Renting is not “throwing your money away”

I am going to begin this article by stating that I am not anti-home ownership. There are many positives of homeownership when the right house is purchased at the right stage of your life. While I am not anti-home ownership, I am very against how much pressure, and in some situations shame, is directed at some of my clients who rent instead of own. I want to be extremely clear that what I am about to write is in defense of the decision to rent, not an attack on the decision to own. I see renting get slandered so often that I feel it needs to be defended as a perfectly reasonable decision that is also frequently the best choice for the renter.

The common negative phrases my clients tell me they hear are:

• “Why are you paying someone else’s mortgage for them?”
• “Why are you still renting? You’re a doctor.”
• “Why are you throwing your money away every month on rent?”

Let’s start with the first one. This usually comes from a misunderstanding of how mortgages work. I’ve heard many people say “I’d rather pay myself than a landlord” when explaining why they bought a house. What they are choosing to overlook is that on a typical 30-year mortgage somewhere between 65% and 90% (depends on the interest rate) of your first monthly payment goes solely to interest owed to the bank, not to yourself. You are just paying a bank instead of a landlord. With every payment a tiny bit more goes toward principal instead of interest, but on the average mortgage approval I’ve seen lately, it’s not until year 13 or so that your monthly payment has more dollars going toward the loan’s principal than toward paying interest to the bank.

The second statement frustrates me the most because it’s such an assumptive thing to say to another person. I can’t count the number of times clients have told me about comments made by family members or friends about them making “doctor money” and “being rich” so they should buy a house. There are many good reasons to rent that I’m going to get into in the next paragraph, but the biggest problem here is assuming that having a higher than average income somehow means you must buy a house. Also, most of my clients who have heard this statement owe hundreds of thousands in student loans. Taking on a mortgage payment when you already have hundreds of thousands of dollars of unsecured debt is uncomfortable for many physicians and that decision should be respected.

The final comment somehow assumes that paying for a safe place to eat, sleep, and live for a month is somehow the same as throwing money in the garbage. This is painfully inaccurate. There is already a huge value in having a comfortable place to do the activities above, but to me the two biggest additional values of renting are:

1. Predictability of costs

When you are renting, you know your maximum monthly cost. When you own, you know your minimum monthly cost. As an owner, if something breaks, you pay to fix it. You also must pay for all the ongoing maintenance. Most people significantly underestimate this cost.

2. Flexibility and avoiding large sunk costs

Buying and selling a house is likely the most expensive thing you’ll ever do. Roughly 10% of the cost of a house is spent in the buying and selling process1 due to all the fees (inspection, appraisal, mortgage origination, title, realtor, etc). If you buy a house and sell it three years later, it is unlikely that you made a net profit after factoring in maintenance, property taxes, and the large transactional fees.

Again, there are good reasons to purchase a home. If you are in a financial position to have a reasonable down-payment, you can comfortably afford the monthly payment, you can handle unexpected expenses, and you plan to own the house for more than five years, being an owner might be the smart choice. However, there are many people and many situations where all the above qualifiers are not met. Those folks should rent and be able to do so while having the confidence to know they are being financially responsible and making a great decision.