monthly rent payment, a single monthly number that replaces all the traditional expenses of property ownership — no additional calculation required.

The problem lies in determining the cost of home ownership. With that, there are many variables, all working over different time frames. There is no simple monthly cost for owning a property, though there might be homeowner’s association dues on top of many other expenses. There is a “sticker price” for a home. But that number bears very little relation to the actual cost we’ll experience living in a purchased home. So what we need is an effective monthly cost of home ownership, that we can compare to the cost of renting.

And that’s what we’ll try to calculate here. To make the number easily scalable to different situations, we’ll look for the “equivalent” monthly cost for each $100,000 of home value. So we can scale the monthly cost number up to different size houses using simple multiplication.

I’ll work through a hypothetical example based on national averages and my own experience, that you could then modify for your situation if desired. More important than my actual calculations — which will vary depending on individuals and economic circumstances — is the process. If you understand the basic issues, and how to compute the components of a monthly ownership cost, then you can duplicate the calculation in your own specific circumstances and decide whether renting or buying is most advantageous for you.

A Rule of Thumb

A while back I was talking to a nearby friend with years of experience owning and managing rental properties. I asked him what was his rule of thumb for identifying a property that could be purchased and rented out profitably? He said he looked for at least $1,000/month in rent for every $100,000 in purchase cost.

So that means a monthly rent equal to 1% of the purchase cost of the home. And that is another way of saying that the ongoing cost of owning a home in our market at the time, along with some profit for the landlord, was approximately $1,000/month for each $100,000 of capital expense.

Where exactly does that $1,000/month number come from? Does it apply in your situation and your market? Let’s dig in and look at the components of home ownership cost as converted to a monthly expense….

Time Period

The first issue you’ll hit when analyzing the rent vs. buy decision is the time period for the calculation. That’s because the transaction costs for buying and selling a home are so large that you can’t ignore them. But you don’t have to swallow them all at once. You can amortize them in some form over the length of time you’ll be in the home.

Yet, without a reasonably accurate estimate of the time period you can’t accurately amortize costs.

Your life is unpredictable — unknown career or health issues can easily impact your time in a given location. Even if you think you know your time frame for acquiring and living in a house, the time required to sell it is nearly always an unknown. Houses are famously hard to sell on a schedule. We were incredibly fortunate to sell our house in 24 hours. But we have friends who’ve needed years.

For the sake of our hypothetical analysis here, let’s say you’ll be in the house for 10 years.

Transaction Costs

Closing and selling costs are some of the most daunting expenses in home ownership. Various government entities, plus a host of professionals — realtors, lawyers, appraisers, surveyors, bankers, etc. — will be standing in line to get paid whenever you buy or sell.

How much does that all cost? For our purposes here I’m not going to try to sum up title fees, points, origination fees, loan fees, document fees, commissions, taxes, inspections and so on. Instead, we’ll rely on some broad percentages for our rough estimate.

Real estate supersite Zillow reports that home buyers typically pay between 2% and 5% of the purchase price of the home in closing costs. Because my own experience buying and selling a couple of houses has shown the costs to be punishing, and because I think it pays to be conservative when it comes to such a large transaction, I’m going to estimate transaction costs for buying a house on the high side of Zillow’s range — at 5% of the sale price of the home.

The picture from the seller’s side is even worse. Selling a house is especially punishing, because you get to pay realtor commission (6% in many cases), plus staging costs, plus some closing-related costs.

In today’s real estate market, the expense to make all necessary repairs and then dress up a house to be competitive in the market can be substantial. For our recent house sale we spent over $4,000 in immediate staging costs. However we spent much more than that on repairs and improvements with an eye to selling, in the years leading up to the sale. So, for the seller, I’m going to estimate transaction costs at 10% of the sale price.

That means for each $100,000 in house cost for our hypothetical example, you are going to spend $15,000 in transaction costs as a buyer then seller. Divide that by the 120 months in our assumed 10-year holding period and you get an ownership expense of about $125/month due to transaction costs.

Note: to keep the math simple in our example, I’m going to ignore time value of money considerations. (The fact that future dollars are worth less than today’s dollars.) This may or may not be appropriate in your own situation, depending on the time frame and interest rates.

Property Insurance

Even for somebody like me who believes in self-insuring, when you own a very large asset like a house, insurance is almost mandatory. Banks will require it for those who take out mortgages. And for most everyone else, the prospect of a 6-digit loss is unthinkable.

