Did I Flush $80,000 Down the Drain by Renting?

Credit: freedigitalphotos.net

Credit: freedigitalphotos.net

Soon after my wife and I got married, we started to look for a house to buy. Well we live in NYC, so when I say house, I mean a co-op. A house, even a starter house in a decent area would be well north of $500,000. When you buy a co-op, you don’t actually own your apartment. Instead, you own shares of a co-op corporation that owns the building. The larger your apartment, the more shares within the corporation you own. Monthly maintenance fees cover building expenses including heat, hot water, insurance, staff salaries, and real estate taxes. My mother was incredulous when I told her that we were going to rent an apartment for a few years instead of buying a place. She told me what I have heard from many people: renting is flushing money down the drain! Why didn’t I buy a place instead and build equity? This was four years ago.

This issue is coming up again as our family is expanding and we might need a slightly bigger place. Should we rent? Should we buy? I don’t know yet. But, recently, my mother-in-law said that my wife and I have wasted about $80,000 on rent in the last four years.

They say that hindsight is 20/20 so let’s go back into history and see whether we were better off buying a place and whether we indeed wasted $80,000. Back in 2009, my wife and I were looking at different co-ops and we actually made an offer on two of them, but the deal fell through. It was at that point we decided that we would just rent for a few years and try to save up for a house. I’m going to do a very basic and simplistic calculation to see which decision would have been the better one…financially.

In my four years renting, we paid $72,060 in rent (It would be close to $80,000 if you include parking charges, but I would have paid for parking whether I rented or bought the co-op). The co-op that we thought about purchasing would have cost $225,000. After a 20% downpayment of $45,000, the monthly mortgage would come out to be $937.35 based on an interest rate of 4%. The monthly maintenance for that co-op was $720 which comes out to a total monthly payment of $1657.35. In four years we would have paid $79,552.80 in mortgage and maintenance payments.

I want to note that this is really not an apples to apples comparison. The co-op we were looking into purchasing was a 2-bedroom apartment whereas the apartment we rent is a 1-bedroom apartment. Yes if we bought, we’d buy a bigger place as most do. When buying, people generally consider their future need for more room, whereas with renting, you can move easily and get a bigger place when you actually need it. Also, the neighborhood where our apartment is located in is a more desirable area. We would probably not have been able to afford a 2-bedroom co-op in this area.

Home Equity
This is the most significant point in the argument for purchasing a house. In my case, based on the amortization calculator, we would have paid $13,475 towards the principal and $27,773 in interest. The value of the co-ops in that complex has stayed about the same so there has been no appreciation. We would have $13,475 in home equity whereas we saved $7552.80 by renting but have built up no equity. It’s not looking to good for my decision so far.
Buying: $13,475
Renting: $7552 (Money saved by renting: $79,552.80 mortgage and maintenance payments minus $72,060 in rent paid)

Closing Costs
This includes attorney fees, bank fees and transfer tax. NYC has one of the highest closing costs but the costs are slightly lower for co-ops when compared to a house. The average closing cost for a co-op that I thought about purchasing is $5,000.
Buying: $8,475
Renting: $7,552

Tax deductions
I have neither the time nor patience to go through our last four years of tax returns to see how much we could have saved from the mortgage and real estate tax deductions. I know for a fact that we would have been able to itemize and take advantage of these deductions. Based on an understanding of our tax returns, I’m going to estimate that we would have saved an additional $9000 in taxes by itemizing the above deductions.
So where am I at now?
Buying: $8,475 home equity plus $9000 from tax deductions = $17,475
Renting: $7,552.80

Opportunity costs
If we had bought the co-op and used our savings for the downpayment we would have lost the use of that money. We eventually used a portion of our savings to pay down high interest student loan debt and the rest stayed in a high-yield savings account (high-yield sadly meaning 1% to 2%). So by paying down the loans and adding the interest that we would have earned, we would be ahead $3,000.
Buying: $17,475
Renting: $10,552.80

Selling costs
We would have bought the co-op with the intention of eventually moving to an area which has a better school district. Also, the location of the co-op would not be as convenient for my job, and possible jobs for my wife if she were to return to work in the future. Renting gives us the flexibility to move easily. If we had bought, we would have to put the co-op on the market (subletting co-ops are more difficult than renting out a house). Selling costs are about 6% which results in commission to real estate agents in the amount of $13,500.
Buying: $3,975 (subtracting the commission of $13,500 from the $22,475)
Renting: $10,552.

