The Wealthy Renter

It seems that everyone wants you to buy a house: your parents, real estate firms, mortgage brokers, and even the government. Alex Avery decided to make a case for renting in his book The Wealthy Renter: How to Choose Housing That Will Make You Rich. His reasonable and balanced analysis contrasts sharply with the usual cheerleading for owning a house.

We’ve all heard people say something like “renting is just throwing money away,” or “why pay your landlord’s mortgage when you can own your own house?” This advice is based on the mistake of comparing rent to a mortgage payment. Typically, renters pay for little other than their rent – maybe a few utilities. Homeowners pay property taxes, maintenance costs, utilities, insurance, and an opportunity cost on home equity. It’s the total of all these costs that we should be comparing to rents.

Avery goes through an example of an $850,000 home and concludes that the cost for an owner to occupy the home is between $4000 and $8000 a month. The high end of this range involves some double-counting and implausibly high maintenance costs,¹ but a range of $4000 to $6000 per month is quite plausible. Most people would find this range shockingly high and simply wouldn’t believe it even after seeing the logic behind it. They’d be wrong.

Some might object that homeowners can look forward to gains on the value of their home. Avery gives a series of charts showing that while house prices are up quite a bit since 1991, “Canadian house prices haven’t delivered returns anywhere near those of the Canadian stock market.”

Renting and investing the difference would have made you richer than owning the average Canadian home. However, this analysis is based on low-cost methods of investing in the stock market. For investors who pay Canada’s sky-high mutual fund costs, the gap is smaller, but still favours stocks over houses. A homeowner might proudly say that his home has tripled in value, but he forgets inflation and all the money he spent on property taxes, maintenance, and other costs.

At a time when banks will lend 5 to 7 times your gross annual salary for a mortgage, the author says “if you want to build wealth, there are much better things to spend your money on than housing. Minimizing consumption of housing is crucial to building wealth.”

In addition to comparing owning to renting, Avery gives some detailed analysis of what drives housing prices. This begins with “Buildings never go up in value,” and “Only land can go up in value.” He also analyzes the 6 biggest housing markets in Canada. Toronto house prices are at 40 times annual rents, which is very high. At first I thought this was for comparable dwellings, but I’m guessing this isn’t the case.

What has really allowed homeowners to do well, Avery explains, is leverage. Investing in a house with borrowed money amplifies returns. Of course, stock investors can use leverage too. But leverage comes with risks, whether investing in stocks or a house.

“Home buying needs to be seen for what it really is: an investment in land plus consumption of the glamorous building that has been erected on that piece of land.” This makes it clear why owning a smaller house is better for your long-term finances.

“The thought of never being able to afford a house because house prices have risen so quickly you can never catch up is irrational. So is buying a house to get into the market.”

Avery includes an excellent chapter “How Housing Can Dictate Your Career in Surprising and Unexpected Ways.” This is something I’ve tried to explain to my sons. The exciting job you start with can end up being a trap if you build a lifestyle that needs your full income. Having a huge mortgage can leave you biting your tongue at work for fear of upsetting the boss and losing your job. This is something I’ve seen many times in coworkers.

One of the claimed benefits of owning a house is the forced savings. This is true to a point. If you rent and just spend all your income, you could end up worse off than a homeowner. To get the full benefit of renting, you need to save and invest some of the money you didn’t spend on home ownership. Avery explains several ways to automate your savings.

So, why is there so much cheerleading for owning a home and almost none for renting? “The primary, and often only, beneficiaries of renting are the renters themselves.” Those who benefit from all the forced spending by homeowners are the ones who promote owning. “Renting is the more logical, cheap, flexible, and low-risk way to live.”

Overall, this book gives a very thoughtful analysis of owning versus renting. Unlike most promotion of owning, the author is not a cheerleader for renting. He acknowledges advantages and disadvantages on both sides. I recommend this book to anyone struggling with a decision of whether to buy a home or rent.


¹ For the high end of the range of monthly home ownership costs, Avery starts with the asking rent for a comparable house before adding other costs. But a landlord might include allowance for some of these costs in the asking rent. The maintenance cost range goes too high as well. As Avery later explains, “The rule of thumb for maintenance costs is 2 to 5 percent of the value of the house in most markets, and lower where house prices are particularly high.” Essentially, the cost of maintaining a house doesn’t go up much just because the land under it becomes more valuable. So, 5% is an unreasonably high estimate for a house sitting on expensive land, which is the case for most $850,000 houses.