People are drawn to buying a home for all kinds of reasons: more space, a backyard for the dog, the investment opportunities or simply because they want to.
And it may be great for them, but you don’t have to beat yourself with someone else’s yardstick.
If you’re not in the position to be able to (or even want to) buy a home, you may have heard that renting is as bad as burning your money. But it’s not a fair comparison.
Here’s how being a renter can work to your financial benefit.
Take advantage of pandemic prices
At the onset of the pandemic, rent in expensive cities like San Francisco, New York and Seattle plummeted. While prices are starting to even back out, they’re still significantly lower than they once were, according to Apartment List, a real estate data site.
As a renter, you can use this to your advantage. Working from home is sure to be the norm for a while longer, and people are flocking to mid-size markets and smaller towns for more space.
If you want to keep renting in the city, now’s the time to lock in a lease at a great price — you may even be able to negotiate with your current landlord for an even better rate.
Misconceptions about renting vs. owning
You’ve probably heard that renting is basically throwing your money out. Or that owning a home is the only investment worth making.
But those assertions rely on some shaky assumptions:
That you’re guaranteed to make money off of your home.
That other investments wouldn’t make you as much or more.
In either situation, that’s not always the case.
No guaranteed returns
In fact, a report on homeownership in Business Review with the apt title, “American Dream or American Obsession?” shows that the actual rate of return on U.S. real estate between 1975 and 2009 was below 0%.
Meanwhile, the stock market’s average annual return was 3.375%, after taxes and inflation, between 1975 and 2009, according to the Business Review study. And it’s never been easier to put money into the market: All you need is a smartphone app.
And don’t forget that owning a home also involves a number of non-recoupable costs like mortgage insurance, homeowners insurance, interest and property taxes. And when something breaks down, you’ve got to fix it yourself instead of simply calling the landlord.
All that that adds up and you’ll never see a return on those investments.
There’s more to life
Finally, the premise that owning is better than renting also assumes that homeownership is your No. 1 priority, without taking into account other goals you may have to spend your money on or what you’d like to do with your life.
If you don’t picture yourself repainting the ol’ white picket fence every spring, there are plenty of other enriching things you can do with your cash.
Other ways to enrich your life
When you’re paying a reasonable amount in rent, it frees up all kinds of money for other pursuits that can be just as financially worthwhile as owning your own home.
Here are a few.
Investing in stocks, bonds and ETF, either through a certified financial planner or a low-commission investing app is a great way to grow your money.
You don’t even need thousands of dollars to play the market — some apps will automatially invest your spare change on debit and credit card purchases.
If you want to grow your money and you already invest or you’re risk-averse, you should consider a high-yield savings account. This type of account can pay upwards of 200 more times than your standard savings account.
Whatever you want to put your money aside for, whether that be an emergency, vacation savings or for a big purchase, a high-yield savings account can be the perfect place to keep your cash safe and working for you.
3. Pay off debt
Credit is convenient, but interest is a killer. If you’ve been relying on your plastic through the pandemic, you’re probably piling up plenty of expensive interest by now.
It may be time to consider putting housing-cost savings towards consolidating your debt. By dropping all your balances into a single lower-interest loan, you can make your debt easier to manage and even pay it off sooner.
If consolidating all of your debt isn’t an option, make sure to focus on your highest interest loans first. And don’t be shy to make extra payments when you can afford it.
4. Shop around for deals
Meanwhile, living modestly doesn’t have to feel like a punishment. In fact, the more excess expenses you cut out, the more money you’ll be able to put towards what you really care about. Your standard of living will be higher overall.
So if you like to shop online, you can download a free browser extension that will instantly find you the best deals and coupons.
5. Invest in yourself
It’s never a bad idea to upgrade your marketable skills by going back to school. Even if you haven’t got all the funds upfront for a college program, taking out a student loan at a competitive rate can help make your dream come true without costing you all your savings.
“But owning a home is my dream”
If your heart is set on becoming a homeowner, you’re not necessarily destined to become house-poor.
Just make sure you follow these tips to make sure you come out of it in the best financial position:
Get the lowest possible rate on your loan. The best way to save on your mortgage is to shop around for the best offer. An interest rate just 0.5% lower can save you tens of thousands of dollars over the life of your loan.
Save on homeowners insurance. Homeowners insurance is a must, but overpaying is not. As with your mortgage, shopping around for the lowest premiums is your top option for saving hundreds of dollars on insurance every year.
Make a plan to be debt-free by retirement. When you’re designing your retirement plan, you don’t want to still be paying your mortgage — especially if your house is going to account for a chunk of your investments. Be sure to keep this goal in mind when you’re budgeting for a home and applying for a mortgage.