So did we waste $80,000 in rent? No! Were we better off renting? I don’t know! Sorry, you guys read all this but there is no conclusive right or wrong answer. Financially speaking, it seems to be a close call. Appreciation is the X-factor in the equation because with some appreciation, buying may have been a better choice financially. Moreover, we plan on staying in our rental at least another year so it would help the argument for buying. Long term I think buying is a good deal, but in the short term, renting can be a better alternative. Ultimately buying a house is a big commitment. We were newly married and still new in our careers so flexibility was important. Also, buying a house cannot just be based on a financial calculation. While I don’t think we flushed money down the drain by renting, I do see many benefits of buying a place. Hopefully, we will be able to do that in the near future.

Am I missing anything in my equation? How did you decide whether to rent or buy a place?

41 thoughts on “Did I Flush $80,000 Down the Drain by Renting?

    1. livingrichcheaply@gmail.com Post author

      Rent is a sunk cost just as interest payments and real estate taxes are sunk costs. It definitely would be nice to own a home, but some people feel very strongly that it is an investment.

  1. Laurie @thefrugalfarmer

    Factoring in repair costs if you own, and necessary improvements, is another thing to consider. Also, the market went up in the last four years. It doesn’t always. As a former mortgage sales assistant, I used to be huge pro-own instead of rent, but after reading lots of articles, I’m convinced renting can be beneficial as well, especially when you live in an expensive place like NYC. The other thing to consider is disposal: With a rental, you can just finish out your lease, as an owner, you may or may not be able to sell, depending on so many different factors. My parents will be selling their home in the not-too-distant future to move to a 50+ townhome or apartment – rented. They don’t want to be stuck with a place they may not like, and they don’t want us kids to have to deal with a sale after they’re gone. Smart move, IMHO.
    Laurie @thefrugalfarmer recently posted…Recipe of the Week: Beans and RiceMy Profile

    1. livingrichcheaply@gmail.com Post author

      I know many huge pro-own people, but they don’t see the other side. Owning a home is great but like you said, when you factor in repairs costs and improvements, it can get expensive.

  2. Brad @ RichmondSavers.com

    This is an interesting analysis!

    The psychological aspects of this issue are a factor as well: with a rental you never have to worry about what horrific repair is right around the corner that you’ll need to spend $10,000 on and you also have an amazing amount of flexibility to just pick up and move when your lease is up. Don’t discount those factors!

    I know people say home ownership is the “American Dream” and all, but I’m currently very down on it in general. I get zero psychological benefit from ‘owning’ my own home (owning a small percentage of it, the bank owning the majority and me paying interest to them which is really just tax deductible rent).

    I don’t think you wasted $80,000 at all; NYC is very expensive and it doesn’t sound all that unreasonable for an apartment.

    I owned a co-op out on Long Island and it just killed me to pay that monthly maintenance fee each month (probably because I was the treasurer of the board and I understood that most of it was going to the “underlying mortgage”, which is the biggest scam I’ve ever heard of…); talk about throwing money away! Those $700 maintenance fees are the equivalent of the payment on a $125,000 mortgage right there.
    Brad @ RichmondSavers.com recently posted…An Introduction to RichmondSavers.comMy Profile

    1. livingrichcheaply@gmail.com Post author

      Thanks Brad. Well with the co-op, I guess the horrific repair costs is less likely as the structural issues and things of that nature would not fall to the co-op owner. Although there are so many restrictions with improvements and other things that it can also be a nuisance. Monthly maintenance can be very expensive, I know many places where is is well over $1,000. We’ve contemplating moving a little farther east possibly to Long Island but it is a little too surburban =) and those real estate taxes can be crazy!

      1. Brad @ RichmondSavers.com

        That’s a great point about the smaller potential structural issues with a co-op — I didn’t even consider that as I was largely thinking about my own house situation.

        I absolutely loved growing up on Long Island — so I’d highly recommend it (Northport on the north shore in Suffolk County is where I’m actually from. It’s a nice place to visit if you’re so inclined; the downtown/harbor area is lovely). But LI is ridiculously expensive, which is part of why we moved to Richmond, VA!

        Friends of mine basically bought a 3 bedroom ranch for $450,000 with $11,000+ real estate taxes each year. And that isn’t so unusual in some of the decent-to-better towns…
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        1. livingrichcheaply@gmail.com Post author

          Nope, $11,000+ real estate taxes are not unusual. I live in Queens but work out in Islip. Although by moving out of NYC, I would no longer have to pay the city income tax of about 3% so that would a savings.

