The return on rent is always negative 100%. No matter how much you spend on rent you will never get a return because you never have the option of selling your apartment or home in the future.
There’s a reason why every single wealth study comparing renters and homeowners show that homeowners are at least 40X wealthier than renters. We humans are not good at saving and investing. At the least, a home is a forced savings account as we pay down the mortgage.
Let’s look at home much rent costs in the 25 largest cities in America.
How Much Rent Costs In The Largest American Cities
Rent is flushing money down the toilet. Don’t let anybody tell you otherwise. To illustrate exactly how much money you are flushing down the toilet over time, take a look at this chart below.
By the age of 50, you will have flushed $671,965 down the toilet if you rented in Austin, $992,434.29 if you lived in Washington DC, $773,000 if you lived in a bad part of NYC, and a whopping $1,647,000 down the toilet if you rented in San Francisco!
Are you kidding me? Stop wasting money folks, and try to at least get neutral real estate by owning your primary residence.
If your city is not on the list, don’t worry. Simply add up how much you’ll end up spending on rent for your desired property if you never buy. Then run the numbers like the example above and see where you’ll end up in 10 – 40 years from now.
If you can’t afford to buy your primary residence, then at least invest in real estate so you don’t get left so far behind.
The best way to invest in real estate is by buying a publicly traded REIT or buy investing in real estate crowdfunding. Fundrise created the eREIT and is the most innovate platform out there.
You don’t have to come up with a 20% downpayment to buy a single concentrated asset if you don’t want to. You can buy a Fundrise eREIT for as little as $500 to start diversifying into real estate.
I’ve personally invested $810,000 in real estate crowdfunding after selling my SF rental for $2,740,000 in 2017, or 30X annual gross rent. It feels great to be diversified into 18 different properties around the country and earn money passively.
Rent Is A Waste Of Money
To recap why renting is a losing proposition long term:
1) The return on rent is always -100%. Yes, you get a place to live, but if you buy, you also get a place to live. Once this variable is canceled out, what’s left is the owner’s optionality to sell the asset.
2) Nobody every saves and invests the full difference. All anti-homeowners say is that they will come out much better because they’ll simply save and invest the difference if they rent. But the statistics don’t show this to be true, otherwise, why is the average homeowner 44X wealthier than the average renter? It’s because Americans are not disciplined enough to save and invest. We are a consumerism culture.
3) Time is your friend when it comes to owning a property. The longer you rent, the longer you will suffer at the expensive of the homeowner who is building equity. Homeownership and renting is one of the biggest reasons for the widening wealth gap over time. Rising rents and rising property prices will crush your financial progress if you are unwilling to get neutral real estate by owning your primary residence or moving to a lower cost area.
4) No risk, no reward. Staying in a rent-controlled apartment is somewhat akin to working at a safe day job with no upward mobility. You’ll likely never starve, but you’ll likely never get rich either. If you take some risk by buying real estate, you might do very well just like if you decided to start your own business or hop to a different employer. Or you can end up losing a lot if you don’t buy appropriately. Always put down 20% and have at least a 10% liquidity buffer after.
5) Massive home equity buffer has been created. There will unlikely be another housing downturn as big as we saw between 2007 – 2010 because of higher lending standards and massive amount of home equity. Therefore, real estate will likely only see a 10-15% correction before a resumption up in prices.
If you don’t have the down payment, don’t want to manage tenants, or don’t want to do any maintenance work, consider owning real estate through Fundrise, the leading real estate crowdfunding platform today.
If you rent for life, you are going to look back 30 years from now with regret. Your kids will also likely hate you for not buying so long ago. If you don’t want to build wealth for yourself, built wealth for your children.
About the Author: Sam worked in investing banking for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis and taking care of his family. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.