Flexibility. Wealth Building. Quality of Life.
There are many opinions on renting versus buying a home. Those who prefer renting say renting gives them flexibility to move and get them out of a lease. In my experience, renting doesn’t always provide a tremendous amount of flexibility.
Learning Lesson #1 — Renting = Flexibility if it’s an Alternative, Rather than the Only Option.
In January 2020, I signed a lease for a “cozy” apartment in NYC’s Greenwich Village neighborhood. With SoHo a couple blocks south, Washington Square park a couple blocks north, and my office close enough for my Apple Watch to acknowledge my heart rate was elevated but still not ask me to confirm if I was on an outdoor walk, paying a few thousands of dollars in rent every month for a 1-bedroom with an outdoor patio felt like a savvy move. Friends would ask the usual taboo question: “How much do you pay, iF YoU DoN’t MiNd mE aSkInG?” [insert face from Spongebob meme].
I’d share the amount with them at a “hushed” volume, just loud enough for those within a 25 foot radius to eavesdrop with ease, knowing they’d respond with: “Oh, for Greenwich Village? That’s a steal!” Reflecting on the experience and almost a decade of cumulative time spent living in the Big Apple, it was a “steal” alright, but who was “stealing” from whom in this arrangement?
[To all my NYC folks — Note that I thoroughly love NYC and the people in it. The positive experiences outweigh the negatives. Yet, the expensive cost of living in NYC offer a solid foundation in the Buying versus Renting debate.]
By the time mid-March rolled around, the COVID-19 pandemic had seized New York. I am thankful to be able to have survived that initial wave and remain employed, which essentially made every other complaint a “First-World Problem” (eg. Bose speaker-sized rats coming above ground more aggressively than before the pandemic, news Helicopters hovering overhead precisely when you have an important Zoom meeting, overhearing the occasional on-foot police-chase outside your window from those looting in SoHo).
Nevertheless, the experience taught me that being locked into a one-year-long lease didn’t always offer the flexibility that supporters of renting over buying often talk about. Sure, those with second homes elsewhere could escape their current situation with relative ease. But if renting is your sole living accommodation, signing a lease doesn’t necessarily mean you have flexibility when it matters most.
Learning Lesson #2 — Increasing your Wealth versus Increasing someone Else’s
Negotiating a small discount with my landlord didn’t save me from paying a lot of money each month until my lease ended. Unlike a hotel, it didn’t matter how many days I stayed in the apartment during the lease being effective. Even worse, the money I paid in rent did nothing to increase my personal wealth. It only served to pay my landlord’s mortgage.
Increasing someone Else’s Wealth:
That is, my landlord owned a home and rented it out to me. The rent payment I made every month would cover the costs of the landlord’s mortgage payment with some additional amount going to the management company the landlord employed to manage me as a tenant + the landlord’s profit. Despite negotiating a reduction in rent amid the pandemic, we can still assume the landlord was increasing their wealth through this arrangement.
Even in the hypothetical scenario where the reduction in rent payments equated to all of the profit the landlord would typically generate from my original rental payments, it’s likely that most, if not all, of the landlord’s mortgage expenses were being paid for by my rental payments.
However, without diving too deeply into those technicalities in this article, the central point is clear: By paying rent, most people are voluntarily increasing someone else’s wealth, instead of their own.At least when you take out a mortgage to buy a home, a portion of your monthly payment, the Principal, goes to increase your own net worth in the form of Equity.
Learning Lesson #3 — Consider Quality of Life
Furthermore, paying that same amount in rental income toward your own home can also increase the quality of life you’re experiencing now, in some cases:
“Renting a one-bedroom apartment can cost $5,000 a month in certain neighborhoods today, yet you can buy a $1 million house with just $4,000 a month in mortgage payments. And the rate is fixed for 30 years — the best kind of rent control.” — Peter Hernandez, Founder and President for Teles Properties
Saving the money for a down payment to buy a home can be a speed bump. However, I’ll park the down payment discussion for now to focus on a point Peter Hernandez alluded to. If we use the numbers in the example above, the monthly rent payment you make to your landlord, $5,000 in the example above, might allow you to rent a one-bedroom apartment.
Remember your $5,000 monthly payment has to cover =
- the landlord’s mortgage
- + the management fees or other associated costs of renting the apartment
- + any additional profit the landlord wishes to make
But what could that same $5,000 per month payment allow you to buy if you purchased the home instead of renting it from someone else?
Using Peter Hernandez’s logic, a lower payment of $4,000 per month could allow you to buy a home worth $1 million, so a $5,000 per month payment should allow you to afford much more than a $1 million home.
One way I conservatively estimate the price of a home without using one of those online affordability calculators (a few options below), is to take the monthly payment multiplied by 200.
This option won’t work if current low interest rates change dramatically, but 200 tends to be a decent multiplier in today’s environment of low-single-digit interest rates, conventional 30-year fixed rate mortgages, while keeping the mental math relatively clean (i.e. double the monthly amount and place two zero’s to the back of that result).
As a result, we might want to ask ourselves: Do I think the home I’m renting presents a better quality of life than a comparable home that I could purchase with monthly mortgage payments of the same amount as my current rent?
In sum, there are three key learning lessons on real estate that are worth keeping in mind if you’re debating renting versus buying a home:
1) Renting can offer Flexibility as long as it’s an Alternative for you and not your Only living Option.
2) Home value changes aside, Home Ownership can Increase your Wealth. Paying Rent Increases someone Else’s Wealth.
3) Can the Decision to Own Improve your Quality of Life?
Originally published on Medium.com