YNAB BLOG

The House Has Got to Go – 2 Bedroom Apartment Here We Come

house

Opportunity Cost: The loss of potential gain from other alternatives when one alternative is chosen.

Confession: When I said I would seriously consider downsizing our home, I was only sort of telling the truth (so much for defeating denial). Yes, I’d evaluate the costs and benefits of downsizing, but there’s no way I’d really get rid of our house, I said to myself.

Maybe that’s still true – maybe there’s no way my wife and I would leave a home and neighborhood we love for the sake of accelerating our savings. But after a couple of hours with Excel, I can now say that staying in our home is purely emotional, because financially it makes no sense at all.

Check out this table:


Housing Alternative Savings 3 Yr Value 5 Yr Value 7 Yr Value 10 Yr Value
Rent Similar Home $310 $12,450.54 $22,323.26 $33,674.98 $53,969.29
Rent Townhome $710 $28,515.75 $51,127.47 $77,126.57 $123,607.07
Rent 2-bedroom Apartment $1,135 $45,585.03 $81,731.95 $123,293.89 $197,597.22

Notes:

  • ‘Savings’ estimates the difference in cost between our current home and the alternative, and includes estimates of the value of the mortgage tax credit, maintenance on the home, utilities, and HOA fees.
  • This table assumes a meager 7% return on the saved amount. If the money earned 10% per year, the 2-bedroom apartment would pay out nearly $235,000 in ten years. Yikes.
  • My wife may threaten divorce if I use this table to try to get her to move.

When I showed Jesse this table, he took it to another level: after ten years of renting, we could go right back to our current cost of living, let the $200k sit in the market for another ten years (when I’d be reaching my goal retirement age of 54), and have around $400,000 extra in savings. Four hundred grand (or $470,000 with a 10% interest rate on the savings).

Summing up: If I lived the next 10 years in a 2-bedroom apartment – investing the savings along the way, the end result could be an additional $16,000+ per year in retirement.

I don’t know what else to say about it. We love our home and our neighbors. We’ve planned to be where we are for a long time – maybe forever.

But these numbers aren’t unreasonable. It’s one thing to grasp the total cost of home ownership in the traditional sense (principal plus interest), but adding in the cost of lost savings is making the house feel really, really expensive.

 

62 Responses to “The House Has Got to Go – 2 Bedroom Apartment Here We Come”

  1. James

    Please don’t forget to consider quality of life in that equation as you only get one (so far as we know).

    Reply
  2. Rob Al

    i dont know what it’s like in the US, but in the UK renting costs only about 10-20% less than a mortgage, and at the end of the mortgage you have the tangible asset (the house) which usually has appreciated at least as much as inflation, and in the last 30 years by many multiples of it. If you rent, you save perhaps 30% of the difference but you have extra expenses (such as moving fees every few years) and other intangible costs (such as having to move your kids between schools which disrupts their education). Have you factored these in? can you share the spreadsheet?

    Reply
    • mark

      Hi Rob –

      The rent figures given are accurate for my area, and the estimates savings is fair.

      The house will appreciate as much as inflation, but what use is that to me? I’d have to sell the house to realize the gain. By putting the saved money in the market I’m able to eventually draw income off the asset.

      Disrupting the kids’ life is a very real cost – but doesn’t factor directly into the finances of the decision – only the quality of the decision (which is debatable).

      Reply
      • Rob Al

        ok: a) when you retire, presumably you dont need a large house any more, or at least you dont have to pay rent any more, or could rent it out and live somewhere smaller etc.
        b) putting a monetary value on things like disrupting the kids’ lives, enjoyment of that view out of the back window, ability to “customise” your house etc. is the only way to compare apples with apples.
        c) If i told you a motorcycle was a cheaper way to get your kids to school than a car, would that be the end of the story? no because of course balancing 2 kids on the handlebars is dangerous. How dangerous? $400? $40,000? can’t say. but it’s critical to the decision.

