Is renting a waste of money? In this post, I’ll explain why renting is not a waste of money and how it can help you reach financial freedom.
Recently I had an argument with a friend about whether you should rent or buy.
He did his best to convince me that renting is an absolute waste of money, it’s like burning money because why would you rent when you can take a mortgage! You might overpay a little bit but you will end up owning the house in the end.
Renting is a service not a waste of money
First of all, I really don’t understand why people think that renting is a waste of money!
I mean you’re actually getting something in return for your money, a place to live in, it’s like a service.
When you’re getting a cab, for example, you don’t think of it as a waste of money because you’re getting a ride so renting a place to stay is a service as well but the point that most people make is you have an option of buying that house so why on earth would you rent?
Consider all the factors when buying
I realized that most people do not consider all the factors when they’re comparing renting to buying.
Now, of course, it’s going to be different for everyone because we all live in different countries and cities, interest rates and house prices are different everywhere and it’s impossible to generalize.
However, there are certain factors that would affect everyone regardless of where you are.
There is an opportunity cost that most people simply ignore although that it’s one of the most important factors to consider when buying a house and it’s probably the reason why buying a house seems like a much better option.
Let’s say you are buying a house for a half million dollars that you could rent for $2,000.
First of all, you will have to make a down payment of, let’s say, 20% which is going to be $100,000 in this case. Let’s say it’s going to be a 30-year mortgage with a monthly payment of $2,430.
At first, it seems like there isn’t much of a difference between buying and renting.
buying obviously seems like a better deal but when you consider other expenses like taxes, insurance, maintenance, and so on it’ll easily cross $3,000.
Now, let’s take a look at the opportunity cost, the $100,000 down payment that you made could be invested.
To make matters simple we’ll assume that you invested in an index fund with an average rate of 8%. On the top of that since you’ll be only paying $2,000 if you are renting you will invest the remaining $1,000.
Here’s a little calculator that will help us do the math. Let’s enter $100,000 for the starting amount, 30 years to invest, $1000 for the additional contribution each month, and submit.
With the help of compound interest, you will end up with almost two and a half million dollars and all the other benefits that renting comes with such as mobility.
In my case, for example, I don’t want to be tied to a certain place or even a city at least for now.
As long as I like it here I’m staying and the moment I realize that there is a better opportunity elsewhere I’m moving there.
But here’s the catch, this will work only if you invest every penny that you would otherwise pay for your mortgage but what usually happens is that when you decide to rent you probably will skip your saving payments because every time you will have an emergency or a reason to spend that money elsewhere.
Let’s be honest it’s much easier to skip your monthly contribution into your savings account than into your mortgage payment.
That’s exactly why buying is a much better option for most people.
Most people aren’t much into investing so what happened at the end of the day is that your friend who took a mortgage will end up with at least something while you will have nothing at the end of the day.
Of course, these numbers aren’t a hundred percent accurate, your rent, for example, isn’t going to stay like that for 30 years it will increase by at least 3% and so your other expenses.
There are a lot of blog posts and YouTube videos that show you the exact math but to be honest everyone’s case is different and there’s no math that works for everyone.
So you should look into the numbers in your city and your financial status and most importantly if you choose to rent are you confident that you have the discipline to keep investing the remaining amount?
In coclusion, don’t consider rentig a waste of money because you’re getting something in return, it’s a sevice. and if you can descipline yourself and invest the money that you would put toward a mortgage you would end up with enough money to buy a new house and a lot more to have fun with and achive your dreams.
Now, I have to say this is my own opinion and if you’re interested in this subject you should read ‘Is your house an asset or a liability?‘ where I explain three different ways we can buy and use real estate and how each one may affect your finances.
Thanks for your time
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