I know I know. You have been told that you are “throwing money on rent”. Someone in your life made you feel guilty about not buying a house and building equity. And let me guess: They said something like, “Ah, I hated paying someone else’s rent!”
There is only one problem: this is not true.
First, let me ask you a simple question: Do you “waste money” when you eat out at a restaurant? of course not. You pay for the value.
However, this logic completely breaks down when applied to real estate.
I decided to take a poll on Twitter to ask what people think.
Not surprisingly, 95% of people said, “No, you didn’t ‘throw the money away’ over a delicious meal.”
Then I asked the same question – but for rent.
very funny! Note the drop from 95% to 81% when I asked if I was “putting money away on rent”. In other words, many people think that rent is wasting money.
You and I know that if we spent $20 on eating out, we’d be happy to spend it for good food, table service, and someone cleaning our plates.
Paying rent is exactly the same: you pay for a roof over your head (the meal). You also pay the landlord to handle any paperwork and maintenance (service) issues.
So why do so many of us blindly repeat the phrase “we waste money on rent?”
Why do people think rent is a waste of money?
Understanding why this myth persists is the first step in understanding the reality of buy versus rent. Check out these reasons why so many people think rent is a waste – what do you notice?
The powerful real estate lobby, the government, and our parents tell us all that “real estate is everyone’s best investment.” There are government tax incentives to buy! Repeat this for decades and residents will start to believe blind, instead of running numbers.
Here is a little glimpse of how the real estate advertising machine works. In this New York Times article, buying a home has been subtly portrayed as the best and surest way to get rich in America. quickly. hurry! Prices are only going up! Add in HGTV’s economic malaise and phrases like “You’re throwing money at the rent.”
“Minus the expenses”. very funny. Given that “expenses” can be more than 10% of a home’s sale price, it’s like saying, “I really enjoyed this trip to the Grand Canyon! All but the part where my son fell off a cliff and died. Anyway, it was It’s fun!”
In fact, real estate is not always the best investment. It comes with big fake expenses. And there are often better investments, such as a simple, low-cost index fund. This is well understood by seasoned investors but ordinary Americans have been tricked into believing that their primary residence is a great investment. Often, it isn’t. (I can buy today but I rent by choice because it is a better option for me).
2. Real estate finance
In America, we believe our home should also be an investment. why? This is not the case in many other countries. In fact, if you sit down at the dinner table with your parents, they want the price of their house to stay high – while young people want the price of housing low!
3. The idea that someone is “beating you”
Americans hate the idea of someone making money from them. The Reddit comment (paraphrased) said, “If you buy, it may cost more but at least you won’t pay the landlord’s rent.” Do you understand how crazy this is? When you eat out, do you say, “I love the food here But I just hate paying rent for this restaurant?“Of course not. We only repeat that phrase with real estate. Stop it.”
4. Not understanding fictitious costs
People think that if you buy a house for $200,000 and sell it for $450,000, you make $250,000. this is not true. They don’t understand maintenance costs, taxes, and other fictitious costs, and they don’t compare ROI with other investments. Moreover, Did you know that real estate prices are dropping too?
5. Follow the same rules of the game as always
Buying a home, in general, was a good thing for most Boomers. There were also fewer low-cost investment options such as index funds in the 1970s and 1980s. So, stuck in the past, they are echoing the same lessons for millennials, who face unaffordable housing, stagnant wages, and better investment options. This is the problem when people (Boomers) recommend something, but they don’t actually understand Why It works: they keep repeating it over and over, even though the situation has changed.
What you need to know about buying vs. renting
Renting is not necessarily better than buying and buying is not necessarily better than renting. It depends on many things:
My advice: Run the numbers and get educated. But never say you “throw money on rent.”