Paying Rent = Throwing Your Money Away

27 February 2022 Mike Lewis

That’s the simple truth

I made the majority of my wealth from owning property, including my own home. Over the longer term, you’ll be better off owning than renting.

Of course, there are exceptions to every rule. That means there are also exceptions to this rule.

I need to mention this upfront because there will always be people that point out the exceptions even when the rule works the majority of the time.

Some exceptions:

If you’re only staying in an area for a short time then you’re probably better off renting.
If you’re saving for a deposit, it may make sense to rent in a low cost of living area while you do so.
If you don’t have a secure job it may not make sense to take on a mortgage.
If you don’t have long left to live it might not make sense to buy a property.

Now that we’ve gone over some of the exceptions, let’s get back to the rule.

If you rent over the longer term you’re just throwing your money away.

To me this is self-evident, but apparently it’s not to others.

When comparing renting costs with buying costs you need to work out the costs over the long-term not the short-term. If renting a property will cost you $1,000 a month and buying a similar property will cost you $1,200 you may think you’re better off renting. That’s not usually the case though.

Suppose you’re a 25-year-old who will live to 85. That’s 60 years to consider. If you buy a property with a 30-year mortgage, you won’t have any rent or mortgage to pay for the last 30 years of your life.

If you rent, you’ll be paying rent for the next 60 years. Think about that.

The true comparison is making mortgage payments for 30 years vs. paying rent for 60 years.

Mortgages can be fixed at the beginning of your loan, so you’ll be paying the same amount for the life of your mortgage. Rent tends to increase at the rate of inflation or even higher.

In addition to this, the effect of inflation will mean that your mortgage payments will be going down in real terms. Your rent will likely be at least keeping up with inflation and more likely outpacing it.

With just a 5% annual increase, that $1,000 rent will have risen to around $1,600 in 10 years, $2,600 in 20 years, and $4,300 in 30 years.

Your mortgage payments will still be $1,200 a month.

So what’s the better deal in 30 years’ time? Paying $4,300 a month rent or paying $0 mortgage. And you’ll still have rental payments to make for another 30 years.

Over the next 60 years, we’re almost guaranteed to have periods of high inflation, as we have now. That will make buying rather than renting an even better choice.

If I take a look at people I know personally and others that I read about it’s even more clear that buying beats renting.

One thing that many don’t seem to take into account is that neighborhoods can change drastically over several decades. I know people that were happy to rent. They argued that it was cheaper. Recently, they have had to move out of areas where they have lived for over 20 years. The area where they had many friends and built up a great network.

What happened? They became gentrified, property prices rose, rents rose. They were then priced out of the rental market. They had no choice but to leave the area. Their friends that bought property were still able to afford living there because they bought over 20 years ago when prices were lower.

Another non-financial consideration is that you may need to constantly move because your landlord wants the property back. This can play havoc with your life, especially if you have children that attend nearby schools. Moving home can also be expensive. The costs can add up quickly.

If you think I’m wrong, perhaps you can give me some examples of people that have rented their whole lives and are happy with that decision. I don’t know a single person in that position. I know quite a few younger people that are happy to be renting and say they will forever, but let’s just wait a few decades to see how they feel. I’m pretty certain that they will have changed their minds.

It’s easy to think that your neighborhood will stay the same forever, but that’s rarely the case.

Of course, the choice of whether to buy or rent is an individual one. If you want to rent, that’s fine with me. I just want to make sure you know the full facts before making your decision.

You may be surprised to know that I currently rent. I have owned property for most of my life though. I recently sold my main property and am currently in a transition phase where I’ll be traveling long-term. I do plan to buy in the next year or two though.