3032: When Renting is Smarter Than Buying by Sierra Black with Get Rich Slowly

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[00:00:51] This is Optimal Finance Daily, when renting is smarter than buying by Sierra Black with GetRichSlowly.org. In my article on Spotify last week, a couple of commenters took me to task for suggesting that subscribing to Access for Music could be better than buying your own permanent copies of the songs you love. A few thought that, as a personal finance writer, I should be urging people to buy their stuff instead of throwing money away renting access to it.

[00:01:21] That's an interesting idea. I think it's often the case that renting or subscribing for access to something is better than buying it outright. Buying stuff can be great too. Ultimately, I don't think the question is whether to rent or buy. It's how you find the solution that gives you the best value for the thing you need to use. Sometimes, you'll spend more money renting access to an item than you would just buying it outright. Other times, the reverse is true. The Rise of Transumers

[00:01:51] Most products aren't investments. They lose value the moment you take them home from the shop and continue to depreciate the longer you own them and the more you use them. This is true of everything, from cars to designer shoes. There are a few things that can appreciate in value. Collectors' items, houses, and jewelry. For most of our stuff, though, we can hope to recover some of what we spent on it by selling it when we no longer need it.

[00:02:20] But we're kissing the bulk of our money goodbye when we make the purchase. Given that, there are plenty of times when it makes more sense to rent. Anytime you're buying something you have a limited use for, you might want to pause and consider renting instead. High-end designer handbags? Specialized power tools for a home improvement project? You can rent this stuff for a fraction of the cost that you'd spend buying it. There's a whole movement of people who call themselves transumers.

[00:02:49] These folks make an effort to own as little as possible, renting what they want or need, and then swapping it for new rental items after a short time. They're not crunchy, hippie types. They're young professionals renting cars and furniture, and even their clothes. They just want to always have the latest trends. So instead of buying their stuff, they rent it and turn it in every few months for the hot new item. In addition to big companies or niche websites that provide rental items to consumers,

[00:03:18] there are websites that specialize in connecting individuals who own stuff with other individuals who want to borrow it for a fee. These are like a rental version of the swap sites I've written about before. Instead of trading your stuff permanently for other stuff, you can rent it out. For example, you could rent your fall textbooks on Chegg.com. Some textbooks you may want as a reference text later on in life, but most of them you'll never need to touch again.

[00:03:47] Maybe it makes sense to rent instead of buying them. In some economic conditions and for certain types of investors, it even makes more economic sense to rent your primary residence rather than own it. Rent or buy. How can you decide whether to rent or buy? The bottom line is minimizing the expense for having the stuff you want. Number one, consider the cost. How much does the object cost to buy? How much is the rental fee?

[00:04:16] How long would you have to rent it before you'd have paid as much in rental fees as you would have to purchase it outright? Number two, consider how frequently you want to use an item. Is this something you're going to use once, like a floor sander or a formal gown, or something you want to have on hands at all times, like a hammer or your running shoes? Number three, consider how long you want to use the item. Do you want to have your residence for the next year or the next 20 years?

[00:04:45] Will you need that car for a weekend or a daily commute? Number four, consider its resale value. Does this object appreciate in value, hold a fairly steady value, or rapidly lose value? Number five, consider how much your use will impact the item. Some of our stuff we wear out. Some of it we leave a little trace on. Are you buying a sofa that's going to be destroyed by your kids?

[00:05:11] Or a DVD that you'll watch a few times and then resell good as new on eBay? There's no simple answer to the rent versus buy question. For some people, it probably makes economic sense to rent furniture. They may want to change their furnishings frequently and have a thing for high-end designer items that lose value quickly as they go out of style. Renting a couch for six months in those circumstances makes more sense than shelling out thousands of dollars for one.

[00:05:39] I, on the other hand, am happily using the couch that I received as a hand-me-down from my mom when I moved out. I expect to use it until it breaks or my kids grow up, whichever comes first. The key is to answer the questions mentioned and figure out if it will cost you more to rent or buy the thing you want. It's an equation you should probably be able to solve for anything you want to buy. The equation would look something like cost to buy minus resale value versus cost to rent.

[00:06:07] You'd also want to factor in maintenance costs on items you own. What about Spotify? To go back to the original example of music, it probably depends a lot on how you consume music. If you follow what's hot and tend to listen to a new artist or album for a few months and then move on to the next new thing, you're probably better off with a subscription service. If you have a few favorite bands you want to hear over and over, you're not spending money on new music every month.

[00:06:35] Subscribing to a music service might be a waste for you. Aside from cost, there are psychological issues. The transsumer movement has been around for a while, but it doesn't seem to have really caught on with most things. People seem to prefer owning stuff to renting it. For instance, I rarely rent anything. I own my home, my car, and all the possessions I regularly use.

[00:06:59] I'm experimenting with subscription services like Netflix and Spotify for my media, but the truth is I don't buy a lot of media anyway. I tend to use my library for books, and I often get music and movies from the library too. You just listened to the post titled, When Renting is Smarter Than Buying by Sierra Black with GetRichSlowly.org. Did you know that only 8% of people will stick with their New Year's resolutions all year long?

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[00:09:44] I thought Sierra had some great things to consider when you're deciding if you should rent or buy. I mostly see this debate come up when it comes to housing. Housing costs are the biggest piece of most of our budgets, and homes have the potential to appreciate over time, so many people will look at them as an investment. And many people believe renting a home is throwing your money away, but I don't see it that way.

[00:10:09] I think the decision to buy a home is very personal, highly dependent on your circumstances, and might not make financial sense depending on what you buy. In my case, I bought my house as a lifestyle decision after I was debt-free and investing heavily in retirement vehicles. And while I don't look at my primary residence as an investment, I was house hacking for about two years with a roommate who covered 90% of my mortgage.

[00:10:36] And I do plan to rent this house out in the future. So I intend for it to become an investment eventually. Home ownership has high carrying costs. And if you need to access the money you have locked up in equity in your home, you either need to sell the house or take out a home equity loan, which creates more risk.

[00:10:56] I recognize the risks of home ownership, and so really only considered it after getting other financial goals out of the way, like getting out of consumer debt, fully funding retirement vehicles, and building up a solid emergency fund. And that will do it for today. Have a great day and start to your weekend. Thank you for listening. And I'll be back here reading for you tomorrow, where your optimal life awaits.