

Is It Better to Buy or Rent? (NYT tool) - MikeCapone
http://www.nytimes.com/interactive/business/buy-rent-calculator.html

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jasonkester
Strange that they buried the most important factor way down at the bottom of
the 3rd page of "Advanced" options.

At its core, the whole rent vs buy economic decision boils down to comparing
your expected returns investing in the housing market to your expected returns
investing in the market in general. The rest of the factors in that calculator
are just there to help you arrive at the conversion factor.

Since it's pretty much impossible to determine what the stock market and
housing markets are going to do, it's probably best to base your home buying
decision on something more rational. Such as "Do I want to own a house?"

For me, the answer to that question is quickly arrived at by asking a few of
your homeowner friends what they did last weekend, and what they plan to do
next weekend. The answer will invariably revolve around some form of
maintenance on the house.

Like it or not, buying a house gives you a new full-time hobby. Lots of people
like that hobby, and that's why they have houses. If gardening and cleaning
gutters don't sound like fun to you, there are plenty of other ways to invest
your money that are less hands-on.

~~~
yardie
Maintenance isn't so bad, and it doesn't require every hour of every weekend.
But I've got a small apartment with a small patch of grass. It takes me 10
minutes to cut the grass and 20 to trim the hedges, once a month.

Like any hobby, you get out what you put into it. I spent 2 weekends gutting
and renovating the kitchen, put ethernet and coax in every room, and wired my
garden for electricity and music.

My last rental had 3 fireplaces, none of them worked because the owner, rather
than paying someone to clean and maintain them decided to plug them up.
Ethernet? forget about it. Cable in every room, not an option. The kitchen was
nice and new, but designed to someone else's specification, not mine.

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drp
A simple way to quickly compare buying vs renting for entire areas is the
"rent ratio", which is calculated by dividing an area's median house price by
its annual rent. Obviously it just paints a geographical picture and each
property should be evaluated individually before making any sort of specific
buy vs. rent decision. We turned the rent ratios for the US into a heat map a
few years ago (but keep it up to date): <http://hotpads.com/search/rent-ratio-
heat-maps>

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barrkel
It's interesting to see just how sensitive the scale is to initial
assumptions. But more important to me is the inefficiency created by the drag
on movement - when you're renting, it's much easier to move, even when you've
got furnishing and the whole lot etc. When you've bought, and you want to
move, you may be at the mercy of the current state of the property market as
to whether you make a loss or a gain, or even need to stay for a few years
more.

I grew up in rented homes. Perhaps the most poignant thing is that the house I
remember best (age 9 to 18 or so) has been renovated, sold etc. It's not
somewhere I can ever go back to. But that may have been the case with a bought
home anyhow.

~~~
dreeves
I believe that it would necessarily be irrational to ever "need to stay for a
few years more" because of the state of the housing market. (I do agree in
general that you're more mobile as a renter, I just think think you've
overstated it.)

An extreme example: You buy a house and then the value plummets to a fraction
of what you paid. Why might you need to stay in that house? Other house prices
presumably fell along with yours so you can still sell yours and buy a similar
one. I think people find it painful to sell at a loss because it makes a loss
on paper become explicit. If you don't sell then you can tell yourself that
you're speculating -- you really think your house is worth more than it will
currently fetch so it's imprudent to sell. But probably you're not smarter
than the market in that regard. In other words, there's no harm in turning a
loss on paper into an explicit loss.

Bottom line, if you want to move from house A to house B and the price
difference (plus moving costs) is worth it, then do it, with no thought at all
to the price you happened to have paid when you bought the first house.

Of course, moving costs when realtors are involved are huge so the original
point partially stands. You're never stuck in the sense the parent implied,
moving is just more expensive when you buy vs rent.

~~~
bronson
> Other house prices presumably fell along with yours so you can still sell
> yours and buy a similar one.

Not if the house lost more value than your down payment. If you're underwater
(and a lot of people are), you need to either arrange a short sale or bring
money to the close. Either way it's nowhere near as easy as you imply.

~~~
dreeves
If you owe more than the house is worth then theoretically you should default
and walk away. I know that question has been debated endlessly and I don't
understand all the practical implications like what it means for your credit
rating, or even whether it should be considered ethical.

