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“Renting is throwing your money away.”
“You’d be stupid NOT to buy a house.”
“Buying a house is the ONLY way to secure your future.”
These are all phrases I’m sure we’ve heard over and over again. From our parents, from our friends, from our co-workers.
When I told my mother I’m a Financially Independent and don’t ever need to work again, her response was “So what? You don’t even have a house.”
Boomers just can’t stop selling the idea that buying a house is the ONLY worthy life goal and anyone who rents is a loser.
So who created this illusion?
Banks?
Real estate agents?
Boomers?
After all, THEY’RE the ones who stand to make a KILLING from all this. With interest rates laughably low, and housing prices absurdly high, how can they possibly not win?
But houses are NOT the cash-cows that they’ve lead us to believe, and here’s why I refuse to buy one:
Renting Lets Me Have a Better Career
Do you know what happens when you buy a house?
You get stuck in the same place for 5-15 years.
Why? Because you incur real-estate agent costs, staging/maintenance costs, and lawyer fees every time you sell. Additionally, for the first few years your money is going towards interest and not towards building house equity.
House owners are more likely to stay put, even if there are better jobs elsewhere. This is exactly what happened during the 2008 financial crisis. Job vacancies existed at the SAME time as rampant unemployment. Why? Because the people who had the skills to fill those positions were stuck on the other side of the country. They settled for lower paying jobs in their area, tied down by their houses.
In contrast, renting lets you chase your dream job, as well as turbo-charge your career.
At my last job, I could take on high reward/ high risk projects because I didn’t have a mortgage. If I failed and got fired, I wouldn’t sweat the finances. And as a result, I took on projects that were too risky for my house-owning peers and got two promotions in four years, while they had to slave away on safe projects without a raise in six years.
That job eventually got so bad, I had to be on anxiety meds, but once again, my decision to rent instead of buy, saved me. Since I invested the money that would’ve gone to a giant mortgage, insurance, and maintenance, I generated enough passive income to cover my expenses forever so I never had to work again.
And when I left, I got to do work I love with less pay (author/entrepreneur) because I didn’t have to worry about housing costs.
If I had dumped all my cash into a house like my mother wanted, I would still be stuck at the same hateful job, stressing out about getting laid off while being my boss’s bitch.
Now I wake up at 7am without an alarm because I’m too excited to start my day.
Renting Gives Me Maximum Flexibility
Okay, by a show of hands, who loves shovelling mountains of snow, cleaning leaves out of the eavestrough, and fixing leaky drainage pipes?
Anyone? Anyone?
I thought so. I mean, who wants to do all these things when you can travel, build your dreams, or spend time with your friends and family instead?
When you own a house, that’s what you’ll be doing ALL the time.
And with all the extra costs like property taxes, lawyer fees, house maintenance, house insurance, land transfer taxes, etc, etc etc, forget about impromptu vacations or fun outings with friends. All your money goes towards feeding your insatiable house.
And if you can’t afford to buy a house close to work, you’ll be forced to spend most of your time stuck in traffic. And because you had to buy a car, that means even MORE unexpected costs (car payments, car maintenance, gas, and insurance), causing your bank balance to shrinking and your health to decline.
Because I rented, I found a place within walking to distance to work for a steal. It was easier than finding a house because there were a lot more affordable rental units than properties for sale.
My rent was also fixed so I knew exactly what to expect every month. Even with rents rising due to inflation, it couldn’t go up more than 2% per year. I never had to worry about unexpected $15,000 water damage bills or $5000 window replacements.
And as a result of the extra time and flexibility, I could travel whenever I wanted, work on my own projects, and stay fit.
Renting Lets Me Diversify My Investments
If I asked you to bet all your money on ONE stock, would you do it? Knowing that a certain company called “Nortel” once existed?
So why would you put your life savings into 1 asset, like a house?
Now before you freak out and tell me that you can at least LIVE in that investment, and you can’t LIVE inside stocks, consider this:
Once you become FI, your balanced portfolio generates dividends—free money that corporations pay you as a shareholder of that company. Without having to sell any assets, you get paid FREE MONEY that you can use to pay rent. You can even access this money right away, unlike the house equity that you can’t touch until DECADES down the road. And that’s only IF you sell. And lots of people don’t. And of those who do, most just end up buying even MORE expensive houses.
You are renting a place for free. Let me repeat that. You are renting FOR FREE.
Your stocks are generating FREE RENT while growing in value. So not only are you not throwing money away on rent, you can flexibility move whenever you want, without incurring extra costs like lawyer fees, real-estate agent, fees, etc. And you don’t have to lift a finger to do any maintenance.
And because your investments are well diversified (via bonds, stocks, REITS, preferred shares, etc), you don’t fall into the trap of having all your money locked in ONE asset, whose price you CAN’T control.
