How to Create a Strong Financial Plan When You’re Renting Forever

Moving back and forth from Tennessee to Alaska, Michael Rogers and his wife Christy have twice been stuck simultaneously paying a mortgage and rent. Once, in 2006, the situation dragged on for eight months, finally ending when they sold their house in Tennessee for $20,000 below what they’d paid for it.

Other adventures in homeownership ended well — the couple doubled their money after selling a fixer-upper. Then later, with another property, they had to pay out $30,000 to fix a mudslide around their home, a mistake caused by the builder.

Two years ago, the Rogerses moved to Kingsport, in northeastern Tennessee, where they signed a lease on an apartment they thought would be a yearlong stopgap before buying again.

The couple just renewed their lease for a third year, and have decided to remain renters for good. Mr. Rogers, a construction manager, likes the convenience of being able to move when a job calls.

Either by choice or by being priced out of the market, many people have decided that renting forever is their best — or only — option. Housing costs and interest rates have risen in the last few years, and it can make financial sense to rent. (The Times has recently updated its popular rent-versus-buy calculator to help people understand the trade-offs.) In the 1960s, the median house price was a little over twice as much as the average income. It’s now nearly six times as much.

Home-ownership is a traditional strategy for long-term wealth building. For people who aren’t planning to buy, creating a strong financial plan without building home equity requires a different mind-set.

Owning a home isn’t a magic bullet to secure retirement. Mr. Rogers has seen how being “house poor” has affected older family members, one of whom has three-quarters of her net worth tied up in her house. That situation leaves people with the option of borrowing against the equity in their home or selling the home to get at the value within it.

He’s focused on investing instead, preferring the liquidity and stability of the stock market.

“If you’re buying something like a broad-based U.S. stock index, you’re just kind of buying a slice of the entire U.S. economy,” Mr. Rogers said. “When you buy a house, your risk is concentrated literally down to one house, in one neighborhood, in one state.”

Mr. Rogers has found that people tend to focus on home equity over other factors. He thinks that can be a mistake.

“In the current market, particularly in my area, rent looks like an absolute bargain compared to what houses are selling for now,” he said. “That allows me to really bump up my savings rate. People are like, ‘Well, you’re not building equity.’ Yeah, but I’ve got a 35 percent savings rate. I’m building investment accounts much faster than I would ever build equity in the house.”

Choosing to Rent

As in any other market, predicting the future of rent charges is impossible. Rents could deflate as they did during the pandemic in New York City or balloon as they have in Amazon-inflated Seattle. Housing prices could crumble as they did during the Great Recession or explode as they have in San Francisco. The key is to have a plan that covers you in a variety of scenarios.

“Renting can be a better financial decision; owning can be a better financial decision,” said Ramit Sethi, author of “I Will Teach You to Be Rich.” “Too often, we simply buy because our parents told us to, and their parents told them to.”

Though he’s a millionaire, Mr. Sethi has rented for the last 20 years in cities like San Francisco, New York and Los Angeles. When he lived in Manhattan, he calculated that it would have cost him 2.2 times more per month to own than to rent. He emphasizes that your calculations have to include the phantom costs of mortgage interest, taxes and maintenance, which is often estimated at 1 to 3 percent of a home’s value. So he rented and focused on investing. He’s a fan of index funds, target date funds any long-term, low-cost investment.

“If you choose to rent, there’s one key thing that is the most important thing of all, which is you absolutely must run your numbers,” he said, “and if it’s cheaper to rent than to buy, you must invest the difference.”

He also negotiates his rent, which he said many people aren’t aware is an option. He recommends that renters pay attention to comparable housing costs in their area. If they can find better deals, they should go in at renewal time with documentation. “It doesn’t always work,” he said. “When it does, it’s a huge benefit.”

Over the last century, the S&P 500 has returned an average of about 7 percent a year, when adjusted for inflation. Mr. Sethi said most people have no idea what the stock market is returning. “But you need to know that number,” he said, “because it tells you what your opportunity cost is — in other words, how much you could be making if you just put money into the market.”

