Dec
I admit it, I’m a renter.
At least a few times a year, I get told by my parents that I should buy a house, or put some money down on a condo.
“When you rent, you throw away your money”, they told me many times. “You want to end up with something in the future, like a house”.
In spite of hearing this advice many times, I still rent, and intend on doing so for a long time. Here’s why:
My Philosophy on Debt
“The borrower is servant to the lender” — Proverbs, 22:7
The modern tool for enslavement is debt. In fact, there’s never been a better tool designed to restrict people’s freedom. The path has been clearly laid out when you were born. The way to happiness is to get a good job with a good pension plan, get married and raise a family, and borrow money to fund your American dream.
It starts with your first credit card. Then you borrow money for your first depreciating asset: your car. But your most important expense of all will be your house, which you’re told is an asset, instead of the obvious: the biggest debt you’ve incurred so far. When you owe money to a bank or another lending institution, you cannot be free.
Debt is like an invisible leash tying you to your current circumstances. When you have payments to make, you cannot decide to do something different. If every month you must make payments for your car, your credit card and your mortgage, then you must continue slaving away at that job to make those “ends meet”.
Want to take a trip around the world? You can’t do it.
Want to quit your job and live on your savings? Impossible. Those monthly payments have to be made.
The numbers show that the average person in the USA has $8,500 in consumer debt. Keep in mind that this doesn’t include mortgage debt. That’s for every man, woman and child! Obviously, some people have much higher levels of debt for this average to be so high.
Debt in My Life
My first important step towards total freedom is realizing that any amount of debt will restrict my freedom. Therefore, the ideal amount of debt to have and be free is ZERO, just like the ideal amount of cigarettes to smoke for good health is NONE.
I had no problem with consumer debt like credit cards. I always paid them in full at the end of the month and did not feel I had to cut them down or freeze them like some debt-reduction experts recommend. I like the convenience of credit cards and in fact I could not run my business without them.
I never borrowed to buy depreciating assets like a TV or a computer. I’ve only owned three cars in my life and paid in full for them. I always bought them a few years old, which is the smartest thing to do. But there was one type of debt I was conditioned since birth to view as “good”, and had a very hard time to view as just “debt”. And that’s of course the house mortgage.
I’ve always rented, but almost three years ago I decided to buy a property in Costa Rica, this was a big mistake. But at least it taught me the danger of debt.
A lot of people will tell you that getting a mortgage on a house is a “good” debt, because you’re buying an appreciating asset. Very few people realize that a house mortgage is just a big debt that’s only potentially going to appreciate in value. Like all debt, it will restrict your freedom. But since it’s going to be your largest debt, it will be a more important factor working against your freedom than any other type of debt.
Consider the following:
- A house is NOT an asset until you’ve paid in full for it. It’s only an asset for the bank who loaned you the money, because they can sell it in case you’re no longer able to pay your mortgage.
- Paying a mortgage is NOT comparable to a “forced saving plan”. Only a tiny amount of your monthly payment goes towards your equity. The rest goes towards paying the debt. On a typical mortgage at the average interest rate, you will pay for your house TWICE in the end, with half of the money going to the bank.
- A house only potentially appreciates in value. It’s only worth what you can sell it for, not what you think you COULD sell it for. As many people have found out in the last two years, the real estate market does go down from time to time.
- From 1978 until 2004, real estate appreciated about 8.6% per year on average. At the same time, the stock market appreciated 13.4%. So in the long run, there are much better ways to make a good return on your investment than buying a house.
- As the author of the book “Rich Dad Poor Dad” said, “an asset is something that puts money in your pockets”. So buying a house for yourself is not an asset.
- Renting is cheaper than buying, in most cases. The average homeowner will spend much more on “improvements” on a house than the average renter. If you value your time, you should also think about all the repairs that will go towards the house that the renter will not have to worry about.
- A house mortgage restricts your freedom. If you want to live somewhere else, or take a year to travel, you can’t do it on a whim. Those payments have to be made, or the house has to be sold.
- Buying a house only makes financial sense if you think you’re going to live at the same place and not sell it for at least a 5 to 10 years. At this point, I personally prefer not to be tied down somewhere for that long.
- Buying is easier than selling. You can go any day and buy a house. But selling it is another story. This lack of liquidity can severely restrict your freedom.
- Renters are not “throwing away their money”. They can be using it smarter. All the money you save renting (and not having to worry about repairs and house improvements) can be invested somewhere else, usually at a much better rate of return. It’s not just about the monthly payment.