So how much should we budget for property insurance?

According to one source the national average premium for homeowner’s insurance is running at around $850 now. Given a national median home price right now in the low $200,000’s, that means annual cost for property insurance is approximately one half of one percent of the property value. (If you want to be more accurate, you might subtract the cost of renter’s insurance here, since most homeowner’s policies are also insuring personal property.)

Doing the math, per $100,000 in housing cost, you can expect to pay about $42/month for property insurance, on average.

Maintenance

The most painful aspect of home ownership might be that the buck stops with you. Whether it’s mundane repairs like replacing door locks, fixing toilet leaks, and touch-up painting, or big-ticket items like new roofs, furnaces, or driveways — it all comes out of your pocket. What does this cost homeowners, on average?

A popular rule of thumb for annual maintenance is 1%. But that may be too low. U.S. News and World Report says that homeowner’s spend from 1% to 4% of a home’s value each year on maintenance and repairs.

Looking back at my home maintenance records for our Tennessee home, extending over more than a decade, I see many months where we were shelling out hundreds of dollars, and more than a few where the cost ran into the thousands. On average our cost was about $400/month, which was about 2% of the property value annually.

So let’s stick with a 2% number. That means for each $100,000 in housing value, you’ll incur about $167/month in maintenance costs.

Property Taxes

Next we come to property taxes. This is probably the expense category with the largest variation across the country. A study from the National Association of Home Builders shows property tax rates varying by a factor of three between the low-cost southern states and the high-priced northeast.

Ultimately, property taxes are a function of your state and local government. In relatively low-priced Tennessee, our property taxes came to about 1% of the market value of our home annually . (Keep in mind that property taxes are actually computed based on an “assessment ratio” and/or “assessed value” which may not bear much relation to the market value of your home.)

Our experience was on the low end of tax rates nationally, but let’s assume you’re retiring in a low-cost area and use it for our hypothetical calculation. Thus, 1% of $100,000 monthly means about an $83/month expense for property tax.

Tax Benefits

Speaking of taxes, is the news all bad? No. There is, after all, the mortgage interest deduction — probably the most highly-touted of all tax breaks. It’s often at the center of arguments about why home ownership is a “good” financial decision. After all, you get a tax break. How could you go wrong?

For starters, those with the requisite income, who loathe debt in any form, may pay off their mortgages quickly enough that the mortgage interest deduction is not a major factor in their finances. Even for those who aren’t able to achieve early financial independence, many enter retirement without a mortgage or substantial interest deduction.

Nevertheless, a number of retirees will carry a mortgage and get a deduction on their taxes. And, whereas we’ve been computing the costs of home ownership so far, this will actually be a credit. To compute it you’ll need to know your marginal tax rate and multiply that by the amount of the interest deduction, to get your tax savings. Since that tax rate is a function of your income, I’m going to leave this calculation as an exercise for the reader instead of attempting to generate a one-size fits all number.

Appreciation/Inflation

Are there other benefits to home ownership aside from a possible tax reduction? How about the expected growth in home property value?

There were times, and there will always be places, where killings can be made in real estate. Many of us have seen older parents do well. And we’ve all heard stories about somebody flipping a house and making tens of thousands of dollars in a matter of months.

But that’s rare, especially these days. Now there are more and more voices suggesting that, even over long time spans, the best you should expect from real estate is to keep up with inflation.

In many cases, a home is not a great investment. That was our experience over 17 years in Tennessee — in a real estate market that was largely spared the Great Recession. Despite apparently selling our home for much more than we paid for it, once all the capital improvements were accounted for, it barely kept up with inflation.

So, while it may shock some, I’m going to ignore the potential for any real growth in the value of your home. In general, I just don’t think you can count on it anymore. As for keeping up with inflation, so will most of the other costs we’ve been computing. Yes the value of your home will probably increase at the inflation rate, but so will your maintenance, insurance, and other expenses. It’s a wash.

Interest/Opportunity Cost

The most common argument against renting, one that I’ve read in print and heard in person more times than I can remember, is that renting is somehow “throwing away money.” On the surface it may appear that way. Although we’ve already detailed a number of ongoing costs of home ownership, the one cost you don’t have is the rent itself. That rent seems to add up to astronomical numbers over time for the renter, while the homeowner is spared writing those monthly checks.

