How to Create a Solid Financial Plan When You’re Renting Forever

Moving back and forth between Tennessee and Alaska, Michael Rogers and his wife, Christy, are twice stuck paying the mortgage and rent together. Once, in 2006, the situation dragged on for eight months, finally ending when they sold their house in Tennessee for the $20,000 they paid.

Other adventures in home ownership ended well — the couple doubled their money after selling the fixer-upper. Then later, with another property, they had to pay $30,000 to fix mudslides around their house, it was the builder’s fault.

Two years ago, Rogers moved to Kingsport in northeast Tennessee, where he signed a lease on an apartment that he thought would be a one-year stopgap before buying again.

The couple just renewed their lease for a third year, and have decided to rent for good. Mr. Rogers, a construction manager, likes the convenience of being able to move when a job calls.

Either by choice or by being priced out of the market, many people have decided that renting forever is their best – or only – option. Housing costs and interest rates have risen over the past few years, and it makes financial sense to rent. (The New York Times recently updated its popular rent vs. buy calculator to help people understand the tradeoffs.) In the 1960s, Average home price was slightly more than double. Average income. It’s almost now Six times as much.

Home ownership is a traditional strategy for building long-term wealth. For those who don’t plan to buy, creating a solid financial plan without building home equity requires a different mindset.

Homeownership is not a magic bullet for retirement security. Mr Rogers has seen how being “house poor” has affected elderly family members, one of whom has three-quarters of his net worth tied up in his home. This situation leaves people with the option of taking out a loan against the equity in their home or selling the home to gain value in it.

He has focused on investing instead, preferring the liquidity and stability of the stock market.

“If you’re buying something like a broad-based U.S. stock index, you’re buying a slice of the entire U.S. economy,” Mr. Rogers said. “When you buy a house, your risk is literally concentrated in one house, one neighborhood, one state.”

Mr. Rogers has found that people tend to focus on home equity over other factors. He thinks it might be a mistake.

“In the current market, especially in my area, the rent looks like an absolute bargain compared to the houses that are selling right now,” he said. “It allows me to really increase my savings rate. People are like, ‘Well, you’re not building equity.’ Yes, but I’ve got a 35 percent savings rate. I’m building investment accounts faster than I’ll build equity in my home.”

As with any other market, it is impossible to predict the future of rental charges. Fares can drop like they did in New York City during the pandemic or balloon like they did in Seattle inflated by Amazon. Housing prices can fall like they did during the Great Depression or explode like in San Francisco. The key is to have a plan that covers you in different scenarios.

Renting can be a better financial decision. Owning can be a better financial decision,” said Ramit Sethi, author ofI will teach you to be rich.“Often, we buy only because our parents told us to, and their parents told them to.”

Although he is a millionaire, Mr. Sethi has rented for the past 20 years in cities such as San Francisco, New York and Los Angeles. When he lived in Manhattan, he calculated that he would have to spend 2.2 times more per month than rent. He emphasizes that your calculations need to include mortgage interest, taxes and phantom maintenance costs, which are often estimated at 1 to 3 percent of the home’s value.

So he rented and focused on investing. He’s a fan of index funds, any long-term, low-cost investment-targeted debt fund.

“If you choose to rent, the one thing that’s most important is that you drive your numbers. The difference,” Mr. Sethi said.

He also negotiates his rent, which he said many people don’t know is an option. He recommends that renters pay attention to the comparative costs of housing in their area. If they can find better deals, they should go with the documents at renewal time.

“It doesn’t always work,” he said. “When that happens, it’s a huge advantage.”

Over the past century, the S&P 500 has returned an average of about 7 percent annually, adjusted for inflation. Mr. Sethi said most people had no idea what the stock market was returning. “But you need to know that number,” he said, “because it tells you what your opportunity cost is—in other words, how much you could make if you just put money into the market. are.”

There is also an emotional element to planning your finances when renting. Mr. Sethi said people should not feel guilty if they are renting.

“Remember that there are literally millions of people in America who rent and invest in the gap,” he said. “You’re not weird just because you’re choosing to rent. I do it, and so do a lot of other people.”

“I’m constantly being asked why I’m not buying a house,” said Miranda Marquette, who is in her mid-40s and lives in Idaho Falls, Idaho. “People think it’s weird.”

Ms. Marquette earns between $10,000 and $12,000 per month and has been building an investment portfolio for the past 25 years and multiple income streams for the past 15 years. If you want to start planning for a successful financial life without owning a home, she recommends starting with a retirement calculator.

“When deciding how much I’m going to invest each month, I take a very conservative approach and assume a 6 percent rate of return,” she said. “I know a lot of people will say that you should think the rate of return is too high, especially if you’re investing in stocks, but I like to err on the side of caution.”

You’ll need to consider how much rent is likely to increase over time (Ms. Marquette uses an estimate based on 3 percent inflation) to come up with a figure for how much you’ll need in retirement. Will be.

“Determining if you’re ready for retirement is all about running the numbers, whether you’re renting, having a mortgage or building a rental empire,” he said. “Look at what you want to do in retirement and estimate your monthly needs. Then figure out how you’re going to meet those monthly needs.

“It’s pretty much my life,” said Berna Anat, who lives in the San Francisco Bay Area. “I don’t see home ownership in my future.”

When someone says she’s throwing away money on rent, she thinks of friends who own houses. “They’re like, ‘Oh, we can’t go on vacation for two years because termites ate the foundation of our bathroom,’ or like, ‘Yeah, we can’t actually go on vacation this weekend because we have our ate the bathroom foundation. Hands and knees tiling our crumbling sunroom grout,'” she said. “Forever renting is a movement. It’s a lifestyle.”

It comes with a cost: the theoretical equity many plan as their retirement stronghold.

Ms. Anat, Author “Loud money out“Switching home equity and living in a rental is about diversification and investing more. If you’re working full-time, he said, you can fully contribute to your 401(k). Want to invest and get as much employer matching as possible. Ms. Anat also recommends opening another fund, such as a Roth individual retirement account.

“The idea is, if you’re not spending on charges like housing costs, closing costs, escrow, property taxes” and homeowners association fees, he said, “then you’re paying for all of that.” Investing the money so that you have as happy a retirement as possible, because you won’t have that equity.

“For me, as a renter forever, I have all those things, and I’m investing as aggressively as possible,” she said.

In the short term, Ms. Anat said, you also need to plan for real-world fluctuations. Your rent may go up, or your building may be sold. She recommends at least a six-month emergency fund and a spreadsheet detailing your plan in case you lose your home.

“If you had to move out of your apartment tomorrow, what are your funds and your real life plan?” she said. “It’s almost like an earthquake prevention plan situation.”

Another consideration is your credit score: keep it clean. Make your payments on time and try to keep the amount you owe below your limit. The usual advice is to limit your borrowing to 30 percent of your credit limit. Ms. Anat tries to stick to 10 to 15 percent.

Maintaining a strong credit score is critical, she said, because “landlords are looking at it, and you’re more likely to be able to shop the market again next month or next year and impress a landlord.”

You also need to protect yourself by understanding landlord rights versus tenant rights where you live, as they vary by city and state. Purchase renter’s insurance, which is usually inexpensive.

Overall, Ms. Anat said, you need to stabilize your life with as much financial backup as possible.

“It reminds me a lot of being self-employed,” he said. “Being self-employed means you have to plan for health insurance. You have to DIY your plan for retirement. It’s a little more than getting into that frame of mind.”

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