Unconventional Thinking: Renting as an Investment

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Most people view home ownership as an investment because one’s home will generally appreciate over time, however other contrarian thinkers that your home is a liability because you have to pay all sorts of fees, utilities, taxes, and the like. What if there was a way that you could have the best of both worlds? You wouldn’t have to pay all the taxes and fees associated with owning a home, but you would have all of the benefits of being a home owner.

For homeownership, on a year to year basis, you would be earning 5% or 6% on your money, which is about what real estate averages over long periods of time. In the last several years, housing has gone way up and become much more valuable, but the free ride will not last forever, and the housing market will slow down, but over long periods of time, you can reasonably assume you will earn 6% on any money invested in your home. Unfortunately most of that money is eaten up. You’ll pay about 2% of the value of your home on maintenance, 1% on property taxes, 1% on insurance, so that brings us all the way down to 2%. In addition you are paying for costly utilities, landscape management, and other fees that you would not have if you lived in an ice apartment. After all of that is said in done, the amount of money in your home is really just sitting there not doing much for you.

Does that mean we should all sell our homes and become renters? There are problems with renting too. In essence, you are not building any sort of equity, or any sort of investment. But what if you could turn you being a renter as an investment?

Let’s say you owned a $100,000 home, and were not getting much of anything for a return because of all those costly property taxes, maintenance, and insurances that you have to pay for. What if you decided to sell your home, and invest that $100,000 in the stock market, and use the interest to live in a nice rented apartment or home? The stock market has averaged 12% over long periods of time, so we can reasonably withdraw 9% and still gain 3% for inflation. This means that we could have $9,000 a year just to pay for rent that’s coming off of money we already had. This would allow you to pay for a very nice $750 a month apartment, which would probably be nicer than a $100,000 home or at least very comparable to it, depending on where you live.

However instead of you paying for maintenance, repairs, taxes, home owners insurance, now you only have to pay minimal utilities such as cable and electricity, and you can get much cheaper renters insurance instead of home owners insurance. You still have an investment and it’s still growing, and probably at a better rate of return than your home when all things are said and done.

It will not make sense in all cases, because in some areas of the country, real estate is doing well and is giving double digit returns annually. In slower housing markets though, this plan might make quite a bit of sense.

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