Why "Stop Throwing Your Money Away On Rent" Is A Bullsh*t Statement
Patrick Venn
Head Of Sales @ TL;DR & Speak On Podcasts | We build brave consumer brands. Our own and yours.
Our Summer holidays are over and MentalWealth is back! ?? ??
We thought we would reignite our newsletter and explore one of the most explosive topics in personal finance.
Buying vs Renting.
I have come to realise that homeownership is an obsession around the world and it has a cult-like following. Homeownership has become this life milestone that is hailed as something you must achieve to become successful, build wealth, and live a good life.
It signals you “made it”.
There is so much misinformation about buying houses. People are sleepwalking into the biggest financial decision of their lives, using bad information to make very pricey decisions.
Let me ask you if you have ever heard any of the following statements from a family member, a friend, or a colleague:
“Stop paying someone else’s mortgage”
”Home ownership is the best investment you can make”
”I bought my house for ￡300,000 it’s now worth ￡800,000”?
”The value of your home will always go up”
These types of statements have become part of our societal vernacular. What people don’t realise is that they are widely misleading, yet people take them as gospel.
I want to be very clear, I’m not anti-homeownership. Far from it. I have seen it work really well for lots of people.
However, homeownership is not automatically the right decision for everyone.
My goal is not to put you off buying a house.
My goal is to bring more balance to the discussion and clear up some of these false commandments that have magically morphed into homeownership dogma.
I am going to shine a light on what I believe are the 3 most misleading parts of home ownership.
Let’s start with my personal favourite…
Stop Throwing Your Money Away On Rent
When I ask people why they want to buy a home, a common response I hear is that they are tired of throwing their money out the window, or building someone else’s wealth (i.e.??their landlord’s).
They want to “build an asset” for themselves.
They will say something like, “I’m tired of paying ￡1,000 a month in rent and have nothing to show for it. Why not?invest?￡1,000 a month into my house which I will own in the end”.
This logic is fundamentally flawed.
First off, in exchange for your ￡1,000 monthly rent you get a place to live, and hopefully enjoy. So your money is not “being thrown out the window”. You get something in return.
Second, people don’t understand that most of their monthly mortgage payments and extra cost of homeownership will be lost forever. In the early years, over 70% of that ￡1,000 will be likely thrown away and never seen again.
Let me explain.
Using a typical mortgage calculator, your monthly housing cost comes to?￡1,439.02.
For simplicity, I have been super generous with this scenario and not included things like home insurance, maintenance costs, and a variety of other additional costs to home ownership. We will get to that later!
Any idea how much of the?￡1,439.02?goes towards the?principal?of your mortgage (aka the equity building part of your house)?
About?27% or ￡389?a month.
That means at the start of your mortgage,?73% or ￡1,050?of your monthly payments is being “thrown away” on interest and taxes never to be seen again.?
Put another way, instead of it going to your landlord, your money is now making the bank rich.
Why is nobody talking about this?
In this scenario, it will take you about 15 years before you pay more in principal than interest on your loan.
By the end of this 30 year mortgage, you will have paid?￡194,000 in interest alone?to the bank.
So the original home price of ￡300,000 really cost you about ￡500,000 in total to the bank.
The typical response here is, “Sure, but my home value tripled over 30, so I’m still ahead”.
The second flaw in homeownership logic…
Nobody accurately accounts for the phantom costs of homes
Everyone knows this story...
A friend, family member or a colleague who bought a house 20 years ago for ￡300,000 and today it’s worth ￡800,000.
￡500,000 easy money, right?
But the home buying process is not easy. It’s complicated, complex and uses a lot of maths. It’s hard for people to communicate all the little nuances so they tend to leave out the expensive details.
Nobody talks about the transaction costs you pay when buying and selling a house (transactions costs meaning the real estate agent, the lawyers, the stamp duty tax etc when you purchase or sell your home).
Nobody talks about the ￡30,000 renovations they did when they moved in.
Nobody talks about the leaky roof in year 12 which cost ￡10,000 to fix.
Nobody talks about the 3 times they changed furniture as the old stuff was outdated.
Nobody talks about the ￡194,000 they paid in interest to the bank. WTF!
The list goes on and on and on.
