For many, renting feels like throwing money away when you could be "investing" in a home of your own. But the math doesn't necessarily work out that way. Renting may actually be a more financially prudent choice. On a Fool Live episode recorded on March 5, Fool contributor Brian Stoffel answers a viewer's question: "How can you afford to retire if you rent?"
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Brian Stoffel: Brian, I'm going to piggyback off what you said. I went into Slido and I looked in, some people are saying, "How can you afford to retire if you're renting?" For me, I loved the work that Morgan Housel has done on this. Most of his writing, he did when he was still with Motley Fool, which was that, a house is a terrible financial investment. Now, if you're using it to rent out to other people, there are ways that you can do that that can be very beneficial.
But as your primary residence, it's a terrible financial investment. Here's the main reason why. Because if you take that down payment and you just take that down payment, like forget everything else and you put that into the stock market, there's almost no way that say, when your kids graduate or go off to college or once your 30-year mortgage is done, or whatever that might be, there's almost no way that you have more in the bank than you would have if you would have put it into the stock market.
Now, there's like a thousand other variables you can say, "Well, what happens after that time and what happens after that." But the other part that you've got to be realistic about, I was talking with a friend today who said, when he bought his house, he tried to lay out all the spending and his older friends were like, "You think that's what it's going to be? Are you kidding me?" Your hot water heater is going to break, your furnace is going to break, this is going to happen. As a renter, you don't really have an appreciation for that. Which makes sense. Because why would you?
But then when it's your responsibility and it's your kids whose teeth are chattering because the furnace isn't on, then all of a sudden it becomes one of those "you have to do it" moments and you're like, "Wow, these things really add up quickly."
I would say the better question is, how do homeowners afford to retire? [laughs] If you really, really, look at the numbers. [laughs] I'll even throw in another thing here, and this is coming from a homeowner, myself. There have been studies that have gone back and see which group of people, accounting for all the other variables like age and race and income and whatever, renters generally are happier than homeowners. To me, that's not even remotely surprising.
But the fact that I wouldn't have guessed that 10 years ago, that's the part that's surprising. For us, I have no idea of this is our forever home. But I will say that one thing that Morgan kept saying too is, "Just because it's not a great financial investment doesn't mean that it's not a good investment. It's just that you need to understand this is an emotional and a social investment."
