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I finally got around to owning a house. OK, I really don’t own it - my down payment probably covered the master bedroom. The bank owns the rest of the property. Hopefully, they'll hand over the title in 30 years - maybe 20 if I pay a little extra every month. Owning a house is great, but for the last 17 years, I was a renter and I was proud.
Renting gets a certain undeserved stigma. Somehow when you are renting, the assumption is you haven’t “made it”.
Or so the REALTOR™ industry would make you believe.
But it just so happens that I know a lot of really successful people and many of them rent or did for many years. I live in a place with ridiculous home prices and moderately ridiculous rents. But when I was renting, it never added up to more than 10% of my income and I had it down to 5% before I decided to buy a house. The cheapest guy I know was renting for $500 a month even when he was pulling in $400,000 a year. Now that's a little extreme - but he didn't seem to have a problem living in a studio apartment.
My wife and I have some married friends who pull in about $300,000 a year in income, not too shabby even in this part of the country. Their annual rent bill is around $22,000 which is a whopping 7.3% of their combined income. It's a lovely place, in an upscale part of town and their townhouse comes with a small yard and their pool. As an additional bonus, they don't have to pay a dime for maintenance and they live close to work.
Now for those of you out there saying, “what idiots, don’t they realize how much they could save on income tax at their marginal tax rate!”, you might want to take a closer look and end up renting yourself. Sure, they could easily afford to buy the townhouse they're renting. The price tag is only $700,000. (Midwesterners, please don’t fall out of your seats).
Assume they did buy it and financed it with a thirty year 5% mortgage, their monthly payment would be $4,200. Add in about $1,400 additional for association fees, taxes, maintenance, insurance. Even then, the $5,600 works out to about 22% of their combined income. The tax benefits should easily cover the dues, upkeep and taxes, which would leave them $4,200 out of pocket. So every month they would need to pay $2,300 more for the privilege of owning the property they currently rent for $1,900. If they invested that amount for 15 years and earned a modest 6% return, they'll end up with a windfall of $672,000. And if they manage to earn a 10% return, they would have a cool million.
Now someone might chime in and say, “Hey, but the townhouse will certainly be worth a lot more after 15 years and their rent is likely to go up” and indeed both are likely true. But are rents really going to increase to $4,200 in an environment of wage stagnation and is their townhouse really going to be worth $1.4 million and most importantly, are they really going to sell their house to invest, spend, etc.
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