Is Renting Really Throwing Money Away? The Sum Nobody Shows You
No. Rent buys you somewhere to live, which is a real thing. And owners have money they never see again as well: mortgage interest, property tax, insurance and repairs. In the example below those come to about $2,460 a month in the first year, against a rent of $2,100.
"Renting is throwing money away" is one of the most repeated sentences in personal finance. It is usually said kindly, by someone who bought a home at a good moment, and it leaves out half of the sum.
So here is the whole sum for one home, what owning really gives you that renting does not, and how to think about it when your income is your own business.
A home sits on the personal side, with its mortgage beside it. Example data.
The short version
Rent is the cost of housing. It is not waste.
Owning has costs you never recover: interest, property tax, insurance and upkeep.
What owning adds is equity, built slowly at first, and whatever the home gains in value.
The fair comparison is rent against the unrecoverable costs of owning, not rent against a mortgage payment.
One home, the first year
A $350,000 home, bought with 10% down, on a thirty year mortgage at 6.5%. The figures are an example to show the method.
Line | Amount |
|---|---|
Price | $350,000 |
Down payment | $35,000 |
Mortgage | $315,000 |
Monthly payment, principal and interest | $1,991 |
That $1,991 is the number people compare with rent. It is not the cost of owning, and it is not all gone either. Part of it is interest and part of it pays down the loan.
First year of owning | Never recovered | Becomes equity |
|---|---|---|
Mortgage interest | $20,371 | |
Loan paid down | $3,521 | |
Property tax, at 1.1% | $3,850 | |
Home insurance | $1,800 | |
Upkeep, at 1% of the price | $3,500 | |
Total | $29,521 | $3,521 |
In the first year she pays $29,521 that she will never see again, which is about $2,460 a month. Only $3,521 of everything she paid turned into ownership.
Now set that beside rent
Renting a similar home | Owning it | |
|---|---|---|
Money never recovered, a year | $25,200 | $29,521 |
Money never recovered, a month | $2,100 | $2,460 |
Equity built in the year | $0 | $3,521 |
Still holding the down payment | $35,000 | $0 |
In this example the owner pays $4,321 more in unrecoverable costs than the renter, and builds $3,521 of equity. The renter still has her $35,000. On these numbers the first year is close to even, and slightly in the renter's favor.
That is not an argument against buying. It is the honest starting point, and it looks nothing like "throwing money away".
What owning really gives you
A payment that does not rise with rents. A fixed mortgage stays the same for thirty years while rents generally climb.
Equity that speeds up. Early payments are mostly interest. Over the first ten years of this loan, $47,955 goes to the loan itself, and the pace keeps increasing.
Any rise in the home's value. Which may happen and is not promised.
Stability. Nobody can decide not to renew.
What renting really gives you
Your down payment stays yours. It can sit in savings, a cushion or the business.
No repair bills. A new roof is the landlord's problem.
Freedom to move. Selling a home costs several percent of its price, so owning for only a few years often loses money.
A known monthly cost. No surprises, until the lease renews.
A home and its mortgage are two lines in the picture. Example data.
How long you stay decides most of it
Buying and selling both cost money. Staying a short time means paying those costs for very little equity. Staying a long time lets the equity and the fixed payment do their work.
If you expect to stay | What usually matters most |
|---|---|
Under three years | The cost of buying and selling. Renting is often cheaper. |
Three to seven years | It depends on local prices and rents. Run the numbers. |
More than seven years | The fixed payment and the growing equity. Owning often wins. |
If you work for yourself
Two things are different. A lender will usually count the profit on your last two tax returns, so the business has to look steady on paper, as we covered in our post on debt-to-income for the self-employed. And a down payment taken out of a business cushion can leave you exposed in exactly the year you take on a large fixed cost.
For an owner, the question is often less about rent against mortgage and more about whether the cushion survives the purchase.
So, is it throwing money away?
No. It is paying for a home in a different way, with different costs and different freedoms. The sentence survives because it is simple, and because it is usually said by people who came out ahead.
Whichever you choose, the thing that builds wealth is what you keep after the housing is paid for. A renter who saves the difference and an owner who builds equity can arrive at the same place. Our post on counting a house in your net worth shows how a home fits into the whole picture.
See both versions of your own, free
La Soglia, the free membership of the Money Mastery System, holds everything you own and everything you owe in one place, with no bank connection and no card. Whether you rent or own, it shows the number that matters, which is what you have kept.
Bring it to the Collective
Do you rent or own, and would you choose the same again? The Money Mastery Collective has a discussion feed open on the free membership, and there are good answers on both sides.
Questions we hear
Is renting throwing money away?
No. Rent pays for a place to live. Owners also have costs they never recover, including mortgage interest, property tax, insurance and upkeep.
Is it cheaper to rent or to buy?
It depends on local prices and rents, your mortgage rate and how long you stay. Compare rent with the unrecoverable costs of owning.
How much of a mortgage payment is interest?
In the early years, most of it. In the example, $20,371 of the first year's payments was interest and $3,521 reduced the loan.
How long should I stay to make buying worthwhile?
Often several years, because buying and selling both carry costs. The longer you stay, the more the fixed payment and growing equity count.
References
There are no outside figures in this post. The mortgage figures are our own arithmetic for a $315,000 loan at 6.5% over thirty years, and the property tax, insurance and upkeep rates are assumptions chosen for the example.
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La Soglia is the free membership of the Money Mastery System. It gives you the Net Worth Tracker, where everything you own and everything you owe sits in one place, and the Money Mastery Collective. There is no card to enter and no bank connection.
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A note on what this is
This article is educational. The Money Mastery System is an educational tool, not financial software, and nothing here is legal, tax, investment or financial advice. The figures are illustrations, and housing costs, taxes and prices vary widely by place and by person. For guidance on your own circumstances, please speak with a qualified professional who knows them.
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