So what have we learned from all this?
Renting is NOT throwing your money away, and buying a house comes with WAY more hidden costs than you think. Costs like a fulfilling career, time and flexibility to do what you love, and wealth diversification.
So before you sign up to be your boss’s bitch, lock up your savings in 1 asset where you won’t see the payoff for YEARS, and give up your time with your loved ones to fix leaky roofs, read this.
Our parents made out like bandits on housing. But they never stopped to consider the lucky factors that contributed to their success: reasonable housing prices, falling interest rates, a low cost-to-earnings ratio.
Factors that are no longer realities in our world today.
So let’s stop blindly following our parents’ advice and start making our OWN choices.
Let’s ditch the house, build our wealth, invest it, and live the life we’ve always dreamed of.
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I’m on the complete other side of the rent versus buy debate, so don’t hate me!
I totally get why renting is great. The flexibility, the short-term lower costs, and the point you make about diversification.
But I say inflation is just too powerful a force to combat. Getting neutral inflation as young as possible by buying a primary residence is wise long term imo. Remember when $1,000,000 used to mean a lot? Now it’s like $3 million is the new $1 million decades later due to inflation!
Sam
That’s an interesting perspective, but let’s not forget that equities are also a good hedge against inflation. As inflation rises, companies raise their prices and you, as an investor, get to benefit from it. Another good inflation hedge is Real Return Bonds.
In any case, when the price-to-rent ratio in my city is 26-32, and people are borrowing their brains out to buy houses they can’t really afford, inflation isn’t the biggest concern here.
When real-estate speculators are willing to buy properties even though it means renting them out at a loss for potential capital appreciation, that’s not investing. That’s gambling.
The funny thing is that we were originally looking for house (which is why we saved so much), but when we stumbled on Financial Independence, we found that this life is WAY better. Having a house that I constantly have to feed with pay-checks, does NOT beat having a portfolio that pays me a passive income to travel the world. It really doesn’t. No matter what the capital appreciation is.
Hello! this is now my 2nd time reading this piece, and now with comments.
I wound up here again because a link from a piece saying that home ownership is like a bad savings account linked here.
Anyway, hope you are well and happy.
PS – I really loved the stuff about Mao in your book. Thanks for that.
You make a great point about the career opportunities that can come from being mobile. I personally can’t see myself moving across the country for a job since I have all my family where I live now and a bit of a social network. I absolutely hate commuting, however, so I can’t see buying a place until I’m retired. Maybe I will buy somewhere in the neighborhood I like and rent it out if I ever take a job more than a short commute away. Then I can live there after I retire. I actually like the idea of owning a place and taking care of it and knowing I will only have to pay the same amount till the mortgage is paid off and then I don’t have to pay anything except maintenance and taxes when I am old.
A house does make sense for some. I’m not saying ALL home ownership is bad. It just doesn’t make sense when people are jumping into the market at all COSTS, even if it means being up to their eyeballs in debt. If the price to rent ratio in your area is good, and you’re NOT drowning in debt, then it makes sense for you.
Applies to computer engineers with 90K salary or more. But what about those who makes 40-45K or less? It’s almost half population of US and Canada. With the average and below the average income you can’t rent close to work, the only travel is “all included” when you earn your vacation days, lifestyle is a trip to the mall or local dinery, and after paying your bills nothing left for investment. For those folks paying mortgage instead of rent is the only way to build equity.
“For those folks paying mortgage instead of rent is the only way to build equity.”
Um…nope. Once again, anytime you take on massive mortgages, you are incurring huge amounts of risk. Take a look at Calgary and Edmonton if you don’t believe me.
For those making 40-50K, to achieve this, you can do one of three things:
1) Work side hustles to increase your salary (eg online business, uber driving, teaching English over Skype, etc)
2) Aim for smaller portfolio, so that you can become partially financially independent. So instead of retiring fully, plan to work part time. Even if you make only $10,000/year, you can reduce your portfolio size by 250K. So essentially we could’ve partially retired on a $300K portfolio, by making $14K a year each with freelance work.
3) Plan to live your retirement overseas in low cost places like Thailand, Mexico or South America. The cost of living there is only $21,000/year/couple and you live like kings (also the weather is better). So for that, you only need $525,000, not a million. For 2 people making 50K each, after maxing out RRSPs, TFSAs, you get approx $87,500. Putting away 50% per year, and using a conservative ROI of 6%/year, you can retire in 9 years. With a house, you’re looking at a retirement horizon of 30 years.
I’ll break this down in more detail in a future article.
The house route could work, but it could also be catastrophic. And with housing markets in TO and VC so overvalued, I wouldn’t take that risk. Even the banks are sounding the alarms.
