Myth: Renting is throwing money away.

So many times, I have heard people say, “Well, I don’t want to rent. That’s just throwing money away.” This isn’t necessarily true, and I will try to explain it using some rough math. 

This will all be estimated, so as with anything in personal finance, of course, it depends. I’ll show you where each assumption comes from, I am not just pulling them out of thin air. 

We’ll start with the median home price as of Q4 2023, which was $492,300, per The Federal Reserve Bank of St. Louis. 

Currently, the 30-year mortgage rate comes in at ~6.88%. We will assume we put down 20%. With a $393,840 mortgage, we would also incur closing costs of 2-6% of this loan. This could range from $7,875 to $23,600. Using rough estimations of 1.1% for property tax and an average homeowner’s insurance policy, which is around $1,800 per year, we can tack on an additional $7,200 per year in costs. 

That would bring their monthly payment to right around $3,189. Now, I know what a lot of you are thinking. But Cliff!! There are forced savings, I add to my equity each month!! Of course, but after 5 years you would have added roughly $23,600 in equity while paying a whopping $131,700 in interest. 

By making your monthly payments, you had forced savings of $4,720 per year each year averaged over the first 5 years. This works out to $393 per month.

Fun fact: The average length of homeownership is 8 years. This is the front half of the mortgage, you have not even begun the backend, in which 50% or more of your monthly payment is principal. This is where a homeowner can lose big: massive interest payments and having added barely any equity before moving.

The median rent payment in the US was $1,964 as of November 2023. This is significantly lower than the mortgage payment. This is a spread of $1,225 per month. 

Rent has increased at a rate of 3.12% per year since 2012, per doorloop. On average, property insurance for your home increases 4% each year. When we consider these factors and throw them into an Excel sheet, we can start calculating the difference between buying and renting.

Per American Financing, homes grow on average 2-3%. The past few years have been anything but normal… Either way, we’ll use a more generous 4% appreciation for our calculation.

From 1970 to 2023, the S&P 500 returned over 10% when you account for reinvesting dividends. We will use a more conservative 8% for our calculation.

By increasing rent by 3% each year and increasing the homeowner’s property taxes and insurance by 4% each year, we can now compare. I assumed each dollar saved was invested, besides the last 3 years in which renting became more expensive than owning. (You’ll see the difference is negligent when factoring in the portfolio’s ability to cover the difference).

The total saved by the renter in this made-up scenario was $214,600. When we compare the return of the renter’s portfolio with the appreciation of the home over 30 years, the renter ends up with a portfolio worth $2,162,473 and the homeowner ends up with a home worth $1,596,725.

There you have it. The renter has $565,749 more than the buyer.

Now I get it, this is a rough estimation and doesn’t include a lot of variables. There are potential interest deductions that we didn’t account for just as there are maintenance, improvements, and emergencies we didn’t account for, which can be sizable. Self.inc estimates over 4% of the home’s value can be spent on those items each year.

Yes, I am trying to prove a point here. However, buying is incredibly expensive in this environment. I wanted to show you that renting is NOT throwing money away. There are tons of other benefits to renting such as the mobility and freedom you have, but we will get to that another time.

For reference, here is the Excel sheet that I used for my calculations:

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Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!