Renters Don't Get Left Behind 

Oct 24 2000

So you can't picture yourself with a mortgage and living in the same house for the next 20 years, but you cringe at the thought of all the money you're tossing down the drain on rent?

Cleaning out the gutters is another visual many can't bear to embrace. Fear not, if you plan well and invest your extra money wisely you can avoid a lack of funds later in life that many face by not building equity in a home of their own.

Homeownership is hovering at historically high levels in the U.S. Two of every three families either own their dwelling or are in the process of purchasing it. It's the American Dream after all, made better by very favorable tax rules, namely the deductibility of mortgage interest.

So renters tend to feel left behind. Making matters worse, many people like living in an apartment, and not worrying about doing their own maintenance or worrying about fixing the right deductions on their tax return. There is something to be said for the simple life.

Contrary to common perceptions, you can rent and prosper simultaneously. There are even a couple advantages to renting that seldom come up, especially in times like these with strong appreciation in home prices during the last several years.

So do some planning and enjoy your apartment and life. 

Picture this: you just emptied your bank account to pay your mortgage. Hours later, you realize you don't have any hot water. Perhaps you also discover a leak in your pipes. Now it's the time most people panic.

This is a taste of the kind of stress homeowners feel, particularly those without a lot of excess cash flow. If you rent, all that is someone else's headache. 

The key to beating the housing trap is to pay less in rent than you otherwise would put toward a mortgage. Only then can the excess cash be directed into investment opportunities. 

In addition to saving money through paying less monthly by renting, the renter saves by simply not having to pay for repairs or maintenance of a home. These expenses are what sometimes leave homeowners with a bad taste in their mouths when they find themselves house poor. And they aren't deductible.

Keep in mind this article isn't trying to talk anyone out of buying that first home. Buying a home includes many financial benefits, including: equity building, price appreciation, tax advantages, and access to money through home equity loans.

So can you really swing holding onto your apartment and build that retirement safety net?

"Yes," says Lee Rosenberg, a certified financial planner at ARS Financial Services in Jericho, N.Y. In fact, he says sometimes renters can come out on top.

If a person has a new job and is on a very tight budget, renting instead of buying would be the most logical choice. Money saved can be plowed into a 401K plan, which are employee-sponsored tax deferred retirement vehicles. Few devices help a person save better than a 401(k). 

Younger people have the most to gain by stashing money in tax-deferred accounts now because they have many years to then grow untouched by the owner or Uncle Sam.

"If the money that is saved -- by paying less in rent as opposed to a mortgage -- is invested wisely the renter may possibly gain ground," says Rosenberg. 

The saver should stick with a diversified portfolio of stocks, which is very likely to outperform most other investments over time, Rosenberg adds.

In general, financial planners says renters enjoy five advantages over homebuyers, so take advantage:

1. Money not needed for appliances, landscaping, and routine repairs can be invested. 
2. Renting provides the ability to keep a high level of liquidity, which can be used to invest at key moments, like after the market tanks. That money could also go into a business venture. 
3. Renters enjoy a fixed monthly housing expense with little room for negative surprises. 
4. When the lease ends, the can leave without strings attached. 
5. In renting there is no risk of losing money if the real estate market takes a turn for the worse. Homeowners enjoy the upside but must also suffer bad markets.

Diahann Lassus, president of Lassus, Wherley and Associates, says some people are very busy with their careers and simply don't have time to bother with homeownership. And some people don't have the extra money needed for repairs, she adds.

"(The high cost of some repairs) may be unexpected for new homeowners and their pockets and it may leave them in a tight spot financially," Lassus says. 

Also, don't forget closing costs, all those fees that you pay upfront and can't deduct on your tax return. You need to see strong home price appreciation for several to compensation for these expenses, according to the U.S. Department of Housing and Urban Development.

Given the strong run in residential real estate in recent years, it's easy to forget that home prices do go down on occasion. This seems to happen after bubbles occur. Are we in a real estate bubble now? It's hard to say.

Lassus says that many people are better off financially if they rent and enjoy more safety than homeowners in volatile markets. Planners are quick to warn that there's risk in everything; home buying is no exception.

"I tell people that they should think of their house as a place to live and not an investment," says Lassus.