    1. livingrichcheaply@gmail.com Post author

      I definitely agree…there is no right or wrong answer. I think renting worked out okay for us, but I would really like to buy a place now that I’m more stable with my job location and we’re starting a family.

  3. Holly@ClubThrifty

    We live in an extremely low cost area so buying is almost a no-brainer here. I have a 2400s.f. house in an upscale area and it only cost $150K!! Anyway, I don’t think that you wasted 80K. You needed a place to live right? You could’ve very easily bought a place that depreciated in value and lost money that way. Hindsight is always 20/20.
    Holly@ClubThrifty recently posted…Overcoming Laziness: How I Saved Money Last WeekMy Profile

    1. livingrichcheaply@gmail.com Post author

      That’s absolutely right Holly…I needed a place to live. People don’t understand that you pay rent in exchange for a place to live so it’s not wasted money! So jealous that an 2400 s.f house in an upscale area costs $150,000. In my neighborhood I could probably get a studio for that amount! It is crazy how the cost of living is so different.

  4. Troy

    When I graduated, I got really lucky. My parents let me live with them for 2 years, provided that I pay them $500 a month and help out with the housework. It was a great deal, because I got to eat homemade food and didn’t have to bear the loneliness of living alone.
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    1. livingrichcheaply@gmail.com Post author

      Yea I stayed with my parents too for a few years while going to grad school and paid about $600 to $700 a month…and yes the homemade food was very good as I had no time to cook.

  5. Kurt @ Money Counselor

    Buying is overrated vs renting, imo. I wouldn’t say you ‘wasted’ $80k on rent. I’d say you spent $80k in exchange to being warm, dry, and safe.

    Like all investments, whether buying a home is a better financial choice than renting depends on what happens in the future. Unfortunately, none of us is particularly gifted at accurately forecasting the future. For most places most of the time, I think the numbers are close enough that one should focus instead on intangibles. Renting offers far more flexibility, less risk (for big maintenance costs, for example), fewer responsibilities, and less demands on one’s time. These sort of reduce to incremental personal freedom. If that’s really important to you, then rent and tell the naysayers to take a hike! :-)
    Kurt @ Money Counselor recently posted…Financial Meltdown EffectsMy Profile

    1. livingrichcheaply@gmail.com Post author

      Thanks for your great comment Kurt! Absolutely agree that whether it is a better financial choice depends on the future. Actually I was thinking there would be a couple people telling me that buying a place is the only way to go.

  6. Matt Becker

    Would there have been realtor costs when you bought? When you looked at deductions, did you include all of the interest as newly deductible, or only the portion above what you already took as a standard deduction? What about the cost of any repairs you would have had to do? There are a lot of costs to home ownership that people never really factor in. Especially if you would have planned on moving soon anyways, renting was probably the right decision.
    Matt Becker recently posted…Bad for the Budget. Good for the Soul.My Profile

    1. livingrichcheaply@gmail.com Post author

      You are absolutely right Matt. I forgot to include closing costs in the equation and updated it. The conclusion is still the same though. I did not include all of the interest and real estate as deductible (I probably underestimated the tax impact as I would also be able to deduct charitable contributions and on the opportunity cost section, I would have been taxed on the interest). It was a rough estimate, but I did take into account the standard deduction. As for repairs, the co-op was move in ready so maybe we would have painted…that’s about it. I definitely think that in the short term, renting is often the better choice. But, we are kind of in the middle in the range of 5 to 7 years.

  7. E.M.

    So weird, you work where I live! I could never do that commute. I have decided to rent because LI is insanely expensive and it would take years upon years to save up for something around here. My parents just sold their house because they can’t afford it here anymore, and I can’t wait to move when the opportunity arises. I think it’s honestly up to the person. If you’re not ready to buy, you’re not ready and that’s fine. Owning a house seems daunting right now, and I like the flexibility that renting offers. If you’re happy then you made the right decision.
    E.M. recently posted…Methods for DeclutteringMy Profile

    1. livingrichcheaply@gmail.com Post author

      Everyone says that it’s commuting against traffic but there is still a good deal of traffic! It isn’t too bad if I leave earlier though. Long Island is expensive and there aren’t many affordable options for younger people who are just starting out. I think they are working on that though as a lot of young Long Islanders are leaving for the same exact reason.