But this is largely an illusion. Why? Because that common argument neglects the opportunity cost of tying up equity or capital in a home purchase. It works like this: If you put $100,000 in a home, then that money is not invested somewhere else, growing and earning income. And that missed growth and income is a cost just as real as any other. It’s money you are not earning because you chose to buy a home instead of making some other investment, in stocks and bonds for example.

If you choose to take out a mortgage and borrow the capital for your home, then this cost is more readily apparent: It’s the interest you pay on the home loan. And that is a cost of home ownership like all the others.

The tricky thing about computing opportunity cost is choosing an interest rate. As a general rule, mortgage interest rates are below what you could earn on your money in the stock market. Mortgages are a more reliable financial vehicle, while stocks are more volatile and less predictable over short time spans. That means stocks will pay more in the long run. On the other hand, large mortgages usually incur an additional expense in the form of PMI (Private Mortgage Insurance) at first, increasing their cost and apparent rate.

Where would your money be invested if not in a mortgage, and what would it earn? For our purposes, I’m going to pick an arbitrary 5% rate of return to compute the opportunity cost of owning a home. That’s more than current mortgage interest rates, but less than most conservative projections for stock returns going forward. Though arguably this should be a real rate of return (after inflation), in which case it could be high.

On $100,000 of home value, a 5% foregone return equates to a cost of about $417/month.

And that is the missing link between renting and buying. Generally speaking, this is the single largest cost of home ownership, yet it is invisible, poorly understood, and largely ignored by the majority of people!

The Bottom Line

Ok, so we’ve explored most of the obvious and not-so-obvious costs of home ownership. As we went along, we made some simple calculations using assumptions based on my personal experience and national averages, to come up with monthly equivalents of all these home ownership costs. So now let’s add them up:

Cost of Home Ownership per $100,000
Item Monthly Cost
transaction $125
property insurance $42
maintenance $167
property taxes $83
interest/opportunity cost $417
TOTAL $834

The bottom line for our hypothetical example is that home ownership actually costs about $834/month per $100,000. So, for example, if you’re looking at living in a house valued at $300,000, you could assume that would cost you about 3 x $834 or about $2500/month to own. If you can rent it for less than that — which indeed you can in some U.S. markets right now — then renting is actually the better value.

Interestingly, that $834 value is also in line with the 1% rule of thumb stated above for landlords, because if you’re looking at home ownership as a rental property business, you want to make some profit on top of what the property is costing you. Charging $1000/month in rent would give you that profit margin. (If you’re a landlord reading this, I’d be interested to hear about your real world experience.)

Just remember that the numbers I’ve used in this post are hypothetical and may not apply to your situation, especially if you live or retire in a more expensive region of the country. Instead, take the structure I’ve outlined above and come up with your own “monthly cost of ownership.”

Finally, if you are interested in this topic but don’t want to crunch the numbers yourself, check out the Rent vs. Buy Calculator over at FinancialMentor.

Non-Financial Issues

Before we end, it would be remiss not to discuss some of the non-financial factors in the rent vs. buy decision. Most of us sense that this isn’t a purely financial matter. Owning a home is very satisfying to some people. There are emotional benefits. But, there can be similar benefits to renting also.

When you own a house you have more control over your environment. You can modify things to suit yourself. You don’t need permission. You also don’t have to worry about whether the lease will be renewed or you’ll have to relocate. On the other hand, you are not in control of your monthly budget: A large home repair expense could materialize at any time. On the plus side, a home is a relatively safe place to park your money: Houses are hard to steal, courts don’t like to seize them, and insurance is typically easy and cheap to obtain.

By contrast, when you rent, you have more control over your expenses. Monthly rent is predictable and you don’t have to worry about paying for unexpected repairs. On the other hand, unless you are able to sign a very long lease, there are no guarantees against having to move on relatively short notice. And you have only limited control over your environment. You aren’t free to make changes to suit yourself. Yet, in one respect, you have more flexibility and control when renting: You can leave a place within 12 months, if it doesn’t suit you. There are no transaction costs.

In the end, emotion will continue to drive many rent vs. buy decisions. It’s not a purely financial determination. Just don’t act on your heart, before your head has run all the numbers!