        Reply
  3. Jesse Robertson

    Very interesting but I’m going to be incredibly nit picky. In the last paragraph please change the spelling to principal and interest. Hopefully you aren’t paying your bank your your principles ;-)

    Reply
  4. brad

    Maybe I’m missing it, but I don’t see the value of your home factored in here? If you stay in your home for, let’s say, 20 years, its value should appreciate considerably, perhaps even more so than if you rented and invested the difference. For example, in 1960 my father bought the house I grew up in; he paid $60,000 (which was a lot for a house in 1960 dollars) and sold it in the 1980s for $700,000 (in 1980s dollars). Even considering inflation, that’s a pretty good return.

    But as you alluded to above, renting vs. buying is much more than just a financial question. There are questions of stability, of having a secure home base, and putting down roots, none of which have dollar values attached to them, but all of which have value, perhaps priceless value.

    Our situation is even more dramatic: before we bought our house we were renting a 3-bedroom apartment for $550/month. Our mortgage costs $2,600/month and we still only have three bedrooms. If we’d continued to rent we’d be able to invest almost $25,000 more per year than we do now for our retirement. But you know what? We don’t care. Because we love our house and we love our neighbourhood, and we ain’t gonna budge.

    Reply
    • Terry B

      I have to agree. Without even seeing where you got these figures, the “table” you showed is pretty unusable.

      A lot of other questionable assumptions, too:
      1) 7% or 10% savings each year as conservative? Doubful. Kind of curious what decade you think we’re in.
      2) Rent prices will stay the same over the next 20 years (Rent will be very susceptible to inflation once it’s unleashed – vs. a possible 30 yr mortgage of 3.2% or 15 yr mortgage of 2.66% right now)
      3) I think you need to either buy a house at the end of your rental example, or sell the house at the end of your mortgage example to see the difference.

      I don’t question the premise. I just disagree with so called obviousness in one direction or the other. Plus it’s not surprising to see this type of sentiment after a bubble. No one was making this case 7 years ago.

      Reply
      • mark

        - 7% to 10% in indexed mutual funds? Unreasonable?

        - Good point on rental rates increasing over time.

        Reply
        • Cass

          Rent increases are definitely an issue. The cost of a 1000 sq ft two-bedroom renovated apt in my area is around $1400 and has increased nearly $100 per year. Now after only two years I have to move because my apt has gone out of my budget. My moving cost will be around $900 due to limited availability causing the new lease to overlap my current lease (plus paint and u-haul, etc.).

          Reply
  5. Leslie

    I am curious to do this for ourselves, living in a city we love, we can’t afford to own downtown and we don’t want to live in the suburbs. I always have felt guilty for renting and “throwing away” money that I could “get back” if i sold…… but this makes me wonder if renting is really the way to go…. especially in a city.

    Reply
    • mark

      My European friends find the American obsession with home ownership strange – almost comical. I truly can’t say whether owning or renting is the “way to go.”

      The value in the exercise is trying to consider all the factors, weighing them against your values. The takeaway for me is that home ownership has big visible costs and big hidden costs. It doesn’t mean owning a home is a bad idea. I love my house. But it doesn’t mean that renting is absolutely “throwing money away” as we Americans are so used to saying.

      Reply
  6. linda

    Also need to factor in that in 30 years (or 15 or 20 if you are smart) you live without ANY payment each month, except taxes. And the tax deduction on interest is a help,tho not a good reason to do anything.

    Reply
    • mark

      An excellent point. If we stayed in the home forever (or sold it and moved into something the profits would cover completely) we’d be free of rent and mortgage till the end.

      Reply
      • brad

        I think a lot of people count on selling their house in retirement and downsizing then, which makes a lot of sense. That’s what my folks did — they sold their house and bought a retirement home in a cheaper (and warmer) part of the country that cost about 1/3 of what they got for the house they sold. The leftover money (even after capital gains taxes) came in very handy during their retirement. I don’t think of our house as an investment, but on the other hand at some point we will have to move either for economic reasons or because we can no longer climb the stairs. At that point, the money from the sale can be used to fund future years of retirement.

