3 reasons renting can save you money in 2022

Sometimes renting is the best way to save money.

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Key points

• Despite everything you may have heard about homeownership, it is not always the safest path to wealth.
• Historically, the stock market has beaten rising home values.

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To buy or not to buy? For some, this is a difficult question. Certainly, buying a 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 solution?

Before you head to the open house or start browsing real estate listings, think about 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 payments for a home in the 50 largest metropolitan areas in the United States. They found that renting was generally cheaper than owning a house, with one exception.

Once a landlord has paid off their property and no longer has a mortgage, it is cheaper to own a home than to rent, even with taxes, insurance, and upkeep included.

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

If your budget is tight and an additional $ 300-1,200 in your checking account each month would help, statistics show that leasing may be the best solution right now.

2. You are not responsible for costly home repairs

Imagine the basement leaks in the house you own. The leaking basement is the result of a fundamental problem and the repair bill is $ 7,000. Unless you have enough funds in an emergency savings account, you could find yourself withdrawing a credit card.

Let’s say you use a credit card with an APR of 16% to cover expenses. By making a payment of $ 200 on the credit card bill each month, it would take 47 months to pay off in full, and you would be paying just under $ 2,500 in interest.

If you were a tenant, you could call the landlord or the management company and tell them about the problem. Instead of making a payment of $ 200 per month to a credit card company, you can invest it instead. 47 months is not a long time, but if you were to invest $ 200 per month in an investment with an average annual return of 7%, in four years you would have about $ 10,500 set aside for your future.

3. More money to invest

While saving $ 500 per month might 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 owning a similar house would cost $ 2,500 per month. Again, assume a rate of return of 7%. Here’s what would happen if you invested the $ 500 in savings per month:

If the responsibility for a mortgage, taxes, insurance, maintenance and repairs prevents you from investing as much as you want, leasing may be the answer.

READ MORE: How does compound interest work?

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

Learn from the past

In 2017, a joint study by Florida Atlantic University, Florida International University and the University of Wyoming surprised some people. Researchers have found that no matter how much a property’s value increases, renting and reinvesting on average creates more wealth than owning a home. The results flew against the misconception that buying is always the best financial decision.

To test their conclusions, we looked at the 49 years between 1972 and 2021. Let’s say you were around in 1972 and old enough to buy (or rent) a house. Here’s how things might have turned out, based on the data available:

Scenario 1: It’s 1972 and you bought a house for $ 50,000. Between 1972 and 2021, house prices increased by an average of 4.08% per year. Every dollar spent to buy a house 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’ll need to subtract the 30 years of mortgage payments, interest, taxes, maintenance, and repairs you paid.

Scenario # 2: It’s 1972 and you’ve rented a house, saved $ 250 a month, and invested that savings in the S&P 500, generating an average annual return of 7%. Today, that investment would be worth more than $ 1.3 million. Even if you subtract the amount you’ve invested over the years ($ 147,000), you earn almost $ 1 million.

Between the years 1972 and 2021, the average return on investments of the S&P 500 was 10.95% per annum. Adjusted for inflation, it is 6.86%. When you compare the return on stock investments with housing, stocks have done at least 2.78 percentage points better than housing. And that doesn’t take into account the power of compound interest over investment vehicles.

There are plenty of good reasons to buy a home. In addition to taking root in a community, buying a home allows you to make improvements and decorate however 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 the investment or pack a suitcase whenever the travel bug hits, renting can make it easier to achieve your personal goals. At the end of the day, you have to do what’s best for you, whether it’s renting or taking out a mortgage.