
They Could Buy, but Why? Meet the High-Renters - spking
https://www.nytimes.com/2017/05/19/realestate/they-can-afford-to-buy-but-they-would-rather-rent.html
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jseliger
>Buying an apartment in New York City is a marker of success for some
residents

It's also a sign of folly for some. Many people hate-read the Sunday Real
Estate section. There are often one-bedrooms listed for $700k – $1 million,
with $1K+ per month maintenance fees. Add on to that $200 – 1K per month in
taxes, and suddenly you will have to wait a VERY long time to make anything
like the return you'd get from investing in a Vanguard Total Market Fund and
renting for $3K per month.

Everyone in the real estate industry loves purchases because of the fees
associated with purchase. But buying is often not a good idea (though it
depends on when). If we get another real estate crash and prices drop by 10 –
20%, buying may start to make sense again. In 2011 buying was a great idea.

This same basic dynamic plays out in many cities. The NYT has a decent rent-
vs-buy calculator: [https://www.nytimes.com/interactive/2014/upshot/buy-rent-
cal...](https://www.nytimes.com/interactive/2014/upshot/buy-rent-
calculator.html) that can help answer some questions. Notice the investment
return expected, which is a vital part of these calculations.

~~~
jshen
"and renting for $3K per month"

I think you make a lot of assumptions, like the one above, which don't fit my
admittedly anecdotal experience. I live in one of the hot markets, I bot a
place at the peak of the market before the last crash, and found myself nearly
$200k in the hole on paper. That was roughly 10 years ago, and here's what
happened.

I lived in it for 10 years, and I just sold it for more than I paid for it.
Obviously this in isolation wasn't a good investment, but I did nearly the
worst thing, bought at a peak before a crash, and still came out net positive
10 years later.

Second, you said "and renting for $3K per month" which is a mistake because
it's assuming rent will not go up in any significant way. Where I live, rent
goes up a lot. That place I bought 10 years ago, a couple years back we
thought about selling and renting (to get into a different school district)
and we realized that our mortgage was lower than what we would have to pay in
rent to get a similar place in the same area.

Again, these are just anecdotes, but my experience doesn't fit with the
assumptions you are making above.

~~~
ProfessorLayton
$1 today is worth .85¢ in 2007. You'd have to sell your place for 21% more
than its peak price just to break even (15% inflation + ~6% realtor fees and
other costs) _and_ that doesn't include the returns you could have made in,
say, an index fund over the last 10 years.

I'm not trying to make any assumptions on your anecdote, but only the very
hottest markets have been able to pull off that kind of recovery.

[https://data.bls.gov/cgi-
bin/cpicalc.pl?cost1=1.00&year1=201...](https://data.bls.gov/cgi-
bin/cpicalc.pl?cost1=1.00&year1=201704&year2=200704)

~~~
curiouscats
In most cases you have a mortgage so it isn't as simple as that. For example,
you didn't pay $1 million (even if that is the cost) - maybe you put down
$200,000. If it goes to $1.2 million you sell it and get $400,000 (paying off
the $800,000 you borrowed). That is 100% of your $200,000 even though the
price only went up 20%.

This is oversimplified for illustrative purposes. You have to pay interest,
taxes, get a place to live... but the example shows why you don't need the
sales price to go up by inflation to break even or make a profit even in 2007
dollars.

~~~
ProfessorLayton
I agree that I don't have all the info to make a true apples to apples
comparison, but even your illustrative example is way off:

1.2M - 6% realtor fees is 1.128M. Thats 72K just for realtor fees right off
the bat.

 _not including_ including costs like city transfer tax, capital gains for
short term sales, and countless other seller fees that vary by market
temperature.

All this comes off your 200k "profits", which is still great, but homeowners
typically take years just to stop being underwater when buying a home.

~~~
curiouscats
True.

All I was trying to point out is that the return isn't just the sales price
having to beat inflation.

You are completely right that I forgot to mention buying and selling costs
(which, as you note, are very high in real estate).

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philip1209
My girlfriend and I were looking at real estate in SF. It was unreasonably
expensive for places that we did not love. We have since decided to sell all
of our things and live full-time in AirBNBs around the world. I now only have
a carry-on suitcase and backpack, and getting rid of all of my crap was such
an empowering feeling. For less than rent in SF, we are currently in a
beautiful apartment in Mexico City that is decorated, has all services
provided (including internet), and has weekly maid cleanings.

I don't know how long we will continue this lifestyle, but AirBNB makes it
easy. For multi-month rentals, payments go through monthly.

After dealing with so many headaches in personal and commercial rentals in SF,
I'm welcoming this lifestyle. I'm tired of setting up internet, enrolling in
utility payments, disputing issues with landlords, and moving crap between
apartments. The last year has been a nightmare for this stuff, and having to
deal with long leases has been a root problem preventing me from walking out
of bad personal and business rentals. (Fun fact - even canceling a month-to-
month Comcast business internet account requires 2 months notice.)

