Should You Rent or Own Your Home? You Might Be Surprised By The Answer

Rent vs Own

There are a lot of misconceptions surrounding rent vs own. Let’s jump right to the point. Owning a home is almost always a poor investment from an ROI (return on investment) standpoint. BUT this doesn’t mean you should never own a home. Let’s evaluate…

There’s a lot of false reality out there. It’s easy to get suckered into buying a home, just as it’s easy to get suckered into buying a car. I know because I’ve been suckered into buying homes and cars for the wrong reasons. Before making an emotional decision, I suggest running the numbers. We’ll get to that in a couple of minutes.

Are You Buying on Emotion or Numbers?

Some people love the sense of ownership and truly enjoy working on their home. This does not apply to my wife and I, but maybe that’s you. Don’t get me wrong, I’ve owned five owner-occupied homes over the past decade. Four of those homes were treated more like investments. That is to say, I would buy a slightly distressed home, fix it up (somewhat), live in it a couple of years, then sell it for tax-free gains, legally. That strategy works well in certain markets when the economy is strong. The last owner-occupied home we purchased was purely an emotional buy, and on that note, most people purchase homes as an emotional buy, hoping it will turn out to be a good investment. But sadly, hope is not a good strategy when markets soften and recessions occur.

Back to Today…

Today, we choose to rent so we can enjoy the freedom and flexibility that lifestyle offers. No yard work, no home repairs, no worries when we leave to travel. Meanwhile, we invest our capital into multi-family apartment communities in exchange for monthly passive income. The decision became simple after we ran the numbers. Here are a few things we considered….

The home we decided to rent cost us about $2,000 per month or $24,000 per year. The last house we owned, we had purchased for $412,000 and we sold it for $445,000. After commissions and fees, we barely broke even. That is lesson #1. Buying and selling houses is expensive. Unless you are sure you are ready to settle in for a number of years, renting is likely a better financial option. But here’s the real kicker…

Opportunity Cost

In 2016 I paid off our mortgage and I remember thinking “WOW, this is amazing! We’re 100% debt free!” Paying off a mortgage can be a noble goal, especially for those who follow Dave Ramsey’s advice of living debt-free. But consider this perspective…

With $412,000 equity tied up in our house, the largest expense turned out to be the opportunity cost. That is, what could our money be earning elsewhere if it weren’t locked up in the house earning zero interest, cash flow or dividends?

After running the numbers, we chose to free up that equity by selling our house and investing in apartment syndications. An estimated annualized return was around 8% a year at the time. That meant, the opportunity cost for us was $32,960 a year (412k x 8%). Said another way, investing in apartments could provide us with $32,960 per year in comparison to having a paid-off house that provided us $0 per year. And don’t forget, a mortgage-free home still requires out of pocket expenses for HOA dues (if applicable), property taxes, maintenance and insurance. Yes, the house might have risen in value providing us with some appreciation, but our apartment investments have the same potential.

Why Multifamily?

In our opinion, multifamily apartments are a more conservative investment. Here’s why:

The apartment communities we invest in typically have 200-600 units. This lessens our risk when tenants move out. We also diversify by placing our capital into numerous investment opportunities to spread out our risk geographically and among different asset types. Our house was far less diversified being one property in one neighborhood in one town in one state. We became uncomfortable having this much capital in one asset.

Something else to consider is that multifamily apartments are valued by the NOI (net operating income) vs single-family homes which are valued by local comparable sales. In recessions, people lose jobs and are forced to take pay cuts. If their mortgage payment becomes unsustainable, they may be forced to sell at a loss or foreclosure on their home, which in turn, decreases the value on single-family homes in the area. After experiencing a short-sale or foreclosure, many of these ex-homeowners become renters and move into more affordable housing such as apartments.

Since recessions are mostly unpredictable, but tend to pop up every 10 years or so, we chose to be “cheerful pessimists” as Charlie Munger would put it and err on the side of caution, considering it had been almost 10 years since the last recession. If you strongly believe your house or your alternative investing strategy will do better, you can factor this into your underwriting.

Here Are the Numbers

$32,960 was our opportunity cost. This is the 8% annualized cash flow our 412k could be earning in apartment syndications rather than being tied up in the home.

In addition, we had $12,400 in annual home expenses coming from the following categories:

· $2,400 HOA dues covering common areas in the community

· $1,000 Home insurance

· $6,500 Real estate taxes

· $2,500 Home repairs and maintenance

The Result

It was costing us $45,360 a year to own and maintain our home vs paying $24,000 in rent. In other words, a $21,360 annual premium to live in the house instead of renting. Nearly twice the cost!

There you have it, that is why we choose to rent our home and invest in apartments. Just plug in the numbers and see how your situation stacks up. Sure, there are emotional benefits to owning a home as I mentioned earlier. The question is, are those emotional benefits worth the cost?

To Your Success

Travis Watts