Why I’m Renting and Not Buying
For me, renting is what makes the most sense, at this point in my life.
For one thing, I don’t want any debt for any reason. The only way I would buy a house is if I could pay for it 100% cash. But even then, I would think about it twice, and would make sure I could envision living there for a long period of time.
Of course, some people value other things above freedom. I’m not saying that getting a home mortgage is necessarily wrong for everybody. In your situation, it may be the right thing to do. But for someone who values freedom above everything else, a 100% debt-free life is the way to go.
Renting Increases Your Options
The other problem with the “buying is better” mentality is that it severely restricts your options. Most people think that they must own the place in which they live, and that the only way to drive a car is to buy it or lease it. But when you buy something, you’re stuck with it forever, until you sell it. Most of the time you’ll end up paying more than you can recoup later on.
Let’s say your dream is to own your own tropical island. Most beautiful tropical islands for sale cost at least one million dollars, and financing is generally not available. But did you know that you can rent an entire tropical island for as little as $2000 a month? I was shocked when I learned this! There are literally thousands of tropical islands you can rent in Thailand, Fiji, Panama, and the rest of the South Pacific.
Maybe if you rent a tropical island for a month, you might realize that it is not for you long-term. You spent $2000, got to live your dreams and learned something along the way. But if you spend years saving money to buy that island… you’re stuck with it for a long time! I imagine there might not be a huge market for tropical island buyers.
This is just an example to show you how the “buy-only” mentality can restrict your choices.
For example, let’s say your dream has always been to drive the latest BMW or Infiniti car model, but you felt like you couldn’t afford it, or it was too flashy. Why not rent that car for a weekend and try it out? Then you’ll know if it’s for you or not. At least you’ll get to live your fantasy. You don’t need a million dollars to live your dreams. There are beautiful million-dollars villas you can rent for a very reasonable price in many parts of the world. Why get stuck owning something when you can rent it, stress-free?
Practically anything you’ve always dreamed of doing but always felt you never could — can be done right now for much less than you imagine.
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While I do see your point (especially about the island), the advantage to owning your home if you are married with children (or unmarried with children) outweighs being indebted to the bank for many people.
I rent with children now and it is very hard to get what you need. Renting makes it hard to do things like put a sandbox in the yard, install fencing, paint a mural on your kids’ wall, avoid toxic pesticide spraying in the house, or even get repairs done in a timely way. Owning provides a family with a different kind of freedom: to turn an ordinary house into a cozy, customized, safe home in which to raise children and care for elders.
Hi Frederic,
A house was a prudent investment when raising my kids, and it just went from there.
Along with the cooking came a cycle of weight gain, loss, gain etc. and at the stage now, have finally learned how to keep the weight on an even keel with food and recipes for 7 days that are generally acceptable.
However, I have a medical condition and the raw food diet suits me to a T, but I have yet to find a 7- day a week raw food recipes that have been calorie counted or whatever is important here, and are nutritionally sound and that are available and keeps the weight stable. The fasting is fine, but recipes for 7 days a week would be great! Exercises, including some stretching and yoga would be a great bonus.
My best Regards,
Patricia
I agree Patricia that for many people buying is the best choice!
I do have menus for each day of the week as part of our Raw Vegan Mentor Club.
There are pros and cons to both renting and buying. My husband and I bought our first house together back in 1989 and were debt free ten years later. We are committed to being debt free, except for our monthly credit card bill which we always pay in full and on time. We recently downsized to a smaller home, which has allowed us to free up some capital and lower our cost of living. In 2010, we will both be free to do what we want to do: music, travel, and have our own web-based business
)
By the way, part of the reason for downsizing was also to simplify our lives. We find that following a “mostly” raw diet has also helped to simplfy our lives, not to mention boost our immunity and increase our energy levels.
Heidi
Hi Fred,
I could not agree more with you. We have been so conditioned (the banks did a great job of promoting their #1 asset) to believe that this is wise. I have been arguing these very same points on the same logic for a long time to my clients.
Especially in today’s day and age, do not get yourself tied down, it is best to be free and much better to let someone else deal with the problems, and the ever increasing taxes etc etc….
Besides if you look at the historical charts vs the REAL inflation charts you will quickly see that Real Estate has never really served as anything more than an inflation hedge. It got skewed a few times in boom cycles but always evens itself out. The gains that people think they are getting is an illusion especially when all other things are considered.
I am all about freedom and that is a huge impediment to being free, when all you really want is the use of the property. Even renting Condo’s is usually a big savings when all the fees are considered from owning one….
