3 Reasons Renting Can Save You Money in 2022

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Sometimes, renting is the best way to save money.

Key points

  • Despite all you may have heard about homeownership, it's not always the surest path to wealth.
  • Historically, the stock market beats rising home values.

To buy or not to buy? For some, it is a difficult question. Surely, purchasing property is the right thing to do. Otherwise, why would it be considered part of the American Dream? But what if people are wrong? What if renting is the right way to go?

Before you head out to open houses or begin scrolling through real estate listings, consider these three ways renting can save you money in 2022.

1. The monthly fixed payment is likely to be lower

In a new report, LendingTree compared monthly rental costs to house payments in the 50 largest metro areas in the U.S. What they found was that renting was usually cheaper than owning a home, with one exception.

Once a homeowner pays off their property and no longer carries a mortgage, it is less expensive to own than rent, even accounting for taxes, insurance, and maintenance.

For anyone still paying a mortgage, though, LendingTree found that renting is, on average, $606 cheaper per month than owning. How much cheaper depended on where the lender looked. For example, in high-cost areas like New York, San Jose, and San Francisco, it was about $1,200 less per month to rent than to pay a mortgage. In less expensive areas like Tampa, Orlando, and Indianapolis, renters saved an average of $335 by not buying.

If your budget is tight and $300 to $1,200 extra in your checking account each month would help, statistics show that renting may be the best path for now.

2. You're not responsible for costly home repairs

Imagine the basement leaks in the house you own. The leaky basement results from a foundational issue, and the repair bill comes to $7,000. Unless you have enough put away in an emergency savings account, you may find yourself pulling out a credit card.

Let's say you use a credit card with an APR of 16% to cover the expense. Making a payment of $200 toward the credit card bill each month, it would take 47 months to pay in full, and you would pay just shy of $2,500 in interest.

If you were a renter, you could call the landlord or management company and hand the problem off to them. Instead of making a $200 per month payment to a credit card company, you could invest it instead. 47 months is not long, but if you were to put $200 per month in an investment with an annual average return of 7%, in four years you'd have around $10,500 put away for your future.

3. More money to invest

While a $500 per month savings may not seem like a fortune, it can make a huge difference. Let's say you rent a small house for $2,000 per month and that owning a similar home would run $2,500 per month. Again, let's assume a 7% rate of return. Here's what would happen if you invested the $500 per month savings:

Number of Years Approximate Value
10 $83,000
15 $150,800
20 $246,000
30 $566,800
Source: Author calculations

If responsibility for a mortgage, taxes, insurance, maintenance, and repairs prevents you from investing as much as you'd like, renting may be the answer.

READ MORE: How Does Compound Interest Work?

It's impossible to predict the future, and we have no way of knowing for sure what will happen with housing or stock prices. All we can do is look at the historical performances of each.

Learning from the past

In 2017, a joint study conducted by Florida Atlantic University, Florida International University, and the University of Wyoming, caught some people by surprise. Researchers found that, regardless of how much a property increases in value, renting and reinvesting builds more wealth on average than owning a home. The findings flew in the face of the conventional wisdom that buying is always the best financial move.

To test their findings, we looked at the 49 years between 1972 and 2021. Let's say you were around in 1972 and old enough to purchase (or rent) a home. Here's how things may have played out, based on available data:

Scenario #1: It's 1972, and you purchased a home for $50,000. Between 1972 and 2021, housing prices increased an average of 4.08% annually. Every dollar spent purchasing a home in 1972 would be worth $7.10 today. So, the house you bought for $50,000 would be worth around $355,000 today. Of course, you'd need to subtract the 30 years of mortgage payments, interest, taxes, maintenance, and repairs you paid.

Scenario #2: It's 1972, and you rented a home, saved $250 per month, and invested that savings in the S&P 500, earning an average annual return of 7%. Today, that investment would be worth north of $1.3 million. Even if you subtract the amount you invested over the years ($147,000), you're up by nearly $1 million.

Between the years 1972 and 2021, the average return on S&P 500 investments was 10.95% per year. Adjusted for inflation, that's 6.86%. When you compare the return on stock market investments with housing, stocks did at least 2.78 percentage points better than housing. And that does not take into account the power of compound interest on investment vehicles.

There are plenty of good reasons to buy a house. In addition to putting roots down in a community, buying a home allows you to make upgrades and decorate any way you want. And once you've paid off the mortgage, you know it's yours, as long as you pay taxes.

But if your preference is to focus on investing or to pack a suitcase anytime the travel bug hits, renting may make your personal goals easier to achieve. Ultimately, you need to do what's best for you, whether that means renting or taking out a mortgage.

Our Research Expert