Making My Last Rental Payment; Ever?

Yesterday I wrote out a check for what will likely be the last rental payment for at least the next 12-24 months. Saying it is the last one I will ever write is a bit of a stretch, but it’s a nice thought. Some people are ok with writing out that check each month, but I have to say that for me it is the one expense I loathe the most.

Housing is one of the most expensive budget items that most people will encounter as can be seen by the following:

spending

http://www.creditloan.com/blog/2012/06/26/how-the-average-us-consumer-spends-their-paycheck/

Spending for housing eats up close to 30% of total spending for the average American.  I’m not far from that mark.  To date my rent payment has made up 32% of my monthly spending.  For the next half of the year I expect it to be much less.

My rent covers a roof over my head in a one bedroom apartment with all utilities except electric included.  I don’t have to worry about paying for garbage, water, lawn care, insurance or taxes.  Sounds like a fairly reasonable deal for 8100.00 a year plus a 100.00 for rental insurance.  Even though going forward I will have to pay all of the expenses listed above myself I still believe I will come out ahead, actually I’m banking on it as saving a portion of that 8200.00 a year was part of the appeal of investing in real estate to begin with.  I won’t know exactly how much I’m saving until I move in and start seeing a few of the monthly expenses associated with owning a house.

For the sake of comparison once I have a few months of housing expenses I will look at what it would cost in invested capital to be able to pay for my shelter.  For example, based on my current housing expense of 8200.00 a year I would need $205,000.00 at as SWR of 4%.  That is a decent sum of money just to pay for one expense.  To be fair I could always find cheaper housing or have  a roommate to cut the expense.  Even with those options I still believe I will come out ahead by taking the route I’ve chosen.

Later in the fall I will have some actual numbers from the monthly expenses associated with owning a home and at that time can do a better comparison.  Until then I would love to hear your take on how I’m accounting for the expenses.  Agree with my view?  Think I’m missing something?  Leave me a comment.

9 thoughts on “Making My Last Rental Payment; Ever?

  1. My opinion on this topic is that unless you have the world’s dumbest landlord, you are actually paying all of the expenses you cite (taxes, insurance, utilities, etc) regardless of whether you rent or own. The distinction is whether you’re paying them directly or indirectly. As a renter you are covering your share of those expenses borne by the landlord through your rent check. But when you rent, there is an extra expense that you also pay: profit to the landlord.

    Many of the “rent vs own” cost analyses that I see on PF blogs are flawed due to differences in the types of dwellings typical to renters or owners. For examples many rental units have shared walls and shared outdoor common areas, not to mention shared floors/ceilings. There is an economy of scale realized by the landlord in these buildings which isn’t available through free-standing houses. However it’s much more common for people to purchase a single-family home (as you did). So I think it’s important to compare similar dwellings. Don’t compare your new house against your old apartment; rather, compare it to what it would cost to rent a house like that in the same neighborhood.

    The biggest advantage you get from renting is avoiding the costs associated with real estate transactions (buying/selling) and the flexibility of not having an illiquid asset to maintain and dispose of on short notice.

    Given the fact that you’re willing to add your own labor to the new house, I expect you’ll come out ahead. Good luck!

    • Executioner… You hit the nail on the head; “profit to the landlord”. As you say the expenses will be there no matter what, you can pay them separately when you own a home or you can “package” them which is what happens when paying rent. Plus you have to add in the profit for the landlord. There is a very wide gulf between paying rent and paying a traditonal mortgage. I don’t think the rent vs. own arguments do justice because they typically only consider those two ends of he spectrum. There are many other options in between for those willing to go the non-traditional route…

      I like your idea of comparing what comparable size homes to mine would rent for. I’ll have to look into that…

      My buying transactions were very low, however the selling costs will likely be higher…

      Investing with sweat equity is definitely part of the return equation for this investment. :-) Some will argue that I need to account for the time I invest, but I also think you have to value what the knowledge/skills learned from the process is worth. On the next project the knowledge I am gaining now will certainly come into play. How do I put a dollar figure on that?

