Renting Versus Buying: Which is best for early retirement?

On your path to early retirement it’s inevitable that at some point you will question whether renting or buying is better for reaching FIRE in the shortest time possible.

Then you will laugh, slap your forehead and go ‘silly me, of course buying is better than renting because renting is just throwing money away’.

Right?

Well that’s what I thought until I read this post by Millennial Revolution explaining why renting can be the quickest route to early retirement using their friends as a case study.

Now I’m freaking worried.

I mean their post makes sense. It’s seems mathematically sound and does actually suggest that renting can be a major key to retiring early.

But I really like my house, and have always been taught that renting is just plain bad money management. It’s kind of difficult to reject lifelong thinking just on the basis of one (okay I’ve actually read quite a few of their ‘why you shouldn’t buy a house’ posts) very convincing blog post written by Canada’s youngest retiree.

I mean she’s got the credentials so I really should be listening to her. But honestly I think my situation is different. I remain unconvinced.

But what should one do in the face of such potential earth shattering revelations?

Do my own case study of course, on myself and on my situation. Plus I’m going to show you how to figure out the answer to the renting versus buying question for yourselves!

Sweet, a case study and an action plan. Don’t I treat you guys well!

Before we begin…

To clarify I am not discussing property investing, I am only discussing your main home where you live full time and whether you should be buying it or renting it.

How to figure out if you should be renting or buying?

It’s actually pretty simple to work this out, and honestly I’m unsure why I’ve never done this before!

My method is slightly more simplified than Millennial Revolution’s but it works, however if you’re wanting something super exact with a little bit more maths then I would advise you consult their post!

Basically you need to come up with what it would cost you each month to live in a rented house versus living in a brought home. Then, using these figures and a handy early retirement calculator, find out if you are better putting your money into a house or investing in something like index funds.

Now the thing is that something as small as your mortgage interest rate, the size of your deposit or your savings rate can completely alter whether you should rent or buy. So you really need to work this out for yourself and your own situation.

And if your situation changes in any way, like your mortage interest rate increaes or your rent goes up, then you will need to recalculate.

The Method:

AKA the roadmap to figuring out if you should rent or buy for speediest early retirement.

Step One –

Work out how much it would cost you each month to live in a rented house versus living in a brought home per month.

Brought home costs could include:

Mortgage Payments

Insurance

Property Taxes / Council Tax

Utilities

Maintenance (Normally 1% of property price)

Rented home costs could include:

Rent

Insurance

Property Taxes / Council Tax

Utilities

Check your local property laws to see which costs are applicable, for example in the UK whether you’re renting or buying you still have to pay council tax (our version of property taxes). However in the USA (I think) it’s the owner of the house that must pay property taxes, so if you’re renting this isn’t a cost you have to take care of.

Step Two –

Now you need to work out your overall annual household expenses owning and renting.

Hint one of those options will likely be your actual expenses right now…

Step Three –

Okay now we need to grab a few other numbers to pop in the early retirement calculator:

Annual Income

Amount of income saved each year x2 (which is income minus expenses for both the renting and owning scenario)

Amount of savings you already have x2 (see below*)

*You will have two different numbers for the renting and owning of the house scenarios.

For the owning house calculations do not include any equity you have within that home as part of your savings because this is money that in that scenario you would be unable to also invest elsewhere. If you have not purchased a house yet then ensure you DO NOT include any money you would use for a deposit.

For the renting calculations your amount of savings should include the amount of equity you have in your home (so your house value minus your mortgage is the equity you have). If you have not purchased a house yet then ensure you include any money you have saved for a deposit.

Step Four –

Use the Networthify calculator to figure out if you should be renting or buying.

Easy?

Yeah right, even I’m confused and I wrote the thing. No worries because I’m going to now go through an easy to follow case study (of my own household) so you can see how it actually works in real life (and we will find out if I should be renting or buying, I’m really hoping it come out as buying because I adore my home!!!)

Ideally you will be following along with your own situation to see if you should be renting or buying! But you know its a free country so I’m gonna leave that up to you!

Case Study Example: The Well and Wealthy Household

Heads up I live in the UK so everything is going to be in £, don’t worry currency shouldn’t make a difference with this method.

Step One –

We already own a home thanks to an unexpected inheritance I received, we brought it for £250,000 with a £60,000 mortgage and renovated it. Hopefully it has increased in value to around £300,000 but this is an estimation, as we haven’t had a valuation done yet. We have £58,500.00 left on our mortgage and the repayments are £217 per month for another 34 years (geez). 2.56% interest rate fixed for another two years in case you were wondering.

