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Is it Better to Buy or Rent?

Summary: A frequent question we hear people ask is whether you should buy a primary residence or rent instead. Our answer is always “rent.” In this post, we’ll explain why buying a primary residence is a poor financial decision when you have the option to invest your money in cashflowing real estate instead.

 

It’s no secret that we don’t own a primary residence. In fact, we haven’t owned one since 2014 (unless you count a duplex we house hacked for about 6 months).

So why don’t we own a primary residence?

It’s because we had to make serious decisions early on about whether we wanted to use our money to make money or use it to buy a primary residence. For us, the decision was clear.

Our goal was to grow our wealth as fast as possible so we could achieve Fast FIRE. And we knew that having a primary residence would slow us down.

So let’s take a deep dive into this question. Is it a better financial decision to buy or to rent?

 

The Argument for Buying

People have a lot of arguments in favor of buying a house over renting. Most of them center around financial reasons, since many people view a primary residence as an asset.

 

You throw away your money when you rent

One of the most frequently cited reasons for buying a house is that it is going to save you money over renting. People think that if you are going to spend a certain amount for rent, it’s better to buy and put that money towards a mortgage instead, since you’ll be paying down your mortgage a little at a time with each mortgage payment. That way, the reasoning goes, you aren’t just throwing away your money in rent.

 

You view your house as an investment

Many people see their primary residence as an asset. They expect that their home will appreciate.

And for many, this is true. People are often pleasantly surprised to find that their house has appreciated and the surprise comes from leveraged appreciation.

Most people don’t pay cash for their homes; they make a small down payment and get a mortgage for the rest. However, when the home appreciates, you get the appreciation on your money as well as the bank’s money. The bank doesn’t get any of the appreciated value.

So for example, if you put down 20% on a $1 million home, you put down $200,000 and the bank lends you $800,000. When the house appreciates by 25% and you sell, you make $250,000 and the bank gets none of this appreciated value.

 

You get tax benefits from the mortgage deduction

While this benefit has become less lucrative in more recent years, there is some truth to the fact that you can write off your primary house’s mortgage and get some tax savings from doing so. That being said, there are tax benefits of owning rentals too, especially if you are a real estate professional.

Either way though, you don’t want to let the tax tail wag the dog.

 

Paying your mortgage is forced savings

People don’t say this one out loud very much, probably because it’s not popular to say you have to force yourself into savings, but the fact remains that many people use owning a primary residence as a way to force themselves to save.

Perhaps the most obvious example is the way that people put themselves into 15 year mortgages. There’s something so emotionally satisfying about chipping away at your balance year after year and watching your loan shrink. By extension, it’s even more gratifying to pay it off early!

 

Owning a house has a strong emotional pull

The emotional joy that comes from owning a primary residence is very real. There’s a reason owning a house was part of the American Dream. There’s a reason people still refer to places as their “forever home.”

I, as much as anyone, get the emotional pull of owning your house. Someday I, too, will own a primary residence. When I do, though, I will know it isn’t the best financial choice. I’ll do it for the emotional joy. And it just might be in Italy.

 

The Argument for Renting

Now that we’ve covered the reasons that people give for house ownership, let’s explore why some people chose to rent.

 

You get your money working for you

The more money you have tied up in a primary residence, the more money you have not working for you in this house. This is what we call “lazy equity.” It’s money that’s just not making money for you.

In addition, the argument for buying doesn’t take into account the major cost of owning a house: the opportunity cost.

You have an opportunity cost with the money you put into your house as a down payment. Let’s say you put $100,000 into your down payment. How much money is that money making you each year? Nothing.

But what could that money be making you each year if it was in a cashflowing property at 10% cash-on-cash? That’s right: $10,000. Now, while that may look like a measly number, you also have to consider the equity paydown of the rental as well as the tax savings (from depreciation and expenses). Now that $10,000 isn’t looking so shabby because it’s a bigger number, and it’s tax free (and maybe even protecting some of your clinical income if you are a real estate professional).

Now, multiply this number by five or ten or however long you plan to live in this house of yours. This is the true cost of what you are giving up by owning.

 

You don’t have to worry about appreciation

Banking a primary residence on appreciation is actually more dangerous than people think. 

Is there a chance you’ll get lucky in your market and your primary residence will actually appreciate a lot? Sure. Can you depend on it? No. So unless you have a mechanism to guarantee appreciation, your house is a gamble, not an investment.

You also have to take inflation into account. If you don’t consider inflation, your house may appear to appreciate year over year. But in actuality, it has not. 

I saw a recent analysis that showed housing prices across the country have roughly matched the inflation rate since 1996. Are some markets going to grow faster than the inflation rate? Yes. But how do you know that your market is going to beat inflation?

And don’t forget the maintenance costs of owning a home (on average 1-2% of the total value of the property per year). When you rent, the owner pays for these costs.

And finally, you need to take into account the costs of selling, which in Washington is almost 10% of the value.

In contrast, when you rent, you don’t have to worry about selling costs or take the risk that your home won’t appreciate, meaning that you can actually end up saving money in the long run.

 

Renting gives you more flexibility

We originally decided not to own a house for financial reasons. But now we don’t own a primary residence mostly for flexibility reasons.

Those of us who know us well have watched us move eight times in the last seven years. That’s right. We’ve lived in eight different houses and apartments in seven years! Even I realize that’s crazy.

Over those years, we’ve moved so much in part because we’ve had the flexibility to follow opportunities—because we aren’t tied down by a primary residence. One of those opportunities was to be part of a start-up, which was an invaluable experience and allowed us to build up a chunk of cash to be put towards more cashflowing real estate. If we had a primary residence when that opportunity came up, we likely wouldn’t have jumped at it and moved across the country just two months later.

 

You aren’t gambling on your home

A quick lesson from the Rich Dad, Poor Dad series: an asset puts money into your pocket. A liability takes money out of it. Your primary residence, then, is a liability. You must pay out of pocket to support it each month.

Because we recognize our primary residence is not an asset, during our current financial growth phase, we make sure to put our money towards properties that make us money. As I mentioned above, down the road this will change. But not while we’re still focused on growing our wealth.

 

You don’t have any maintenance costs

When you rent, the owner pays for maintenance. How nice is it when an appliance breaks down and you don’t have to pay for it!

 

So What Are You Going to Do?

To grow your wealth quickly and achieve Fast FIRE through real estate, you will have to make sacrifices.

For some people, that means cutting back on spending and budgeting. For others, it means working extra shifts to get more down payments for cashflowing properties.

For everyone, it means spending the time and effort it takes to learn about real estate, search and purchase properties, and track and manage them over time.

Some of you are going to be willing to do whatever it takes to get to financial freedom as fast as possible. If this is you, we encourage you to really think deeply about whether you can do without owning a primary residence.

Because there is no doubt that you will achieve financial freedom faster if you do not have a large down payment sunk into your house.

Ask yourself this question: if I can be financially free in three years instead of six or seven, is it worth not owning a home?

If it is, you know what you need to do.

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page and join our Doctors or Professionals  group!

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

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Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

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