Renting Your Way to Wealth

Most Americans hold the belief that renting is nothing more than throwing money away. They believe that home-ownership is the only way to go in the long term because one builds wealth through equity and appreciation of the home's value. One writer for Smart Money recently offered a very contrarian view and suggested that there are instances when renting can be more financially desirable over a long period of time. The idea is that there's much less overhead in renting, and the money that you would have sent away to a mortgage company could be used to invest with. Does this alternative financial view of homeownership hold any weight? Let's find out.

Perhaps the strongest argument against home ownership is that the costs associated with home-ownership are much higher than that of renting. When you are renting, you pay your utility bill, buy renter's insurance, and you're good to go. When you buy a home, you have to pay all of your utilities, buy home-owners insurance (which is much costlier than renter's insurance), take care of all of your own maintenance, pay property taxes, take care of your lawn, and the like. These added costs could easily add up to hundreds of dollars per month more that you would pay in buying a home versus renting a nice apartment somewhere.

There's also the argument that one could take the difference between their rent and their mortgage payment, invest it diligently and have more money in the investment than one would in home equity if they had purchased a house over a long period of time. The mathematics in this part of the equation are going to vary quite dramatically depending on which part of the country you're living in. In some parts of the country where real estate is very costly, say Manhattan and Los Angeles, your rent will more than likely be a fraction of what your mortgage payment would be. In some more rural parts of the country, the amount you would pay in rent will be a lot closer to what you would pay on a standard 30 year fixed mortgage.

This of course will only work if the individual doing this is extremely disciplined and makes it a point to put away the difference each month inside of a mutual fund. Otherwise the money will just be squandered on miscellaneous expenses all over the place. 80% of individuals would easily fall under this category. The only way this works is if one is extremely financially disciplined.

Another argument presented that the rate of return on stocks and mutual funds is much higher than that of real estate. If you look at the last few years, that's certainly not been the case, but over a very long period of time, it does appear that investments in the stock market do perform better. Smart Money tells us that between World War II and 2000, home price appreciation increase by a mere 2% above inflation, where as stocks and mutual funds can easily perform 7% above inflation over a long period of time.

This is definitely going to require a substantial amount of number crunching and research into your local real estate market to determine if this would make sense in your case, but it appears that in a lot of instances, renting does make more sense than owning if you have the discipline to invest your money diligently elsewhere.