Before the S&P 500 reached its all-time high back in January, I reached a milestone where my investments were technically paying my rent. I didn’t want to make too big a deal of this, as I knew that markets inevitably experience downturns, and it was also true that my rent was abnormally low, so it didn’t feel right to go around saying that my investments “pay my rent” as if I could just rent anywhere I pleased. In fact, the market took a dip and my roommate raised the rent several months later (not an unreasonable amount considering it hadn’t been raised before and I effectively have access to half a medium-sized house), but this increase meant my investments could no longer technically afford this. But it was still an exhilarating moment when I realized just how powerful incremental wealth building can be, not that I particularly doubted it before.
I know I never shut up about the whole rent vs. buy debate, but it’s endlessly fascinating, and I keep coming across interesting caveats related to it.
One of the issues with the rent vs. buy debate itself is that it’s often assumed that you don’t have money for anything else. Either you buy and are building equity, or you rent and your money isn’t going anywhere else. But this doesn’t necessarily have to be true. If it were that simple, buying would almost always make more sense. If instead, you rented and put either substantial sums into other investments or otherwise invested your savings from maintenance and the downpayment, that money could grow in the market.
Now, I want to be clear that it’s dangerous to treat the market as a magical money tree. If you wish to do so, just remember that a cold frost can kill fruit in a hurry. But the United States is uniquely positioned for market increases thanks to its culture, institutions, and (relative) lack of corruption. History and statistics provide quite a number of reasons to believe this will continue into the future, but be careful not to worship them.
That being said, I think it’s unfortunate that so many Americans think that buying a house is the only way to get ahead financially. The idea is that by taking out a mortgage, you can leverage what you borrow into equity and reap the gains. This can certainly work, but houses are expensive to maintain, so it only works when house values increase and you remain either employed or have enough financial reserves to pay the mortgage and keep the house maintained. For many in society, this simply isn’t feasible.
Not too long ago, before my parents moved to Potato Land, I was over at their place and watching TV, and as network news often does, there was a segment about a family that was working overtime desperately in order to buy a house, and it was this sob story about how rising interest rates were making that impossible for them. I’m honestly not a cold-hearted jerk, but if you have to work overtime to buy a house, you absolutely do not have enough money to own a house. Doing so is a recipe for financial disaster, and I was frustrated by the segment because it was being played up as somebody’s dream being dashed, when really, people need to understand that houses cost money simply to own, so they are literally financially unviable for those who have low incomes. And that’s absolutely nothing against people with low incomes, but it’s so important to note that the cultural obsession with homeownership often leads people to ruin.
Those people would honestly be better served putting their money in more appropriate places. For example, if they don’t have a substantial emergency fund, that’s the first thing they should put their money into. Beyond that, they could simply invest what they had set aside for a downpayment into the market instead. Especially if you do have a low income, I would think having liquid assets would be far more useful in a downturn than a big piece of property that only earns you money if you can pay the piper or sell at a profit.
Obviously, there are plenty of non-financial reasons to buy a house, this is true. But equity is simply one type of asset, and too often it’s treated as essential for your future. It’s not.
Again, it’s not my desire to play this up as some sort of magical bullshit money generator, but at this point in time, I don’t really feel the need to have equity because I have assets instead. No, those assets can’t yet afford me the average apartment, but they cover a lot of expenses. And if I don’t touch them for a long time, they should, in theory, grow quite substantially. And, frankly, I really enjoy not owing a house. It’s a large part of how I’ve been able to quit my job and take a year off. I’m even planning to go back to Nepal next month.
Granted, software pays well. I never want to dismiss this or ignore the fact that earning a higher income makes it much easier to put money aside. Don’t always trust assholes with money, our assumptions are often unique to our situations. The more you earn over your base expenses, the faster your gains can be, but that doesn’t mean that saving “only” $500 a month can’t snowball into something quite substantial over time. But if you keep renting and putting this money aside, it also means you never have to worry about foreclosure. If you foreclose on your house, you basically lose everything you put into it. The majority of people won’t experience this, but for the surprising number who will, it’s one of the worst things they can experience, and hopefully it doesn’t ruin their marriages (if they’re married). But if you put aside what you can, you could still be substantially in the black many years down the road.