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Comments

  1. So what are you planning to do?

  2. I did a quick simulation recently to see if I should sell the house and move to a rental. There were other reasons prompting this, it wasn’t just timing the market. This improves my cashflow quite a bit, initially requiring only half as much cash every month and gives me extra cash up front. If I invest all of that, even with a conservative return of inflation + 4% it grows to be enough to pay for the rent in 10-20 years. When I put in actual historical returns and looked at the difference in 40 years, it was a ridiculously large number that I won’t put in here; even someone with a balanced viewpoint wouldn’t believe it if they don’t run it themselves.

    If you know the real costs of owning a home it’s fairly easy to build a simulation like this. You can also test the risks. At an investment return of 4%, the investment portfolio eventually starts to decline after 40 years due to the costs of paying rising rents. At a return of 3%, the net benefit turns negative after 40 years. Based on that I’m very confident that it’s a safe move.

    Another benefit of renting is that you don’t even need to spend your time on any repairs that come up. You can just call someone, and if you live in a well-managed building some things will be handled without your intervention. Combined with the option of leaving when you want with minimal costs, there are a lot of non-financial advantages for anyone who wants a place to live rather than a never-ending project.

    • Thanks for those numbers Richard. Very interesting! More evidence that people should run the numbers themselves, rather than accepting the advice of institutional “experts” with a vested interest in home ownership. I especially appreciate your point about the time commitment. After many years of home ownership, I’m at a point in life where I don’t want to spend any of my time on home maintenance!

  3. Renting certainly has it’s attractions. When something breaks in my home, i’m on the hook to fix it or find someone to do it for me. When I rented, I just called the landlord.

    I’d still be in a rental, but my wife likes owning.

  4. Excellent analysis, Darrow!

    Should I ever feel the urge to purchase another house after selling the one I’m currently in, I’ll be sure to do these types of calculations in order to talk myself out of it.

    Looking forward to joining you as a renter sometime next year (assuming my home-selling experience is closer to yours and not Jim’s)!

    • Thanks Mad Fi! Best wishes on your own transition. My top two tips for home selling: properly stage the place, and price it at the market value by getting it appraised first.

  5. Great article, Darrow, I really appreciate putting numbers on the parameters.

    Your first number seems to be the most important: 10 years. Frankly, only those who are self-employed or financially independent could confidently claim to be able to stay put for a decade. Active-duty military should never own a home until they hang up their uniform.

    One other number that could be added into the decision: utility expenses. Owners can make their homes more efficient with insulation, EnergyStar windows & appliances, solar water heating, photovoltaic arrays, DC-motor ceiling fans, solar attic exhaust fans, high-efficiency furnaces & air-conditioners, gray-water irrigation, and even composting toilets. These capital investments have a payback, but most of them are less than a decade (especially with homeowner tax credits). And frankly tenants would have to have a very green landlord to be able to recharge an electric vehicle or plug-in hybrid…

    • Thanks Doug. After my experiences, I couldn’t recommend that anybody own a home for less than 10 years. That seems like a formula for loss, given all the transaction expenses. Very interesting point about utilities: No question if you are stuck with an inefficient home as a renter it’s going to cost you more, whereas you could fix that as an owner. Thanks again for the comment!

  6. Aaron Johnson says:

    Something that suddenly occurred to me in these calculations; where’s the calculation for the increase in rent factor? I mean, if I’m comparing a decade in a rental with the same period of a mortgage, the landlord isn’t going to keep my monthly rent cost the same. Sure, unless I refinance my mortgage, my mortgage payment stays the same. But if you ignore the factor for rent increase, this whole comparison is skewed. Perhaps wildly so…

    • Hi Aaron, good point to raise. I’m not sure if it skews the calculation or not though. I would assume that rent increases, when they happen, generally keep pace with inflation. And one reason that rents increase is because maintenance, insurance, taxes, and other costs of ownership increase — same as they would for a homeowner. So it could be a wash comparing to ownership, or it might be a factor, depending on the area.

      Side note: we had occasion to price the exact same (pretty nice) apartment complex that we lived at in Tennessee 17 years ago, last summer when we were on our way out of town. In 1996 we paid $675/month for a 2 bedroom apartment there. Currently rent for a 2 bedroom there is around $900. That’s an annual increase of 1.7%, less than the rate of inflation.

