A co-worker recently told me he wanted to buy a house so that he could avoid throwing his money away on rent. This got me to thinking about whether or not that statement actually made sense. So I decided to look at how much my wife and I pay in “thrown away money” that we wouldn’t pay if we were in an apartment instead of a house.
Initially there was the $2,000 that we paid in closing costs, costs that we would not have incurred in renting another apartment.
Then our monthly costs are:
$749.42 in mortgage interest
$ 46.00 in homeowner’s insurance
$286.00 in property taxes
$100.00 extra beyond the cost of utilities in an apartment
So at the least, my wife and I pay $1181.72 each month in thrown away money. This money is the exact same as rent. I did not include the equity in that number, just interest. And these costs are all before repairs or upkeep (like lawn care or cleaning).
But after 15-30 years, the interest payment will go away and I’ll own the house completely and then I’ll be ahead right? Well, I’ll still be paying the $432 in other costs (which is still like rent).
But at that point I will also have $180k that is “stuck” in my house. If I take that $180k and instead invest it in an index fund and assume only a 6% return, then I can make $10800 a year. If my apartment rent would normally be $600/month then after subtracting the $432, I would be paying $168 more to rent an apartment. Or $2016 per year more difference to rent an apartment instead of living in a house. So if I live in an apartment instead of a house, then I can make $10800 – $2016 = $8784 each year before compounding.
Now take that $8784 each year and compound it at the 6% for 20 years and you end up with about $300k. That’s huge!
So by buying a house you are actually giving up money each year versus what you would have renting an apartment.
I’m not saying buying a house is bad or wrong. I love my house, and my back yard. And I like that no one can kick me out of it (except for the government, but that’s a different beef entirely). I’m just trying to point out that the conventional wisdom of “buy a house, don’t throw you money away on rent” isn’t necessarily true.