I concede that if defaulting is not an option then you may be stuck if you owe
more than the value of the house and can't borrow more money. Good point.

~~~
barrkel
Defaulting differs in different countries. You may be forced to liquidate
other investments to make up the shortfall. Nonrecourse loans are not usual
outside of California, AFAIK.

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hartror
Buying is as much a emotional decision as it is a financial one.

You have to take into account not only the how much you can afford and how
much you want/would like your money to grow but what kind of lifestyle you
desire. If the lifestyle that owning one's home affords is more important than
the increased returns then perhaps you should buy. On the other hand if you
are happy to rent for a decade or two you will likely end up richer.

I am currently of two minds, I love the idea of being able to do what I like
to my own home. But at the same time real estate isn't necessarily the best
investment, though where I am (Melbourne, Australia) we've had massive growth
in housing prices (somewhere in the order of 20%+pa off the top of my head)
though it is slowing down now.

One of my favourite bloggers Ramit Sethi has some strong opinions on the issue
<http://www.iwillteachyoutoberich.com/buying-a-house/>

~~~
duck
Another piece of the lifestyle choice is control. While renting you are at the
mercy of the landlord. I found this out last year when our landlord decided
she wanted to move back into her house. Even though we had a lease, and the
law is _suppose_ to protect you, it doesn't stop them from making your life
miserable - and that cost isn't worth any amount of money to me.

~~~
virinvictus
That's bleeding horrible, and I agree. I've had some pretty miserable
landlords (though I still continue to rent, and will not buy a house (at least
not in the city I'm living in)).

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dreeves
I wrote about this a year ago: <http://messymatters.com/buyrent>

(I'm so proud of that article! I think it's literally the most popular thing
I've ever written. It was even translated into Spanish.)

Short version: Neither choice is a no-brainer. It comes down to all the
auxiliary aspects of the decision like tax benefits and personal preferences.

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asanwal
If you are doing the startup thing, it may be worthwhile keeping your
financial obligations/footprint to a minimum. You can always downsize a
rental, but a mortgage is not so easy to exit.

Plus, that mortgage downpayment might be better invested in yourself and your
venture?

There are factors besides the rent vs buy calcs worth considering esp for
entrepeneurs.

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stretchwithme
Let's see. Housing is propped up by the policies of a government that is
currently borrowing 43% of the largest budget in human history. Will it be
able to continue doing either indefinitely?

If you think so, by all means buy a house.

But if you think everybody reaps what they sow, think twice.

~~~
barrkel
FWIW: the dynamics of governments borrowing - particularly governments with
control of their currency, and debts denominated in that currency - are in no
way like personal borrowing.

If the country we are talking about was at or close to its richest point, and
it is in a bad recession, I would expect its budget to be very large with a
significant portion of borrowing. To do otherwise would be irresponsible.

~~~
stretchwithme
No, I think its irresponsible, especially in light of all the nonsense being
funded.

Stimulus does not create recovery, any more than the stimulus of a massive
housing bubble and two ways prevented the current economic trouble.

In fact, government created this bubble and the inevitable with stimulus. A
phony economy where building things that people would not ordinarily demand
requires building an expensive infrastructure which becomes useless when the
phony economy collapses.

We can either let the economy return to normal, building things people are
willing to pay for. Or we can try to create another phony government-directed
economy with another recession to follow.

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barmstrong
Interesting - on the few California properties I tried, it says it _never_
makes sense to buy, no matter how long you live there.

This could actually be true in some areas. Prices are still really high
relative to rent. The Houston prices I put in made sense to own after a 2-3
years.

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petercooper
Where "better" is defined entirely to mean cost efficiency. Targeted at those
who believe a home is primarily a financial asset.

~~~
yason
I noticed the same. Who looks _only_ at the figures? I certainly don't and I
suspect that most people just partially factor them in.

For me, the biggest factor is that does the apartment or house feel like my
home. If it does, then I will consider buying or renting, depending on whether
it's on sale or to let.

