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Michael Rogers and his wife, Christy, who split their time between Tennessee and Alaska, twice struggled to keep up with mortgage and rent payments. Once, in 2006, the situation lasted eight months, and they sold their Tennessee home for $20,000 less than they paid for it.
Other adventures in the home-buying process ended up being successful — the couple doubled their money after selling a home that needed repairs, and later bought another home only to have to spend $30,000 to repair mudslides around the property caused by a builder’s mistake.
Two years ago, the Rogers family moved to Kingsport in northeast Tennessee, where they signed a lease on an apartment, thinking it would be a one-year stopgap before they bought it.
The couple just renewed their lease for a third year and have decided to continue renting. Michael Rogers, the building manager, likes the convenience of being able to move when work requires it.
Whether by choice or because they can’t afford it, many people have decided that renting forever is their best, or only, option. Housing costs and interest rates have risen over the past few years, making renting financially sound. (The New York Times recently updated its popular Rent vs. Buy calculator to help people understand the pros and cons.) In the 1960s, the median home price was a little more than two times the median income. Now, it’s nearly six times the median income.
Owning a home is a traditional strategy for building wealth over the long term. For those who don’t plan to buy a home, developing a strong financial plan without building home equity requires a different way of thinking.
Owning a home is not a panacea for a secure retirement. Rogers has seen firsthand the impact of “house slavery” on older family members, including one who had three-quarters of his net worth tied up in his home. This situation forces people to choose between borrowing against their property or selling their home to get its value.
He focuses on investing and prefers the liquidity and stability of the stock market.
“If you buy something like a U.S. stock index, you’re buying a slice of the entire U.S. economy,” Rogers said. “When you buy a house, your risk is really concentrated on one house in one state, one neighborhood.”
Rogers has found that people tend to focus more on home equity than on other factors, and he thinks that may be a mistake.
“In the current market, especially in my area, renting looks like an absolute bargain compared to what homes are selling for right now,” he said. “It’s allowed me to really increase my savings rate. People say, ‘Well, you’re not building equity.’ Yes, but my savings rate is 35%. I’m building my investment account much faster than I’m building equity in my home.”
Choose to rent
As with any other market, predicting future rents is impossible. Rents may drop, as they did in New York City during the pandemic, or they may skyrocket, as they did in Seattle after the Amazon bubble burst. Home prices may plummet, as they did during the Great Recession, or they may skyrocket, as they did in San Francisco. The key is to have a plan that covers a variety of scenarios.
“Renting is probably a better financial decision; buying is probably a better financial decision,” said Ramit Sethi, author of “I Will Teach You to Be Rich.” “A lot of times, we buy a house just because our parents told us to, and their parents told them to.”
Although he is a millionaire, Ceci has spent the past 20 years renting in cities such as San Francisco, New York and Los Angeles. When he lived in Manhattan, he calculated that the monthly cost of owning a home was 2.2 times that of renting. He stressed that the calculation must include fictitious costs such as mortgage interest, taxes and maintenance, which are usually estimated at 1% to 3% of the home’s value. Therefore, he rents and focuses on investing. He is a fan of index funds, target date funds and any long-term, low-cost investment.
“If you choose to rent, the most important thing is to do the math,” he said. “If renting is cheaper than buying, you have to invest the difference.”
He also negotiates rent, which he says many people don’t know is an option. He advises renters to pay attention to comparable housing costs in their area. If they can find a better deal, they should go with the documentation at lease renewal time. “It doesn’t always work,” he says. “When it does, it’s a huge benefit.”
Over the past century, the S&P 500 has returned an average of about 7% a year, adjusted for inflation. Most people don’t know what the stock market’s return is, Sethi said. “But you need to know that number,” he said, “because it tells you what your opportunity cost is — in other words, how much money you could have made if you had put your money into the market.”
There is also an emotional element to planning your finances when renting. Sethi said people shouldn’t feel guilty about renting.
“Remember, there are millions of people in the U.S. who rent and invest the difference,” he said. “You’re not a weirdo just because you rent. I do it, and there are a lot of people who do it.”
Crunching the numbers
“I often get asked why I don’t own a home,” said Miranda Marquit, a 40-something who lives in Idaho Falls, Idaho. “People think it’s weird.”
Marquit, who earns between $10,000 and $12,000 a month, has been building an investment portfolio for the past 25 years and multiple income streams for the past 15. If you want to start planning for a successful financial life without a property, she recommends starting with the retirement calculator on investor.gov.
“I take a very conservative approach when deciding how much to invest each month and assume a 6% return,” she said. “I know a lot of people would say you should assume a higher rate of return, especially if you’re investing in stocks, but I err on the side of caution.”
You’ll need to consider how much rent is likely to rise over time (Marquit uses estimates based on 3% inflation) to figure out how much you’ll need in retirement.
“To figure out if you’re ready for retirement, you have to do the numbers and see if you’re renting, have a mortgage or are building a rental empire,” she said. “Look at what you want to do in retirement and estimate your monthly needs. Then figure out how you’re going to meet those monthly needs.”
Rent-only strategy
“This is my life,” said Berna Arnat, who lives in the San Francisco Bay Area. “I don’t see myself owning a house in the future.”
When someone tells her she’s wasting money on renting, she thinks of her friends who own houses. “They’ll say, ‘Oh, we can’t go on vacation in two years because the termites have eaten through our bathroom foundation,’ or, ‘Yeah, we can’t actually go out this weekend because we’re on our knees tiling our crappy sunroom,'” she says. “Renting forever is a sport. It’s a lifestyle.”
It has a cost: The theoretical fairness of many plans is the backbone of their retirement.
Anat, author of Money Out Loud, says using your home equity to rent is all about diversifying and maximizing your investments. If you work full-time, you’ll want to put all your money into a 401(k) plan and get as much employer matching as possible, she says. Anat also recommends opening another fund, such as a Roth IRA.
“The idea is that if you’re not spending money on housing costs, closing costs, escrow fees, property taxes” and expenses like homeowners’ association fees, she said, “then you’re investing all that money so that your retirement is as comfortable as possible because you won’t own those assets.”
“For me, as a perpetual renter, I own all of these things, and I’m investing as aggressively as I can,” she said.
In the short term, you also need to plan for real-world volatility, Anat said. Your rent might go up, or your house might be sold. She recommends having at least six months of emergency funds ready and a spreadsheet detailing your plans if you lose your home.
“If you had to move out of your apartment tomorrow, what would your actual plan be for your money and your life?” she said. “It’s almost like an earthquake escape plan situation.”
Another factor to consider is your credit score: Keep it in good standing. Make payments on time and try to keep the amount you owe below your credit limit. The general advice is to limit borrowing to 30% of your credit limit; Anat tries to keep it between 10% and 15%.
Maintaining a good credit score is crucial, she said, because “landlords are looking at that and you’re likely going to have to go shopping again next month or next year to impress your landlord.”
You also need to understand your landlord and tenant rights in your area to protect yourself, as they vary from city to city and state to state. Buy tenant insurance, which is usually reasonably priced.
Overall, she said, you have to stabilize your life by getting as much financial support as possible.
“It reminds me of being self-employed,” Anat said. “Being self-employed means you have to do your own health insurance plan. You have to do your own retirement plan. It’s more like getting into that mindset.”
This article was originally published on New York Times.
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