      Thanks for shraring your thoughts, much appreciated! :-)

  2. I agree with everything Executioner stated. I think (most) people should own their own dwelling as a hedge against inflation.

    Your comparison of the monies you’re paying toward housing vs. an investment portfolio is right on, IMO and is a very valid and realistic way of looking at where your investing dollars are going.

    I just made a similar comparison in yesterday’s post regarding the rental house I’m now attemping to pay off quickly and the fictitous portfolio I’d have to have to get those returns.

    http://payoffmyrentals.blogspot.com/2013/07/update-july-2013.html

    • POMR— Thanks for stopping by! Yes, we made very similar comparisons here. Great job on the amount of debt you have paid off over the past few years as well as to funding your Roth. I’m looking forward to following your journey…

  3. Thanks for sharing Stoic. The place I rent sounds comparable to yours. I think it will cost me $7600 per year or so. Buying a house is not an option for me, I know I will be deploying to the Middle East in the next year or two, then moving somewhere else in 2-4 years. I’m not biased one way or the other about renting. I have little choice, buying a house is not practical for my circumstances.

    It seems most people buy a bigger house than they rent. That’s where they end up spending more than they should. Not only does it make the house, insurance, and taxes greater; but you have to furnish it and spend more on utilities/maintenance too. If you live in essentially the same place renting or owning, I think you’d come out ahead owning. The landlord makes a profit, that’s why.

    I think owning a house is more than just about money. You own the house! You’re the boss and you make the calls. You’re the king and answer to nobody (except maybe a HOA).

    On the other hand, if I did own a house, I might be cutting the grass right now instead of reading your fine blog!

    Cheers

  4. Great post, love the discussion. I am currently in Michigan and housing is fairly cheap. Right now I am in a 1 bedroom Apt. and rent for $425/month with heat included in. All I really pay on top of that is electric which has run dirt cheap. Shared wall and all that though….

    My alternative is to go buy a house. I could easily do that and there are many in my area for around 30 or 40K that are livable. These are also in a county where property taxes would be quite low at around $900/year. Not bad at all. I could easily pay cash for the house.

    This represents opportunity cost. Currently I have about 4 to 5 times that much in investments. Over the last 18 months that money has grown significantly. Of course it is easy to make money in a bull market, right? Buying a house outright helps to diversify a bit if and when the crash comes. So there is that as well.

    I am not handy. I like renting because it is worry free. I rent a box with shared walls, nothing fancy at all. Very basic. But I don’t really want more at this time. And $425/month is really cheap. It is not like I waste the money that I would put into a house payment or a mortgage. I actually have that 40K invested and working for me.

    Even if you own you still pay “rent” in the form of property taxes + maintenance + opportunity cost. My rent is roughly 5K per year. And my investments are producing waaaay more than that currently (but like I said, everyone makes it look easy in a bull market).

    For me, I like renting for now. But I keep eyeballing those cheap houses here in Michigan. Property taxes of $80/month with no mortgage payment sounds pretty enticing. But then I think about mowing the lawn and shoveling the driveway and I think, naw……

    I have to admit, it is a nice first world problem to have. I don’t take it for granted. I am grateful to have easy access to shelter today. Rent or buy, doesn’t matter. Life is good!

  5. Rent is probably the thing one thing I hate most. I completely can’t stand paying it, and that is why I’ve devoted all my efforts to not paying it. I don’t own my a personal residence yet (really no need to atm), but my rental properties are getting close to covering that expense for me. Once I finish closing #3, I should have enough cash flow to pay for rent every month, in addition to quite a few other things. Real estate has been good to me so far, and I’m working aggressively to expand the “empire”.

    All the best.

    • FIfighter… It is wonderful you are so close to having your rent paid by you RE income. Congrats!

      Wish you the best with the empire. :-)

  6. Pingback: The Costs Of Owning A Home | The Stoic Investor

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