Planning your finances while renting also has an emotional element. Mr. Sethi said people shouldn’t feel guilty if they’re renting.

“Remember that there are literally millions of people in America who rent and invest the difference,” he said. “You’re not some weirdo just because you’re choosing to rent. I do it and plenty of other people do it.”

Running the numbers

“I am constantly being asked why I’m not buying a house,” said Miranda Marquit, who is in her mid-40s and living in Idaho Falls, Idaho. “People think it’s weird.”

Ms. Marquit earns between $10,000 and $12,000 each month and has been creating an investment portfolio for the last 25 years and multiple income streams for the last 15 years. If you want to start planning a successful financial life without homeownership, she suggests starting with retirement calculators at investor.gov.

“When deciding how much I’m going to invest each month, I take a very conservative approach and assume a 6 percent rate of return,” she said. “I know a lot of people will say you should assume a much higher rate of return, especially if you’re investing in stocks, but I like to err on the side of caution.”

You’ll need to factor in how much rent is likely to increase over time (Ms. Marquit uses a 3 percent inflation-based estimate) to come up with the number of how much you’re going to need in retirement.

“Figuring out whether you’re set for retirement is about running the numbers, whether you rent, have a mortgage or are building a rental empire,” she said. “Look at what you want to do in retirement and estimate your monthly needs. Then figure out how you’ll meet those monthly needs.”

The Renting-Only Strategy

“This is very much my life,” said Berna Anat, who lives in the San Francisco Bay Area. “I don’t see home owning in my future.”

When someone says she’s throwing away money on renting, she thinks of friends who have homes. “They’re like, ‘Oh, we can’t go on vacation for two years, because termites have eaten the foundation of our bathroom,’ or like, ‘Yeah, we actually can’t hang out this weekend because we are on our hands and knees tiling the grout of our decrepit sunroom,’” she said. “Forever renting is very much a movement. It’s a lifestyle.”

It comes with a cost: the theoretical equity many plan as a stronghold of their retirement.

Ms. Anat, author of “Money Out Loud,” said replacing that home equity and living a renting lifestyle is about diversification and maximizing investments. If you’re employed full-time, she said, you’ll want to be fully invested in your 401(K) and getting as much of an employer match as possible. Ms. Anat recommends opening up another fund as well, such as a Roth I.R.A.

“The idea is, if you are not spending on housing costs, closing costs, escrow, property taxes” and charges like homeowners’ association fees, she said, “then you are investing all of that money so that your retirement is as cushy as possible, since you won’t have that equity.”

“For me, as a forever renter, I have all those things and I’m investing as aggressively as possible,” she said.

In the short term, Ms. Anat said, you also need to plan for real-world volatility. Your rent could spike or your building could get sold. She recommends an emergency fund of at least six months and a spreadsheet detailing your plan if you lose housing.

“If you were to have to move out of your apartment tomorrow, what is the actual plan for your funds and your life?” she said. “It’s almost like those earthquake escape plan situations.”

Another consideration is your credit score: Keep it clean. Make your payments on time and try to keep the amount you owe low compared with your limit. The usual advice is to restrict your borrowing to 30 percent of your credit limit; Ms. Anat tries to stick to 10 to 15 percent.

Maintaining a strong credit score is critical, she said, because “landlords are looking at that, and you’re more likely to have to shop the market again next month or next year and impress a landlord.”

You also need to protect yourself by understanding landlord’s rights vs. renter’s rights where you live, as it varies by city and state. Buy renter’s insurance, which is usually affordable.

Overall, she said, you have to stabilize your life with as much financial backup as possible.

“It reminds me so much of being self-employed,” said Ms. Anat. “Being self-employed means that you have to make your own plan for health insurance. You have to D.I.Y. your plan for retirement. It’s a little bit more of getting into that mental mode.”