RENT vs BUY
The Housing Rent vs Buy question may, in many senses, be summed up as a debate between the ideas espoused by two top authors and radio personalities: Dave Ramsey, of “The Total Money Make Over” and Robert Kiyosaki, author of “Rich Dad, Poor Dad.”
Outside of taxes, housing expenses represents an Americans single largest personal finance budget item. So, when we are looking at gaining financial freedom, a good decision on housing certainly contributes.
If you want to get ahead financially, getting a handle on housing expenses is vitally important. Yet, leading financial experts, including Ramsey and Kiyosaki, are often seemingly divided on the issue.
One school of thought seems to suggest treatment of a house as an asset, the end goal being to pay it off in full and walk around proudly in the house you own outright.
The other school of thought seems to suggest treating the house we live in as a liability, even when owned outright. The implication being that, though your house may be a “store of value” (that’s economists speak for you) your house is not an asset and maybe not even a good investment.
While both of these gurus are renown, their approaches to housing seems fundamentally polarized.
Looking at the issue, I became fascinated with the (rent vs own) housing decision and the impact it has on us.
Years ago, I took to research the specifics. I wanted to know for myself:
Is buying the house you live in as good of an investment as conventional wisdom would suggest?
Or, is housing more of a liability, an expense, to be controlled and more tightly regulated like we would other utilities and necessities?
What I found challenged much of what I’d been led to believe in life.
In the end, my own conclusion left me somewhere in the middle of Ramsey’s and Kiyosaki’s views.
Logically, I understand Dave Ramsey’s approach.
Summary: get and live in a house, fully paid-off. Indeed, this is great for those who want to lay down some roots and need a feeling of security.
However, as I reviewed it, I saw Ramsey’s treatment of housing in “The Total Money Make Over” didn’t fully address items, like: on-going maintenance, taxes, liquidity, and market (profit/loss) risk.
My further research shows that houses tend to improve (very generously speaking) at about 5% per year. Yet, taxes and maintenance each take about 1% and inflation takes another 2-3%... So, those together, consume all the appreciation. On top of that, commissions at selling hit hard, especially if you move every 7 years or less.
In the end, a house has plenty of holding costs and net appreciation after expenses is not as much as the top line appreciation would have us believe.
On the other side, I see Robert Kiyosaki’s point.
Summary: your house is not an asset.
Simply, his point is: since it takes money out of your pocket and has financial obligations month-after-month, the house has more characteristics of a Liability than it does an Asset.
My further research shows that, even if owned fully, a house still takes money (cash) out of your pocket and that leaves less available for other things.
A point on which both Dave and Robert would likely agree is:
Houses are expensive (a luxury) and should be treated as such.
Similar to Ramsey’s recommendation regarding auto/transportation expense: drive a “beater” until you can afford a more luxurious coach; so too it seem he might recommend keeping housing expenses low, very low, until you can afford the luxury of owning a house.
Emphasis on the word “luxury”. Unfortunately, while housing should be an inalienable right, “owning” one is not in every one’s (current) financial cards. That’s the sad fact.
So, another question arises…
If owning a house is not part of our current reality, as a renter, should we feel like an inferior class?
Are we missing out on bigger/better and nicer housing because we can’t own it? Is renting really throwing money away?
I took to more research and did a fair bit of math to better understand. What I found may amaze you.
Owning is not the simple solution the world would have us believe and renting is not as bad as it seem.
A house can be a great investment, no doubt! But, owning is, more often than not, many times more expensive than what people believe and the average house returns far less than what people think.
People often see the top line appreciation and presume: “It is a great investment” and then assume it is something that is better to own. In fact, many people’s lives ambition seems to have the sole objective of buying and paying off the house.
Personally and based on what I found, I have a greater preference for cash in my pocket and relocation freedom. To me, it seems buying a house is a great “commitment device” to help build savings.
Dave Ramsey seems to love savings, even in a house; but Robert Kiyosaki famously touts: “savers are losers”.
So what is up here?
Empirically, we see people pour far more money into a house they “own” vs one they rent. Overspending on a house we “own” (even with a loan) feels justified. In the end, the house often leaves people feeling “house poor” for about 30 years, to then realize their only savings is in their house - which they can’t spend or must get an expensive home equity loan to access.
Though they’d have very different means of getting to the same recommendation and different reasons for recommending it, I’d suggest both Dave and Robert would agree there is immense value of building wealth through investments (i.e. owning a business, the stock market, gold or real estate). And, when you can buy these assets with as little as $10 through an app, there is no reason to not start stockpiling them.
However, the problem is: most people have only nominal equity in their house, about zero (or negative) savings and no investments.
To that end and now knowing that houses which, in the best of cases, might return 5% per year have many other expenses associated with them, including taxes, maintenance, and real estate brokerage fees, I’ve personally landed somewhere in the middle.
My view: Rent to live; Own to Rent…and invest the difference.
For me, I’ve found that Renting is Freedom.
Financially, I’ve found I am NOT throwing away money as a renter. In fact, when you consider the amount of housing I get for the money I pay – I have very low cost housing.
For more details, here’s a book on it: Rent Your Way to Freedom.
Or, if you prefer, you can have the Preface/Intro for FREE.
The book, Rent Your Way to Freedom, documents the whole matter in far more detail. It goes through all the typical objection and the financial side is synthesized, right up front. It shows houses to be FAR more expensive than we imagine and return less that what we think. But the finances alone are not, exclusively, why I’ve landed in favour of renting.
I’ve found renting lets me scale up/down my housing needs as my family’s situation changes. Renting allows me to keep costs low, as I have nicer accommodation by renting more house than what I can afford to buy. This frees up cash (specifically the amount that would otherwise be tied-up in a down payment) for investment in other assets (maybe even housing as an investment) that produce cash and grow in value, faster.
Personally, I’ve found that “freedom” plays a bigger role in the rent vs buy housing decision than does the issue of liability vs asset - or paying yourself vs paying a landlord.
We can run numbers all day to prove one side of the argument or other.
But, I’ve found that, just as Dave Ramsey suggests there is a sense of pride one gets walking through a lawn they own, free of bank debt; I’ve also found that renting provides me peace of mind knowing I am not in debt (to the bank) and can upscale/downscale immediately as situations change.
How often one moves. One’s preference for liquidity. One’s preference for impressing the Jones. Those have as much, or more, to do with the rent verse buy decision than do views of it as an “asset.”
The book looks these issues and the financial aspects too. Or, as Ken H. Johnson, Ph.D. Real Estate Economist and President of the American Real Estate Society, says: “The power of Rent Your Way to Freedom is that it explores many different scenarios and asks that its readers simply consider some increasingly obvious alternatives, which are well laid out in a straight forward read. “
Knowing what I know now, after having researched the matter deeply, I’ve concluded that: owning is not as great as it’s cracked up to be and renting is not as bad as it is vilified to be.
For me, I’ve found both personal and financial peace in the ability to: