Own or Rent When Approaching FIRE?

[EarlyFIRE]

Hi everyone,


I am inspired by the posts here on a daily basis. I searched for this topic, and didn't get any good results (here or anywhere, it seems). It seems that conventional thinking is that it's better to live in a home you own. But the facts don't seem to support that in my situation. Based on my current situation:


Own:
RE Tax - $11,000 (TX)
Mortgage - $13,000 (can be paid off)

Maintenance - $6,000 allowance
Mowing and Lawn Care - $3,000
Insurance - $2,500
Utilities - $4,000
Total Annual - $39,000



It would appear that it would be far better for me to rent a smaller place, and to rent this home, producing positive or neutral cash flow, essentially living for free or nearly for free (for housing expenses, at least). That way, you get the benefits of appreciation and inflation, while also limiting your own monthly costs.



I have a large home that would probably be too much for FIRE, but the situation doesn't get much better in a smaller home - the RE tax, insurance, utilities wouldn't be that much lower, unless we move to a lower RE Tax state.



Also, I seem to have a real fear of maintenance, similar to a naked put option (I've heard horror stories of people getting large repair bills for foundation movement, etc). I can cover them now, but unlike all the other expenses, which can be managed, this one seems uncapped. I also haven't found any good resources on the cost of maintaining a home as it ages. There are the big items, like a roof and HVAC, but seemingly a dozen smaller items like windows, carpets, flooring, etc.



Any suggestions? Has anyone else rented out their home and rented a smaller place in FIRE? Any suggestions on the true cost of home ownership?


Thanks!

 

[walkinwood]

In my opinion, it is a financial and emotional decision. You could also buy a smaller home & sell the big one. Or buy a condo and have someone else worry about maintenance. Or rent.


Regarding costs to own - you should only count mortgage interest in the expense - not sure if you're done that. Also, you should include the opportunity cost of your equity in the house. That is, would it make more money for you if invested elsewhere.



For us - from a financial viewpoint, owning our current home wins hands down over renting. Our house is very energy efficient, is relatively new and in an area of rising property values. Emotionally, we love the neighbors and neighborhood and the space that this house gives us. We especially appreciated it during this pandemic. We will downsize some day but aren't in a hurry to do so.

 

[Ready]

This question is going to vary greatly by region. You will have to look at the cost of homes in your neighborhood and compare them to the cost of renting a comparable home to evaluate which one is best. Without knowing the specifics of your neighborhood it would be hard to give you any recommendation.

To make the comparison fair though be sure you are comparing comparable homes, and not comparing a large single family residence with a big yard to a small apartment unit.

Also factor in the non financial aspects of this. Do you like to decorate your home? Will you be happy with the flooring and window coverings in an apartment? Will you want to buy custom furniture for an apartment if you are not sure how long you will be there? Will the place you are renting be available long term or will you be required to move if the landlord sells the unit? Are there any protections against rent increases? Lots to think about beyond the financial aspects of rent vs own.

 

[chassis]

Hi everyone,


I am inspired by the posts here on a daily basis. I searched for this topic, and didn't get any good results (here or anywhere, it seems). It seems that conventional thinking is that it's better to live in a home you own. But the facts don't seem to support that in my situation. Based on my current situation:


Own:
RE Tax - $11,000 (TX)
Mortgage - $13,000 (can be paid off)

Maintenance - $6,000 allowance
Mowing and Lawn Care - $3,000
Insurance - $2,500
Utilities - $4,000
Total Annual - $39,000



It would appear that it would be far better for me to rent a smaller place, and to rent this home, producing positive or neutral cash flow, essentially living for free or nearly for free (for housing expenses, at least). That way, you get the benefits of appreciation and inflation, while also limiting your own monthly costs.



I have a large home that would probably be too much for FIRE, but the situation doesn't get much better in a smaller home - the RE tax, insurance, utilities wouldn't be that much lower, unless we move to a lower RE Tax state.



Also, I seem to have a real fear of maintenance, similar to a naked put option (I've heard horror stories of people getting large repair bills for foundation movement, etc). I can cover them now, but unlike all the other expenses, which can be managed, this one seems uncapped. I also haven't found any good resources on the cost of maintaining a home as it ages. There are the big items, like a roof and HVAC, but seemingly a dozen smaller items like windows, carpets, flooring, etc.



Any suggestions? Has anyone else rented out their home and rented a smaller place in FIRE? Any suggestions on the true cost of home ownership?


Thanks!

I think you have answered your own question. You should rent.

We are pre-FIRE and renting a small home in a neighborhood we would not have raised our kids in. The rent is cheaper here. We raised our kids in a mortgaged home in “the high rent district” by choice. We are now renting in the “not high rent district” and it has been a blessing.

One family member has had major foundation issues in their mid-70s age. They are ok with the financial aspect but it was a major pain in the backside. Another house I know of in the relative’s neighborhood I know with 100% certainty has a cracked foundation.

For the foreseeable future, I am renting. I love having no maintenance, living below our means in the non-ritzy, non-keeping-up-with-the-Joneses lifestyle and many other things.

A primary dwelling is an expense, not an investment.

 

[EarlyFIRE]

Thanks!

Thanks for so many great replies in such a short amount of time. It is about more than just numbers, as some have said, but it seems most of the articles are biased towards ownership.

If we factor in the opportunity cost of home equity, it would be a no-brainer to rent. RE doesn't appreciate here as fast as it does on the coasts, so investing returns would clearly outpace RE appreciation.

We could probably be close to FIRE today if we rented, but we want the kiddies to enjoy this lifestyle for a few more years before they go to college. Again, more than just numbers. If we do rent, it would be in an adjacent neighborhood, so we could still hang out with our friends and neighbors in this community.

 

[Markola]

Getting into rental real estate by renting out your home requires either learning a whole new skill set or hiring a good property manager who charges about 10%, which is a skill set in itself. So far, I’ve talked myself out of it in favor of my beloved Vanguard index funds which give so much and ask for so little in return.

 

[bloom2708]

Sell and buy a smaller place or rent. Your home does not sound like a good rental property.

What can you rent for less than $3,000/month?

Others like a no maintenance/lock and go condo type property.

We will have a home base, lock and go, smaller condo type of place with underground parking at some point. See what is out there.

 

[EarlyFIRE]

Sell and buy a smaller place or rent. Your home does not sound like a good rental property.

What can you rent for less than $3,000/month?

Others like a no maintenance/lock and go condo type property.

We will have a home base, lock and go, smaller condo type of place with underground parking at some point. See what is out there.

That's what I was thinking of. A lock and go condo with little maintenance to worry about so you have flexibility to move around.

As you said, renting a larger home is more difficult, but there seems to be a strong market around here based on recent data, and they go within a month or two.

 

[W2R]

Own:
RE Tax - $11,000 (TX) $1,956 (LA)
Mortgage - $13,000 (can be paid off) $0

Maintenance - $6,000 allowance $500
Mowing and Lawn Care - $3,000 $1,260
Insurance - $2,500 $2,976
Utilities - $4,000 $1,500
Total Annual - $39,000 $8,192

I own my own 1500 sf home in the New Orleans suburbs. The above values in blue are what I spent last year on each category. Of course, maintenance is pretty variable and has ranged from $150-$7292 in the past six years since I bought this house. (The $7292 covered an entirely new HVAC system).

Dividing the total of $8,192 by 12, that would give me $683/month for rent and any utilities not paid for by the landlord. Zillow says an equivalent home here would rent for $1,800/month. So, there's that. And then, there's the "peace of mind" benefit during uncertain times such as these now that I am fully retired. Owning my own home lets me sleep at night no matter what scare stories I have read in the news that day.

On the other hand, there's the "opportunity costs". In other words, with the market booming as it has since 2008, I'd probably have done *way* better if I sold every last thing I own and put my entire net worth in the market. Not gonna do it, though!

As you so wisely point out, different people in different situations may find the rent/buy choice works out differently for them.

 

[Animorph]

For me, I like to modify and upgrade my living space too much to make renting practical.

Secondarily, it seems like renting is also paying someone else to select and maintain your appliances or whatever. Many of those things could be done by you without paying extra for the middleman.