      • From my own personal experience, I rent out a condo I own. I thought I would reap the benefits of the “supposed” static mortgage and HOA dues with the increasing rent prices in the area. But unfortunately I’ve gone through 2 HOA dues increases, 1 homeowner’s insurance increase, and 2 property tax reassessments. In total I pay 20% more now and I’ve increased rent by 20%. A wash!

        • Hi Cyrus. I’ve heard many similar stories about condos. (For what it’s worth, I think it’s especially hard to make vacation rentals pay, because of low occupancy rates.) Thanks for sharing your numbers!

      • Some owners don’t increase rents with the market. I’ve observed a lot of old buildings that have low rents, possibly due to the effect of paying off a mortgage and anchoring the rent to the time of the original purchase which makes them comfortable with the income from a relatively low rent.

        You may also be in an area that restricts rent increases which is bad if you’re a new renter but could be an advantage if you stay for a while (I think the main effect of this is a lower-quality rental stock so you could just rent a less expensive place if you want).

  7. My own experience is that renting results in a much higher frequency of relocation. I don’t think I saw any allowance for those costs within the comparison.

    • Interesting point. Anecdotally, I agree. People who rent, probably move more often. But I’m not sure which is the cause and which is the effect. There are certainly cases where renters are forced to move, but I suspect those are in the minority. Also, moving between rentals would have much lower transaction costs than buying/selling. Still, I think it’s a valid issue, so people should include those costs if they think they’d move more frequently between rentals than owned dwellings. Thanks MSaw.

  8. I joke with my friends now when they ask about home ownership, and tell them I wish I just stayed a renter and invested the money. I love our home and don’t really have regrets, but it’s clear we would have been better off simply renting and investing our money instead of owning and paying off our mortgage from 2010 to 2013. Our opportunity costs are huge. Still, we’re debt free now and can try to make up for lost time by investing more now than we could if we were renting.

    This is a great article, Darrow. Like you said, the real takeaway is the process that readers can use to plug in their own assumptions. I doubt my wife will ever go for renting again but the math at least dispels the notion that renting is some plainly terrible choice when compared to owning.

    Hell, the math required to even calculate the cost of owning makes a compelling argument to rent…

    • Thanks Done by Forty. I’m a big fan of being debt free. Congratulations! Agreed on the math too, and the process. Home ownership may fail the “keep it simple” rule. But if cost is important, we can always try to run the numbers and do our best to figure out which is best…

  9. Aaron Johnson says:

    Darrow,
    I only started to think about it when I remembered the house I rented in my town 11 years ago cost us $350/month. In June I saw it with a rental sign out front for $895. I’m sure it’s different in every area. That being said, my homeowners insurance hasn’t increased over the past 6 years, and the property taxes have increased only due to an increase in home values, which have been, from what I’ve read in the newspaper, about 2-3% annually on average. Our property tax rate is 1.128 with a median home value of $189,000.

    I don’t have the calculation to do this by each year’s increase, but even if you averaged the $545/mo rental increase, that’s tens of thousands of dollars in increased rental cost. I’d have to say that’s definately a significant portion of an equation missing…

  10. This article just reaffirms the answer to this question is so complex it’s likely impossible to answer. You assume and estimate so wildly, the numbers could easily be swayed in either direction. $4,000 in “staging costs”? 10% transaction costs? Ignoring tax implications of buying makes this article completely useless unless your point was to convince yourself that renting is the right thing to do. I imagine you simply change some of your assumptions to change the conclusion to buying making more sense.

    • Hi Brett, thanks for your opinion. The point of this post wasn’t to provide a universal answer to the rent vs. buy question, because that’s impossible. I tried to provide a structure, and some starting assumptions based on my personal experience and national averages. But those numbers simply won’t apply to everybody. That’s why I encouraged people to do their own analysis, and even provided a link to a relevant calculator. Note, ignoring tax implications of mortgage debt isn’t useless for those who are financially independent and pay cash for a home. Everybody is different.

  11. Didn’t you count a big chunk of the expenses of owning twice?

    To justify not counting appreciation, you say “Despite apparently selling our home for much more than we paid for it, once all the expenses were in, it barely kept up with inflation”. But then those same expenses also get listed on their own line-items.

    If you want to say that appreciation barely kept up with inflation, that is one thing. But you can’t say appreciation barely kept up with inflation+expenses, and then also count the expenses separately as well.