        Reply
  7. spaceamoeba

    Wow, where do you live? I just bought a house 2 years ago, and moved from a 2 bedroom apartment. The rent for the apartment was $950/mo and that was cheap. Add to that the heating costs and we were in around $1025 a month. My mortgage payment, by contrast is $760 plus $216 for land taxes each month. That’s less than the rent, and we have more space, a back yard, and more importantly, an investment. I fully admit that the house costs a little more (say $150 a month max) than the apartment when I factor in all the other expenses, but I think the value of the house goes up at a rate that more than makes up for it.

    Reply
    • mark

      I’ve heard from others that rent exceeds mortgage where they live as well. In my circumstances, these rental prices are accurate and would save me the indicated amounts.

      Reply
    • Ellen

      My mortgage (taxes and PMI included) is $760/month. The apt I was renting before was $1200/mo. Neither include utilities. Same SF inside, but I have a yard with a garden now. And much less noise. For me, renting would not make sense here.

      Reply
  8. wwms

    Another piece to factor in to the overall calculation, is that in retirement, you would continue to have the cost of rent, at whatever that rate is. If your home was paid off by that time, you would still have to figure in maintenance and taxes, but the numbers are worth comparing. I think you have to extrapolate beyond 10 years to get a full picture of renting vs home ownership into and beyond retirement.

    Reply
  9. Roger

    I wonder where one can get a 10% interest rate on savings, or in the market, over an extended period of time these days.

    Reply
    • Colin Michael

      Dave Ramsey answers this question multiple times per week on his show and web site / blog. Hint: it won’t be in banks or bonds ;-)

      Reply
      • brad

        Yes, but Dave Ramsey’s answer is dead wrong. Unfortunately he uses the wrong measure of the stock market’s average rate of return to come up with his 12% growth figure; the actual compounded growth rate is quite a bit lower, around 9.8% from 1929 through 2010. That’s still a lot better than you’ll get from a savings account, but if you’re counting on 12% average return you’re in for a disappointment. Of course it’s easy to cherry-pick periods when you would get an even better return, but you can also find periods when you would have gotten a negative return (ending up with less money than you put in).

        Reply
      • Terry B

        Hint: Why so vague & smug? If you’re going to answer, give a real answer.

        Also, Dave’s magical 12% number of his is based on incorrect math.

        Reply
        • mark

          No reason to fight, internet strangers. The good news is we’re all free to make our own decisions.

          Reply
      • brad

        The problem is that Dave is using average annual returns, which is not a realistic measure of the stock market’s actual performance. A lot of people have pointed out this error, but he doesn’t seem to pay attention. See for example this New York Times article: http://bucks.blogs.nytimes.com/2011/05/13/dave-ramseys-12-solution/.

        What he should be using is the compound annual growth rate, which shows what you’d actually earn. The compound annual growth rate of the stock market since 1929 has been 9.89%, not 12%, which may not sound like a big difference but when you add the high fees of the advisors who pay him to be included on his “endorsed local providers” list you’re looking at closer to 5-6% actual returns — about half of the 12% he cites.

        Dave Ramsey gives wonderful advice when it comes to helping people get out of debt. But it’s best to take anything he says about investing with a big grain of salt.

        Reply
  10. Serene

    I’d love to see the spreadsheet. Does it take property taxes into account? What about your home appreciation or just plain equity in the home? What if you cram yourselves into a two bedroom apartment and your family is at each other’s throats within a few months? I guess I’m not convinced. Seems like a better plan would be to sell your home once you reach retirement and then downsize. But I’m no expert.

    Reply
    • mark

      It does take property taxes into account, but it doesn’t factor in my wife’s feelings about the move. This post is the first she’ll have heard of it, and she’ll laugh her head off at the proposal. :)

      Reply
      • Serene

        Nevertheless, it’s nice to see someone approaching things with an “everything is on the table” mentality. If only the government would take the same approach. We absolutely love YNAB. It is getting us through the upcoming furloughs. Thanks for that.

        Reply
  11. Colin Michael

    I’m also not seeing any factoring for rising rent cost. My area also has much higher rent than mortgage costs. I was pretty much forced to buy a house when I moved (from Maine to Cincinnati area) due to the high rents. There were no apartments large enough for my family and 4 bedroom houses in reasonable neighborhoods rent for 1300-1800 bucks a month. Our PITI is $922 and our utilities are lower than apartment-dwelling families we know nearby. Even if my house never appreciates in value relative to inflation, I really could not have afforded to live here without buying!