And money isn’t a race. You don’t have to prove anything to anybody. Just because your cousin’s neighbor’s friend got rich in crypto doesn’t mean you “missed out”. Just because you know somebody who made $100k-200k on their house doesn’t mean you’re a loser if you didn’t. In fact, not owning a house might have been the best thing for you, given how fickle markets can be and how variable people’s lives are. There’s no one financial strategy for everybody. Yeah, I have a lot of money, but I’m also single and childless in my early 30s, and my career requires constant learning. At this rate, I could probably retire in my early 40s, but I’d like to get married and have a family far before then, and that changes the financial landscape a bit. Life has all sorts of tradeoffs.
But I wish people were more keen on what is actually best for them. For all of the hype about owning a house, there are so many homeowners who are broke as fuck, and life-long renters with $50k in their bank accounts are sometimes far better off. I knew a fellow software developer who was in his 50s and had rented his entire life. He and his wife got tired of the crap their townhouse association was pulling, so they literally paid cash for a house (or condo?) in the area. “What do I care?” he laughed. “I’m loaded!”
Now, just to be clear, there’s nothing wrong with owning a house. I just have to make that disclaimer. Just understand that because it’s the cultural default, it causes a lot of problems, and that’s what I’m speaking out against, as usual.
Now, when people become homeowners, most people don’t make a big deal about it. They might take a picture of the keys or the sold sign in the front yard – common tropes – but most people don’t go far beyond that. Occasionally, some people feel the need to preach homeownership at you, even well-meaning people, and that can be pretty annoying. Some go too far with it and treat homeownership as the only sensible thing in the world, and think everybody else is stupid and ignorant, which…ugh. But there’s actually another category that I’ve recently encountered: some people are simply motivated by the excessive desire to be responsible.
This was interesting to me. Two friends were talking.
Friend 1: “I’ve been looking into buying a house to use as an investment property”.
Me (unable to resist): “It takes a certain kind of personality to do well at being a landlord, but some can pull it off”.
Friend 1: “Oh, I’d probably just hire a property management company”.
Me: “…” [It’s not that easy]
Friend 2: “Yeah, that’s good. It’s good to own a house that way you aren’t throwing your money out on rent”.
Me: *sigh*
But Friend 2 actually has a very interesting dedication to “responsibility”, which seems to be a driving force in their life. Some time later, I put two and two together. This person wasn’t arrogant about owning a house, was not preachy about owning a house, was not silent about owning a house, but saw it more specifically as an act of responsibility and stewardship, likely based on the assumption that renting is throwing money away.
I thought that it was really interesting. It’s not like I’ve gone around asking all of my homeowning friends what their specific motivations for buying were, but I’m sure there’s some interesting approaches.
In fact, given the number of people in the church who try to be “good people” [don’t misunderstand the quotes, I think this is a good thing], I think it’s all the more important that we understand what “responsibility” really means in the context of our lives. It’s not all clear what being “responsible” with money actually looks like, which goes back to my philosophical question about what it means to be “good” with money. If anything, this makes me think it’s important to keep digging into that question. But if we aren’t accurately defining what it means to be “responsible” with money, then many well-meaning people may be going down the wrong path.
Is it “responsible” to go half a million dollars in debt to own something that might pay out in the future? Is money a renewable resource? What does it mean to “waste” money? Is it a “waste” of money to pay rent while otherwise reaping money from investments? How does this differ from owning a house? Is it a “waste” of money to rent when you can’t afford any other option?
I don’t know why anyone would see renting as specifically irresponsible, but if they did, I would put some of these questions to them. Personally, I strongly contest the assertion that renting is throwing money away, and I think that my current situation does a decent job of showing why. If the investments I own are almost paying my rent, am I actually throwing money out on rent? I don’t believe so at all, but I also don’t believe renting is throwing money out in the first place. Hence, I don’t see owning a house as some move toward responsibility, either, though I suppose it could be an act of responsibility under some circumstances. It’s certainly better than throwing money out on junk and gain-less luxury, but that typically has nothing to do with your housing situation and everything to do with your attitude toward money. Honestly, I just think the real estate industry has done an incredible job convincing everyone that renting is for losers and paying into their system is for winners. The reality, as usual, is far more nuanced.