Share This:

LinkedIn
Email
Facebook
Twitter

Top 8 Advantages of Renting

Jake - Author/Founder

Jake - Author/Founder

Hi. I'm Jake. I believe you can build a wealthy life through frugal living and index investing.

You can’t make an informed rent vs. buy decision without understanding the advantages of renting.

I’ve heard statements like “renting is throwing money away” and a “home is your best investment.” Such partial truths are the product of deeply held values in our culture. Homeownership is seen as a core component of a successful life.

Even if these statements were 100% correct, we would still have a problem.

Sky-high home prices, inflation, and rising rates are barriers to homeownership for many Millennials, especially those without help from mom and dad.

And even if you can afford a home, it is not always a clear win over renting. For my circumstances, I choose to rent and invest in index funds instead of buying a home. I expect this decision to maximize my wealth while preserving my time and energy. 

Often, renting living space can protect your most valuable resources:

  • Time
  • Energy
  • Money

Consider this post a counterbalance to the societal bias towards homeownership. 

Finally, renting is not without its disadvantages. There is eviction risk and rent inflation risk. Plus, a mortgage can act as a form of forced savings, limiting the demands on self-discipline to build wealth. 

Table of Contents

1. Renting Saves Time and Energy

It seems common for people to expend 30 minutes of driving to save 5 cents per liter on cheaper gas. In this case, time is valued at ~$10/hour. That’s too low. 

Humans tend to undervalue time and overvalue money. This is bad because time is your most valuable non-renewable resource. 

Renting frees up time and energy that would otherwise be consumed as a homeowner. You can use this extra time and energy to increase well-being through fitness, good relationships, and investment in your human capital.  

Home Maintenance Time

Home maintenance is the main source of time and energy savings for renters.  

The leaky roof, hot water heater replacement, new driveway, or flooring replacement require coordination, decision making, and time. If homeowners conduct DIY maintenance, time commitments expand even further. 

In addition, there are smaller DIY tasks that slowly erode time and energy. Cutting grass, shoveling, painting, appliance replacement, lawn maintenance, and gutter clearing are some examples. 

Finally, homeowners must keep the home up-to-date if they want to retain the value of the structure. Otherwise, the structure depreciates. These are called “obsolescence” costs and they come in the form of time-intensive renovations. 

Renters deal with maintenance differently. Corrective maintenance requirements are complete with a simple call to the landlord, and obsolescence maintenance is a non-issue for renters. These updates generally take place between tenants. 

Administrative Time

A renter gets to avoid the time leeching administrative activities that are required to buy or sell a home. Time demands are highest if you move often. For long-term homeowners, these time demands are one-time ordeals and have minimal effect. 

When buying a home, you need to spend time and energy to: 

  • Work with a mortgage broker. 
  • Work with a realtor. 
  • Make offers and counter-offers. 
  • Coordinate home inspections.
  • Work with an attorney 

On the selling end: 

  • Coordinating showings around your schedule. 
  • Working with the listing agent. 
  • Reviewing offers and making counter-offers.
  • Work with an attorney 

Renting simplifies the process of acquiring and leaving a residence. Administrative activities for renters are reduced to reviewing and signing a lease, gaining tenant insurance, paying first and last months’ rent, and connecting utilities.  

2. Renting Can Maximize Net Worth

It is true that “renting is throwing money away”. But you know what else is true? 

You also “throw money away” when you own a home. 

The money thrown away by homeowners is equal to all the costs that don’t go towards home equity: 

  • Property tax (1% of home value)
  • Mortgage interest (4% of loan)
  • Home maintenance (1% of home value)
  • The opportunity cost of home equity (3% of home equity) 

In addition, money tied up in the home (equity), can’t be invested in assets that provide higher returns than residential real estate. By giving up the opportunity for higher returns, you absorb an implicit cost called the opportunity cost of home equity. 

After inflation, global stocks return about 5.3% annually while real estate is expected to return 1.5% annually (source). The gap is 3.8% annually. When we round down to account for taxes on investment income, stocks outpace real-estate appreciation by 3% annually. 

Renting and investing can maximize wealth relative to owning. This is a concept discussed in The Wealthy Renter by Alex Avery.

A rule of thumb is that homeowners “throw away” 4% to 6% of the home value annually. Therefore, renting can be a wealth maximizing decision as long as annual rent is less than 4-6% of a house’s purchase price. 

I encourage you to read deeper into the Rent vs Buy Evaluation and you can evaluate the wealth maximizing decision with my Google Sheets Rent vs. Buy Calculator. 

Self-Discipline: Renting and Investing

Renting and investing may work well on paper to maximize long-run wealth. 

But this fails if you spend the extra cash (that would otherwise be used to pay a mortgage) on vacations, booze, pet rabbits, and entertainment.

Self-discipline is required to consistently invest in index funds that match your unique risk tolerance. This includes consistent investing during market crashes. 

Self-discipline is less of a problem for a homeowner since the mortgage is a form of Forced Savings. A portion of every mortgage payment is stashed away in home equity, and it’s less likely that you’ll overspend and miss a mortgage payment.  

3. A Smaller Emergency Fund

Homeowners face large lump sum home maintenance expenses. Some of these costs can be planned well ahead of time, like paving the driveway, sealing the foundation or updating the garage. 

But other repairs cannot be forecasted, like a roof that leaks, a furnace failure, or a hot water heater failure.  

To account for this, homeowners require a large cash emergency fund. Otherwise, you will need to dip into your investments or take on credit at high-interest rates when disaster hits.

Renters do not face this issue, as large expenses are the landlord’s problem. Therefore, the renter will have a smaller emergency fund. 

I’ll discuss why a small emergency fund is better for wealth. 

