Original question from Quora:
Why do a lot of rich people say rent instead of buy property?
The shortest possible answer is because they understand money secrets that you don’t.
Writing that sounds silly, but it’s true. Wealthy people know things that most people don’t. Allow me to explain…
I’m not wealthy, but I’ve experienced enough in my life so far to understand how to get there. Real estate is one area where I’ve learned some lessons that many others haven’t.
Real lessons that cost me real dollars.
Years ago, around 2006 or 2007 I had a online marketing business that made a decent side income. At one point I had a few grand free to invest.
At the time I thought it was a good idea to invest in some cheap rental property. I was able to buy a former HUD home for pennies on the dollar.
I think the home was worth something like $75,000, but I managed to get it for something like $35,000. The down payment was around 5-10%. With closing costs I think it was around $5,000 give or take total investment.
Not a bad way to buy a house, and the monthly mortgage payments were around $350.
At the time I had friends moving into town, so I was able to rent it to them for I think around $600 a month. In retrospect, I could have charged more rent, but that doesn’t so much change the story.
Renting to friends wasn’t a bad deal. They took pretty good care of the place and I had a decent experience as a landlord.
The most annoying parts were all on the front end and back end of owning property. Getting it ready to rent was a pain and selling it was an even bigger pain.
I guess taking care of the lawn wasn’t much fun either. I should have hired that out.
Nonetheless, renting property I made a small profit. I think I was making $100-200 a month.
After a few years I grew tired of renting property and wanted to get rid of it…
I think it was around 2010 and I figured I would have no problem selling the property at a profit. After all, bought it at like half price. Should have been easy money right?
You would think so, but I guess not.
I figured I could sell it for $60,000 - $70,000. Nope.
Eventually we sold it for something around $35,000 or maybe $40,000.
However, to even get that price, we ended up putting a lot of time and some money back into the house to get it sold. The buyer had a long, ridiculous punch list. Oh boy.
When it was all said and done we were at breakeven when it was all said and done. I estimate it cost maybe five or six thousand dollars to buy the house and I got that much out basically.
Overall, I don’t think I made a whole lot of money on that deal. When you figure the time and energy spent, I didn’t come out ahead.
You know, I could have put my money into a safe enough investment and got a 1-5% return without doing anything at all. I could have paid down debt in other areas like mortgage or credit cards and got a guaranteed 5-30% return on my money.
The point is I could have got an equal or better return by putting my money elsewhere.
I could have saved myself hours and hours of time.
That is what many of the rich understand that everyone else doesn’t. Time is money. Literally.
So, when you do the math on renting vs. buying, if you look at it as an investment of your time, renting is often a way better deal.
And the worst part about owning a house is, it’s not really an investment at all. Even if you buy it as an investment property, that doesn’t mean it will pay off and often you will at best break even on your money and lose money on your time.
There is one reason to buy a home… because it makes you happy.
It’s totally fine to buy the idea that a home will make you happy. As long as that is why you are buying a house, that’s as good of a reason as any. Just know that you are paying a premium to make yourself happy, even if it often doesn’t make financial sense.
You don’t have to do everything that makes the most financial sense. Nobody is financially rational all the time. Not even Warren Buffet.
However, don’t complain when you have financial difficulties after making a decision that makes you happy.
Short term happiness and financial success are not in any way related.
P.S. I unpack more ideas in Creative Genius.