    • Hi Jeff. I don’t believe I counted expenses twice. But this was a good catch on your part! I got sloppy with my language and wrote “expenses” in the original post, instead of “capital improvements.” I just took the liberty of changing that section since it really was misleading. (Your comment here can document the original text, if anybody is interested.) At issue is the difference between maintenance and capital improvements. There is more detail on that distinction in my post Investing in Real Estate under “The Rate of Return on our Home,” though there is surely more to be said on the subject. Thanks again for your helpful comment.

  12. On rental property criteria: My initial criteria is that I want the price to be no more than 10 times the annual rent, so for a $1000/month rental I’d look at it if the price was under $120,000.

    On the calculations in general:

    One item you left out of the home ownership vs. rental costs is water/sewer/trash, which are usually paid by the landlord, especially in a multi-unit property.

    When you talked about the time value of money at 5% it seemed to me that this was based on a 100% cash deal. On a typical mortgage where you put say 20% down isn’t it going to be different? Also, other than a home mortgage I don’t know of any other way you can borrow money for 30 years at a fixed percentage rate. I realize that you deliberately didn’t take inflation into account and used today’s dollars, but with a fixed rate loan if you want to calculate it in today’s dollars then you need to *reduce* the cost of the mortgage payment each year by the amount of inflation (did this make any sense?) To put it another way, your monthly rent is likely to go up every year by the amount of inflation, but your mortgage payment is fixed in absolute dollar terms, but actually drops each year by the amount of inflation since you’re not *paying* it in today’s dollars.

    • Hey Steve, thanks for your rule of thumb. And good point about water/sewer/trash. In general, getting any portion of utilities included would make renting more favorable. Though that seems relatively rare in the mostly single-family units we’ve been looking at.

      Regarding time value of money (and tax considerations), yes, my article was definitely tilted toward an all-cash deal. Partly to keep it simple and partly because that’s where my head is at in early retirement. That particular scenario isn’t viable for a lot of people, I understand, but the general structure presented in the post can still be helpful for analyzing the issues.

      I basically agree with what you say about mortgages too. In general it’s good to be a debtor in inflationary times because the dollars you pay back are worth less. To be a debtor with a fixed interest rate and government blessing is even more tempting.

      But, as I point out in the article, there are other costs of home ownership that are likely to rise with inflation.

      This can be a complex issue. Thanks for rounding out my treatment with additional perspective.

  13. Darrow, thanks so much for this site and practical ideas. Wish I had been encouraged early in life to live toward independence financially. It’s frightening to soon be in retirement and worry about running out of money.

    • Hi Ingrid, thanks and sorry to hear about your concerns, shared by many. The ideas here and elsewhere on frugality, simple investing, and retirement planning, can always help improve matters, regardless of your starting point.

  14. Hi Darrow! Thanks for running all those numbers. We are definitely renting until my wife retires from the Navy. A few years ago we bought a house, had to move, rented it out, still lost money. A very common story for active duty families. We know other families who are long-distance, unwilling landlords. Some of them have more than one rental property, and in different states. It works for some, but not us. In fact, when we retire I’m thinking of renting for a year or two before we finally buy a home. That would put us over 50 before owning a home again (only my second).

    On the other hand, by buying a home I definitely felt the emotional benefits you mention. For example, while I was on active duty I never felt a reason to vote for anything other than President. I knew I’d only be a ‘local’ for one or two election cycles. As a homeowner and taxpayer, however, I felt like I had to care and research every candidate for every office. We only lived in that house for 3 years, but I still feel more of a connection to that area than a lot of other places I’ve lived.

    I agree with Doug that in general it is wise for military families to forego buying a home while on active duty. The service members that come out on top by buying usually do so by making career sacrifices to stay in one place, becoming ‘geo bachelors’ and leave their family in the home while they serve at a distant location, or are just plain lucky with orders/market timings.

    • Hi Rob, great to hear from you. Thanks for the insightful comments. Times have changed. I remember when I was growing up that military families usually did well when buying wherever they were stationed. Now it’s not a given. Thanks also for the thoughts on emotional benefits. Makes good sense.

  15. Thanks for this article, Darrow. Well written as always. I often lament at how expensive home ownership is. It’s painful to write the annual check for my real estate taxes which are above 2% in my area. Add that to the constant calling to improve or repair something and houses are a big money drain – not that renting is perfect either. I’ll certainly be referring back to this article when it’s time to move again.

