I’m saving my pennies for a down payment on a house. Perhaps I’ll figure out where I want to purchase a house (one problem we are having with not being ready) and will have my down payment saved over the next few years as a renter. I have used a savings plan calculator to help get my act together.
Someday I hope to be a home owner, yet that someday may be farther away than I had originally planned. Until then, though, is renting a financially sound option? Am I really throwing my money away? I have to live somewhere and few places are truly rent-free. Shelter is a basic necessity, obviously, and my options range from unusual to traditional. If my husband were more open-minded, some of the more unusual ideas I listed below could work:
- Build a cob house.
- Set up temporary living quarters in a Tuff Shed.
- Camp during the summer.
- Live in an RV.
- Convert a shipping container into a shelter.
- Go native – build temporary housing out of straw or mud and learn to live off the land.
These choices are unusual and all would require paying for storage to contain all of our modern possessions. However, the cost of rent would be nil and would off-set the monthly storage rental fee. Until my husband begins to think abstractly (and I learn to hunt and gather), these ideas are out of the question.
So that brings me to the more traditional rental options; renting a house or an apartment. In Southern California, rent is almost as expensive here as it is in New York City or San Francisco. I think we rank 3rd as one of the most expensive cities to live in. A few years ago, when we rented the house we currently live in, $1,800 a month seemed like a deal considering homes in the surrounding areas were selling for over $500,000. Though home prices have sank by up to 35%, rent has remained the same.
Since we aren’t as close to purchasing our own house as we would like to be, my husband and I are now talking about making a lateral move: move into another, nicer rental house for about the same price. I’m tired of the exorbitant electric bills in the summer and winter due to drafty windows, the cockroaches crawling out from under our cabinets, and the crummy plumbing. However, this got me wondering if continuing to rent was a sound financial decision. How many millionaires rent their homes? How many financially sound individuals choose to rent as opposed to buying property? What would it mean to us financially if we continued to rent for another 3-6 years?
After a little research on the subject (there is a lot of debate on this issue with the majority leaning towards buying as opposed to renting) and some calculations using both The New York Times calculator and Michael Bluejay’s calculator, buying is a more financially viable option after year 5 or 19 depending on which calculation I use. As an example, I factored in what a modest home in a good neighborhood is averaging in my neck of the woods, $350,000 with only 5% down, compared to monthly rent payment of $1,800.
- The New York Times calculator: I like that I can adjust the annual appreciation on a property and it determines if renting is more financially sound after 6 years versus 19. However, their complete analysis is a little light. The rent costs also seem a bit simplified. They approximate renter’s insurance costing $331 for 6 years and I pay more than that in one year alone!
- Michael Bluejay’s calculator: His calculator has a better explanation of why it would be better to rent up to year 5. And that is only if the amount saved is religiously invested! His calculator also breaks down renting versus buying year by year.
On a side note, using Michael Bluejay’s calculator showed that when houses in my area were selling for no less than $500,000, renting was a much better option. Buying didn’t become financially viable until year 30! I feel very sorry for those people who are saddled with a mortgage of over $500,000. At least I knew at that time that buying was completely out of the question and renting was a better option.
Perhaps I’ll figure out where I want to purchase a house (one problem we are having with not being ready) and will have my down payment saved over the next few years as a renter.
Do you rent or own? Have you recently thought about moving, but can’t due to owning a home? Are you saving for a down payment and hope to purchase soon?
8 Comments
Interesting, Little House! I suppose with the downpayment that you would have in a house, you could be investing the money instead (argument for rent). It’s nice not to have to feel “tied down” to a mortgage though, with renting… =) As I say this, I am house hunting myself, lol!
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I know My Frugal Freedom lives in an RV and rents her home. But having a rental seems to be a hassle with the tenants. And Millionaire Mommy Next Door is a renter and believed in it for a long time (recent post claims she is waiting until 2012 to buy.
In California, I can see the reasoning to rent a home (atrocious buying prices, unless you want to live far out from a main city). For me though, I’ve had issues with getting the owner to fix or maintain items. So owning is good in that regards, as long as you can cover things when they need to be fixed.
Another choice… move out of California to a place that is a bit more affordable, rent (as it will be cheaper) and then buy. Of course, that is assuming the salary is somewhat compareable to here.
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@Money Funk – You’ve made some terrific points. I also read Millionaire Mommy Next Door and see her point on renting through 2012. As for landlords, they do stink, most don’t want to fix up their places which is why we want to move out of our current rental. Our landlord likes the benefits of receiving our monthly rent (we see them purchase things the very next day! They live next door. But that’s a long story…) but doesn’t want the responsibility of maintaining the house. We’ve put quite a bit of our own money in our rental and don’t want to do that again!
As for moving out of CA, if only I could convince my husband! He loves our weather here and can’t think of any place he’d rather live. *Sigh* Until I can find a similar climate (no snow, very little rain, sunny, sunny, sunny, but not sweltering) I’m stuck in CA.
I’m thinking long and hard about renting. I currently owe my home (not a typo). We bought our house to be a starter home that we hoped to upgrade once we had kids. Well two kids later we are still in the house. We are going to attempt to sell next spring. Since we are still in debt I don’t think we’ll be able to cover any short fall from our current home value/amount owed and have a downpayment large enough to buy. There are plenty of great rentals so the more I look, the more I like the idea.
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@Deliver Away Debt – I wonder if you could rent your current house and then rent one someplace less expensive? I’m not sure if you are thinking of moving out of the area or just down the street, but it’s a thought.
@DeliverAwayDebt
Jeff, didn’t Brad do the same thing to get his debt paid off? It’s definitely one too consider if you can find an awesome landlord or… find a landlord that lives out of state but uses a rental company to take care of the property. Many of times, the houses go for lower rental rates than normal. But you have to act quickly if you find one, because they go fast.
We heading up to NV, right below South Tahoe to the city of Gardnerville. No state taxes; works great on buying a house. The only issue, you do get some high winds at times due being cradled in the valley.
.-= Money Funk´s last blog ..Early Retirement Extreme 21-Day Makeover =-.
@Dr. Dean – Great point! It’s good to hear from others that my decision has a solid foundation.
@Mr. Credit Card – Well, I can only hope that will be the case. So many options to choose from! Thanks for the wonderful comment.
@Barb Friedberg – I’ve thought of this. The only problem in SoCal is that many owners are underwater on their homes and the whole arrangement makes me suspicious and a little nervous. I think I’d rather wait it out a while longer. Thanks for the tip, though!