The housing market has been going crazy for the last 2 years during the pandemic. (I’m a Real Estate Agent, I’ve seen it first hand.) It seems like everyone and their brother wants to move out to the suburbs and get a 5 bedroom house with a giant yard, just in case we all have to lockdown again. But with all the craziness of the last few years, we still choose to rent …for now.
High Cost of Living vs Low Cost of Living Areas
“Renting is just throwing your money away.” That’s what I heard over and over again.
Growing up, we lived in a middle-class neighborhood in Oregon. My parents owned their house (with a mortgage.) My aunts and uncles owned their houses. Pretty much everyone I knew, owned their homes, even those who weren’t that well off.
But we had a family friend who lived in New York, who rented.
She was a successful hairdresser who had top-class clients and earned a lot of money. My parents and aunties could not understand how she could throw money away every month on rent. She earned enough to buy, why not just buy?
As a teen in a middle cost of living state, constantly hearing that buying was the best option, no matter what, I wondered why she would choose to rent as well.
Now, I live in very high cost of living (HCOL) Honolulu, HI. The median single-family home price in December 2021 is $1,050,000. (Star Advertiser)
The median cost for a condo is $485,000 but that price doesn’t even include the $600-$1000+ building maintenance/association fee, which only covers sewer, water, and trash in most buildings.
Now, her choice to rent in HCOL New York makes perfect sense to me, so long you invest the difference.
The Math
The rent for our awesome 2 bedroom, 2 bath, 2 parking condo in the middle of everything (check out my article on Why We Love Our Small Home) is $1,900 a month.
The average condo in our building (2 bed, 2 bath, 1 parking) is currently selling for about $450,000.
We actually contemplated buying when we first moved in because we loved the building. And the cost of a single-family house was out of the question.
But even with a 20% down payment of $90,000, we would have a mortgage payment (including taxes and insurance) of about $2,208.
This would not include the $600+ maintenance fee.
So if we were to buy, we would be paying a total of $2,808 a month. AND would be responsible for our own maintenance of things like leaky pipes and broken appliances.
As renters for the last 2.5 years, we have had consistent monthly costs of $1,900 every month. (We have a very nice landlord who does not raise rent every year)
Even a broken pipe and 3 large appliances breaking down, didn’t affect our monthly budget, the landlord took care of it. Quickly and with little bother to us.
And because of this lower monthly payment, we are able to take the difference between renting and buying and invest that amount each and every month. (Check out my article on Super Simple Investing)
Buying: $2,808
Renting: $1,900
Difference to invest every month: $908
Invest the Difference
By not paying the 20% down payment on our home, we are able to keep that $90,000 in our investing accounts.
If nothing were to change and we were able to:
- Start with $90,000 (what we didn’t use for a down payment)
- Consistently invest $908 every month (Difference between owning and renting)
- Total amount invested $326,880
- For the next 30 years (common length of a mortgage)
- And earn an 10% return (average annual return of the S&P 500 for the last 50 years)
In 30 years, our investment account would hold $3,443,507
If we followed the 4% rule of withdrawal in retirement, this would give us a decent $137,000 a year to live on. (But yes, we’d still have to pay rent)
(Check out this Handy Dandy Investing Calculator and run your own numbers)
Cost of Buying
Now, if we had chosen to take that $90,000 and applied it towards the purchase of our condo and paid off our mortgage in the same 30 years, the value of our purchase would look like this:
- $450,000 original value of condo
- $90,000 down payment
- Total payments with interest (3.2%) made over 30 years $560,000
- This does not include building maintenance/association fees or regular costs to maintain the property
- Average value increase of real estate in the USA is 3.2-3.8% annually (we’ll round up to 4% to make it easy)
In 30 years, the value of the home would be $1,459,529
A very sizable chunk of change and a free place to live in retirement, but a much smaller return. And that value is 100% home equity. You can’t access it for spending unless you sell the house or take out an equity loan.
(Check out this super easy Rent vs Buy Calculator)
Renting Wins…For Now
The current crazy high-priced real estate market and general cost of houses in Honolulu are why we are choosing to rent and invest the difference… for now.
But who knows what will happen in the future.
We may move to the mainland USA to a lower cost of living city where buying might actually make more sense.
Maybe the real estate market will cool down in the next few years. As the pandemic stops making people crazy, we’ll have a large enough downpayment to purchase a home where the payments make sense and we can house hack. (This is our hope.)
But for now, renting just makes more sense financially.
Wrap-Up
Deciding to rent vs buy is a very personal decision. Many factors must be considered including:
- Current financial situation
- How long you plan to stay in the area
- If you want/have the time to be responsible for the maintenance of a home
- The simple math of renting vs buying
Whatever your decision, make sure you take the time to really figure out what you want and need. Do the math.
And remember that no decision is permanent. If you change your mind a few years later or your life situation changes, it’s just time to do the math again, make the necessary changes, and move on to your best life.
That’s all anyone really needs. (Check out my article about the life advice from My Future Me)
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