    On a side note, it was an absolute pleasure to meet you and Caroline at Fincon. Thanks for taking the time to hang out.

    • Thanks Prob8, good to hear from you. Those taxes sound painful, and I know some areas are worse. I was also astounded at how much we spent on our house over 17 years, even though we aren’t big on home improvement.

      P.S. It was great hanging out with you too. Best wishes on your quest!

  16. Hello Darrow,

    I think this was well thought out and presented. It certainly is a complex topic!

    You briefly touched on inflation, but I think that deserves a bit more attention. In an inflationary environment, owning becomes preferable in a much shorter time frame. And if interest rates are rising too, owning with a long term, fixed rate mortgage is even better.

    I think a lot of the conventional wisdom that “owning beats renting” stems from the fact that we’ve lived with moderate inflation for the past 80 years or so.

    On the other hand, in a deflationary environment, the calculus changes, and tilts the scales heavily in favor of renting (and makes a mortgage a killer!)

    In addition, many folks will talk about the peace of mind that comes from living in a mortgage-free home. It’s hard to put a dollar value on this, but from a long-term financial planning perspective, another way to look at living in a mortgage-free home is to consider the paid-for value as a tax free, inflation indexed annuity.

    As the saying goes, “you need a place to live”, and living in a mortgage free home puts a huge cap on this expense. Of course, as you point out, it never eliminates (or caps) the costs entirely. But it can drastically lessen your cash flow and thus income requirements.

    • Thanks Jay. Appreciate the perspective on inflation/deflation impacts. And I agree about the peace of mind from living in a mortgage-free home. I felt that in our previous home. And yet, after running all these numbers, I realize that peace of mind is a bit more fictional than expected, because of the other ongoing costs of home ownership. (If you can’t afford to insure, maintain, or pay taxes on your home then it could still be lost.) Thanks again for the thoughtful comments.

  17. Running the numbers is always a good idea. However, when it comes to renting vs. owning, in my experience the assumption is that the renter will always manage to invest their cost savings while the reality is that most people are not disciplined enough to do so. Given that a mortgage forces you to prioritize and invest in your home equity, you don’t have a choice.

    Many other variables can and will change. But having both rented and owned, the only time I would rent would be if I couldn’t be reasonably sure I’d still be in the house in 5 years, or couldn’t afford the 20% downpayment.

  18. Thanks for this analysis Darrrow. I add this only for perspective. I have been a homeowner for 20 years and recently bought a vacation/future retirement home. I bought my first home in my mid-thirties after a very itinerant life. I am very on the fence about owning a home, let alone two, and must admit that I put four years of thought into owning a home before purchasing. I came away with this and it has nothing to do with money: buying a home finally grounded me and put a major obstacle in my genetic programming that made me feel as if I had to move every few years. This meant I generally stayed in the same job with significant increases in salary, benefits, and retirement associated with longevity in a company. The downside of this is that I did enjoy the change immensely but realized in time that it usually is not sustainable from an employment standpoint.

  19. Hi Darrow,

    I appreciated the article. I am in my mid twenties and am working toward FI around 40.

    I like the methodical approach to doing the analysis and certainly agree that everyone should make their own analysis. I do have a few points regarding the assumptions.

    The first is the use of all cash to buy a home. I know some people with lots of cash consider this as an option to “guarantee” a return. However, with interest rates still relatively low, the opportunity cost associated with stashing that much cash with that low of a return is pretty high.

    Additionally, the leverage allowed by a mortgage is fairly high. We can control a large asset say 100k with only a portion of our cash. Assuming 30k in down payments and closing costs we can control an asset worth 100k. Even if that 100k only increases with inflation every year, say 3%, we see a 3k gain. 3k on our 30k investment is 10%.

    I am not saying everyone should buy homes, or that homes are great investments, because leverage can work both ways, but I do think the investment value of real estate, particularly homes is tangible and relevant.

    I look forward to reading more of your entries, as I have just discovered this site!
    thanks.

    • Hi Lucas, thanks for the comments. Yes, all cash deals may not be as common, and people should run their own numbers. You make the case for using leverage. (Just don’t forget interest costs.) I know a number of people who have done well in rental real estate, and I definitely consider it one of the surer paths to wealth. But it’s also good for readers to know they can get to financial independence, as I did, without leverage or debt. Thanks again!