Brought home costs (per month):

Mortgage Payments: £217

Insurance: £20

Property Taxes (called Council Tax here): £125

Utilities: £200

Maintenance: £50 (normally you put away 1% of the property value, we do not put away 1% because we have just finished renovating the property it should not need large work for a good few years and by that time those £50s will be a decent chunk of money)

Total: £612 (£7,344 per annum) 

Rented home costs (to rent a property of a similar type in the same area)(per month):

Rent: £1,100

Insurance: £20

Property Taxes (called Council Tax here): £125

Utilities: £200

Total: £1,445 (£17,340)

So at step one, buying is certainly looking better than renting, but that could all change!!!

Step Two –

Overall household expenses when owning: £23,000

Overall household expenses when renting: £32,996

I calculated this by working out much my boyfriend and I spend each year on everything NOT house related. So basically I got our budget and minused the mortage, ultilities, council tax, insurance and maintenance. Then I just added the annual ‘Brought house costs’ to this to get the ‘Overall household expenses when owning’ and added the annual ‘Rented house costs’ to it to get the Overall household expenses when renting’.

Woah that’s a massive difference! But that’s because we have a lot of capital in the house and thus our mortgage is super low. But still right now renting looks like a crazy idea!

Step Three –

Let’s grab the digits we need to input into my favorite early retiremnet calculator!

So currently I’m not earning a full time wage as I’m starting my own business working on this blog instead (and you can find out why here). My partner is working full time however and earns £16,800 after tax (he’s due for a pay rise soon).

Now obviously if I only use the one income thats currently coming in, well it doesn’t even cover our basic expenses as my expenses are currently being covered by my emergency fund.

Therefore for the purposes of this of this calculation I’m going to assume I’m also earning a full time wage the same value as my partners. This is realistic as I could go out tomorrow and get a job with that wage.

When owning:

Annual Income: £33,600

Amount of income saved each year: £10,600 (‘Overall household expenses when owning’ – ‘Annual Income’)

Amount of savings you already have: £49,000

When renting:

Annual Income: £33,600

Amount of income saved each year: £604 (‘Overall household expenses when renting’ – ‘Annual Income’)

Amount of savings you already have: £290,500 (This is my currently savings, plus the equity we have in the house we own)

(£300,000 – £58,500 mortgage + £49,000 savings = £290,500)

Step Four –

Now I’m going to input these figures iinto the Networthify calculator to figure out if we should be renting or buying.

Starting with the owning a house numbers:

Put your ‘Annual Income’ into ‘Current annual income’.

Put the ‘Amount of income saved each year’ into ‘Current annual savings’.

Check the ‘Current annual expenses’ matches your ‘Overall household expenses’ from step two.

Put the ‘Amount of savings you already have’ into ‘Current portfolio value’.

Click the ‘+ Show more options’ and put 7% into ‘Annual return on investment’ as this is the most likely figure.

Check the ‘Withdrawal rate’ is 4%, change if necessary.

Having done all that, with no increase in current earnings we would retire in 18.8 years.

Below I have included screenshots of the calculator so you can see what I inputted and exactly what it spat out.

Now we will alter a few things to get your renting figures:

Change ‘Current annual savings’ to your ‘Amount of income saved each year’ from the renting section.

Change ‘Current portfolio value’ to the ‘Amount of savings you already have’ in the renting section.

Check the ‘Annual return on investment’ is still 7% and the ‘Withdrawal rate’ is still 4%.

Now how do the numbers check out? Apparently we can now retire in just 15.1 years, which is most definitely an improvement. It’s interesting how we could actually retire quicker saving less, just goes to show the power of compound interest!!!

I have included the screenshots again in case you want to take a peak.

Conclusion:

Well, well, well it does indeed appear that renting over buying would make retirement that little bit closer. By a whole 3.7 years!!!

Right now because I am not actually earning anything we couldn’t afford to have the increased monthly cost of renting over buying, even though it would be better in the long run.

However once this blog starts seriously paying some bills I will definitely be revisiting this calculation to check if we should be selling up!

Perhaps renting isn’t actually just throwing money away…

If you want a get a little more math in then I would advise you check out Millennial Revolution’s posts that originally inspired me to question buying over renting, and this this post from Afford Anything which dispels the most well know buying versus renting myths.

But right now, tell me what happened when you worked it out in the comments below!

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