What’s Wrong With Renting Forever?

At a suburban party I was attending, the topic of conversation was that someone’s mother was still renting at her age. This New York City resident was in a financial jam since she was on a limited salary and had to pay rent. She should have been able to pay off her mortgage and own her home outright by now.

It didn’t matter whether this person’s financial situation was caused only by her status as a continuous renter. It was assumed by everyone. This line of reasoning confirms what suburban homeowners with large mortgages prefer to hear: that they’re accumulating money.

Indeed, most people in America have traditionally accumulated wealth through housing. Is it, however, the only option? Is it true that being a renter locks you into a life of financial mediocrity for the rest of your life? As we progress toward a renter society, the subject of wealth becomes more crucial to study.

Homeowners who are content

A society based on renters

Don’t think we’re becoming a rental society? Consider today’s housing market: a historically low supply of homes for sale combined with rising demand has resulted in skyrocketing prices that have put affordability out of reach for many. Because so many people can’t buy a home in this market, they have to think about renting for the foreseeable future.

Institutional landlords, who have become aware of the occurrence, are contributing to the problem: they’ve purchased entire communities of single-family houses with Wall Street funds, not to sell, but to rent out.

Being a renter has several advantages: it’s simple to pick up and move, there’s no maintenance to worry about, and signing a lease is far easier than getting a mortgage. However, there are usually greater benefits to being a business owner. Throwing in the towel on homeownership too soon in favor of an apparently less complicated existence as a renter is often not a sensible financial option for the average salary earner.

It is possible to amass wealth while renting an apartment.

Although it is possible to amass riches as a perpetual renter, the majority of people do not do so. Investing the money people save by renting takes discipline. Rent is usually more expensive than a mortgage payment, but renters don’t have as many other costs, such as a down payment (which is usually more than a security deposit), property taxes, insurance, upkeep, and repairs. Renters could make money by investing the money they save by not owning property. That isn’t usually the case.

According to the Federal Reserve’s Survey of Consumer Finances, the median net worth of homeowners was $255,000 in 2019, while the median net worth of renters was $6,300. That is all there is to it.

Property ownership allows people to be self-sufficient.

There are other benefits to owning, besides accumulating wealth through increased home equity. Landlords have the ability to amend the lease terms at any time during the length of the lease. Increasing the rent could be one way. Even rent-controlled and rent-stabilized properties have built-in increases. Smoking could be banned inside and outside the apartment, and COVID-19 vaccines could be required of renters.

Look at what the big tech companies are proposing and see if that doesn’t make you reconsider being a perpetual renter. Alphabet, the parent company of Google, has purchased 80 acres of land in San Jose, California, with the intention of creating tens of thousands of rental units. To put it in a less cynical light, this means Alphabet employees will pay their company rent.

Similar concepts are being pursued by Meta Platforms (previously Facebook). It purchased 59 acres in Menlo Park, California, with plans to build around 1,700 residences. These arrangements, in which people work for and rent from the same company, have the potential to become, at best, a modern-day version of the company town or, at worst, indentured servitude.

Investments in rental homes are wise.

Although it is in most people’s best interests to own a home, not everyone can or wants to do so, at least not in the current economic climate. That’s why rental homes have always been and will continue to be a popular and profitable real estate investment option.

This post is the author’s own view, which may differ from a Motley Fool premium advice service’s “official” recommendation position. We’re a mishmash! Questioning an investing theory, even our own, encourages us to think critically about investing and make decisions that will make us smarter, happier, and wealthier.