Ratlinks Redux: Rent vs Buy
Are you asset-light?
THIS OLD MILLENNIAL
With the 21st century entering its third decade, demographics are becoming more complicated. Millennials, individuals born 1981-1996, are now dividing into two cohorts - old and young.
Old millennials are more likely to be settling down, starting a family and telling the world about it on Instagram.
Young millennials are more likely to know how to code, crush white claw and send nudes via Snapchat.
Old millennials are looking at longer-term housing decisions and debating what is better: renting or buying. The debate boils down to should you continue to rent or should you become a full-fledged adult and shackle yourself with joys of homeownership.
The argument between rent vs buy used to be simple. If you could afford it, you should buy.
Why not.
Buying a home was a rite of passage. Allowed for tax benefits through mortgage and property tax deductions and best of all, home prices prior to 2008 never declined.
Before you say capitalism is so dumb. Be careful prospective Bernie Bro or Yang Gang-banger because as a homeowner you might have more in common with private equity titans Steve Schwarzman or Leon Black than a socialist bartender from the Bronx. As purchasing a home appears quite similar to leveraged buyouts (LBO).
In a traditional LBO, where a private equity firm takes a public company private. The PE firm pays roughly 1/4th-1/5th of the purchase price in equity and financing the remainder with debt. When purchasing a home historically, 20% of the value of a home is used as a down payment, becoming the equity component with the remaining 80% financed via a mortgage (debt). For example, if a $1,000,000 home purchased with a 20% down payment of $200,000 turns out to be worth $2,000,000 in a few years. Thanks to leverage the return is magnified from a 2x return if only cash was used (2000/1000) to a roughly 10x return through debt (2000/200).
The above example is purely hypothetical. The ability for real estate value to double in a few years depends on geography and demand. If you want to learn more about renting vs buying, I suggest the following links from LifeHacker and the New York Times Rent Buy Calculator.
Before we move on, it is worth noting there is another major factor that impacts the rent vs buy decision - state and local tax deductions aka SALT.
However, that is a really esoteric and BORING topic.Instead let’s divert focus to the other shaker.
BUD ASSET LIGHT
Millennials aren’t the only ones debating whether to rent or buy. Gen Z, individuals born between 1997 and 2010 appear to never want to own anything. Rather preferring to rent; be it a home (Airbnb), a car (Uber) or the runway.
The sharing economy is here in full force and appears to work best with “fallow assets.” Expensive items that people rarely use, says Aileen Lee, founder of the venture capital firm Cowboy Ventures.
The gym appears to be the perfect proving ground in the rent vs buy debate.
Today, you can get a standard monthly gym membership, join class pass (rent all the gyms), buy home gym equipment or subscribe to streaming work out classes.
Peloton the leader in home exercise bikes wants you to “own the gym” but has gone full circle allowing for a 30 day rental of their equipment. Peloton knows that once users get the bike in their home, their craving for internet fame coupled with the potential for virtual high fives. Wins out over the crippling anxiety of going to the gym and interacting with real people who may actually applaud your efforts.
Not that I would know anything about that. I would never change my Peloton user name to something ridiculous knowing there is a high likelihood of a shout out during the ceremonial century ride.