Men and women on the verge of divorce often wonder if their single income will be enough to buy a home, and they even contemplate if it’s the financially sensible thing to do. If you’re in this situation, you might compare buying versus renting based on the monthly expenses you’d have to pay in either scenario. This is a good way to forecast your finances into the future by several years.
From a hypothetical standpoint, if you currently have two teenagers that you’ll be taking care of, they’ll both want their own bedrooms, which means 3 bedrooms are an absolute must in this situation. As far as upfront expenses are concerned, it costs more money to buy a home upfront than it would be to rent.
After crunching the theoretical numbers, let’s say you decided to buy a new house for $180,000. To cover the 20% down payment, you’d need $36,000 in cash plus thousands more to cover closing costs on top of moving expenses.
On the other hand, to rent an apartment for $1500 per month, you’d need to have $4500 on hand to pay for your first month’s rent, last month’s rent, and security deposit.
Renting an apartment is the big winner, right? Not so fast!
Renting Destroys Your Chances of Building Real Wealth
Switching perspectives for a moment, it’s blatantly obvious that renting becomes a much bigger expense when looked at on a month-to-month basis.
How much more expensive? About 50% more!
After putting 20% down on a $180,000 house, and combining monthly homeowners’ insurance, property taxes, and a mortgage payment, the monthly payment would come to roughly $1050 each month.
Keep in mind, the best priced 3-bedroom apartment that we can find in this scenario costs $1500 a month.
As a homeowner, it’s understandable that other expenses will spring up from time to time that are part and parcel of becoming a homeowner. But overall, it’s still going to be a lot cheaper to buy a house. And it’s a great way to accumulate wealth.
Remember, every mortgage payment made pays some of the principal on your home, even if it is a small amount in the first decade of a 30-year mortgage. This turns into equity that you get to accrue year after year as a homeowner.
On the flip-side, paying rent means giving away every last penny of the $1500 to somebody else. You are helping your landlord achieve wealth, all the while sacrificing your potential to accrue principal on a home that you own.
And another thing.
After looking at renting versus buying, you’ll see clearly that after owning a home for five years or more, you’ve accrued real wealth that you’ve either retained in your home or gain if you decide to sell your home.
In fact, owning a home is truly a reliable method to amass a large portion of wealth over the long term. It’s like opening your own savings account and amassing interest as the years go by and the market improves.
Renting is a huge opportunity cost because you only spend and never get any money back. And now that rent is so expensive, this situation is worse than ever and makes it nearly impossible to become wealthy.
Getting Trapped in the Renting Cycle When You Cannot Afford to Buy
For the most part, renting a home or apartment, or buying property, is becoming incredibly expensive for everyone. This became very evident after I analyzed whether it’s more expensive to buy or rent.
Thankfully, I quickly realized that without having the money for a down payment, I would likely be stuck in the rent cycle for the rest of my life. And so many Americans find themselves in this exact spot. They have no choice but to rent because homeownership isn’t an option because they don’t make enough money to come up with the down payment.
Young people are convinced that they should rent a cheap place and save 20% for their future down payment. But this is becoming nearly impossible because paying rent is so darn expensive these days. And if you have kids that you have to take care of, adding money to your savings account becomes a beautiful dream and nothing more.
A person bringing in an average income is likely going to be forced to continue renting. And because of this situation, at the end of the month there would be very little money left over to save. Maybe you can squirrel away a few hundred dollars every month if you really tightened your purse strings.
Nevertheless, if you were only able to save $200 a month, on average, it would take you 15 years to come up with the $36,000 down payment. By that point, the value of the house would likely have risen and you’d need to continue saving more to come up with the new down payment amount.
Even more important, in the last two years alone, home values have inflated by a wide margin. So, coming up with down payment money is harder than ever at this point in time as long as you continue to rent.
How does someone come up with a 20% down payment in a country where renters pay 50% more per month than the average homeowner? Does that seem far-fetched? Take a look around Zillow to see if I’m making this up. The premium to rent nearly everywhere is so high that making it possible for the average person to save is more difficult than ever before.
Rental premiums are a serious challenge for average people. But the short-term rental market like Vrbo and Airbnb have created a market for investors, who tend to outbid low-income buyers and first-time homebuyers by snatching up all of the affordable properties.
Or another possibility, an investor buys an excellent starter home at a great price, but they turn around and flip it for a higher price making it much less affordable. These situations have investors gobbling up affordable homes, taking them off the market, and then putting them back on the market for much higher overall prices. Low-income buyers and first-time homeowners are finding it really tough to discover a new home that they can afford to buy.
Do you know what else?
This situation is another reason why the wealth gap is widening more than ever before. Higher rent prices and higher prices to buy homes mean that many renters get trapped in the never-ending rental cycle unless they can get help from their family or someone else. Most of these people are barely scraping by with paying their rent as it is.
Millions of American people need help to overcome this devastating situation. Is there a solid answer to this problem? If there is, I don’t know how to figure out how to fix this broken investor friendly market.
As human beings, shelter is a basic need and right. The rising costs of education and healthcare are intense problems that we should all be mad about. But we also have to remember that so many millions of Americans can no longer afford to keep themselves sheltered with a roof over their head.