    Reply
  12. Ella

    I spent almost $20,000 on maintenance for my 25 year old house in the past two years. None of the things that were done will add value when I sell, they are just necessary repairs that happen as a house ages. Most people don’t think about that when they compare renting to buying. I wish that money was in my retirement fund instead of someone else’s pocket.

    It is wonderful to have a house when you are raising your family. That is the best reason to buy. But, it seems like the days of dramatic increases in value are over.

    Reply
    • mark

      $20,000 in two years? I’m very sorry to hear that. My house isn’t a fixer-upper, but I did overpay for it in a big way, so the only way it could end up a good decision is if we stay in it a couple more decades, at least.

      Reply
  13. Debbie

    We looking into this for us here. Turns out, to rent a similar home to ours would likely cost us about and EXTRA $500-1000 a month. Renting in a poor neighbourhood, in a really run down home, would work out to close to the same…only a few hundred more than we pay now.

    Reply
  14. Todd

    Is this specific to your area? or do you just have a really big, expensive house. In northeast Florida, my 2/2.5 townhouse costs ~$950/month, including mortgage (15-year note), HOA, taxes, insurance, generous allowance for repairs and maintenance. To rent the exact same floor plan in our development would cost an additional $100/month.

    Reply
  15. Mark

    Can you keep you house, rent it out and move into a smaller apartment? If rent will cover your costs of owning the home, this could be an even bigger win. You keep the home, get the appreciation, and let your tenants pay off the principal and mortgage. Your savings comes by down sizing into a smaller apartment.

    Just a thought.

    Reply
    • mark

      The thought of keeping the house and moving to an apartment had occurred to me, but I forgot to include it in the post. I can say with certainty that the rent I received wouldn’t cover my mortgage, though, so I’m not sure it’s worth considering.

      Reply
      • Mark

        Glad you ran the numbers. I’ve considered that, as rents in my area are high enough.

        One last thought, buy and move into a duplex (or triplex, 4-plex…). The purchase cost is higher, but you generally do much better on a monthly cash flow. The hidden savings here is taxes. You can write off your rental expenses (including utilites and interest). This means they come off of your income, rather than after as a decduction. I’ve done great at tax time with my duplex.

        This was a great post!

        Reply
  16. Darren

    Another idea:
    Sure, rent an apartment. But keep your house and rent it out to someone else also. Depending on where you live and where your mortgage is at, you may be able to rent it out for mortgage+homeowner repairs+taxes and in the end you’ve got yourself investing, plus someone else investing for you. If you lived in the 2 bedroom for e.g. the remainder of your mortgage term, you’d have your house to move back into (now paid off) and your investment from your savings to live on.

    Reply
  17. Blurg

    Does this table take equity into account at all? In other words, it’s neat that you’ll have extra money to save, but all the money you put toward rent is gone. Period. Put this another way, by owning your home, you’re renting from yourself. Historically, in owning a home a good portion of what you pay toward the loan will come back to you in equity, especially if you’re in the home for more than a short time.

    Also, as other posters have pointed out, you have to acknowledge the fact that rent can and will creep up to track inflation and market factors. Every six months or year, your landlord can adjust that rent upward. By nailing down a mortgage now, you set a monthly payment that will be fixed for a set number of years (15, 20, 30, etc.). Not only can that be great in today’s dollars, it’s even better in the future. Paying whatever amount you’re paying today might be painful, but inflation alone will make your future payments “feel” smaller and smaller until in the last years of your mortgage it’s a joke that you’re paying so little for where you live. (This is all especially true if you can take or have taken advantage of today’s mortgage rates).

    This article’s a nice thought, but I think really does a disservice to anyone who thinks that renting over owning a home is a slam dunk decision that will put 200k in your pocket over ten years. In order to be at all accurate, it should consider what value there will or could be in the home if your family stayed there over the same period of time that you calculate you could “save” by renting. If there is truly such a disparity between a two-bedroom apartment and staying in your house that you’d be losing out on 200k over 10 years, you’d be nuts to stay.

