Is Rent Throwing Away Money? – Episode 241

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler. So one of the oldest real estate questions is, is rent throwing away money? In today’s episode, Kim Butler and I talk about this. We also explain when it makes sense to be renting and when it makes sense to be buying. There are some circumstances when it makes sense to rent your primary residence and buy an investment property. We’ll have a lightning round where I ask Kim these questions and we’ll dive into all of the different scenarios of rent versus buying. Let’s get into the interview. Welcome to the Prosperity Podcast.

[01:03] Today we’re talking about real estate, but a specific part of real estate and maybe one of the oldest arguments in real estate, and that is, is paying rent throwing away money? Kim, what do you think? Such a great question, Spencer. Thanks for asking it. So my initial reaction would have always been yes, until about three or four years ago. So let me just run with the initial reaction first. Financially, economically, yes, of course, paying rent is throwing away money. We all know that when we put a calculator to it, and yet now that I have had this happen to a couple of our clients, it makes so much sense to me that clearly the answer is it depends. Now, I’m not sure clearly, and it depends, go in the same sentence, but it really does

[01:53] depend because of a family or an individual person’s need for flexibility. And in today’s world, because job situations change so much, family situations change so much, paying rent could actually buy you the flexibility that you need to take another job in a year’s time, to go overseas because you have an opportunity to live there for a year or two, to move because your family needs a different situation for school or climate or whatever it is. And if you have a home that you have to sell, you might not be inclined to take that job, travel and live internationally, or move your family for other reasons. And so without a doubt, I believe that kids right out of school should go ahead and pay rent.

[02:48] And at the same time, they should be saving towards the down payment of a house, but they shouldn’t be overly obsessed in buying that house because paying rent is giving them the flexibility to figure out, do I really like this city? Do I like this job? Am I going to stay here? Does that make sense? That does make sense. Now, I’m really curious as to why or what was the pivotal moment that made you change from thinking that it wasn’t throwing away money to, you know, from the old paradigm to the new paradigm? What was that? Yeah, well, it was actually two clients, one that was paying rent and got an opportunity to move and literally gave his notice and the apartment was gone in two weeks. And another client that had an opportunity to move and they were both job related

[03:37] moves and didn’t take the job because they couldn’t get their house sold. And, you know, who knows long term what that opportunity lost will do for him and his family. And certainly they could have moved. They could have had two mortgage payments or a mortgage and a rent payment, etc. You know, we’ve all been aware of people that but there was just such a striking like I literally talked to them both in the same week and it was such a striking difference between the two opportunities and the two capabilities really and taking advantage of those opportunities and in one case not taking advantage of them, that it made me really see the difference. And then furthermore, I always love helping kids right out of college.

[04:16] I mean, you know, you might think that’s not a very good clientele for a financial person, but it’s truly a love that I have. And so I always hope that I can help kids right out of college. And I’ve got a son that’s graduating in May and we’ve got other kids and family friends and whatnot that are around that age. And it’s just so clear to me that they should rent until they’re really solid about the city that their home should be in and that they really shouldn’t buy a home until they’re ready to do that. And furthermore, as we’re all aware, you know, here we are recording this basically early 2018 and the real estate market is pretty ripe for a correction. You know, there’s going to be a lot of cities that aren’t really affected.

[04:57] But some of the cities whose prices are really high right now, good heavens, if you wait six months to a year, chances are decent that you could get a lot better deal on a home. And so in an instance like that, I would also say it is better to rent. I totally agree with you. Now, I don’t know if I’ve, I don’t know if we’ve ever actually talked about this part, but I used to own a real estate brokerage and I owned an investment company, so I’ve owned tons and tons of houses. And years ago, just like you, when someone said, oh, rent, I would think it was throwing away money. Well, in fact, I loved it when they were paying me rent, but now I see it and I totally agree with you that paying rent is not throwing away money.

[05:41] It is a necessary item for living and sometimes living needs flexibility. So regardless of what the reasons are, I think we need to not be afraid to pay rent and at the same time, if there is a difference, you know, let’s say, oh, you could afford a thousand dollar mortgage payment, but instead you’re renting a $700 apartment building or whatever, then absolutely save that $300 difference so that you have the capability when the time does come to do the down payment or to buy the furniture or, you know, whatever additional steps are necessary. And that’s another thing with a home, you’re always going to spend more on furnishings and lawn and, you know, other things that go with a home that you’re not ever going to have in an apartment.

[06:26] Of course, you know, people could be renting homes, but still it’s not your home, so you’re probably not going to paint. You’re probably not going to care that the countertop might be the wrong color or whatever it is. And yet if it were your own, you’d be jumping at the bit, spend the money to replace the countertop or, you know, take whatever other physical steps there are, so I think that’s an additional advantage as well. I agree. Now, maybe we can talk about some of the indicators and you can, we can go through a quick lightning round of should a person rent or should a person buy, want to go for that? Yeah, that sounds fun. Okay. So how about this? Just recently graduating college rent or buy rent.

