

The Renter’s Manifesto - limist
http://www.mint.com/blog/goals/rent-vs-buy/

======
trjordan
Big detail missing here: a standard mortgage is the only way for the average
person to make an investment with 5x (or more) in leverage. For a 20% down
payment, you effectively get to invest 5x your money into a real estate
investment of your choice. The real estate market as a whole is certainly less
value-producing than something like tech or chemicals, but Joe Salaried can't
easily go out and ask his 401(k) plan to leverage him out at 5x his net worth.

It's not for everyone, and it's certainly a risk (like all leveraged
investments), but it does provide an opportunity that very few other common
financial instruments provide.

~~~
nostrademons
Why would you want to leverage up an investment whose expected returns are
barely above inflation, though? It's a fairly good bet that the appreciation
on your home will be less than the interest you're paying on your mortgage,
which makes this a net loss. (Particularly _now_ , right after home prices
have seen the most spectacular run-up and bubble in nearly a century.)

~~~
hugh3
You'd do it because you expect that the return on this particular property at
this particular time will be significantly above inflation.

I think this would be a reasonable bet in cities which have had particularly
strong post-bubble deflation but which nonetheless have strong long-term
growth prospects. If I had lots of spare money I think I'd be buying up five-
figure houses in suburban Sacramento right now.

~~~
usaar333
Out of curiosity, why do you see Sac rebounding strongly?

~~~
hugh3
Just a guess based on the vibe of the place -- it feels like a city which is
going to continue to grow in population and importance, and it's come down a
helluva long way since the peak of the boom. I could be wrong. If I had a
really good reason for believing it then I'd be out there buying instead of
talking about buying.

I'm only picking on Sacramento because I used to live there, there could be
much better buying opportunities in cities I don't know so well.

~~~
usaar333
It is possible that it will rise, but it seems to lack the NY/SF factors of
limited supply (land) driving prices through the roof. In SF, there is only so
much space, so the affluent can keep driving prices higher. Around Sac, there
is plenty of farmland ripe for development.

(example: Austin, TX is a great place to live overall, but it remains cheap
due to "endless" land).

------
chime
Every now and then I see articles like these. It always seems to me that the
author is simply trying to justify the fact that they rent. Renting vs. buying
is a very personal decision and has a lot more to do with lifestyle and
personal choices than financial soundness. I bought my house in 2005 at almost
the top of housing market in Florida. I paid $145k for my house and told
everyone about how smart of a financial decision I was making. I've spent $15k
in home improvements and my house is now worth $125k. Oops. However, my
mortgage is still very low and I can easily afford it regardless of the
current worth.

Now the question is, if I could see the future back in 2005, would I still buy
this house? If all I could see was the housing crash of 2008-2009, then of
course not. But if I could see the great times I've had in this house which
includes absolute peace and quiet, friendly neighbors who don't change every
other month, and the feeling of a little place by the beach to call my own, I
would indeed buy this house. Buying a house has a lot more to do with making
it a home than just a shelter for cheap.

Nobody knows the future. I could have rented this exact house and instead of
benefiting in the long run, I could have ended up losing more money if rent
prices skyrocketed. All I know is that for people who can afford to buy and
afford to rent, money has very little to do with buying vs. renting.

~~~
tpz
Agreed.

re: "It always seems to me that the author is simply trying to justify the
fact that they rent." - this always seems to be the case. The few renters who
seem to do well financially would also do well financially as homeowners but
for some reason have convinced themselves that the numbers work out better for
renting. Maybe it does for those people, maybe it doesn't. I'll come back to
that point in the next paragraph. In the meantime, however, the vast majority
of renters one might speak to are just pissing away money, are no further in
terms of savings than those with mortgages, and have none of the equity built
up that those with mortgages have, even those who are pretty new to their
mortgages.

Now, back to whether or not those "smart" renters are any better off. First
off, I'll readily admit that my single data point is just that, but it bears
consideration nonetheless. I bought property in 2005. In a neighbourhood with
some growth potential, in an overall market with generally upward movement.
Nothing bullish, just generally upward movement. In fact, that movement had
been slowing a bit at that point, and continued to slow somewhat more
afterwards. We all know what happened next. I sold early this year. I wonder
how many smart renters could have done this _well_, even given the shitty few
years I happened to own before selling: I paid $500 more per month than what I
would have paid to rent the same space (in other words, put me up against a
smart renter with $500 to invest each month), for a total of $30,000
"invested" progressively over those five years. I sold for a net profit of
$125,000 after all fees, commissions, etc. In a hesitant market still
recovering from the nasty troubles we all know too well.