When you have kids you’ll have no time for a side job and no way to save money with small income. All your advices make sense when you are young, no kids, no husband and have a lot of energy.
60% Americans haven’t been outside of their state and you tell them to live in Guatemala. Haha.
I agree that it’s a lot harder once you have kids, but people don’t just completely give up on their ambitions once they have kids. Even as little as an hour a day adds up to a TON of work on side projects. I actually think having kids drive you to be more creative and to increase your salary, because you want to do it for them. The trick is to be strategic about it. Read Pat Flynn’s blog (he has 2 kids) on how to start a side gig if you have a day job: http://www.smartpassiveincome.com/how-to-get-25-hours-in-a-day/
There are many places in the States with a low cost of living. My buddy Justin is raising 3 kids on 40K in Raleigh, NC. But hey, if people are just going to throw up their hands and say “can’t win, don’t try”, then they should stay in their exact situation and change nothing. People who have no creativity and no desire to change can’t be helped.
What are your own personal thoughts on settling down, assuming both of you plan to have kids one day?
Wouldn’t that mean staying in one place for a relatively lengthy period of time, given that frequent travels/moves may have a destabilizing effect on the kids, especially during their schooling years?
For the first 3-4 years, we can travel with the kid. After that we could a) homeschool and continue traveling or b) move to small, inexpensive city (like Waterloo or Hamilton) and enrol them in school there. And then every summer, once school lets out, we’d go traveling with them again.
What about if I am a veteran. I use my VA loan to buy a home. No downpayment. So, pretty much Ill be paying mortgage like if I was a renter. Also, because I live in Hawaii, military is number 1 renter here. Am I an exception? By the way I’m a 90 baby, proud millenial….:)
The media seems to favour owning over renting.
“This is alarming because renters are poorer than homeowners. According to the Canadian Mortgage and Housing Corporation, the median 2011 after-tax income for a homeowner in Toronto was almost double that of a renter.”
from article: http://www.metronews.ca/views/toronto/torys-toronto-matt-elliott/2016/11/21/government-attention-on-homeowners-is-raw-deal-for-renters.html
I’m not sure how to check their stats CMHC.
That’s correlation, not causation and a useless statistic. People who have higher salaries tend to buy homes because banks approve higher mortgages based on salary. Buying a home doesn’t magically increase your salary.
I agree with the author. After buying a house in a nice neighborhood, in 5+ years, the neighborhood turns into sh*t. So time to move again. I had lot’s of equity, but now homes are priced 3x the amount than before. I usually by new homes (or few years old). I can’t imagine paying for used home that someone had bought for the value.
Looking back, wish I had rented instead. I could have rented, saved all the money and invested the rest. After all, people who’ve bought homes were renters before. I can’t believe the mortgage interest is as much as the principle. Now the property taxes have 2 mellows, with the 2nd mellows being in the $1,000 range. Not to mention increase in Home Owners Insurance, Utilities and Repairs/Maintenance. Ridiculous!!
Don’t forget that if you rent, someone who owns it is renting to you. That means they will pass on the cost of such things as property taxes and mortgage. Most of the time it is cheaper to own than to rent for a simple reason, no one will rent you a house for less than it costs them to upkeep.
It’s like this, will you put money in the bank if you get negative interest, meaning instead of your money growing, you will have to pay the bank every month and your money will be shrinking.
Just wondering if Toronto has rent control? 2%? I am listening my way through ChooseFI and decided to go over this article again! Thanks!
Owning a home/condo in the “right” location is key.
Why? Simple. By putting down only 10% of the property value down, you benefit from value appreciation of the entire 100% of the property.
And now is the time, because interest rates are historically low so that 90% of the property is financed at a very low rate.
I am in NYC and owning a condo is the right location. Switching jobs is easy, they are all within 2 mile radius.
Why is NYC the “right” location? Because condo appreciation is not only due to local economic factors, but also due to global factors. We have buyers from Asia and Canada as well.
So while a regular home value around the states appreciated 18% in 10 years, NYC condo prices have more than doubled due to the global effect.
Also consider this: As a renter, you can easily spend half a million dollars or more on rent over the years ($1,500 a month for 30 years comes to $540,000), and in the end wind up just where you started — owning nothing. Or you can buy a house and spend the same amount paying down a mortgage, and in the end wind up owning your own home free and clear!”
November 2019…
This comment didn’t age well..
Totally agree! I rented during my 14 year long career and journey to FIRE. I have only recently finished an investment property development and actually, when I run the numbers the profits would have been awfully similar had I just stuck it in the S&P500 (and a lot less stress). I’ve actually moved on average every year chasing my career. Now I’ve retired, I am looking to buy a small block of land in the hills to call home though
No doubt renting is a best business for getting rich. Thanks for sharing your thoughts on this.