An investing strategy for renters

It’s a deep part of American cul­ture to own our homes. There’s a lot of gov­ern­ment pol­i­cy to sup­port this too, not least of which is the tax break pro­vid­ed to mort­gage inter­est.

That said, my gut tells me this is chang­ing. Millennials, who’ve seen their par­ents’ net worth get dec­i­mat­ed in the last decade are sig­nal­ing that they don’t val­ue “things”. Things includ­ing big homes filled with lots of stuff, like their par­ents.

It’s no sur­prise then that we can eas­i­ly find arti­cles that talk about the val­ue of rent­ing vs buy­ing. The arti­cle lists three things bet­ter about rent­ing than buy­ing:

1. Diversification
2. Freedom
3. Low costs

The risk

A fun­ny thing about that arti­cle, not the only fun­ny thing, is that two of the three points are actu­al­ly root­ed in the fact that peo­ple buy too much home (more than they can afford).

When call­ing home own­er­ship worse than rent­ing because you have no mon­ey to invest else­where and you’re over-indexed on real-estate because of your home… well, that just tells me you’re spend­ing too much on your home.

Same with low costs. While there’s cer­tain­ly few­er expens­es with rent­ing, it just speaks to poor bud­get­ing if spend­ing too much on main­te­nance means you can’t invest else­where. Same with neigh­bor­hoods. I’m sure you want to live in the fan­cy neigh­bor­hood, but if you can’t afford it…

And, the author’s exam­ple of rent­ing in the nice ‘hood is anoth­er exam­ple of poten­tial­ly bad think­ing. Spend more on rent to live in the neigh­bor­hood you can’t afford to buy in so you can have more today, but at the expense of your future. Not sure it’s a good idea.

I do real­ly like the author’s point about diver­si­fi­ca­tion though.

As a renter, you don’t have to pay for a large down pay­ment to get into a home. You don’t have to pay for repairs or to upgrade your appli­ances. You also don’t have to pay prop­er­ty tax­es or clos­ing costs, which can run thou­sands of dol­lars.

Because of all of this, you can use your mon­ey to invest heav­i­ly instead…

The word “can” should be replaced with “should”.

People who rent their whole lives but don’t invest are in trou­ble.

My fear

I have a very long-term point of view.

I believe that many American’s main source of retire­ment funds are their homes. They have large homes that they no longer need, need to main­tain, or pay tax on. They sell their homes, and they have mon­ey to retire some­where more mod­est.

What hap­pens when a gen­er­a­tion retires with­out own­ing homes that they can use to fund retire­ment?

Yeah, they’re screwed. Unless they plan ahead.

We don’t have a good track record of plan­ning ahead (finan­cial­ly).

Elephant’s Paycheck dreaming

I’ve always thought that it would be inter­est­ing to com­pare an Elephant’s Paycheck port­fo­lio to home own­er­ship sim­ply from the per­spec­tive of an invest­ment strat­e­gy. Take the finances of a mort­gage, but instead split it into rent and invest­ing, and track the invest­ing from an income gen­er­at­ing per­spec­tive towards retire­ment.

In fact, this was my first thought when years ago I thought of how I might write a book about this top­ic.

The thing would be that peo­ple would need some way to enforce the dis­ci­pline of actu­al­ly mak­ing the invest­ments of “prin­ci­ple” when there’s no bank threat­en­ing fore­clo­sure. That would take more fis­cal dis­ci­pline than I think most peo­ple have.

Like this post? Have a look at my book The Elephant in the Room has a Paycheck: A fun & social­ly con­scious blue­print to get start­ed invest­ing