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kirubakaran
A must-see : <http://www.khanacademy.org/video?v=YL10H_EcB-E>

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grandalf
This is a superb calculator, however it assumes a faster growth rate relative
to inflation than is likely. Try it with a -1% appreciation rate (which is the
historical average for residential real estate since ww2)

~~~
modeless
Another thing to check is condo or homeowner's association fees. The default
value in the calculator is 0, but for many condos the fees are 1/4 or more of
what you'd pay in rent on a comparable apartment, which makes a _huge_
difference long-term.

~~~
yardie
Every place I've, rented the association fees were in addition to the rent. It
might be included in the rent but listed as a seperate item, or it could be
the renter that pays directly. In any case, association fees weren't included
in the deposit. In my case rent was 1500, deposit was 3000, but the check
every month was 1700.

~~~
modeless
I've never seen HOA fees listed separately from rent for apartment buildings.
I've rented in LA and Seattle; maybe it's different other places.

~~~
yardie
Apartment buildings normally don't have HOA fees. I can't imagine why they
would since no one there is a homeowner. If you are renting a condo then the
owner may or may not include the fee in the rent. In my case this charge
includes heat and water, 2 things that change frequently.

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STHayden
I bought a house. According to this calc i may or may not have been a good
idea based on how the house appreciates (I got it at the bottom of the
market).

But at the end of the day my house is like 4x bigger then my apartment. So
worth it even if it does not end up being an over all savings or not.

~~~
rokhayakebe
I don't get this calculator, because you are likely to make money or get back
your payments when you sell the home. Rent is forever gone.

~~~
dreeves
I think I can make intuitive why the "rent is forever gone" argument is wrong.
Another way to state that argument is "after I pay off the mortgage I own a
house and live for free whereas if I'd rented the whole time then I'd own
nothing and still have rent to pay".

Quoting myself from the comments of <http://messymatters.com/buyrent> ...

Imagine yourself 30 years from now with a house you fully own, with no more
payments to make. Now imagine your alternate renting self who, instead of
steadily paying down the principal on the mortgage, has built up hundreds of
thousands of dollars in equity in some other investment. You still have rent
to pay each month but that's also about how much you're collecting in interest
on your investments. So the renter now lives for free just like the home-
buyer.

Another way to say all this is that if you ignore price bubbles, taxes,
personal preferences, and leverage then renting and buying are roughly
financially equivalent. Not that you should ignore those things, just don't
fall for the myths that it's a no-brainer decision.

~~~
orangecat
_Another way to say all this is that if you ignore price bubbles, taxes,
personal preferences, and leverage then renting and buying are roughly
financially equivalent._

And that shouldn't be surprising. In a world where buying really is clearly
superior to renting, there would be lots of arbitrage opportunities to buy
houses and rent them profitably. That would increase both the demand for
houses and the supply of rentals, which would make buying more expensive and
renting cheaper until they reach a point of equivalence.

~~~
krschultz
Landlords aren't charities. Their profit is based explicitly on the idea that
buyers get a better deal than renters.

~~~
dreeves
Quoting myself from <http://messymatters.com/buyrent> again:

In fact, landlord profits are probably a very small part of the equation: on
par with the cost of collecting your rent and arranging (not paying for)
maintenance. We can check this by seeing how much property management
companies charge. Casual web searching indicates it can range from 3% to 15%
of rent. But that includes the cost of finding new tenants — the equivalent of
which home-buyers pay in spades in realtor commissions (directly or
indirectly). I think it's safe to say that at most a few percent or so of your
rent is wasted in the sense of being profit for your landlord.

(Which is what you'd expect in a competitive market, as someone above pointed
out.)

~~~
krschultz
That's not the point at all.

The strategic picture is this: if renting were so much better than buying
fewer people would buy, and nobody would be dumb enough to buy and then rent
the place. But obviously buying is better than renting because a lot of people
choose to go and spend their money buying _extra_ homes beyond the one they
need and renting it.

I don't need to refer to google searches for my information, I have seen the
landlord perspective 1st hand. I'm not surprised that most landlords see very
little in the way of month to month cashflow profit. The renter pays in but
you have to pay out a lot of other expenses (as mentioned).

