The Renting/Owning question
This article is my response to MyMoneyWizards article on the hidden costs of owning a home. In case you don’t want to read it in full, I shall summarise:
“Owning a home isn’t any good, it costs money, waah, waah, waah”. Fine, I’m being a little harsh here, I actually enjoyed the article, it was well written and it challenges a belief ingrained in western society – that home ownership is the be all and end all. I would recommend that you read My Money Wizards article in full, rather than take only my butchered summary of it.
My Money Wizards point is that there are hidden costs to owning a house. When you come to sell up, you should remember these before congratulating yourself on making a killing. He summarises with a table (see it reproduced below) describing how Joe Average ‘doubled’ his money from $200,000 to $177,000 by owning for 20 years –saying ‘see, renting’s not the only way to throw money away’.
So, I’ve laughed at My Money Wizard, I’ve regurgitated his point, and I’ve said how much I liked the article, so what more is there to say?
He’s comparing apples and oranges, that’s what!!
It’s that last point, that buying is throwing money away just like renting that gets my goat. In his example, Joe Average loses $23,000 over the course of 20 years.
Is that good? That’s only losing $1,000 a year?
Is that bad? He is losing money after all.
Answer: we just don’t know. We don’t have the other information required.
What do we know
We know Joe lost money over that 20 years. Is that the metric we care about – money lost or gained? This might sound strange initially, but I don’t think we do. Joe also got a place to live for 20 years. In the null (or control) example of holding his $200,000 for 20 years, Joe made no money (ignoring interest) but also was sleeping on the streets, warmed only by the pile of money lining his sleeping bag.
I would argue you want to compare that ‘money lost on owning’ to the ‘money lost on renting’ – subtly different to the ‘money lost on not owning’. This way, Joe has a place to sleep, and we can track they money he spends over time.
Making this like with like
In My Money Wizards example, the house grows in value along with inflation. We shall therefore assume that rent prices grow the same way – doubling over 20 years, increasing evenly over time.
Also, we shall assume that Joe lives in the same house, a $200,000 house. We shall assume a 5% cap rate (and since Paula Pant would insist, also a 10% cap rate). So year one will have a $10,000 rent, increasing to $20,000 a year in year 20 ($20,000 and $40,000 in the PP example). Joe will therefore pay rents over 20 years as shown in the table below.
So, if Joe rents for the 20 years, he spends somewhere between $290,000 and $578,000 dollars.
I bet he wishes he had only lost $23,000.
Yes, the money was tied up in the house.
Yes, he didn’t really make any money while he owned the house. That doesn’t matter, because he also didn’t lose half a fucking million dollars. Think of the latte’s or smashed avocado toast he could have bought with that.
While I am fundamentally supportive of home ownership, and My Money Wizard is fundamentally against, we can agree on one thing. Owning your own home is not an investment. While it is a fine repository for your wealth, a long term cheaper option than renting and a nice little status symbol, it should not be confused with investing.
I look at it as the difference between investing money and being frugal. By being frugal (owning a home for 20 years) I reduce the amount of income my investments need to make me to maintain my lifestyle.
As with most things in personal finance, the choice of what to do should not be determined by the finances alone. That is a sure fire way to misery. Your decision of whether to rent or buy should be just as dependant on the lifestyle factors (are you likely to move area soon, what are the houses like in your local area, what is the rental/property market like at the moment, etc).
Self depricating note
Listen to me – talking about my investments maintaining my lifestyle, like I’ve reached FI and shit already. Not the case, bub- I’m still very early on my journey. My own house is the repository of 80% of my wealth and my investments (at the time of writing) could sustain me for 18 months at most, if a portion of them were not locked away in a pension wrapper (Americans, think 401k, but more restrictive).
This is another way that My Money Wizard and I are similar, we’re early on in the wealth building process. Our portfolios look very different in asset allocation (house!!!) but we are both on the right track to long term success. And it just goes to show that wealth building is a very personal thing, with everyone’s journey looking different.