Opportunity Cost of Emergency Fund

It is clear that the cash held in an emergency fund loses value to inflation.

But there is another cost to that large emergency fund that is less clear.  Cash in an emergency fund is money that cannot be invested, and so you are missing out on the opportunity to capture investment returns. This is the “opportunity cost” of the emergency fund. It’s similar to the opportunity cost of home equity. 

For example, a $20,000 emergency fund, represents $20k that cannot be invested. At the average market return of 7.3%, that $20k would grow to $40k over 10 years.

A $20k cash emergency fund has an opportunity cost of $20k over 10 years and an opportunity cost of $60k over 20 years.  

4. Renting Increases Flexibility

Renting provides flexibility to vacate relative to owning. You simply need to provide a notification to the landlord that is in line with the lease and local tenancy laws in your area. 

Selling a home is hard. Lawyers, realtors, home inspectors, offers, counter offers, and housing markets that induce factors outside of your control. This all disappears with renting, providing more flexibility. 

Flexibility to move can help you increase income as you are better positioned to jump on job opportunities. Renting permits your human capital to increase in liquidity. 

5. Less Interest Rate Risk

Rising interest rates pose risk to homeowners in the following two ways:

  • Variable and fixed-rate monthly mortgage payments can increase with rising rates. The mortgage rate increases immediately with variable-rate mortgages, and fixed mortgage rates increase when the term expires.  
  • Home prices are sensitive to interest rates. Rising rates increase living costs and reduce the demand for houses. This can result in falling house prices in a rising rate environment. 

With these two effects, homeowners can see their monthly mortgage payment go up while their home declines in value. The decline in home value can be especially dangerous for those with a small down payment; the only thing worse than losing money is losing borrowed money. 

Exposure to Interest Rate Risk as a Renter

As a renter, you are not exposed to the same degree of interest rate risk that is present when you own a home. You also limit exposure to risk associated with the housing market in your local area. 

How is a renter exposed to interest rate risk? 

The renter is exposed to interest rate risk in the form of increased rent costs. Increasing rates can flood the rental market with people who can no longer afford to buy a home. This jump in rent demand causes rent prices to go up.

In addition, rising rates increase the cost of debt for real estate investors. The extra cost trickles down to renters in the form of rent increases.

Current renters are often protected by limits on rent increases (and therefore interest rate risk). For example, Ontario protects current renters by limiting rent increases to 1.3% in 2022. The landlord must gain approval from the Landlord and Tenant Board to increase rent above that threshold. 

6. Low Up Front Costs

The up-front cost of renting is limited to the first and last months’ rent. You don’t need a giant down payment, unlike a home purchase. This is obvious.

What is less obvious is that a willingness to rent for the long-term permits you to invest savings that would otherwise be saved for a downpayment. This is good because equity (stock) index funds have historically beat real-estate appreciation by ~3% per year, after-tax.

I stress “long term” because stocks can see downturns that take years to recover. Stocks are not the place for money that is needed within the next 5 years.

Some will say this is not a fair comparison because a down payment is for a leveraged investment (the house). But this is an invalid argument – you can also use leverage to invest in stocks if you desire.

7. Less Stuff, More Time, More Energy

The average house in Canada is 1792 ft2 (source), 2.11 times larger than the average rental at 849 ft2 (source). Therefore, a rented spot is likely smaller than an owned home.

Stuff is like a fart – it naturally expands to fill all available space in a home.

The average renter will have less stuff than a homeowner. And more stuff comes with more lifecycle costs. You need to shop for the stuff, organize the stuff, maintain the stuff and dispose of the stuff. All of this absorbs your valuable time, money, and energy.

Plus, clutter in your environment equates to clutter in your mind. I don’t fully understand this effect and don’t have a reference, but I feel that this is true. 

I talk more about stuff in my post 6 Time-Saving Tips That Cost Nothing.

8. Renting Limits Attachment To Your Dwelling

Homeowners from attachments to their homes, thanks to the Endowment Effect that causes you (and me) to overvalue the goods we own. The bias is rooted in loss aversion, which states that losses are more painful than an equivalent gain is pleasurable. 

You can read more about the endowment effect and its link to loss aversion in this paper. 

Due to attachment, homeowners are susceptible to spending additional money, energy, and time on their homes, beyond that required to conduct corrective and obsolescence maintenance. 

I suspect the strength of the endowment effect increases with the amount of time, energy, and money you have invested in the home. This is similar to the sunk cost fallacy. 

For example, a DIY basement renovation would only strengthen the endowment effect, increasing attachment to the home. In turn, the desire for further alterations to the home grows. Then, the renovations are conducted that are net negative in value – the renovation costs more than it increases home value. 

A renter is partly shielded from the endowment effect as they do not own the rental location. Less attachment makes it easier to part ways with the dwelling, increasing flexibility. Further, renting puts up a barrier against time and energy-intensive renovations motivated by the endowment effect. 

Conclusion

That’s a wrap on the advantages of renting. The primary theme is that renting saves time and energy through simplicity. 

Home maintenance, reduced dwelling attachment, and a smaller living-space footprint enable time savings and simple living. For this reason, a renter will often have more time and energy to spend on activities that maximize wellbeing. 

In addition, renting can be a wealth maximizing decision, provided you have the risk tolerance and self-discipline to continually invest in total market index funds. 

This post is focused on advantages, but there are also some disadvantages. Ownership of a home provides a real and perceived sense of security. Finally, many of the time-saving advantages can be captured by owning a condo. 

Be sure to sign up for the newsletter if you enjoyed this article 🙂 

Jake out. 

People who invest in financial education have less stress and more freedom. 

Photo: Founder of Wealthy Corner