But at the end you own the house and the renter doesn't. Basically if you have
enough money to front for the down payment the house costs you little or
nothing after that except time/hassle of dealing with your tenant. It probably
doesn't actually put more money in your pocket each month, but neither would a
bunch of stocks if you were reinvesting the returns.

So why tie yourself up in a single house instead of a bunch of stocks?

Leverage.If I have 40k and get a mortgage on a 200k and make a small return,
at some point that is better than getting 40k of stocks and making
hypothetically a bigger return.

Plus there are other intangiables. I can buy a shitty little house and spend a
few weeks working on it and turn sweat equity into real equity, no matter how
much you look at your stocks you haven't increased their value.

Of course there are negatives, the tenant can trash the place, you can go
without tenants for a while, but overall it makes sense for a lot of people
who have some free cash and a bit of extra time and want to have a side
business.

~~~
orangecat
_if renting were so much better than buying fewer people would buy, and nobody
would be dumb enough to buy and then rent the place._

Correct, which means that renting isn't clearly superior to buying either.
(Except during insane housing bubbles). Again exactly what we should expect.

 _But obviously buying is better than renting because a lot of people choose
to go and spend their money buying extra homes beyond the one they need and
renting it._

And obviously growing your own food is better than buying it because lots of
people grow extra food and sell it. The point is that the profits you can earn
in either case aren't so great that it's foolish not to do it.

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nradov
The Bubblizer spreadsheet is a much better tool. It allows you to go in and
tweak a bunch of different variables.
[http://randolfe.typepad.com/randolfe/2006/04/bubblizer_a_req...](http://randolfe.typepad.com/randolfe/2006/04/bubblizer_a_req.html)

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po
One common technique for lowering the cost of a mortgage is to make one
additional payment per year and/or each month. This lowers the principal and
makes subsequent interest payments lower.

Although, not everyone can afford that it would be nice if this calculator
would allow you to factor that in. I suppose you can fake it by altering the
interest rate an appropriate amount but I'm not sure it follows the same
curve.

~~~
dreeves
I don't believe this is really a factor. Paying down the principal faster
saves you the 5% (or whatever your mortgage rate is) interest on the amount of
your pre-payment. It's tantamount to investing that money at a risk-free 5%.
That might be the smartest thing to do with your savings but it doesn't change
the calculus fundamentally.

Buying a house with a suitcase full of cash or getting a zero-amortization
(infinity-year, ie, interest-only) mortgage or anything in between is all
roughly financially equivalent if you have alternative investments available.

Actually the longer the mortgage term the bigger total tax deduction you get,
so in that sense the more you pre-pay the costlier it is.

~~~
po
I don't have a mortgage so I don't personally do this, but I can tell you it's
a popular practice.

> but it doesn't change the calculus fundamentally.

It does change the calculation that this tool is showing. If you use the tool
and assume you make 3% interest on savings, but then make periodic payments on
your 6% interest loan, there is no way to model that with this tool.

OK, so lets say this is a bad idea and you should instead not have any savings
in that case, and make all of your savings into payments on your mortgage
interest. You're saying we could model that by assuming you are making
periodic risk-free 5% (or whatever) investment instead.

> Actually the longer the mortgage term the bigger total tax deduction you
> get, so in that sense the more you pre-pay the costlier it is.

I get what you're saying but a tax deduction can never completely offset the
interest payment right? Also, it depends on the difference between capital
gains tax and the credit you would get on your tax rate for the interest.

~~~
dreeves
> OK, so lets say this is a bad idea and you should instead > not have any
> savings in that case, and make all of your > savings into payments on your
> mortgage interest. You're > saying we could model that by assuming you are
> making > periodic risk-free 5% (or whatever) investment instead.

Exactly.

> I get what you're saying but a tax deduction can never > completely offset
> the interest payment right?

Agreed, but I just meant that the more mortgage interest you pay the more you
save on taxes, not that the interest is totally offset or anything.

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po
NY Times put out this exact same calculator in 2007. Is this one any
different? Have they updated some data or how the calculations are done?

~~~
DLWormwood
Concepts like compound interest and tax calculation based on a known rate are
based on straight mathematics, not politics. The only thing different between
now and then is the starting figures you enter in the calcuator.

------
dgroves
It is better to own your own home outright.