You are absolutely right about renting. These days, with the mortgage rates, one will pay over a million dollars for a $400,000 house (Canadian). I can find better things to spend my money on than giving it to a bank. Most people can’t see that and so they live day to day as slaves to the system.
For me…I have found the exact opposite. I have accumulated a conservative and full profit (down-payment and repairs deducted about 80k in equity over about 5 years from my home, despite the current housing market lull. I bought it as a solid but slight fixer-upper, my husband does the work himself. It was nowhere Near close to 80k….not even 10k! and we bought it private to save on real estate fees. You shouldn’t be scared of home ownership, you just have to be smart about it….same as running a business.
As well…there is no way, atleast in my case, that renting is cheaper than mortgage payments. And I had no huge downpayment to make that so, either. I am saving money every month…owning. Money that I can invest or spend however I want. I Love not being a slave to high living costs!
Speaking of freedom, with owning your own home, there is much to be had in owning as well…it’s just different types of freedoms.
Renting with kids is also harder. It’s not good for them to be bouncing around from place to place and this is a fact. Landlords prefer not to rent to families, especially ones with 3 or more kids. No dogs, etc either. But kids need some stability. …even Brangelina had to recognize this.
Not saying you don’t make some good points, just that they are all very debatable and subjective and suit to your more single lifestyle perhaps better than mine with a slew of kids.
You don’t need a big house, you don’t know where you want to live and condo fees is money severely poorly spent. Also, you may not be handy and would have to pay contractors for all work needed on the house, or not know what to look for when buying a house. People can go so wrong in home ownership! Most people’s biggest mistake is not buying just what they Need, but rather what they are double-incomed qualified to buy….they should always buy no more than they can comfortably afford on only One person’s income. Then if you have babes, mom can stay home, or you can both work only part-time.
Obviously, yes, I do pay more than what I will recoup in home ownership…but if I was renting, not only would I be forced to pay a few hundred more per month, I would also have zero equity/savings/assets (however you want to term it) as a result of my renting. I rented all through my twenties and never made me a dime. Now I am so glad I have some equity to fall back on if I should ever need to for some reason.
In a few years, when I am done school, I hope to move out west, then I will rent for probably a year or so, but that’s just for relocation needs. I much prefer making actual payments, then just gaining a roof for 30 days.
Not dissing your view, just presenting a fair opposite side comparison. Pros and cons to both for sure….I would say for people with kids, it’s a no-brainer to own though.
I agree Anna, there are different lifestyles for everybody. With children, a steady place makes a lot of sense. I am not a finance expert, but I thought it would be interesting to share my experience.
Radio Show host and debt-elimination expert Dave Ramsey has his “100% Cashdown Method”. He says it’s not for everybody, but if you can do it, paying cash is the way to go.
I considered for a while buying a condo or house and after much research decided against it. Even if I could pay for it 100% cash, I wouldn’t. Before I buy anywhere, I would want to be certain I would be there for at least 5 years, if not longer.
What a timely post, Fred. My Husband and I have been in the situation you describe, and are currently finalising the sale of our first home. Libing under the pressure of our first mortgage led to tbe most toxic period of my life, and following what everyone else was doing by borrowing against tge equity has caused us great losses. After moving to a place where we could be at our best, we rented our house out and within 1 year it went from brand new to derelict, and we are about to sell it under what we owe. Yes we paid for our wedding, got a car and stuff with that equity but whats the cost?
We’re now renting a million dollar property with stunning views, in a beautiful part of our city for so much less than our mortgage. I may not be able to paint the walls but I have an agent on side ready to pay for repairs etc.
I’m now focussing on doing what I love, and not only becoming debt free but building my business so I can buy what I want in cash.
Thanks again for your words of wisdom!
(please excuse the typos in above comment, I’m typing on my phone!)
yes, Just to break even with purchasing costs, and then selling costs, you would need to live there for atleast two years….and that’s with a decent housing market. So I agree, five years is good…unless we’ve just left a recession, typically they only come along every so often, so fairly safe bet you could break even, or even profit ten grand or so, with as little as 2-3 years ownership.
100% makes sense, but with housing, most people don’t have that kind of cash laying around! I pay cash for cars and everything else sure….live within your means…but sometimes you have to spend it to make it, right? This is the rationale for home ownership, even borrowed. And if you’re into house flipping, I know a few people who made out like bandits…set themselves up for life. Ofcourse, not for everyone, lots of pitfalls and you have to understand housing and ownership in all respects.
