A Financial Advisor said Renting is Better but He Owns his Home?

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Personal Finance isn’t what it used to be

What was once a boring segment relegated to the back of a major publication’s variety section, has elevated to a featured tab. At its peak with Dave Ramsey’s Baby Steps and every other variation of Dave Ramsey, personal finance became all about paying off debt. Second only to credit card debt, Dave hates mortgage debt associated with home ownership.

Thus by proxy, Ramseyites are also anti-mortgage debt. Unfortunately, the plague upgraded to not owning a home at all.

“But Personal Finance is Ownership though?”

In a lot of ways, personal finances stopped being personal. Instead it was more of a copy and paste no matter your risk profile or time horizon. Most didn’t even study Accounting or Finances.

It’s the wild west.

However, like all things Apple IPhone, we inherited a new digital and glossy FinFluencer with all the charm, half of the life experiences and all the filters of social media.

Anyone with a cell and some catchy recycled quotes can now enter the space of giving life altering advice on Index investing, Fractional investing, cryptocurrencies, NFTs, and quitting your job today based on a prosperity prayer to the luxury gods.

Despite these Meta improvements, home ownership for the bottom 90% of Americans reigns supreme when it comes to wealth building and financial stability. As a homeowner and financial literacy educator, it would be disingenuous of me to tell you to do otherwise.

Home-ownership is a wealth gap Closer.

Renting vs Home-ownership Take Aways:

Lifestyle fallacy. Most FinFluencers own a home and/or a rental property. It turns out that ownership is beyond a mere lifestyle choice. It’s an investment in financial stability and long-term social mobility.
Real estate is not as liquid as stocks while costing more initially. However, Real Estate can create more consistent passive income, increase your cash flow while appreciating in value.
Home Owners invest more than renters. Contrary to popular believer, most renters do not invest the none-existent difference.
Renters tend to pay more than owners for their total housing costs. In some cases, rental prices have gone up 40% since 2020. Even $1,500 rent today will cost over $4,000 in 30 years.
Finally, never trust a person that says one thing and does this other. It’s disingenuous (at best) and negligent (at worst).

At least there are happy owners in stock photos.

Let’s Start Easy, I’ve been an Asset Poor Renter

Renting was never meant to be a permanent state of being. Human kind prospered for millenniums under the concept of moving to greener pastures and finding your own patch of earth. Any one that wants to build for the future knows that. This is why Warren Buffet and other uber-rich people own their home for years.

Buying a home in the modern day is fairly easy process even though it’s emotional laced.

Here are some quick tips. Take accountability for where you are financially (today). Decrease your expenses and your consumer debt to improve your debt to income (DTI) ratio. Increase your income if and when possible. Open yourself up to understanding the process of buying a home. Save or invest to get the down payment for an affordable home. Post about said home on social media and voila.

Well the last part is optional.

The simple case for owning a home

A home builds equity over time.

On average, home values go up about 3% every year, however that rate varies from area to area. People who don’t sell before seven years are likely to retain and benefit from the value of their investments.

On top of that, home profits fall under the capital gains tax structure. Basically, for single people it’s tax free for up to $250,000 and for married people, up to $500,000.

That’s insane.

Those who bought affordable homes and made gradual improvements, often sell at a profit. Best part, if you never sell, you can pass down said property and create a generational wealth transfer.

As a homeowner, you really have to understand the long term impact of this purchase even if it doesn’t grant you the instantaneous lifestyle of the perceived rich and famous.

For my home, our goal is to pay off 3 mortgages by 2036. We will be making the most of this, because God is not making any more land next to a cozy coffee shop.

How can the Math Favor Renters without the Relevant Data?

My wife and I bought our condo, priced at $132,500, in November 2016. Based on the recent statement by the bank, it’s now worth $257,500 on the market. So for the last five years, this affordable condo appreciated by $125,000 (average $25,000 per year).

My wife was paying $1,200 per month for rent (not including utilities) and I was paying $1,000 per month in a 5 bedroom 2 bath in Columbia Heights (DC). Our current mortgage is $1,000. That’s a relevant savings difference of $1,250. To make matters worse, turns out 2/2 units for rent are going for over $2,300 per month on average.

That’s what is know as relevant data. When all things are equal, my wife and I are saving more money not renting vs owning.

Owning and Appreciating Opportunities

Let’s say over the next 30 years that the price of the condo appreciates at current historical rates of about 4%. That means that in year 30, the condo would be worth $395,048 for a profit of $262,548. If we sold, we wouldn’t even be taxed since we didn’t reach the $500,000 threshold.

But we aren’t selling, even at today’s rate, the rent on this unit is valued at $1,750. This is literally how people stay rich. Even if I took 30% off the top for taxes, repairs and incidentals that’s still $14,700 to fuel annual family trips. Or better yet, we can use the surplus to invest in the market at 9% or pay down other debts faster.

For 80% of the US Population, Home-ownership Equals Access to Wealth

Rent Prices Went Up 9% in September 2021 Alone. My Mortgage has been the same since 2016. This is true, but even with a rising rent each year, it does not impact the initial down payment or maintenance costs that the renter would experience. Also, the renter also has the ability to relocate to cheaper areas to offset those costs.
Stagnant Wage Raises and Inflation are Taking Ownership Out of the Equation. While the renter will still have to pay for housing indefinitely, in this scenario the renter still has nearly three times more money at year 30 than the homeowner. Also, the homeowner still pays property taxes, which may increase over time, and still has to contend with annual maintenance.

We all have to live somewhere?!

Based on the Apartment Guide Rent Report as of November 2021, prices are up nearly 20 percent for a one-bedroom and just over 17 percent for a two-bedroom apartment. Orlando, FL is up over 55% for 2 bedrooms so far, while Richmond, VA is down over 5%.

When comparing information for Atlanta (in graphics below), turns our 3 bedroom rentals are going for an average of $3,073 which is way more than a similar mortgage for the area at $2,194. Even if I included the monthly maintenance, the math favors the owners by $510. Over 30 years, that’s a boost of $868k to your net worth.

Renters will have to tackle rising costs. At even 2.5% inflation or cost adjustments, by 2051 that 3 bedroom rental will be going for $6,446. That’s an increase of over 109.76%, all while the owner will flat out own their home. Even if we account for the initial deposit as an investment (graphic #2), that’s a serious $1M differential.

While I can’t force you to Own…

I can tell you that based on my research for most people, it’s better to own. It can end up being the difference through generations that will follow. And try not to follow people that tell you one thing and does the other. Benefits in summary:

Home Equity. Every month you pay rent, it’s basically your landlord’s income. When you own a home, your mortgage payment goes toward building equity for you. The more equity you have, the more credit you can access to. Additionally, you can also refinance.
Tax Benefits. With rent, there is absolutely no tax advantages. All of your dollars are still taxed at ordinary income. With a mortgage, you get mortgage interest and property tax breaks. When home owners sell, they can avoid capital gains taxes if they meet certain IRS conditions.

Ownership is a gateway tool. It has to be approached carefully. You should start with an affordable home, rent it out vs selling and continue to hold. Your kids’ kid will thank you for your perseverance. Conversely, your kids won’t be too trilled having to house you while you retire broke.

Disclosure: This post is brought to you by the Neighborhood Finance Guy. We highlight financial literacy information, resources, and more on your way to money management goals and personal wealth. Our goal is to help you make S.M.A.R.T decisions with our money. We do not give investment advice or encourage you to adopt a certain investment strategy. Your personal finance is up to you. If you take action based on one of our recommendations, we don’t earn a dime as of 5.2021. We operate independently.

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