However, if it comes time when assisted living looks good and I need someone to do lots of stuff for me and I can't be bothered thinking about maintenance, I'll be happy to rent!

 

[ncbill]

That's what I was thinking of. A lock and go condo with little maintenance to worry about so you have flexibility to move around.

As you said, renting a larger home is more difficult, but there seems to be a strong market around here based on recent data, and they go within a month or two.

Yep, that's what I love about the townhouse I've lived in for over 20 years.

After getting stuck as a kid spending several hours every week doing all the yard-work for our family's large (~6,000 sqft) home I now just pay a modest monthly fee.

 

[Music Lover]

A primary dwelling is an expense, not an investment.

It can be expensive but it can also be an investment in many cases. But it's really a lifestyle decision. People usually own because they want a "home base" and are willing to do the maintenance and chores.

IMO, if your decision comes down to the numbers alone then you're probably better off renting.

 

[Finance Dave]

Ownership is typically more financially attractive in the long run IMO, but it will depend on the condition of the house you buy, part of the country, and so on.

But, renting gives you lots of benefits such as flexibility, minimal/no maintenance, and less messiness (landlord takes care of taxes, maintenance, depreciation, etc.).

As the owner of 5 rentals, over 15 years running them, and a member of two landlord organizations, I can say that most people significantly underestimate the amount of work involved in managing rentals and getting started. Reading state laws and incorporating them into your business is a very time-intensive activity. Laws are numerous, and you can easily run afoul of so many things like lead paint, asbestos, fair housing laws, fair credit reporting act, discrimination laws, etc.

 

[flyingaway]

If I had my way, I would rent an apartment. But my wife wanted a big house, so we have to work for one more year to pay for that,

 

[EarlyFIRE]

I own my own 1500 sf home in the New Orleans suburbs. The above values in blue are what I spent last year on each category. Of course, maintenance is pretty variable and has ranged from $150-$7292 in the past six years since I bought this house. (The $7292 covered an entirely new HVAC system).

Dividing the total of $8,192 by 12, that would give me $683/month for rent and any utilities not paid for by the landlord. Zillow says an equivalent home here would rent for $1,800/month. So, there's that. And then, there's the "peace of mind" benefit during uncertain times such as these now that I am fully retired. Owning my own home lets me sleep at night no matter what scare stories I have read in the news that day.

On the other hand, there's the "opportunity costs". In other words, with the market booming as it has since 2008, I'd probably have done *way* better if I sold every last thing I own and put my entire net worth in the market. Not gonna do it, though!

As you so wisely point out, different people in different situations may find the rent/buy choice works out differently for them.

Thanks for this viewpoint. I really appreciate all of the responses.

 

[EarlyFIRE]

IMO, if your decision comes down to the numbers alone then you're probably better off renting.

That's a fair assessment in some parts of the country, like where I am. There are intangibles, but I like the posted above in LA, the numbers don't look so good in low appreciation, high-RE tax areas like TX.


I think we'll compute the FIRE dates both ways and then have an open discussion.

 

[Sunset]

Own:
RE Tax - $11,000 (TX)
Mortgage - $13,000 (can be paid off)

Maintenance - $6,000 allowance
Mowing and Lawn Care - $3,000
Insurance - $2,500
Utilities - $4,000
Total Annual - $39,000

OP - Not sure you are just counting the interest on the mortgage only.

I think you should either learn to mow the grass and consider $2,000 for maintenance yearly as more realistic.

Given your numbers, if I had that house and those numbers, I'd have to rent it out for $50,000 per year as you need to make a profit, and there are other expenses you are not showing that come with a rental.

If you can't rent it out for $50K per year, then sell and buy something smaller.

We live in a 1,000 sq ft house, and don't use all of it, so it can be done.

 

[EarlyFIRE]

OP - Not sure you are just counting the interest on the mortgage only.

I think you should either learn to mow the grass and consider $2,000 for maintenance yearly as more realistic.

Given your numbers, if I had that house and those numbers, I'd have to rent it out for $50,000 per year as you need to make a profit, and there are other expenses you are not showing that come with a rental.