What happens is that people talk to one another about the massive “profits” they make on home ownership by inaccurately omitting hundreds of thousands of pounds of costs they incurred and money they put into the house.
People completely over-inflate the “profits” as they don’t account for all the costs.
The consequence of this false narrative is that people start feeling like idiots for not getting on the property ladder and making “easy” money from real estate.
For years I felt like the only loser who wasn’t making money from housing. Why am I renting? I can make a ton of money from housing. I need to buy property!
Luckily I have educated myself more about money and I have had enough conversations with friends to change my views on this entirely.
A few months ago I spoke to a friend about his new house.
“Pat, I bought our property for ￡400,000 6 months ago. It’s worth ￡500,000 now. ￡100,000 profits in half a year. Incredible right?”
I thought it was too simple. So I asked a few follow up questions.
“Sounds great man. Did you have to pay real estate agents fees and all that stuff when you bought it?”
My happy friend responded, “Oh yea, you’re right. It was about ￡10,000 all in by the time we closed. So about ￡90,000 profit.”
“Ok cool. And did you do any renovations on the house or was it ready to move into right away?”
My less happy friend responded, “Well, yes. The kitchen was just too outdated so we revamped that. It’s summer so we redid the back garden for barbecues and hosting. And we did upgrade the bathroom too as we wanted an ensuite.”
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“What did that cost?”, I asked.
My visibly irritated friend responded. “We got it quoted and they said around ￡25,000 for all the work, but when we finished it was closer to ￡40,000”.
He then went on to tell me about the furniture they had to buy for the new house which was another ￡5,000.
By the end his “profit” after 6 months was closer to ￡15,000. But it’s not profit at all!
It was simply the value of his home that increased, in theory, on paper. Nothing else.
He would only see that money if he sold the house. However, if he did that he would need to pay for more transaction costs on the sale side bringing his total “profit” closer to ￡0.
People omit huge costs when talking about their housing numbers.
It can seem like houses basically print money and build wealth overnight. No wonder people are killing themselves to get on the property ladder. It’s easy money right?
Wrong!
Before you make a ￡500,000 purchase, it would be smart to run the numbers.
All of them.
Renters don’t benefit from rise in house prices
The final flaw in the homeownership dogma is that homeowners benefit from the rise in housing prices and renters do not.
On the surface this statement is true. However it assumes that the renter has no other options to invest or build wealth. Which is false.
Typically house prices do rise slowly overtime, but it doesn’t always go up. Anyone remember 2008 and the global housing crisis?
Many people were forced to sell their houses at a loss. Even worse, some people defaulted on their mortgage, banks seized their property, and they got nothing.
On the other hand, investing in the stock market may give you a comparable, if not potentially a better return than housing.
According to?Halifax, who tracked the average UK housing price from 1983-2012, homes increased in value by 428% (wow!). However, the cost of living has gone way up over those years so you need to factor in inflation into that return.
When you adjust for inflation the real return of the UK housing market from 1983-2012 was 101% (still wow!).
The FTSE 100 which tracks the performance of the 100 largest companies in the UK was introduced in 1984.
During that same time period (1 year less to be specific), the inflation adjusted return on the FTSE 100 was 105%, beating the performance of the housing market.
Now none of the extra phantom housing costs I explained above (i.e. transaction fees, renovations, interest, etc.) have been factored into the average house price rise.
If the renter was wise and took the extra money saved on those phantom housing costs and invested in, my guess is he wouldn't be just 4% ahead, but a lot further (compound interest baby!).
The USA has an even more interesting story. Historically, US house prices have barley kept pace with inflation and have lagged way behind the stock market performance of the S&P500.
Take a look below at the chart which looked at the S&P500 index performance (red line) compared to the Case-Shiller Home Price Index (black line) for the past 50 years.
From 1972-2022 the Case-Shiller Home Price Index is up +1,300%, not too shabby.
But the S&P500 is up nearly +4,000% in that same time frame. Wowzers!
To illustrate the point, that buying a house isn’t the only way to make money, I assume the renter uses the extra money they saved (i.e. they don’t have to worry about buying a new dishwasher because the other one broke) and puts it into the stock market.?
Whereas the buyer uses the money saved to invest in a house and later extra money goes into paying the mortgage off and maintaining the house. In both countries, the renter who invested their money had a greater opportunity to build wealth.
