Owning your own home is an integral part of the American Dream. Like every dream, however, it isn’t necessarily the right decision for everyone. Let’s take a look at two examples of people who chose to rent rather than own.
Tony is a middle-aged man who has never married. For the past 15 years he has lived in the same small, inexpensive apartment. It is comfortable enough and certainly adequate, but that’s about all that can be said for it. Tony doesn’t care. He prefers to spend his discretionary funds on boating, snowmobiling, skiing, and travel. He also spends his free time on those activities instead of having to maintain a house and yard.
The Thompson family lived in a small rented house for nearly 20 years. The rent was low, which allowed the husband to do modestly-paid work he loved and allowed the wife to stay home when the couple’s two children were young. Eventually, however, the marriage ended in divorce. Mrs. Thompson stayed for a time in the rental house, then decided she wanted a place of her own. Even though she was working and earning enough to live comfortably, she had a terrible time finding a house she could afford to buy.
In these two examples, renting was clearly the right choice for Tony. To me, at least, it was the wrong choice for the Thompsons. One important difference? Net worth.
Tony spent his money on things that brought value to his life, which included securing his financial future. While living in his modest apartment, Tony was investing. The money he didn’t need to spend on housing went into mutual funds. Today, he has a substantial portfolio. If he chooses, he can quit work in another ten years, with enough income to travel, ski, and go boating as much as he wishes.
The Thompsons, on the other hand, saw renting instead of buying as a way to live on one income and raise their children in the way that was important to them. This was certainly admirable and worked well for them. However, the couple never managed to invest anything substantial for their retirement. Even when Mrs. Thompson took a job after the children were teenagers, her earnings went to help put them through college.
When the Thompsons divorced, they had no debt. Neither did they have any substantial assets. With no equity in a house, no investments, and little savings, to call their net worth “modest” would have been an exaggeration. Buying a house some 20 years earlier would possibly have been difficult and involved some sacrifice for the first few years. As their earnings increased over the years, however, the payments would have stayed the same and therefore taken a smaller percentage of their income. By the time the marriage ended, the house would have been nearly paid for. The shared equity would have given each of them something with which to start their new lives.
The second mistake the Thompsons made was to devote the wife’s earnings to the children’s education at the cost of their own future financial security.
Financial planners generally do not consider clients’ homes as part of their assets. We consider home ownership as providing a place to live rather than as an investment. In most cases, however, it does also help build net worth.
Renting instead of buying can certainly work well for some. It is essential, however, to create net worth at the same time. Long-term renting can be a wise choice when renting costs substantially less than owning (think beaches and big cities), when you move frequently, or when you invest enough to assure your financial independence.