If you can't rent it out for $50K per year, then sell and buy something smaller.

We live in a 1,000 sq ft house, and don't use all of it, so it can be done.

We did that not too long ago, so we know it can be done. [emoji16]

 

[badatmath]

Well I have been considering becoming a renter again for <reasons>. But I have a young friend at work who has a lease not being renewed and he has to move on fairly short notice. So there is that to consider. My retired friend who is renting a house sees rent increases of $150/month every year and he has decided its time to get out. How common this is I have no idea.

I meant to add that if you do not like maintenance on a house you live in it is NOT going to be any more fun to be a landlord and fix problems for someone else - or that someone else caused.

 

[Finance Dave]

Well I have been considering becoming a renter again for <reasons>. But I have a young friend at work who has a lease not being renewed and he has to move on fairly short notice. So there is that to consider. My retired friend who is renting a house sees rent increases of $150/month every year and he has decided its time to get out. How common this is I have no idea.

I meant to add that if you do not like maintenance on a house you live in it is NOT going to be any more fun to be a landlord and fix problems for someone else - or that someone else caused.

Something is amiss with your friend seeing that type of increase. Either he was WAY below market before, or the owner is making significant improvements to the house, or something like that.

I belong to a large landlord organization, and I attended a countrywide conference 2 years ago, and I can tell you most LLs raise rent approximately in line with inflation...or about 3%/year.. So unless your friend is living in a $5,000/month rental, something doesn't add up.

 

[RobbieB]

I got evicted once because the owner sold the place.

And when stuff needs fixing, it ain't gonna be anytime soon.

 

[wrigley]

Something is amiss with your friend seeing that type of increase. Either he was WAY below market before, or the owner is making significant improvements to the house, or something like that.

I belong to a large landlord organization, and I attended a countrywide conference 2 years ago, and I can tell you most LLs raise rent approximately in line with inflation...or about 3%/year.. So unless your friend is living in a $5,000/month rental, something doesn't add up.

Could it be supply and demand in the area? I know, in the area where I live, when a single family home of any size with a decent backyard comes up for "Rent", it usually only sits for hours before someone rents it. I see people posting on social media asking if anyone is considering either selling, or renting their home in desired neighbors. I just recently paid off my mortgage. $1085.00 a month was my payment PITI. 1900 sf, 4 beds, 2 baths, on a cul-de-sac. My daughter lives less than a mile away from me. She and her husband rent a 1400 sf, 3 beds, 2 baths, single family home and her rent just went to $1695.00 per month. She's 2 blocks from my grandson's school and in a desired neighborhood. I guess it's all about location, location, location.


Mike

 

[Koolau]

I agree with others that there are many factors in the rent vs own question (heh, heh, just for your info, there have been MANY discussions of this subject in the past - I can NEVER seem to find stuff with the search function either.)

I read a book titled THE COMING GENERATIONAL STORM (Burns and Kotlikoff)

https://www.amazon.com/Coming-Gener...erational+storm&qid=1614850838&s=books&sr=1-2

In one chapter, the authors demonstrate the "implied" income by owning. I was impressed with the arguments.

To me, being able to pick up and move quickly argues most strongly for renting while lower (total) cost for delivered and implied utility favors owning. Obviously, there are exceptions to all rules so YMMV.

 

[Bamaman]

We live where home prices are relatively low (for what you get), and the homes are pretty substantial. Our property taxes are extremely low, and in my case $0 since my wife's disabled.

We do have apartments locally for rent, but the rental houses are usually in low line neighborhoods where you wouldn't want to live. After living in houses the last 46 years, I just don't care to live in such close proximity to others in apartments or condos full time.

And since our home is paid for, any accruals we'd have to make for roof or HVAC repairs is a small percentage of what monthly rent would be.

I'm just thankful to live in a ultra low COL area--all things relative.

 

[ncbill]

You can combine both...I've lived in a 3BR/3BA townhouse for the last 20+ years.

Pay a modest monthly fee & everything outside is taken care of, e.g. no lawn mowing or other landscaping, no gutter cleaning, roof leaks fixed...plus our development has a pool very few residents use.