You’d be smart to go with an open variable interest rate, but I’m sure, if you did your research, you’ve already realized that was a much better deal. Wish I had’ve had a little more faith in that plan…I went with the masses and locked into a higher, albeit, secure rate.
Everybody knows people who have made a huge profit in real estate, just from sheer appreciation combined with a timely sale. I know several people like that myself. However, I can count as many people or more who have experienced the exact opposite.
If you’re a renter and you don’t put aside any money or invest, you’re going to lose in the end, compared to the average indebted home-owner. That’s why a lot of people compare buying a home to a “forced savings plan.” However a smart renter can save a lot and if he smartly invests that money, he can also win in the end.
From my own thinking on the subject, I realized is that mortgage debt is NOT a “good” debt. It’s a debt, period. Now borrowing for a house may actually be a good thing for many people, like it has been for you Anna. But it certainly isn’t the right thing for a great majority of new homeowners who think that’s what they need to do, even when it doesn’t make sense for them.
Yes. I can accept that…my sister…single, struggles to make ends meet now that she is in home ownership. She bought her house at the peak of the housing market, so it’s not worth a whole lot more than what she bought right now.
It’s also a new house, as she has no skills to do any repairs herself, and also therefore, paid full price, with no fixing needed. And now she is trapped in a subdivision. Ick.
lol…for me, I apparently need a forced savings plan as I am one of those many people who never seemed to have enough to save anything prior to home ownership. My one blessing, was running no debt either however.
debt is one form of enslavement however the immorality of our so called leaders is infectious those who encouraged others to spend more, desire more, buy more, borrow more – thus those who have been carried away and into massive debt know they can walk away from it with relative ease just like our governments currently are doing and who can blame them when lying and cheating seems to be the flavour of the day
Hi Fred,
Well, freedom is relevant, and can only be defined by the individual.
I think that the decision on whether to own or buy is influenced by many factors, including where in the world you live, what property values are in that part of the world, your income, your lifestyle, your profession and your ability to do well within it, whether you have children, what the market is like at the time of buying, etc……
Where I live in NYC, you usually will pay less in mortgage and maintenance payments than you would renting a comparable living space. And you can make that space yours…….without feeling like you
are making improvements on someone else’s space, and therefore wasting money.
There are drawbacks to both renting and owning. Some drawbacks to renting when I was doing that is that you are at the mercy of the owner to deal with problems, whether they be bugs, mice (or worse, rats!) to broken windows, appliances, or simply malfunctioning appliances, which often means they need replacing, something many owners are reluctant to do, unless you are living in a luxury building…..and I’m told that even then, people often don’t get the service they feel they should. Nobody will do anything about a noisy neighbor, something you usually don’t find out about until you move in to an apartment. Then you have to move…..often
forfeiting your considerable deposit. You can be subjected to the prejudices of a rental agent or owner: if they don’t like single people, couples, people of color, of a certain religious affiliation,etc.. well then, too bad for you……it won’t be worth the hassle of reporting them, you’ll be forced to keep looking.
Finally, as we all witnessed recently, the stock market is not necessarily a secure place to put one’s money either!
So, I think that wherever you spend your hard-earned cash, it’s wise to consider the various factors involved in getting the most bang for your buck! And to really take the time, with major purchases, to do research and feel good about what you’re doing. If you’re a person who is in transit
alot, or you’re not sure what you are doing with your life, then owning probably isn’t the way to go.
p.s. I meant to say that freedom is relative! Of course it is relevant too, but the word I was looking for was relative!
Perhaps the absolute best advice given by Frederic, a (very) smart person, well aware of our times…
I was debt free for decades, believing as you do. Then my family talked me into buy a small Florida condo at a great price so I could live near my elderly Mom. I suddenly was inundated with all the problems of ownership, not the least of which was the loss of the feeling of freedom I had always enjoyed subconsciously. I should have known better. Years later some repairs forced me to refinance, getting me deeper into my only debt. Finally we hit the mortgage crisis just when I was between jobs and I became one of the first foreclosures of the crisis. THis of course was really the best thing that ever happened to me since it reminded me of the true path of freedom, and so now I happily rent!
