Professor's House

Are Renters Stupid – The Stigma of Renting

A friend of mine was filling out a credit application to buy a nice, new red car, and checked the box indicating he was a renter and not an owner of his home. He told me later he felt like a second-class citizen.

Social Suicide

I thought about it. When my wife and I moved a year ago we rented a house because we were moving to a new area for us and didn’t want to make a big commitment to live anywhere at that point, nor was I sure I would want that particular house forever, even as an investment. We had owned our previous home eleven years and moved for my wife’s work.

But it actually, honestly, got to where I would lie when people would ask if we bought the house we live in. Oh, sure, I’d say, incredulous at myself for the fib! What was this about? I was used to being a homeowner, I guess – heck I was a real estate broker and a property manager for years, so heaven forbid I became a lowly renter!

There was a stigma still there, on renting, at least in my own mind. A man in his forties renting a house? Obviously he’s some sort of failure or idiot, of course! Or he made some serious mistakes along the way, maybe foreclosure, a job loss or divorce, all assumptions.

So I decided to look this over as it was kind of a funny thing. I don’t consider myself vain or pretentious, so why the thing?

Perpetrators of the Myth of Renting

Well, the stigma, I think, comes from an earlier time, when it did make a lot of sense to buy, ultimately. Real estate seemed to always go up and was a big slice of the American Pie.

But the stigma was manufactured by the real estate industry to make purchase prospects out of all renters, and by previous generations for whom purchasing a home was the proven way to middle-class wealth, which is very much in question now. Mom and dad hoped you would get an education, marry, and buy a home.

Rent was money thrown away, and renters as a people were therefore less capable, responsible, or intelligent. Further, bad tenants were the lowest form of life, as not only non-stakeholders in the society but an outright liability. The evil landlord of old silent movies with the big, curly mustache was an evaporated myth. Be a landlord!

In fact if we look further back, it has been landowners throughout world history who made the rules, had the rights, hired guards and passed along their fortunes, while the serfs cooked their rice and begged for bread.

The National Association of Realtors® is the largest professional association in the United States today with over one million members. All that membership moolah goes to lobby Congress, provide support services for professionals, and perpetrate the ideal of home ownership – a worthy thing of course – but often to the social stigma of renters.

The Invisible Hand

Consider this: A Realtor® stands to makes $3,000 to well over $10,000 on a sale, versus just $100 to $1,000 on a rental.

Back when everything your Realtor® touched was gold, investors would happily go upside down on a house because they saw their net worth grow despite the negative cash flow, on paper anyway.

A house they paid $1,000 a month for and only collected $800 a month for in rent would lose $2,400 a year, but values were growing at 20% per year for a while, for an equity gain of $20,000 or more every year while it lasted.

Crash

The real estate bubble, which burst during the great recession, kind of changed all of this. For the first time we may have no idea what will happen with values. For the first time in my lifetime I have heard financial advisors recommend against real estate!

We all know what happened. Homeowners commonly owe twice as much as their house is worth and can’t make their payments. Investors walk away. One in four or five homes is vacant in some areas.

The Smoke Clears

The world is a very different place, and this has affected the calculus of rent versus buy.

No longer do we get a job in the town we grew up in with a great company that will be around forever that has lots of growth opportunities, get married and settle down, have some kids, grow old and leave that same house to the kids.

No, no, no! Today we use terms like virtual office, nomad-oriented work, and laptop lifestyle. We are a transient people more and more, and I don’t know if it’s all bad, but it is very different. Divorce is up, marriage is down. Marriages last just over seven years on average. Most then wait three years and get married again, often forming all-new households, and stay that way another seven years. The average length of employment with one company is roughly five years and the average life of a mortgage is another five years.

Why, then, would you ever buy?

The question is almost flipped completely over! There are still reasons to buy, of course. Last I checked it’s still a big slice of the American Dream and a predictable route to retirement, but renting has a whole new allure and legitimate place in life-planning.

Renting ROCKS!

When you rent, provided you have at least a decent landlord, there are perks. The first that comes to mind is you’re usually not responsible for any major repairs. Another biggie is your rent rate is competitive if not still better than a mortgage with taxes (going up) and homeowner’s insurance (also going up).

In fact when I was a property manager as the economy began to tank, landlords were all too happy to forgive past-due rent, or in some cases even lower the monthly rent to keep a decent tenant. Remember, the alternative is to get you moved out, make repairs, market, and deal with vacancy.

Renters also do not lose equity when values go down, and this is especially attractive when values decline and landlords lose net worth.

When you rent you have great flexibility, too. Should you decide to move you usually just provide thirty-day notice and go, after getting your deposit back, of course. There’s no complicated listing, selling, hoping, waiting, praying, or burying Saint Christopher in the yard.

And – ready for this? – even if you are renting and your landlord gets foreclosed, you may have the right to stay in the house up to two years according to the Protecting Tenants in Foreclosure Act of 2009. Good luck with that if you’re the owner!

So, What Now?

Stigmas take a while to evaporate, but they do. I wonder what it might be like if someday soon renting is regarded not as a personal defect but as one of many prudent financial and life options.

There will always be a place for classic real estate investing: buy and hold long term. And there’s a place for the guy who buys a fixer and fixes it. He too adds value to the community and deserves to get paid. It’s the range riders who simply rode rising values who are gone, and they won’t be missed!

Modern lifestyles along with all the advantages of being able to get up go, all the amenities available to renters and all the lifestyle flexibility and options, make renting cool, actually.

If you are confident, however, that you’ll be happy planting roots in that one place for years to come, or have a plan to retire by being a landlord to some degree, or want to take advantage of current low prices, or want a stable neighborhood to raise your kids in, by all means of course, buy, buy! You are the backbone of the community, actually.

But when your friends tell you they are buying for any reasons other than those above, and you happen to be a savvy renter, I am suggesting right here and now that you take the high road. Be polite and understand they might be behind the times, locked in an old anachronism, and for Pete’s sake, don’t scoff!

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