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The Difficulties of Wealth Accumulation When Renting is Your Only Option
During the early stages of my divorce, I grappled with the question of whether purchasing a home was feasible or financially wise. I explored both renting and buying to assess my potential monthly expenses and understand my long-term financial outlook. With a teenage son and a preteen daughter, I required at least three bedrooms, which significantly limited my options, especially when considering rentals.
From a financial perspective, buying a home seemed pricier upfront. For a property valued at approximately $180,000, I would need around $36,000 for a down payment, in addition to several thousand dollars for closing costs. On the other hand, renting a three-bedroom unit, which typically started at $1,500 per month, would require about $4,500 upfront for first and last month’s rent plus a security deposit.
The truth is, renting does not contribute to wealth accumulation.
However, I quickly realized that my monthly rental expenses would be significantly higher—by about 50%. A mortgage on a $180,000 home, after a 20% down payment, would result in a monthly payment (including property taxes and homeowners insurance) of only $1,040. In contrast, the cheapest rental option was $1,500.
It’s true that owning a home incurs monthly costs, and some might argue that renting is “cheaper.” I strongly disagree for two reasons. Firstly, a portion of my mortgage payment builds equity in my home, which I can recoup if I choose to sell. With time, as I continue making payments, that equity increases due to amortization.
In contrast, every dollar spent on rent enriches someone else, with no return on my investment.
Secondly, many analyses comparing renting versus buying overlook the returns gained after five years of homeownership, particularly when selling the property.
Owning a home is one of the most dependable means of building wealth. It acts like a savings account with interest. Renting, on the other hand, presents a significant opportunity cost because you never see any of your money returned. This issue is exacerbated by escalating rental prices.
If purchasing a home is out of reach, many find themselves caught in a never-ending cycle of renting.
As housing costs continue to rise, the struggle to maintain any kind of shelter—whether rented or owned—becomes increasingly difficult. Upon reviewing my situation, I recognized that without the ability to make that down payment, I would have been trapped in a perpetual renting cycle. The exorbitant rent would leave me with little to no savings at the end of each month—an experience shared by countless Americans.
The societal narrative suggests that young individuals can rent affordably and save diligently to buy a home. However, how can one save when all disposable income is consumed by exorbitant rental costs? Toss in a couple of kids needing extra bedrooms, and the notion of saving becomes even more of a fantasy.
With my income, if I had been relegated to renting, I would have had minimal funds left over—possibly a couple hundred dollars each month if I really tightened my budget. At that rate, saving for a down payment would take 15 years. By then, home prices would have likely soared, requiring a significantly larger down payment than just a few years prior. In fact, if I were to buy my current home today, I would need nearly $6,000 more for the down payment, not to mention an additional $175 on the monthly mortgage.
It’s baffling to think about how one is expected to save 20% for a down payment when renting often costs 50% more per month than buying. Just take a look at Zillow, and you’ll see that rental premiums effectively eliminate the ability to save.
Moreover, with the potential for landlords to profit more from short-term rentals through platforms like Airbnb or Vrbo, investors frequently outbid first-time and lower-income buyers, snatching up affordable properties. This practice not only removes potential homes from the market but also drives up prices, making homeownership even more of a challenge.
This issue significantly contributes to the widening wealth gap. Rising housing costs mean that, without family financial support, many individuals remain trapped in a cycle of barely managing rent, making it impossible to save for a home.
The only reason my former partner and I were able to buy our first home in 2008 was that we lived rent-free with a generous relative for a year, allowing us to save $25,000. That year was pivotal in building our net worth, as we later sold that house for a considerable profit, which translated into equity for our current home. It was that rent-free year that laid the groundwork for my homeownership today.
Unfortunately, many Americans lack such support. This issue is rarely discussed, but it deserves more attention. Shelter is a fundamental human need, and while we express outrage over rising healthcare costs and educational inequalities, millions of Americans are slowly being priced out of even having a roof over their heads.
For further insights, check out this related blog post and consider visiting March of Dimes, which offers excellent resources on pregnancy and home insemination.
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