~~~
devrandomguy
I was living the nomadic developer lifestyle for a couple years, and it has
been the best experience of my life. Living in and working from a dozen or so
different countries has given me an incredible perspective on where in the
world I actually want to be.

If you and your SO are a developers, then I would highly recommend a work-
cation in Prague. I spent a few weeks at a really cool co-working space,
PaperHub, which was part of the Institute of Cryptanarchy (lol). They take BTC
for everything, the transit system is a dream, and there are tiny little
specialist grocery stores everywhere. If I was ever going to return to the
same place twice, it would be Prague.

Beware of burnout, though - there is no rest in this lifestyle. The home
office wants me online during their business day, and constantly learning new
cultures is a huge cognitive load. After two years of this, I needed to settle
down for a while; right now I am resting between jobs, thanks to a very
supportive mother. Oh, make sure to take good care of your parents, they may
end up being the only solid, reliable people in your life.

~~~
Mediterraneo10
> I spent a few weeks at a really cool co-working space, PaperHub

I honestly don’t get the attraction of co-working spaces for most digital
nomads. The costs often outweigh simply working from a cafe or the balcony of
your AirBnB – 3G internet is cheap in most of the world now. In my hometown,
co-working spaces attract locals who set up small teams with other local
freelancers and could benefit from in-person collaboration. But for a solitary
digital nomad all of whose contacts are remote, what's the point?

~~~
phamilton
Networking is a big one. Traveling around the world gives you a chance to
uniquely expand your professional network.

~~~
Mediterraneo10
I see. I guess this must be a developer thing. I’m a digital nomad, but my
profession is translation. In a co-working space in a third country, I’d be
unlikely to ever meet anyone who needs my particular language pairs, and the
only benefit would be working in an unusually quiet place that, in itself,
doesn’t seem worth the cost.

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jimlawruk
Buyers in a high priced area are taking on way more risk then people realize.
If you have $200K and buy a $1M dollar apartment, you just put 500% of your
net worth into one asset. If prices fall by 20%, you just lost all of your
money. Hot markets like NYC and SF have inflated prices propped up by high
incomes, restrictive building practices, low interest rates, and high
desirability. You can't assume all of these factors will remain forever.

~~~
jdavis703
No, you put 100% of your net worth into that condo. Assuming that a market
crash doesn't affect your ability to pay your mortgage you're still seeing a
positive ROI in regards to imputed rents.

~~~
IanCal
You have $1M in real estate and an $800k debt. Your net worth is still $200k,
however.

~~~
alpha_squared
Why wouldn't the net worth be -$600k? Debt is usually accounted for in net
worth.

~~~
sndp
You'd account for the debt, as well as the value of the property.

Liabilites: $800k loan

Assets: $1M property $0 cash

Net worth: $200k

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verelo
So this is a fun topic. I own 3 places, two apartments and one house. One of
the apartments I lived in [and co-own with my partner] before we moved to the
house, the other apartment I purchased because I was able to make the month to
month math work [read: cash flow break even] and it gave me the 60(personal
property)/20(market funds)/20(investment real estate) net worth split i
wanted.

The only reason real estate can work for me is because I'm able to put down
30% of the purchase price in cash for the apartments and borrow the rest at
crazy low rates [2.99% & 2.59% for the more recently purchased unit]. If we
assume a reasonable return on the apartment (4% annually) and a healthy yearly
stock market return (8%), if you consider the fact that I couldn't borrow
money to play with stock, the 'bonus' I get on appreciating portion of the
property that is actually borrowed money makes them experience very similar
performance when modelled[1] over a 10 year period.

At the end of the day, as with all financial advice, what you should do
dramatically depends on your current personal situation, goals and age.

[1]
[https://docs.google.com/spreadsheets/d/1esgwYfYhDo0JaFP0qGhr...](https://docs.google.com/spreadsheets/d/1esgwYfYhDo0JaFP0qGhr3ybD4vaw_2I89n6zB5fAa9Y/edit?usp=sharing)

~~~
mstade
See, you've obviously put significant thought into this, even to the point of
building a model. Most people I know, they buy a place because they need a
place to live. They also tell themselves that buying a place is a great way to
grow your capital. They may be right, but when asked "where are you going to
live, once you've sold?" most people I know have terrible answers. Most people
I know answer "I'll just buy a new place."