  8. CashRebel

    Great analysis. I think a lot of folks will tell you that buying is always the better call just because that’s what they did. You have to run the numbers carefully (like you did), to really know which one’s better. For me, it’s certainly renting for now, and it sounds like you could have gone either way.
    CashRebel recently posted…My $8 Trip To TorontoMy Profile

    1. livingrichcheaply@gmail.com Post author

      Thanks! It’s true that many people will just assume that buying is always better. Even with running the numbers it is difficult to determine what is better because there are so many variables and no one can forecast the future.

  9. KK @ Student Debt Survivor

    I used to think that renting was a horrible idea (growing up in a small town in Maine where everyone owned their homes). Now that we’re in NYC I completely understand why many people rent (either they can’t afford to buy, or don’t want to be locked into condos and co-ops with their crazy neighbors. I love our condo, but our neighbors sometimes made me insane. It’s like we own our “apartment” but still can’t be free to do what we want because there are 4 other owners in the building, ugg. Not to mention the condo fees ugg, it pains me to write that check every month. Give me a single family home any day. Unfortunately, we don’t have 1mil plus to drop on a single family.
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    1. livingrichcheaply@gmail.com Post author

      Co-ops and condos really do seem like the only “house” I can afford. But I agree with you that it is like “owning” your apartment. Apartment owner definitely has some downsides…we’ve had some pretty bad neighbors and there is very little separation. I would love to have a single family home with a backyard someday especially with a baby on the way. Apartment or even condo/co-op living is a little too crowded.

  10. Lauren @ Cheapstudents.ca

    Thanks for providing some great insight on the topic of rent vs. own. I am currently renting near my university and will head home for a bit after I’m done (since I’m going to be pretty low on money). When it comes time to leave my parents place I will face the dilemma of buying or renting and especially in major cities the cost to own are incredibly high. It is a sunk cost to rent, but then there are a lot of sunk costs when it comes to home purchasing that you don’t have to deal with as a renter.
    Lauren @ Cheapstudents.ca recently posted…I’ve Jumped on The Blue Jays BandwagonMy Profile

    1. livingrichcheaply@gmail.com Post author

      I think for someone who has just finished school and starting a career, it makes sense to rent initially. You don’t want to be tied down to one area. It’s good to have some flexibility to move if you need to for your career. You will have plenty of time to save up and buy a house when you are ready. Check out this calculator to help you with your decision http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0
      Of course you shouldn’t just rely on a calculator but it is pretty helpful.

  11. Done by Forty

    I think your analysis is sound and like others have said, buy vs. rent can only be answered by doing like you did and running the numbers. When we purchased our first home in AZ in 2010 our numbers were clearly on the buy side, but I really enjoyed being a renter, too. Maybe I’m being nostalgic for younger days, but you’re a cooler person when you’re renting?

    Flexibility is something that’s kind of priceless but hard to plug into a cost breakdown. When renting, it’s really easy to move when you get a better job opportunity, suffer a layoff, your family expands, your family splits up, etc. etc. If it’s too close to call between renting and buying, I think the tie has to go to renting, if only because it sets you up nicely for the changes coming down the line.
    Done by Forty recently posted…Thirty Things Lighter UpdateMy Profile

    1. livingrichcheaply@gmail.com Post author

      Thanks. Yea I think AZ took a huge hit in 2008…good thing you waited until 2010. I agree that flexibility is important, although now that things are pretty stable for me, I’d like to buy. The grass is always cleaner because renting doesn’t feel that cool! Well here in NYC, it is a bit cramped when renting an apartment…you can often hear your neighbors, might be able to smell what they’re cooking…and smoking!! I’d like to have more space between my place and my neighbor’s place.

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  13. Bruce in Canada

    I’m noticing recently that when there are discussions on the internet about buying versus renting, the majority of the commenters are firmly on the renting side. The pendulum has surely swung from the “buy is better” period. There are pros and cons for both sides, and one aspect that I don’t hear too much is the forced savings aspect when buying. We often say “if we saved the difference we would be better off renting”, but for many, do they actually save that money?

    As other posters have said, it really depends on the area, how new the place is, and how long you want to stay in one place, how good the market is…. I used to always say, the feeling of owning a home is incredible, It is yours, and you can do whatever you want to it. I still believe that, and, I now understand or appreciate the other side of the coin of having the freedom to get up and move to where ever you want, whenever you want.

    Thanks for your story

    1. livingrichcheaply@gmail.com Post author

      Thanks for your comment Bruce. I definitely agree that there are advantages and disadvantages to both sides. It is not black or white and there is no clear cut answer. The decision to buy or rent really depends on your situation. I think there is some truth to forced savings for some people. For most personal finance blog readers I think they are pretty disciplined in saving though.

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