Is it better to Rent… Or better to Own? Let’s explore…

Rent vs Own – The Ultimate Showdown

Recently I watched Gary Keller and Jay Papasan at Keller Williams Realty International share a stage at Mega Camp in Austin Texas and they shared a few interesting facts about the debate and the credibility of owning vs. renting. Here are some of the key takeaways from our time together.

Quite often, the powers at be, start pontificating about whether it is better to buy or better to rent. I believe that we can all agree, that many factors play a role in this equation as there is a downpayment, the interest that is paid for borrowing, any of the fees associated with that purchase, and the regular maintenance that goes along with owning a product vs. borrowing a product for a period of time. Let’s look at the most recent market cycle and break down a real-life case study based on the actual historical performance of this market cycle.

Rent vs Own over time…

In each of the three columns above, you go back in time to 2012 and make a different choice around homeownership, and here is how Gary and Jay explained the options and benefits.

You have three choices… they are Owning, Renting and Investing 100%, and Renting and Investing 10%.

1. Owning – You listen to your trusted Realtor partner. Instead of renting, you purchased a median-priced home for $177,200 with 10% down and paid about 4% in closing costs. And then for almost a decade, you let equity build-up through price appreciation and the forced savings of paying a mortgage.

2. Renting and Investing 100% – After reading an article on the merits of renting, you rented a median-priced place. You invested the unused 10% downpayment and the unpaid closing costs in an S&P 500 mutual fund. With incredible self-discipline, you invested 100% of your monthly savings (from renting instead of buying) in that same S&P 500 mutual fund. You did this for ten years and watched your stock portfolio grow.

3. Renting and Investing 10% – After reading an article on the merits of renting, you rented a median-priced place. You invested the unused 10% downpayment and the unpaid closing costs in an S&P 500 mutual fund. With more (ordinary) self-discipline, you invested 10% of your monthly savings (from renting instead of buying) in that same S&P 500 mutual fund. You did this for ten years and watched your stock portfolio grow.

So who wins? It depends. For a few years, renting can be a better choice. However, the balance tips toward homeownership’s favor between the third and fourth years. Even after all the additional costs, homeownership leaves renting in the dust after that. If you purchased the home, you came out with over $77,000 more in wealth than the superhuman who invested 100% of their savings, and over $126,000 more than the more-averagely-disciplined renter.

This outcome validates advice I’ve heard from real estate pros for the past twenty years…If you think you might be living in an area for at least three years, you should seriously explore buying.

Inside the Numbers

You probably have lots of questions about how they arrived at these numbers, so here you go…

For the homeownership path, we used actual appreciation for each year based on data from the National Association of Realtors. We estimated private mortgage insurance (PMI) at 0.5% of the mortgage until our equity reached 78% of the home value. We got to drop the PMI between year two and year three. We also estimated maintenance (0.1% of the home value per month), insurance (0.25% of the home value annually), and property taxes (2% of the home value annually). We also included appropriate buying costs at purchase and selling costs each year. So the “owning” column represents your net after all costs including commissions.

Two homeownership factors we did NOT include: the mortgage tax deduction (which has too many variables to estimate) and a hardware store addiction (which might include enough garden gnomes to undo your appreciation).

For the two renting paths, we assumed a one-month deposit and used CoStar’s annual median rents for “Class A Residential” costs. Rent started at $1,137/month and appreciated at a 3.6% rate for the decade. We did not account for renters’ insurance.

During this ten-year period, homeownership did great. We enjoyed an average annual rate of price appreciation of about 7.4%. That’s above the long-term trend line of 4%. However, the S&P 500 performed even better, averaging 15% annual growth. We used Yahoo Finance and our imaginary mutual fund has no annual fees. Take that, Vanguard!

Safe as Houses

Researching this article, Jay stumbled on some amazing research that kinda puts a bow on the front door of your home purchase. A 2017 working paper by the Federal Reserve Bank of San Francisco examined rates of return on treasury bills, bonds, equities, and residential real estate from 1870 to 2015. The headline: “Residential real estate, not equity, has been the best long-run investment throughout modern history.” They found both equities and housing averaged about a 7% ROI, but that equities were more than twice as volatile. No one expected T-bills or bonds to win. Low risk is expected to yield a lower return. Housing appears to warp the risk-reward relationship in its favor.

Whether you're looking at ten years or almost 150 years, homeownership comes with real financial benefits.

If you or someone you know, like, and care about are in the market to purchase your first home, a move-up/move-down home, or an investment property, please don’t keep me a secret. I would love to discuss the benefits of real estate to you, and them. You’ll be glad we met! Thank you for your time and for your willingness to hear me out.

Special thanks and gratitude to our leadership and to Jay Papasan for investing the time and resources to help paint the aforementioned picture.
Jay Papasan is Co-author of The One Thing & The Millionaire Real Estate Agent