Find me a renter with that kind of ROI on their investments over the last 5
years and I'll congratulate them over a nice lunch which I'll be happy to buy
for them.

 _(crickets)_

Yeah, I thought so.

~~~
earl
The fact that you got lucky and timed the market doesn't mean other people
should attempt to do the same, or that they will have any success doing so.

~~~
tpz
If I were lucky or if I had made any effort whatsoever to time the market, you
might be right. On the other hand, I know of lots of data points like mine,
even with the crapfest of the last couple of years. (Sensationalist news
articles and statistics about idiots lending too much money to other idiots
really shouldn't hold much water to the HN audience, if you think about it.)
Regardless, find me that renter and I'll buy them a nice lunch. If I could
have made $125,000 during those years then by their own arguments all of these
"smart" renters should have been able to do the same through some alternate
portfolio of their choice.

As an aside, am I the only person to notice that every time a renter posts
these kinds of articles they always talk about how down the road they'll have
enough money to buy a mortgage-payer's home but they never actually bother to
mention how their investments have been doing for them in the meantime? I
suspect there's an obvious reason for the omission.

~~~
mechanical_fish
_they never actually bother to mention how their investments have been doing
for them in the meantime_

So, you're unhappy because other people don't use the same sort of anecdotal
evidence that you are so fond of using yourself?

Who needs anecdotes when you have data? Here's a typical chart of median home
prices since 1971, adjusted for inflation:

[http://www.newfinancialwisdom.com/median-home-prices-
inflati...](http://www.newfinancialwisdom.com/median-home-prices-inflation-
adjusted/)

And here's a chart of the inflation-adjusted S&P500 since 1950 (skip down a
few charts):

[http://www.simplestockinvesting.com/SP500-historical-real-
to...](http://www.simplestockinvesting.com/SP500-historical-real-total-
returns.htm)

What we see here is that, aside from some interesting but minor fluctuations
and a scary but temporary blip representing last decade's bubble, housing
prices are almost flat in real terms: The increase in median house price is
almost equal to the inflation rate. Meanwhile, stock market investment values
fluctuate a lot -- the last decade was not especially kind to investors -- but
over the 1950-2008 time period the market averaged nearly 7% over inflation if
you reinvest all dividends.

Now, you can get lucky. Or you can leverage insider knowledge: If you figure
out that land in a certain area is systematically underpriced relative to
future demand, you can make a killing without relying solely on luck. But the
averages show that for every person who makes a killing in residential real
estate, there's someone else who takes the equivalent bath. And note that the
argument that "land in NYC/Northern California/Desirable Area X will keep
growing in value because everyone wants to live there" presumes that the rest
of the market hasn't already figured out that such land is more desirable and
set prices accordingly.

~~~
tpz
For the record, I'm not unhappy at all, and if you'll look back at my original
reply I was very up front about being just one data point.

You can get lucky. Or you can leverage insider knowledge. Or you can do some
personal learning and invest wisely. All of these are equally applicable to
investing in real estate or to investing in other things while being a renter.
For some reason, however, those who profit from real estate are chalked up as
lucky and those who profit from other things while renting seem to get to talk
as if their success involved any less luck or any more informed investing. Why
is this? In my case, I invested in a physical market in a particular region I
had been watching for many years and which has generally steady indicators. I
exited for entirely personal reasons (to live with my girlfriend, just to put
it out there), not to "time" the market as claimed by one commenter who also
claimed I got lucky. I was subsequently called out as unhappy by another -
you. Again, why is this?

Any argument that can be made for or against success by an owner can be made
equally well for or against success by a renter investing elsewhere, yet luck
only gets cast towards the former, wisdom only towards the latter, and all the
while the latter never seem to publish any of their investment success numbers
to match their claims of benefit down the road. Again, why the disparity?

Whether in real estate or elsewhere, it's the same $500 per month during the
same five years. Whether sourced from luck and/or expertise, why are one class
of returns immediately disparaged while another goes entirely unstated yet
entirely uncontested? I've never taken it as an offense personally, but do
admit that it does seem to be a common pattern and not a particularly fair
pattern, at that.

