Michael Rogers and his wife, Kristy, who split their time between Tennessee and Alaska, have twice been stuck paying their mortgage and rent at the same time. Once in 2006, this situation lasted him eight months and ultimately ended with him selling a house in Tennessee for $20,000 less than his purchase price.
Other homeownership adventures also ended well. The couple doubled their money by selling their fixer-upper. Later, on another property, she had to pay $30,000 to repair a landslide around her house, which was due to a mistake by the builder.
Two years ago, the Rodgers moved to Kingsport in northeast Tennessee, where they rented an apartment for a year before buying again.
The couple had just renewed their lease for three years and decided to remain tenants permanently. Mr. Rogers, a construction manager, likes the convenience of being able to travel when work comes.
Many people decide that renting permanently is their best or only option, either by choice or because it's off market value. With housing costs and interest rates rising in recent years, renting may make financial sense. (The Times recently updated its popular rent-versus-buy calculator to help people understand the trade-offs.) In the 1960s, the median home price was just over twice the median income. Now it's nearly six times more.
Homeownership is a traditional strategy for building long-term wealth. For those not planning to buy, developing a strong financial plan without building home equity requires a different mindset.
Owning a home is not a silver bullet for securing retirement. Mr. Rogers has seen how being “house poor” affects older family members. One of them has three-quarters of his net worth tied up in his home. In these situations, people are left with the option of borrowing against the equity in their home or selling their home and getting the value out of it.
He focuses on investing instead, preferring the liquidity and stability of the stock market.
“When you buy something like a broad-based U.S. stock index, you're buying a slice of the entire U.S. economy,” Rogers said. “When you buy a home, your risk is literally concentrated in one state, one district, and one home.”
Rogers found that people tend to focus on home equity more than other factors. He thinks that might be a mistake.
“In the current market, especially in my area, rents look like an absolute bargain when compared to current home prices for sale,” he says. “This allows you to significantly increase your savings rate. People say, 'Well, you're not building equity, are you?' Yes, but his savings rate is 35%. I am building my investment account much faster than I am building equity at home. ”
Select rental
As with any market, it is impossible to predict the future of rents. Rents could fall, as they did in New York City during the pandemic, or they could rise, as in Seattle, where rents have skyrocketed due to Amazon. Home 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 a variety of scenarios.
“Renting can be a better decision financially. Owning can be a better decision financially,” says Ramit, author of I Will Teach You to Get Rich. says Sethi. “A lot of times we just buy because our parents told us to, and because our parents told us to.”
Mr. Sethi, a billionaire, has spent the past 20 years renting in cities including San Francisco, New York and Los Angeles. When he lived in Manhattan, he calculated that owning would cost him 2.2 times more per month than renting. He stresses that calculations must include phantom costs such as mortgage interest, taxes and maintenance fees, which he estimates are often 1-3% of the home price. It is being So he signed a lease and focused on his investments. He is a fan of his funds that index and likes to incorporate his funds that target his dates into long-term, low-cost investments.
“If you choose to rent, there’s one thing that’s most important: You absolutely have to hit the numbers,” he said. “And if it's cheaper to rent than to buy, you have to invest the difference.”
He also negotiates rent, but says many people don't realize that's an option. He advises renters to pay attention to comparable housing costs in their area. If you manage to find a better deal, you'll need to bring the documentation with you to negotiate at renewal time. “It doesn’t always work out,” he said. “If that happens, there will be significant benefits.”
Over the past century, the inflation-adjusted S&P 500 Index has averaged an annual return of about 7%. Sethi said most people have no idea what the stock market is returning. “But you need to know that number, because it tells you what your opportunity cost is. In other words, how much money you could potentially make just by putting your money into the market. ,” he said.
Financial planning while renting also involves an emotional component. Sethi said there's no need to feel guilty if you're renting.
“Remember, there are literally millions of people in America who are borrowing and investing that difference,” he said. “Just because you choose to rent doesn't make you a weirdo. I do it, and so do many others.”
run the numbers
“People always ask me why I don't buy a house,” says Miranda Marchit, a woman in her mid-40s who lives in Idaho Falls, Idaho. “People think it's weird.”
Markit earns between $10,000 and $12,000 per month and has been building investment portfolios for the past 25 years and multiple streams of income for the past 15 years. If you want to plan for financial success without homeownership, she recommends starting by using the retirement calculator at investor.gov.
“When deciding how much to invest each month, I take a very conservative approach and assume a 6% rate of return,” she said. “I know that many people should expect a much higher rate of return, especially if they're investing in stocks, but I prefer to be cautious.”
To calculate how much money you'll need in retirement, you need to consider how much your rent is likely to rise over time (Marquit uses an estimate based on 3% inflation).
“To determine if you're ready for retirement, it's important to crunch the numbers, whether you're renting or having a mortgage or building a rental empire,” she said . “Think about what you want to do in retirement and estimate your monthly needs. Then think about how you will meet those monthly needs.”
Rental-only strategy
“This is just my life,” said Berna Anat, who lives in the San Francisco Bay Area. “I don't think about owning a house in the future.”
When she says someone is wasting money on renting, she thinks of a friend who owns a home. “They say, 'Oh, I can't go on vacation for two years because termites have taken over the foundation of my bathroom,' or 'Well, actually, I can't go on vacation this weekend because I'm on vacation.' “We're on our hands and knees tiling grout in an aging sunroom,” she said. “Renting forever is a movement. It's a lifestyle.”
That comes at a price. Theoretical assets are what many people plan to use as their retirement base.
Ms Anat, author of 'Money Out Loud', said replacing residential property with a rental lifestyle was about diversifying and maximizing your investment. If you're employed full-time, you'll want to fully invest in your 401(K) and be matched with as many employers as possible, she said. Anat also recommends opening another fund, such as a Roth IRA.
If you're not spending money on housing costs, closing costs, escrow, property taxes, and homeowner association fees, you can invest all that money into making your retirement more comfortable. “The idea is to make it a thing,” she said. It's possible because you don't have that asset. ”
“I’m a permanent renter, so I have all of those things and I invest them as aggressively as I can,” she said.
In the short term, Anat said, companies also need to plan for real-world volatility. Rent may rise or the building may be sold. She recommends having at least a six-month emergency fund and a spreadsheet detailing your plans in case you lose your home.
“If I had to move out of my apartment tomorrow, what would happen to my actual financial and living plans?” she said. “It's like an earthquake escape plan situation.”
Another consideration is your credit score. Please keep it clean at all times. Make your payments on time and try to keep your repayments below the limit. The general advice is to limit your borrowing to 30% of your credit limit. Anat tries to stick to 10 to 15 percent.
Maintaining a high credit score is very important, she says. That's because “landlords are paying attention to it, so there's a good chance you'll have to shop the market again next month or next year to impress them.”
You also need to protect yourself by understanding landlord rights and tenant rights where you live, as they vary by city and state. Get renters insurance. Usually affordable.
Overall, she said, you need to get as much financial backup as possible to stabilize your life.
“It reminds me a lot of being self-employed,” Anat said. “Being self-employed means you have to make your own health insurance plans. You have to make your own retirement plans. It's a little bit more to get into that mental mode.”