I’m a landlord. I’m also a renter.
Interesting, right?
Why would someone who owns a home rent an apartment?
I’ll answer that and more, but it has to do with money, life circumstances, and peace of mind.
I’ve previously written about, “Is it Better to Rent or Buy a House?” Most people are very passionate about which is better. If you ever find someone who is overly passionate about one or the other, listen – but take it with a grain of salt.
Both can be right. In fact, I’m doing both right now. I own a home and rent an apartment.
Let’s talk more about why I am renting and the decision-making process I went through.
The Backstory
I bought a townhome in Seattle in 2019. The Pacific Northwest has always been home. It’s where family and friends live. Most of my social circle is within an hour of Seattle, and it’s also where my job was located at the time.
I bought the townhome because I wanted to settle down. I had been moving apartments every year or two and grew tired of uprooting my life every summer. Packing, moving, and unpacking ate away at two of the peak weather weeks in Seattle. I wanted that time back and wanted not to have to worry about moving if rent increased or roommate situations changed.
I also finally had enough for a down payment where the mortgage payment would feel comfortable. I knew I didn’t want to be house rich and cash poor.
So, I bought the townhome. It checked nearly every box.
The location was great. It had a garage! That’s a rarity in Seattle, particularly for a townhome. There was space for a guest bedroom. The kitchen opened up into the living room. There was a patio for summer barbequing. It even had a small patch of dirt overrun by bamboo, but after removing it, I could transform it into a small garden.
Where it Gets Complicated
When I bought the townhouse, I was in a relationship that was getting more serious, but you never know how relationships will develop.
I knew my girlfriend at the time, now fiancée, was going to graduate from medical school in a couple of years and needed to do her residency next. The problem is, nobody knows where they are going to do their residency until about three months before they start! It can be anywhere.
And as I mentioned, who knew if we were going to be together, if she would do her residency in Seattle, or if I would even move.
As you can probably deduce from the title of this section, life got more complicated. We got engaged, her residency was not in Seattle, and I did move with her.
To Sell or To Rent and to Buy or to Rent
We had a few options once we knew her residency wasn’t going to be in Seattle.
- Sell the Seattle townhome and rent in Wisconsin
- Sell the Seattle townhome and buy in Wisconsin
- Rent the Seattle townhome and rent in Wisconsin
- Rent the Seattle townhome and buy in Wisconsin
We chose option three: rent the Seattle townhome and rent in Wisconsin.
That’s how I became a landlord in Seattle and a renter in Wisconsin.
What was the logic behind those two decisions?
Why I Rented the Seattle Townhome
First, I never wanted to become a landlord. The people hawking real estate like a lifestyle guide to passive income never seem to share the pitfalls of being a landlord.
“It’s easy”, they say. Maybe for some, but probably not for most.
I dreaded becoming a landlord. I like simplicity. I like dealing with fewer problems. I like time to enjoy life.
However, as much as I was opposed to being a landlord, we plan to return to Seattle in the future. Although I have no idea how real estate prices will change between now and then, I had feared that if I sold, I wouldn’t be able to buy a similar home in the future.
Real estate uses debt, or leverage, which can amplify gains and losses. Let’s say real estate prices go up 10% on a $500,000 home that you put $125,000 into. In that case, your gain is $50,000, which is an incredible return for only “investing” $125,000. I put investing in quotes because I don’t see your primary residence as an investment. It’s a place to live, but I want to highlight the leverage piece.
If I invested the $125,000 into the stock market and it earned 10%, the gain is only $12,500.
I could have sold the townhome, probably lost money after fees, and then invested the proceeds into the stock market, but I feared that money wouldn’t keep up enough to put a future down payment on another townhome.
Even if the real estate market only went up 3%, that’s still a $15,000 gain, which is more than the gain on earning 10% in the stock market.
None of these numbers are guaranteed, but I wanted to give you an idea of my thought process from an economic perspective.
The other perspective is we liked the townhome. It checked all the boxes and after searching for some time for a home, I know how hard it is to find something that checks all the boxes within my price range.
Lastly, I was somewhat confident the rental income would cover the mortgage.
Since we plan to return to Seattle one day, I figured if I could cover the mortgage and not lose money, I could deal with the pain of being a landlord if it meant I could return to a home I loved.
Why I Rented in Wisconsin
Despite home prices being much more affordable in Wisconsin than in Seattle, we chose to rent in Wisconsin.
The biggest reason for renting is that we only plan to stay for 3-5 years, which is the length of her training.
Most people recommend only buying if you plan to stay in the home for more than 5-7 years. There are certainly exceptions to that general rule of thumb, particularly when real estate markets have done as well as they have the past decade, but it’s a good guideline to follow.