One thing you buyers may not know (I did research on this decades ago, but you will have to check it out for yourself – don’t take my word for it), is that even if you buy your home for cash, or eventually pay it off – you are still NOT free! You see, as a voter in your community you have legal responsibility to the country, county and state for ITS debts! Yes, when your state goes bankrupt because you voted for some bond issue or something to build a park or school, you are the co-signer, in a manner of speaking, on that debt! Governments just don’t create money from nothing – they create it from their collateral, the productivity and assets of the people. All government debt is de facto collateralized by the assets of the voters – and if push comes to shove in the economy some day, some Bankster could just come knocking at the door of the home you thought was paid for! And even long before that, local government’s can now claim eminent domain over your property for even the slimmest of reasons, like making it available to a developer for luxury housing – the legal justification is that the additional property taxes are a benefit to the community.
Rent On Brothers & Sisters!
I LOVE articles like this.
It just shows that there is no “one size fits all”. I own my house outright & therefore it was possible to totally remodel it to suit my lifestyle, including getting rid of the cooker & upgrading the kitchen to suit a living foods lifestyle. Also I can grow what I like in the garden, something that renters cannot do.
But likewise I own 2 rental flats, not outright because the ridiculous UK taxation system makes this a very bad idea, but the rent covers the mortgages. And I supply somewhere nice for someone else to live in. Win-win.
Hi Frederic
I completely agree with you, I never wanted to tie my life to a morgage, I could see that it meant spending the best years of my life doing nothing but working to pay that morgage, obvious slavery ! And that I would be too old to enjoy it when the payment is done at last. But then we inherited this quite large property and in this overpopulated country where nature is being destroyed everywhere we feel it is a duty to give wild life somewhere to live if you can, as so many species are becoming extinct. It is hard work to keep going as taxes are high but we would not move from here for anything. Is life supposed to be easy for anyone when a billion people or so suffer from starvation and related problems ? And try to create a new world with more justice is a lovely challenge, isn’t it ?
If your work is mainly done on the Internet, then you have the choice to rent or buy in a region where rents, house prices and rates or taxes are cheap, which is not the case where we are. But I believe that the more you have and the more responsabilities you have, the more you own, the more you have to look after. And yes, it is a lot of work, but the other side of the coin is that you are never bored, and also you become part of that environment. So anyway I moved all my life renting and then one day I arrived somewhere and thought : I am going to stay here, this is where I want to make my life, and somehow it just happened, without even trying, just doing what I have to do in a day to day way.
This is my life, everyone has their own path to follow. But if you live your life in a true sort of way, you will know what to do when it happens.
I have grown up in a world where rents were so cheap that there was no need to buy in a way, but things are different nowadays, but then again it probably depends which country. But if you buy somewhere and keep it, you will always want to go back there regularly, it is like some sort of “home” possibly…
Lots of great ideas from everybody! Thanks for your comments and making this Do What You Love community grow. By the way if you’d like to add a little avatar picture to your comments, you may do so by signing up at: http://en.gravatar.com/site/signup/
The email address you use will show your avatar picture on every blog where you use it !
Hi Fred,
great post!!!
Do you also have a formula in order to get out of debt?
Hi Francesco. I like the formula by Dave Ramsey to get rid of the smallest debts first in a sort of “Debt Snowball”. I recommend to check out his books and podcasts!
Thank you! Interesting thoughts about renting!
Overall I think we need to be fully educated ourselves from both sides and be very careful of having our conscious and subconscious biases force us to only consider one side or the other!!!
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In general, I agree with you that debt usually is a poor freedom builder, but like many things there is also the researse in some occastions where debt can leverage you and positively work to your advantage.
Renting for me is more like not being in charge of my life (less mental freedom) and the owner of the house can kick me out any time he wants (OK a month notice) and I have to look for a new place, move furniture… try to make sure that he choose me, prove income… it seems not worth it for me, too much stress and no profit possibilities.
When I make discussion to buy or rent house I would consider few things:
1) Is it good buyers market?
2) What is cheaper to rent or to buy?
For example right now in Vegas it is cheaper to buy than rent, so even if i want to live some where else I can rent and make a profit. In San Diego where we moved from, it was the reverse.
Plus, I think prices will go up in few years, which make it a profitable investment
You can grow your own garden and fruit trees in your own house to save money on food
Your idea to pay 100% is good, but does not fully agree with all your other points.
Renters have less “FREEDOM” and privileges to make changes and improvements (add solar, grow garden, switch the pool from toxic chlorine to ozone, replace the carpeting with something better, repaint with non-toxic paints, remove stove and microwave!…)
I appreciate your MALE perspective and I love traveling… yet as ‘most’ women and mothers will confess they may put up with the unstable vagabond lifestyle for a while BUT it is in their DNA to ‘nest’ and have stability. We’ll see what your fiance has to say in a few years about home owning, especially if she becomes a mother!