Shuttling back and forth from Tennessee to Alaska, Michael Rogers and his wife Christy were twice stuck paying a mortgage and rent simultaneously. Once, in 2006, the situation dragged on for eight months, finally ending when they sold their Tennessee home for $20,000 less than they paid for it.
Other adventures in homeownership ended well — the couple doubled their money after selling a fixer-upper. Later, with another property, they had to pay $30,000 to fix a landslide around their home, an error caused by the builder.
Two years ago, the Rogers moved to Kingsport in northeast Tennessee, where they signed a lease on an apartment they thought would be a one-year stopgap before they bought again.
The couple have just renewed their lease for a third year and have decided to remain tenants forever. Rogers, a construction manager, likes the convenience of being able to move around when work is involved.
Whether by choice or because it was priced out of the market, many people have decided that renting forever is their best – or only – option. Housing costs and interest rates have risen in recent years and it may make financial sense to rent. (The Times recently updated its popular rent-versus-buy calculator to help people understand the tradeoffs.) In the 1960s, the average housing price was a little more than twice the average income. Now it is almost six times more.
Home ownership is a traditional strategy for building long-term wealth. For people who don’t plan to buy, creating a solid financial plan without building home equity requires a different mindset.
Owning a home is not a magic solution to ensuring retirement. Rogers has seen how being “house poor” has affected older family members, one of whom has three-quarters of his net worth invested in his home. This situation leaves people with the option of taking out a loan against the equity in their home or selling the home to get the value out of it.
Instead, he is focused on investing, preferring the liquidity and stability of the stock market.
“If you’re buying something like a broad-based American stock index, you’re just buying a slice of the entire U.S. economy,” Rogers said. “When you buy a home, your risk is literally concentrated in one house, in one neighborhood, in one state.”
Rogers found that people tend to focus on home equity at the expense of other factors. He thinks this might be a mistake.
“In the current market, especially in my area, the rent seems like an absolute bargain compared to what houses are selling for now,” he said. “This allows me to really increase my savings rate. People say, ‘Well, you’re not building equity.’ Yes, but I have a 35% savings rate. I’m building investment accounts much faster than I would ever build equity in the house.”
Choosing to rent
As in any other market, it is impossible to predict the future of rent charges. Rents can deflate, as happened during the pandemic in New York City, or increase, as happened in Seattle, inflated by the Amazon. Housing prices could collapse as they did during the Great Recession or explode as they did in San Francisco. The key is to have a plan that covers you in multiple scenarios.
“Renting may be a better financial decision; owning can be a better financial decision,” said Ramit Sethi, author of “I Will Teach You to Be Rich.” “Often, we simply buy it because our parents told us to and their parents told us to.”
Although he is a millionaire, Sethi has rented for the last 20 years in cities such as San Francisco, New York and Los Angeles. When he lived in Manhattan, he calculated that it would have cost 2.2 times more per month to buy a property than to rent. He emphasizes that his calculations should include the phantom costs of mortgage interest, taxes and maintenance, which are generally estimated at 1 to 3 percent of a home’s value. So he rented and focused on investing. He is a fan of index funds, which finance any long-term, low-cost investment.
“If you decide to rent, there is one fundamental thing that is the most important of all: you must absolutely run your numbers,” he said, “and if it is cheaper to rent than buy, you must invest the difference. ”
He also negotiates rent, which he says many people don’t know is an option. He recommends that renters pay attention to comparable housing costs in their area. If they can find better deals, they should come in at the time of renewal with the documentation. “It doesn’t always work,” he said. “When that happens, it’s a huge benefit.”
Over the last century, the S&P 500 has returned an average of about 7% per year, when adjusted for inflation. Sethi said most people have no idea about stock market returns. “But you need to know this number,” he said, “because it tells you what your opportunity cost is — in other words, how much you could earn if you simply put money into the market.”
Planning your finances while renting also has an emotional element. Sethi said people shouldn’t feel guilty if they are renting.
“Remember, there are literally millions of people in America who rent and invest the difference,” he said. “You are not a stranger just because you choose to rent. I do this and a lot of other people do this.”
Running the numbers
“I get asked all the time why I don’t buy a house,” said Miranda Marquit, who is in her 40s and lives in Idaho Falls, Idaho. “People think it’s weird.”
Ms. Marquit earns between $10,000 and $12,000 per month and has been building an investment portfolio for the past 25 years and multiple income streams for the past 15 years. If you want to start planning a successful financial life without owning a home, she suggests starting with retirement calculators at investor.gov.
“When deciding how much I will invest each month, I take a very conservative approach and assume a 6% rate of return,” she said. “I know a lot of people will say you should assume a much higher rate of return, especially if you’re investing in stocks, but I like to err on the side of caution.”
You’ll need to take into account how much your rent is likely to increase over time (Ms. Marquit uses a 3% estimate based on inflation) to come up with the number for how much you’ll need in retirement.
“Finding out if you’re ready for retirement is a matter of crunching the numbers, whether you rent, have a mortgage or are building a rental empire,” she said. “See what you want to do in retirement and estimate your monthly needs. Then figure out how you will meet those monthly needs.”
The rent-only strategy
“This is my life,” said Berna Anat, who lives in the San Francisco Bay Area. “I don’t see owning a home in my future.”
When someone says they’re wasting money on rent, they think of friends who have homes. “They’re like, ‘Oh, we can’t go on vacation for two years because the termites ate the foundation of our bathroom,’ or like, ‘Yeah, we actually can’t go out this weekend because we’re on our hands and knees. paving the mortar of our decrepit marquee,’” she said. “Rent Forever is a movement. It’s a lifestyle.”
This comes at a cost: the theoretical wealth that many plan as a retirement asset.
Anat, author of “Money Out Loud,” said replacing home equity and living a rental lifestyle is about diversification and maximizing investments. If you work full time, she said, you’ll want to fully invest in your 401(K) and get as much of an employer match as possible. Ms. Anat recommends opening another fund as well, like a Roth IRA
“The idea is that if you’re not spending on housing costs, closing costs, escrows, property taxes” and charges like homeowners association fees, she said, “then you’re investing all that money so that your retirement is as comfortable as possible, since you won’t have that wealth.”
“For me, as a permanent renter, I have all of these things and I’m investing as aggressively as possible,” she said.
In the short term, Anat said, it is also necessary to plan for real-world volatility. Your rent could increase or your building could be sold. She recommends having at least a six-month emergency fund and a spreadsheet detailing your plan if you lose your housing.
“If you had to move out of your apartment tomorrow, what would be the real plan for your funds and your life?” she said. “It’s almost like those earthquake escape plan situations.”
Another consideration is your credit score: keep it clean. Make your payments on time and try to keep the amount owed low compared to your limit. The usual advice is to restrict your borrowing to 30% of your credit limit; Anat tries to maintain between 10% and 15%.
Maintaining a strong credit score is critical, she said, because “landlords are looking at this and you’re more likely to have to shop the market again next month or next year and impress the landlord.”
You also need to protect yourself by understanding landlord rights and renter rights where you live, as this varies by city and state. Purchase renter’s insurance, which is generally affordable.
Overall, she said, you need to stabilize your life with as much financial support as possible.
“It reminds me a lot of working for myself,” Anat said. “Being self-employed means you have to make your own health insurance plan. You have to DIY your retirement plan. It’s a little more to get into that mental mode.”