    But my sense is that at worst it will be a break-even proposition or that the house will make more financial sense, especially as you take the table out farther and farther.

    Reply
  18. Corey

    I should mention that I actually tried to build my spreadsheet to mimic the calculator until I realized the math behind the calculator is actually quite solid!

    Reply
  19. Gina

    I would have been happy to continue living in an apartment but we got tired of having to deal with neighbors.. They are much more of a consideration in an apartment than a house. Many, not all, apartment dwelling do not seem to recognize they share walls, ceilings and floors with other people.. We decided to buy even though it costs us a few hundred dollars a month more just to get away from living around crazy people.

    Reply
  20. Lydia

    This definitely depends on where you live. In Boston, the rental market is inflated, so a studio apartment is $1300, while you can purchase a 2 bedroom for that amount monthly.

    Reply
  21. Absotively

    It might make sense to do the math for buying a smaller place, like the townhouse in your example. Then you could both save more with a cheaper mortgage payment now, and have the financial advantages of owning that other people have mentioned, like eventually having no mortgage and getting money from selling if you ever move (again).

    And hopefully you’ve got enough of your current mortgage paid that you could make a pretty good-sized down payment on the new place.

    Reply
  22. YJ

    also don’t discount the fact that you don’t know what’s going to happen to rent prices. also how many children do you have? at what point would sharing a room become unreasonable?

    Reply
  23. Rita Potakh

    I guess then you guys don’t plan to have any kids. What about quality of life today, or your only concern is quality of life when you retire? where I live (Houston, TX) renting a decent apartment in a decent neighbourhood would cost about the same as a mortage on a usually larger house. To me, this article makes no sense.

    Reply
  24. Susan Sophia

    Very interesting. But this could only work if one doesn’t care about the land. For me it is all about the land. I can’t see my neighbors, I don’t hear traffic and I can have a very large garden. That has more value than any amount of savings.

    Reply
  25. Alexandra

    I am in Australia, and what you describe in your article does not hold true for people here at all. In fact, for the most part, I would say most people should do the OPPOSITE of what you wrote.

    I realise that your post is based on where you live and your personal situation, so perhaps what you advise may work in the States.

    With respect, I think you need to re think your article a bit more. There are a lot of valid flaws which people have pointed out.

    Reply
  26. Arden

    What you didn’t give us was the actual amount you are paying on your present mortgage, what the interest rate is, and how much of your monthly payment is being “thrown away” on interest. This is the amount that should be compared to the rent money you will be “throwing away”, that is, money which will not earn ownership or any return on your investment. I think the strongest argument for property ownership is the impact on your retirement years. Do you really plan to be working to meet the monthly housing payment (whether rent OR mortgage) when you are ninety and your health is failing? If you want to move into a retirement facility, you will need the equity to pay for it; if you have children to care for you, they will need your financial assistance as well.

    Reply
  27. Rebecca Rice

    While your analysis may make sense mathematically, I will say that one of the reasons that I don’t rent is because of the yearly uncertainty about having to give up part of my family. I currently have two dogs (one of which is 60 pounds) and two cats. Last time I rented with just the two cats, I had to pay $600/year, just to have them, non-refundable. Finding a place at a reasonable cost that will take a 60-pound dog? That’s close to impossible, because they are so rare, and landlords really up the price. So, realistically, I would probably have to get rid of two pets, and one would probably be the greyhound. And then, every year when the lease is up, there is the uncertainty about whether the landlord is going to change their mind about pets, and suddenly I am faced with having to find a new place in 30 days (and come up with a new 500-600 pet deposit, on top of the new security deposit) or give up animals that I have made a commitment to.

    Plus, I live in an area where it’s actually cheaper for me to pay my mortgage for a 3-bedroom halfplex than it is to rent a 1-bedroom apartment.

    Reply
  28. Kimberly Price

    Mark, I’m enjoying your posts, and while I thought it just might be you (from a picture you had in the post about making your own cross fit equipment), I now know for sure from your post yesterday about retirement that it is in fact the “Mark” I know from college. This is Kimberly from the Riviera ward (Lyndsay’s roommate).