The reality is that most people I know would rather rent – it's easier and in
many cases even cheaper _here_. But the problem is that _here_ is Stockholm,
and Stockholm has a highly dysfunctional rental market where it's practically
impossible for anyone to just come on to the market and find a place to rent
within a week or two. You're more or less _forced_ into buying a place if
you're going to stick around. People that stick around for a couple of weeks,
maybe a month, are going to be fine – plenty of hotels and such make it easy
to stay. But if you're staying for more than a month, but _probably_ less than
say three years – you're more or less SOL. There's a sort of secondary (and
even tertiary, believe it or not) rental market, but you'll probably be moving
around every few months whether you like it or not.

I can't help but think the chips are stacked against those who just need a
place to live for a while, here in Stockholm at least.

~~~
verelo
FYI here is a copy of my model:
[https://docs.google.com/spreadsheets/d/1esgwYfYhDo0JaFP0qGhr...](https://docs.google.com/spreadsheets/d/1esgwYfYhDo0JaFP0qGhr3ybD4vaw_2I89n6zB5fAa9Y/edit?usp=sharing)

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jhulla
Interesting.

One important benefit of buying: the $500K capital gains tax exemption for
married couples on sales of their primary home after living for two+ years.

[http://www.nolo.com/legal-
encyclopedia/the-250000500000-home...](http://www.nolo.com/legal-
encyclopedia/the-250000500000-home-sale-tax-exclusion.html)

~~~
ThrustVectoring
Also the mortgage interest deduction. It essentially means that you pay
interest on the mortgage with pre-tax dollars, not post-tax.

~~~
gnopgnip
Most people overestimate the value of this deduction. If you are married
filing jointly you would get a $12600 without itemizing. So you are only
saving any money if your mortgage interest and property taxes are more than
$12600 a year, or if you have other deductions.

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Overtonwindow
I lived in apartments since I was 18, up and down the east coast. After ten
years renting and paying through the nose in DC I went to Atlanta and bought a
house at 34. Sadly no jobs in my industry so I've moved back to the DC area
and I'm renting out my house. The lesson for me was that I should have bought
sooner. This house is a nice foundation for myself and it's actually freed my
worry to be a little bold, and go where I need to go. I always have that house
to go back to if all else fails, so to speak.

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dionidium
I lived most of my life in the Midwest and this was true for me there, too. I
moved apartments a lot, because I enjoyed spending time in different
neighborhoods. Plus, whenever I changed jobs, I moved to be closer to the
office. Earlier this year I moved to New York. I couldn't have done any of
that so easily if I'd bought a house when all my peers did.

~~~
angmarsbane
I think you bring up a big point that hasn't been discussed yet. If you own
property and lose your job or get a job opportunity on the other side of a
city with a lot of traffic or another part of the country it is a lot more
difficult to shed an owned property than it is a rental.

~~~
dionidium
Yes, exactly. Owning a home made a lot more sense when employment was for life
and young adults had kids. But I don't have children and who knows where my
next job will be? I'd take a good offer almost anywhere. Owning complicates
that.

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southphillyman
All of my NYC friends move to different apartments every year or two as well.
For a completely different reason though, they can not afford the yearly
increases. One friend had a place near Barclays for $2800 and it went up to
$3500 in a single years increase.

~~~
kaosjester
I'm moving out of a house right now in the midwest that bumped my rent by
$100/mo each year, but they listed it back at my original rate this year. For
some reason, being a multi-year tenant cost me an extra ~$3000.

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muninn_
> Ms. Braddock said: “Here, there’s no stigma attached to renting, which is
> not true elsewhere in the country.”

Interesting comment. Never in my life or travels have I met anoybody who
attached stigma to renting a place.

~~~
ghostly_s
In the small city where I grew up there is definitely a stigma attached to
renting. The pool of rental housing is very small and poor quality/low-rent,
so renting implies not having "made it".