There are a few reasons for this:
- Real estate prices can decline, leaving you underwater on your mortgage
- Real estate transaction costs are high, which can mean you lose money on the transaction even if your home value went up
For example, let’s say you buy a $500,000 home, put $125,000 down, and take a $375,000 mortgage. If home prices decline 10% immediately, your home is now worth $450,000. That’s not great, but you still have positive equity.
If you were to sell for $450,000, you can still get $75,000 out of the home after paying off the $375,000 mortgage.
Well, not really.
The $75,000 is the equity you have in the house, but you still need to account for realtor costs and other taxes.
Let’s say you pay 6% in realtor costs, which equals $27,000.
Then, let’s say you have another 2% in other closing costs, such as taxes, closing fees, and anything else that comes up. That equals $9,000.
In total, you have $36,000 in closing costs.
Most closing costs are 8-10% total. By using 2% in other closing costs, I am on the lesser side of closing costs. If I assumed 10%, it would be $45,000 in closing costs.
By the time you sell, pay off the mortgage, and pay closing costs, you get $39,000 out of the house ($75,000 equity minus $36,000 closing costs).
You put $125,000 into the home, but only received $39,000 when you sold. What’s the rate of return?
-68.8%. Ouch.
It’s tough to say if renting or buying is better. There are many factors at play, and the future is unknowable.
Okay, but what if real estate prices go up?
Let’s say you own a home for three years and it goes up 20%. I’m being generous here because although home prices have gone up significantly the past few years, the long-term average is slightly above inflation. What this means is if inflation is 3%, home prices may have only gone up by about 4%.
It’s the end of three years and your home is now worth 20% more, or $600,000.
Let’s assume another 8% in closing costs and that you paid your mortgage down to about $352,000 by that point. That’s roughly the amount I calculated using an amortization calculator with a 30-year fixed-rate mortgage.
The 8% closing costs on a $600,000 home equals $48,000.
What you receive will be $200,000 ($600,000 minus $352,000 mortgage payoff minus $48,000 in closing costs).
You put $125,000 into the home and received $200,000 when you sold. What’s the rate of return?
60%. Nice!
I show you both a negative and a positive outcome because most people only focus on the positive outcomes. Homes are bought with debt, which means price fluctuations in either direction amplify the returns.
When the home price went down in value by 10%, the return was nearly -70%.
When the home price went up in value by 20%, the return was 60%.
Nobody knows what real estate prices will do, particularly in short periods of time. Many people during the Financial Crisis felt home prices could only go up. Some people who bought their home still owed more on their mortgage than the home was worth more than 10 years later.
I didn’t want to be in a situation where home prices go down and I either had to hold onto the home, take a loss, or in an extreme example, bring additional cash to closing to pay off the mortgage because the proceeds are not enough to pay it.
Please keep in mind none of this takes into account the cost to maintain the home. Most people recommend budgeting 1-4% of your home value each year for maintenance expenses. It only takes a few appliances breaking, siding, or a roof needing to be replaced to quickly increase the costs.
These expenses can also reduce the return when selling, and I find most people don’t take these expenses into account when they say they made a certain amount of money on their home.
Besides the financial consequences of owning and selling a home, there is also the peace of mind and time factors.
It snows in Wisconsin. Snow means shoveling.
Do you know who didn’t want to shovel snow at 4 a.m. before my fiancee went to work? Both of us. Sure, we could have paid someone to do it, but that’s one more thing to coordinate and who knows what time they could arrive.
Homes also break. I know because in the past year I had to deal with a downed fence from the wind, an issue with the garbage disposal, and weird sounds coming from the water heater in my Seattle townhome. It cost about $1,300 to fix those issues.
I didn’t want to have to deal with home maintenance in Wisconsin. I wanted simple.
If something breaks, I submit a request and maintenance shows up the next day usually.
There are no researching different home repair experts, trying to figure out a fair price, and coordinating a time to come out to the house.
The other factor is location. We are close to the hospital, and my fiancée can walk to work. If we had bought a home, we likely would not have been within walking distance. Convenience is important when you are working 60-80 hour weeks.
People seem to have the notion that renting is throwing money away, but I am very happy with the decision to rent. My monthly rent is the most I will pay. A mortgage is the least amount you will pay.
I have no idea if financially it will work out better, but that doesn’t matter. I did not want the risk that it didn’t.
More importantly, we are in a great location, don’t have to worry about repairs, and can go sledding instead of shoveling snow.
Summary – Final Thoughts
Renting is a great option in certain circumstances. Buying a home is also a great option in certain circumstances.
At the moment, I am doing both because both options make sense right now.
I’ve enjoyed being a homeowner, but it also comes with more responsibility. There are more financial responsibilities, but there is also the time commitment and knowing when something needs to be repaired or replaced.
I also love renting. I know what I am going to pay each month. There are no additional costs or responsibilities.
You need to decide what works best for you and your lifestyle.