    We’ve loved YNAB since 2007 and can’t imagine life without it. We’ve moved nearly every two years of our 10 years of marriage, and two of those moves took us to Germany (to Germany in 2007, then back to the States, and now back in Germany). We’ve watched many of our friends buy homes (some when the market was high and some when the market was low), but we’ve tried not to be too concerned about the fact we haven’t bought a home for many of the reasons you have in your post. We have a modest 1-bedroom now in a big city in Germany. We have one baby, and it will get tight relatively soon, but we’re saving SO much in rent for the time being, that we’ll make it work as long as possible. And in the meantime, since we’ve been using YNAB a while, we have no debt to worry about, and extra savings go toward our “down payment” category, so that someday, if we are more permanent, we can hopefully mitigate our mortgage payments, if we do decide to buy a home, by having a decent down payment. I swear it’s the crazy interest on homes that people often forget when they talk about basic buying and selling prices. By having a good-sized down payment, and trying to pay the home of quickly, to minimize interest, then the cost to own vs. rent could be definitely in favor of owning.

    Yes, Americans are often crazy with their desires to own homes, especially young couples who think they need a home right away, and it needs to be about as big as what they grew up in. I think it’s a bit of a reach for many. Ok, I write way too much. Just wanted to say hi. I chuckled yesterday when I realized this is definitely Mr. Mark Butler from the Riv. Best wishes to you and your family. – Kimberly :)

    (PS – I would have just emailed you, but didn’t see your email address on the company website. You can delete this comment if it’s too personal. I’m jealous you’re working for YNAB. I keep seeing job postings come through, but since I just had my first baby, I don’t think the timing is right…maybe someday.)

    Reply
    • mark

      Hi Kimberly!

      I won’t delete the comment because it’s a great testimonial for YNAB. You’d be amazed how many of my friends/extended family have been using the software for years. Seems like I’m the only one late to the party.

      Sounds like you’re doing great! Thanks for saying hello. It’s always good to hear from old friends.

      Congrats on your happy family and enjoy Europe – what a great experience.

      - Mark

      Reply
  29. Debt RoundUp

    It is the constant fight between emotions and numbers. It is hard for me to ignore the numbers, but the wife runs on emotion. We have to come to a compromise about most things because we come from two different places. Good luck trying to get your wife to move Mark!

    Reply
  30. Erin

    We owned a home and sold it right before the market dropped out in about 2008. Our home didn’t appreciate at all. We put on a new roof, had to buy a bunch of yard tools, repair a bunch of plumbing, paint, re-wire some electrical and sold our house for less than we got it for (which was great that we could sell). It cost SO MUCH MORE than it appeared on paper when we purchased. We were spending all our extra income and even some savings on repairs and upkeep. We now live in a 2 bedroom apartment. Granted, our rent now is close to what our mortgage was because we moved from Utah to San Diego, but our rent is a good deal, utilities included, great maintenance, and a pool. I can say there are some sacrifices (no garage) but we have less junk and have a better outlook on homeownership. Plus we can save and invest a lot more and it is pretty much a fixed amount with no surprises. I hope to own a house again someday, but I am not as worried about it now. There was kind of a stigma about renters in Utah that I don’t feel in San Diego. That is nice. It makes renting an apartment feel more normal and not like you are 2 steps behind everyone else. I may upgrade to a nicer town home, then a home. We will see! Thanks for the numbers! I love making spreadsheets!!

    Reply
  31. Ilze Pienaar

    I have to admit I am in a similar situation and after doing some research and stumbling across this article (all be it a few months later now) there may be a a lot of good reasons to downsize and some good financial incentives esp in my situation where we are just two people however, the safety is an issue as mentioned in this article ( http://www.youi.com.au/youi-news/home-insurance/Maximising-Apartment-Security ) I wouldn’t feel safe with so many people around me and not being in control of who is letting someone in etc. I have to be honest I don’t know if it really is security or just the discomfort of sharing your building that has changed my mind but for now I’m sticking to my house and looking to cut and make savings elsewhere.

    Reply

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