BenjaminSte.in

Maybe I’m just an idiot, but I never really understood why renting can be cheaper than owning. 

We all know mortgage payments can be higher than rent payments, but aren’t you building equity instead of “throwing your money away”?  That’s the point I’ve never quite understood.  But cm pointed me to this very simple explanation, which I will dumb down even further.

Let’s say renting an apartment in NYC costs $2,000/month and buying something equivalent costs $3,000/month. With the latter, you are investing $3,000/month in your house. With the former, you are spending $2,000 on rent, but you still have $1,000 leftover to invest elsewhere.

So now the question becomes, will the house appreciate more than investing that $1,000 in something else?  

Imagine you own for 5 years. The alternative is having $60,000 for you to invest in other assets (stocks, bonds, money market) with compounding interest. Depending on what the markets look like during that window, you could do significantly better investing in other things, which would make renting a cheaper alternative.

Footnotes:

• I’m not advocating one or the other - just explaining how it’s possible for renting to be cheaper
• I’m ignoring a ton of stuff here: tax benefits, closing costs, maintenance fees, house repairs, actually owning an asset, the possibility of paying off the mortgage, but none of that is relevant to the discussion
• I’m also ignoring quality of life things: are home improvements appealing to you or annoying to you? 
• I’m also assuming you buy your house and live in it, but if you rent out all or some of your building, the math is the same. You just have to subtract. Or possibly divide.