Are You Throwing Away Your Money When You Rent?

By NICOLE MURRAY

With Americans analyzing every dollar they spend to make it in today’s economy, some people are wondering what they should do when it comes to housing.

Home prices and interest rates are high, but so are rents. At the same time, many people have been conditioned to believe homeownership is economically better than being a renter.

But is that true?

The Mortgage Note spoke with three economists from the University of New Haven in West Haven, Connecticut, and all three had very different perspectives on the economic status of people who rent versus people who are paying a mortgage.

We asked them the question, “Are you throwing away your money when you rent?” Here are their responses:

Patrick Gourley – No

Patrick Gourley, an associate professor of economics, explains that the ideology that someone is throwing away their money when they rent is incorrect. Instead, he encourages people to view renting as a free economic exchange or mutually beneficial transaction.

“It is like when you go out to eat versus cooking your own food,” said Gourley. “Everyone can cook their own food in the comfort of their home and everyone can choose to go out and have someone cook and serve you. Just like renting versus owning, there are advantages and disadvantages to both.”

Gourley also warns consumers to be aware of who is promoting the idea that renting is a waste of money because there may be an ulterior motive.

“If someone that is a mortgage broker says, ‘Oh, renting is throwing your money away,’ it’s not objective. They are someone who makes their living based on people who decide not to rent. If the same message comes from a homeowner, be wary because their property value improves for every person who decides they don’t want to rent anymore. Just for perspective, take in who is giving you the advice.”

When asked how to best decide if renting or buying is best, Gourley said multiple factors come into play and there is no across-the-board answer.

“Part of the decision is how long you plan to live in a single location for,” explained Gourley. “If you rent the same property for 20 years, then yes that would be a poor use of your money. On the flip side, repeatedly owning homes for a year or two and then moving just to re-buy is also a bad idea.”

An added benefit of renting, according to Gourley, is that people may be able to afford extra amenities that they cannot afford if they buy a home.

“My wife and I rented a one-bedroom apartment in a complex that came with a swimming pool, a ping pong table, and a rooftop and there was no way we could have afforded a house with all those features in New Haven, Connecticut, you would have to be a millionaire. There are times where renting is beneficial, especially for those who are just starting out.”

James Mohs – Sort Of

For James Mohs, an associate professor of accounting and taxation, the answer to this question is not so simple.

While there are financial benefits to owning a property, Mohs believes the decision to rent or buy should be made on a case-by-case basis.

“When you own, it is absolutely true that you build equity in a home and have certain tax benefits that you don’t get while renting. However, for every pro there is a corresponding con,” said Mohs.

“For example, renting is much more flexible than buying. Breaking a lease isn’t great, but to sell your home and take your equity with you is a much longer and more complicated process.”

He pointed out that people may not have a choice about when to sell, and if the housing market in their area is down, they may not get out of their homes what they were expecting to get.

In addition, Mohs said that many more unexpected expenses tend to pop up when owning.

“I just had my home insurance skyrocket by 50% year-over-year. That is a risk you run when owning that does not exist when renting,” said Mohs.

As a result, Mohs encourages people to not alter their timelines because of the idea that they are “wasting” money when renting.

“Don’t buy just for the sake of buying,” said Mohs. “Make sure the economics behind it fit your circumstances. A big part of this is to also ensure that you are not overbuying. It’s the same with cars – do you need transportation? Yes. But do you need a Porsche Turbo Carrera? No. Stay within your means so the purchase makes sense.”

John Rosen – Yes

John Rosen, an adjunct professor of economics, views renting in the same light as many mortgage professionals and says it is throwing your money away.

“You’re not building up any equity or long-term wealth. You can’t sell your rented apartment 30 years from now and retire,” said Rosen. “Don’t give your money to your landlord, give it to your bank because at least the value of your house is increasing.”

Rosen said if people have to rent because they cannot afford to buy a home, they should be saving to make sure they can eventually get onto the homeownership ladder.

“The important thing is to buy a house you can afford because you will almost certainly make money on any real estate investment. Many people ask themselves, ‘Can I afford a $600,000 house?’ That’s the wrong question. It’s, ‘Can I afford the mortgage payment of a $600,000 house with interest rates and all?’ If the answer is no, then keep saving.”

Rosen added that there are other times when renting can make sense and he agrees that if a person is not ready to commit to an area, they shouldn’t buy because closing costs and real estate fees are not recoverable.

Renting is also better for people who aren’t interested in the responsibilities that come along with homeownership.

“If you are into minimizing hassle and keeping life simple, then renting can have its perks because someone else is responsible for all the upkeep,” added Rosen. “When you own, it kind of feels like you write a check for something unexpected every month. Something needs to be painted or the gutters need to be cleaned or a window is broken.”

What are your opinions on this topic? Share them with us at [email protected].

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