[07:04] Okay. How about newly married and early on in career? I’m going to go rent with an option to buy. In fact, Hey, that’s an actual deal, right? Lease with an option to buy. Okay. Let’s try that. How about has an opportunity in emergency fund, but starting a new business? Oh, rent. Okay. How about this established business and married, established family rent or buy? Then you should be buying. Now you’re getting to the buy box without a doubt. Okay. Salary employee actually we’ll say dual income salary employees. Yeah. Buy love it. Okay. How about this family that is progressing in the career, but in a marketplace like Seattle, San Francisco, Los Angeles, where the prices are astronomical. Yep.

[08:01] That’s your perfect rent and hold like hold on. Until the market takes a dip and then buy. Ooh, okay. Now what does the person do with the excess money that they’re saving? So meaning this, let’s say you’re in one of those marketplaces. I’m going to use Seattle because statistically Seattle is bonkers. It makes no sense right now. So we see Seattle, we’ve got dual income earners, good income. Their rent is less than what the mortgage would be. What should they be doing with that difference? They absolutely want to be saving it. And so they can save it in a bank or a brokerage house money market. If they’re truly serious about that money being down payment money and the buy box is let’s say less than two years.

[08:47] Ideally though, they’ll save that difference into a life insurance policy, which would be better if the buy box was two years or greater. And their life insurance policy will be the place that they will use as their down payment. And maybe they do both. You know, maybe there’s enough savings going on that they can save into the money market or the bank account for the down payment while also saving into the life insurance policy’s cash value for their emergency opportunity fund. And again, with heavy emphasis on the opportunity. Interesting. Now I’m going to throw one last curve ball as we wrap up. Does it ever make sense to buy real estate that you rent out and rent your own primary residence?

[09:33] That is a fun question. So I’m going to say, yes, it can absolutely make sense because maybe you have a place that you really like. And so you want it long-term. So you don’t want to live in it, but you want to own the property. Then that’s an awesome buy and then rent out and rent your own place. Maybe because you do have a temporary job situation or what have you, or maybe you just don’t want to deal with long lawn care, et cetera, now and not somebody else dealing with that. Or maybe you have a home that is of too small of a size or something like that, but you know, it’s a good deal. Of course we have a special real estate calculator to help people figure out the rate of return that an individual property is earning.

[10:20] And so if you have a property and you’re debating whether you should sell it or rent it, if you’ll get the proper information available, like what would it rent for? What would it sell for? What would my management costs be? Et cetera, et cetera. We can actually analyze that individual property and give you an interest rate. So for example, let’s say you take a look at this property and we say, Hey, if you can rent it at X dollars a month and you have all your other expenses and you know, we’ve got all the data necessary for having a proper calculation, the rate of return on this property is say six percent. Well, I’m going to say that’s not worth it. Like that’s too much time and effort to earn six percent.

[11:00] But let’s say we do all the analysis and the rate of return on that property is twenty four percent. Well, that’s worth it. Like that’s worth a little bit of hassle factor, a little bit of extra time, and you should rent that property because that’s a good interest rate on an investment and totally worth your extra time and effort. So if anybody needs help with that, they can email me hello at partners number four prosperity dot com. The actual calculator is available at truth concepts dot com. If people want to buy it, it’s a couple hundred bucks. And so if you have a lot of rental properties, it might be valuable to you. But if you just want to take a peek at one, I’m more than happy to do

[11:38] the numbers for you again. Hello at partners number four prosperity dot com. That’s wonderful. Thank you so much, Kim. And one of the things that I want to say just from my real estate background is buying and renting for the most part is an emotional decision. And that’s probably one of the hardest parts. When you have a primary residence, you have to look at it as your home. Too often in the 2007, 2008 collapse, people looked at it as an investment. And that word that I want to use is speculation. When you speculate, you get in trouble. How do you feel about that, Kim? Well, it’s very accurate statement. When you speculate or gamble, which we could use, I think, as interchangeable words, you absolutely get in trouble.

[12:27] And because real estate can be emotional, it can be very tricky. And I also think you really have to know yourself. I’ve done real estate investing successfully, and I’ve done real estate investing unsuccessfully. And I finally realized, you know, this is just not my thing. Like, I don’t love this aspect of my life, even though we had management companies, et cetera. And so we chose to not be involved with that anymore. And so that’s something that you sometimes can’t learn without trying, but do what you can to try to pay attention to it. Don’t just do it for money. Do it because it’s something that you love. Some people can get into the real estate investing game and do very, very well, and for others, it ends up being a nightmare.

[13:07] And I don’t think it’s always because of the finances. I think it’s a lot of times because of the emotion and all of the other things that tie into that. That’s very well said. So for our listeners, if you already have a primary residence, well, continue to save your money because there will be expenses. If you’re renting, well, again, save your money so that you can have a down payment. And if you’re thinking of getting investment properties, email Kim, hello at partnersforprosperity.com. And she’d be happy to run those numbers for you. Thanks so much for being with us today, Kim. Absolutely. Onward and upward we go. Thank you for listening to the Prosperity podcast. To take control of your money and have it work for you,

[13:55] visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.