People never question the opportunity cost of homeownership.
Final Thoughts
My aim with this article was not to completely bash homeownership. It was to present the other side of the argument.
My role here is to encourage you to question the biggest financial decision of your life. That way when you decide on something you go in with both eyes open.
I wanted to challenge the assumption that homeownership is always the best option (key word here is “always”). As this is what most of my friends and family believe.
There is a lot of money to be made by a lot of people when the housing market is strong. From governments collecting taxes, to banks making billions off of mortgage loans, to real estate agents, lawyers, and developers getting chunky fees, and even sometimes homeowners turning a profit (after factoring in costs).
Without sounding too conspiracy theory about the whole thing, there is a huge financial incentive to persuade people that homeownership is the way to go!
I do think this partly why these little phrases like “stop throwing your money away on rent” have become so ingrained in our society as universal truths.
Homeownership can be great, there are a lot of pros to it too:
Whatever decision you make, whether that is to rent or to buy a property, at the end of the day it must make sense for your situation.?
We are all on our unique financial journeys.
???Patrick &?TOMII Tribe
What We're Using???
This is one of the best Buy vs Rent calculator?comparisons I have seen. All you do is plug in your hypothetical numbers and see who comes out on top financially in your market, buyers or renters. It's USA focused using dollars but you can use it no matter where you are to get an idea?which one is better from a financial spreadsheet lens.?
What We're Pondering???
I have?spoken to a dozen people over the age of 50. Not one single person bought their??house as an "investment". It was a place to live, somewhere they liked, to build?memories with their family. The money they made was a?bonus they were not expecting.?
What We’re Reading???
A personal finance classic.?I am revisiting certain quotes and?chapters as he was the first person to call out homeowners as not owning an asset, but a liability. Below is an exert from a recent blog post about the book:
When I wrote “Rich Dad Poor Dad,” I said that your house is not an asset. Rather it is a liability. That was like spraying water on a hornets’ nest.
Your financial planner, real estate agent, and accountant all call your house an asset.
In reality, an asset is only something that puts money in your pocket. So-called financial experts have lots of fancy accounting maneuvers to make things that aren’t assets look like assets, and they can be helpful for certain situations.
But in the real world where you need money in your pocket to survive, if you have a house, paid for or not, that you live in, then it really isn’t an asset. Instead of putting money in your pocket, it takes money out of your pocket in the form of a mortgage, utility payments, taxes, maintenance, and more. That is the simple definition of a liability.
This is doubly true if you don’t own your home yet. Then it’s the bank’s asset, and it is working for them.
Information Technology Telecomm/Network Specialist at Internal Revenue Service
1 年This is a great article, thank you for the time and effort you put into this!
Want to be a more confident leader? Freeing you from your inner critic/imposter syndrome so you can fully enjoy your success!| 1:1 executive coaching | TEDx Speaker | Co-author | Founder at The Executive Adventurer??
2 年Great article - thank you. Sets things out clearly in a way most people don't consider. And even when you do eventually 'own' the property, there are still all the upkeep costs etc even when the mortgage payments are done. Plus if you buy with a partner and then split up, you may well simply break even - eg if you'd simply saved cash in ISAs and not invested in the stock market, by the time you factor in stamp duty and fees etc that you paid at the beginning, and then the mortgage payments (most of which are interest), when you sell and get the 'profit' or cash from the sale, its probably not more than simple saving...depending on where and when you buy and sell. Speaking from experience!
Commercial Construction Recruiter | 0472 723 685
2 年Love this!
Fractional B2B Head of Growth ??
2 年Great article! Everyone talks about buying as a route to freedom - but until you’ve paid off your mortgage, in a way, you don’t own the house, it owns you - you’ve got to earn at a certain level.
Building Physics Engineer at Ramboll
2 年Great piece Patrick! I will be sending this to the next person who tells me off for being a renter! And props for bringing up the stock market which I think not enough people recognize as a great investment that lots of renters use to build wealth when homeownership is unfeasible. A great phrase I've heard is 'rent is the maximum you'll pay for housing, your mortgage is the bare minimum', it's simple but quite realistic. We all try to make the best financial decisions we can with the situation we're in. Although personally homeowning is my end goal, the narrative about renting needs to change. Housing is a basic necessity and it is never a waste of money.