Renting vs Buying a House?

Ignoring the traditional FIRE advice of renting a house (instead of buying), we bought our home during our FI journey. Although not a financially sound decision, we are happy with it!

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Renting a House instead of Buying

In the ‘Renting vs. Buying a House’ debate, the die-hard FIRE community members prefer renting to buying a house. And I agree with them – owning a home is a financially unwise decision. There are several reasons why you may not want to own a house:

1. Real Estate vs. Stocks

In terms of asset growth, stocks outperform real estate. You can always hear your friends or relatives talk about how much their house value has gone up. And that may be true in a specific location due to the factors specific to that area.

But overall, stock prices rise faster than property prices. Below is a comparison of two stock market indices and two property price indices. As you can see, stocks outperform real estate.

2. A Large Debt

A mortgage (home loan) is a huge debt – typically the biggest debt people take in their lifetime. In past decades people had the luxury of having more predictability around their jobs. However, that is not the case now. Although stocks outperform real estate, real estate prices have risen faster than incomes. Hence now you have to pay more (as a percentage of income) to buy a house.

You have to be confident in your future earning potential to take up a large debt like a mortgage.

3. Costs of buying vs renting

Owning a house does not mean just paying the monthly mortgage. It also involves other payments that a renter will never have to worry about: property tax, homeowners insurance, utilities like garbage collection, etc. If the house is part of an association, there are fees associated with that.

Selling a house also involves paying a 4-6% fee to a real estate agent.

Not to forget, as a homeowner, you have to pay for all repairs and fixes that may be needed. On the other hand, a renter has to just call up the property company to get things fixed.

4. Non-financial Reasons

One of the most important reasons for not buying a house is that it anchors you to one place. It is difficult and costly to buy or sell a house. This is especially relevant in a case such as when you get a job in a different city / state.

If you were a renter, it is easier to move.

Why we ended up buying (instead of renting)?

For a long time, we did not buy a house – because of the reasons listed above. Eventually, we did end up buying a house.

1. Finding the Why

One of the first things we had to think about was the WHY of buying a house. We knew very well that financially it made no sense to buy. We would rather rent all our life, financially speaking. But we did not want to.

We wanted to own a place we could call our own. A place where we could turn on the music and the neighbors would not complain.

2. Mindset Shift

Yet, it was not easy to convince financially minded Finers to buy a house. That was because we were thinking of our house as an investment. We compared real estate and stocks. Therefore, instead of buying a house, we kept investing our money in stocks.

Then we had an epiphany: A house you live in cannot be an investment!

An investment, by definition, can be bought and sold. However, if you sell the house you live in – where will you live? You will have to buy another house. Or rent a house. Either way, you cannot live without a house. So a home did not seem like an investment.

Another way to think about it is to consider how I buy groceries. I do not compare buying groceries and buying stocks to see where I should invest my money. That is because I do not think of groceries as an investment. So why was I thinking of a house as an investment?

Do not mistake the house that you live in for an investment. It is your home!

When we made this mindset shift, we concluded that we would buy a house even if it were financially not the best thing to do with our money.

How we Bought our Home

Until we had the mindset shift, we had been renters for several years. This meant we ended up paying more when we finally did buy a house (because property prices had risen in the prior years). However, a few things worked in our favor:

• Downpayment: We had saved money in the prior years, so when we did end up buying in 2017, we could make a 20% downpayment. This meant that we did not have to pay mortgage insurance. This also helped us get a better rate.
• Rates: Over the years that we were renting, we had built up a good credit history. This helped us get a low rate of 3% (15-year mortgage).

What we Learned about Refinancing

Although rates were at historic lows when we bought the house, they still went lower after that! So we were able to refinance at a lower rate of 2% in 2021.

The key benefit of refinancing was we were able to get the lower rate of 2021 while having the property price of 2017. Basically, we bought in 2017 when property prices were lower than 2021, but we have the interest rate of 2021 (which is better than the one in 2017). So refinancing allowed us to have the best of both worlds – lower property prices of 2017 and lower rates of 2021.

Buying vs Renting: Impact on our FI date

So, what was the impact of buying the house on our time to early retirement? Being financially minded, I wanted to calculate the exact number of extra years I had to work to pay for the house. But given the mindset shift we had, I never did that calculation. We are happy to have a home and were okay with delaying our FI date.

One good thing we have going our way is that our mortgage rate is only 2%. So we will never pre-pay our mortgage – we will instead continue to invest in broad-based low-cost index funds. Over the timeline of our mortgage (15 years), I am pretty sure we will get a return above 2%.

In Conclusion

Buying vs. renting a house is one of the most important financial decisions in one’s lifetime. There is no right way to make this decision. However, we made the choices easy by not thinking of it as an investment decision.

This meant our FI journey took longer than initially planned. However, we are okay with that.

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