Is Renting Really Throwing Away Money?

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Don’t buy a house based solely on this mistaken belief.

Key points

• Renting a property is often referred to as throwing away money.
• That’s because, unlike with a mortgage loan, renting doesn’t help you build equity.
• Renting isn’t necessarily the wrong move for everyone though.

Millions of Americans rent properties across the country. Sometimes, people who are renting decide they want to buy a house not because they’re really interested in doing so, but because they’ve been told over and over that renting is “throwing away money.”

This perception that renting is a waste of money likely stems from the fact that the rent you pay does not help you to acquire ownership in a house. Unlike when you make a mortgage payment, you aren’t building equity or getting closer to owning a valuable asset free and clear. Instead, you’re likely paying your landlord’s mortgage and then some with your monthly payments.

But while there is an argument to be made for the idea that rent payments aren’t a wise use of money, the reality is that there are plenty of circumstances where being a renter is the best financial choice.

Renting buys you a roof over your head

The bottom line is, renting is not a waste of money for most people because it buys them a roof over their head. Everyone needs a place to live, and if buying a property isn’t possible or isn’t a sound financial choice, then renting is most likely the best option.

And in many cases, being a renter is actually the better financial move and property ownership could be more wasteful. This can happen, for example:

• If real estate prices are in a bubble and you’re renting while you wait for them to come down: In this case, buying a home would likely be throwing away money because if you purchased the property at a high price and the bubble burst, you could be out thousands of dollars. 
• If renting is much cheaper than buying a comparable property: If you have to pay much more each month to your mortgage than you’d pay for rent, you’ll be tying up too much cash in real estate when there could be better investments out there. You could end up with a higher net worth if you rent and invest the difference.
• If you have to move soon: The transaction costs of buying and selling a home can be very high. If you must move within a few years, ownership could be throwing away money more than renting because you wouldn’t get back the closing fees you paid. 

And these are just some of many examples where renting isn’t a bad choice, but instead is the best way to have a place to live while doing other smart things with your money.

Should you rent or buy?

You should never buy a home just because you believe paying rent is wasteful. You should buy a home only if you are in a good financial position to do so, can find a property at a reasonable price, and will remain in that property for a while. 

If you don’t meet these criteria, don’t feel bad about sending money to a landlord to have a comfortable place to live — even if that means you end up renting forever if you move often and don’t want to set down roots. While you won’t end up with a house in the end, you could still end up with a higher net worth than you’d have had if you bought a home at a time that wasn’t right for you.