------
mhb
Felix Salmon on American home ownership attitudes:

[http://blogs.reuters.com/felix-salmon/2010/04/06/the-
nationa...](http://blogs.reuters.com/felix-salmon/2010/04/06/the-national-
housing-survey-and-the-real-estate-bear-market/)

~~~
hugh3
_There is absolutely no reason to believe that countries with high levels of
homeownership, like the U.S., have better economies than those with low levels
of homeownership, like Germany._

And yet the US has a higher per-capita GDP than Germany, right?

Besides, homes have to be owned by _somebody_. If homes aren't tying up the
wealth of Joe Workingclass they'll be tying up the wealth of John Richbastard
instead.

How much of the low rate of home ownership in Europe can be attributed to
property title? If the only housing units available are blocks of apartments
on a single deed then you'd expect a low rate of ownership, whereas if the
entire country was split into individual-title houses then you'd expect a much
higher rate.

EDIT: Wait, I forgot to mention the screwiest thing about the long-term
prospects of Germany: it has a birth rate of 1.4 per couple, way below
replacement rate. I'm guessing that this could have a lot to do with the
housing supply being concentrated towards small apartments and away from large
houses.

~~~
earl
The US does have a higher per-capita gdp (probably; the numbers are subject to
a lot of interpretation) but that is in no small part due to the fact that the
rest of the industrialized word was mostly leveled in WWII. As of recently, I
believe West Europe's gdp growth numbers are comparable to or exceed those of
the US. But again, the devil is in the details in these things.

As for birth rates, well... that's a pretty wild speculation. Demographers
have a decent handle, as far as I know, on the causes of low birth rates. Do
note that America has a declining population ex immigration, and that the
birth rate for white people is below replacement rate and has been for 30
years.

------
hugh3
Given a market that is in any way sensible, shouldn't buying wind up cheaper
than renting over the long run? Landlords don't buy investment property out of
the goodness of their heart, they buy investment property because they think
that the money they make in rent, plus the capital gain on the property, minus
the various maintenance costs etc, should be sufficient to compensate them for
tying up hundreds of thousands of dollars in the asset.

~~~
usaar333
Who says the market is sensible? There's a lot of noise out there. Someone
buying property not only has to guess that an area will go up in value, but
they also have to factor in:

1) inflation rates (higher inflation is much better)

2) tax changes (e.g. the passage of prop 13 in California helped investment
property owners greatly)

~~~
hugh3
Well I'd never say the market was sensible at any given place and time, but I
think it tends to fluctuate back and forth somewhere around the vicinity of
"sensible". If you decide that renting is going to be cheaper than buying for
the rest of your life then you're gambling on the assumption that the market
stays on one particular side of "sensible" for decades.

~~~
Retric
You can always switch from renting to buying, it's much harder to go the other
way.

~~~
hugh3
How's that? Sell house, sign lease, you're done. Only a problem if you're
underwater and I'd strongly advise against buying for anyone in a position
where winding up underwater is a strong possibility (ie anyone with less than,
say, a 20% deposit).

~~~
usaar333
Even if you aren't underwater, it still sucks to lose a quarter of your down
payment because the value of your home dropped 5% in a year.

Also, you lose 6% total from real estate commissions; consequently, it is much
harder to move between owned homes and rented ones.

------
barmstrong
I tend to agree with the article - especially in California it makes no sense
to own a home at current prices, rent is a great deal and most landlords with
a mortgage have negative cash flow.

In some other markets, like Texas, it's possible to own rental real estate
that cash flows.

So this is the strange position I'm in where I own houses to rent but rent the
place I live.

------
patrickk
Here's a very useful tool from the NY Times that calculates whether you would
be better off renting or buying a house (financially speaking):

[http://www.nytimes.com/interactive/business/buy-rent-
calcula...](http://www.nytimes.com/interactive/business/buy-rent-
calculator.html)

Takes into account variables such as monthly rent, house price, down payment,
property taxes.... and it has a sweet graph that shows over time where you are
financially better off renting or buying. Pretty cool.

Great for anyone who is between two minds about what to do, or is considering
investing into a depressed market.

------
sown
What about when I pay a lot of my mortgage early? Say, within a few years?

~~~
philwelch
The mortgage is structured for a given term. If you pay off a 30 year mortgage
in 2 years, you're still paying 30 years worth of interest. There's no gain,
in fact, you lose because you lose the time value of money.

Paying straight cash for a house, or buying a house on a small fixed interest
and a short term already baked into the mortgage, can gain you something.
Paying off an existing mortgage early gains you time and the psychological
benefits of not worrying about making the mortgage next month. If you're about
to die, it lets your descendants take their time selling the house if they
can't afford to make the payments.

~~~
gaius
That is not true. Well, it might be in some specific cases but in the UK at
least it's perfectly normal for a lender to impose no penalties for early- or
over-payment. Our mortgage market is _extremely_ competitive however (that
amplified the effect of the housing bubble).

~~~
philwelch
Mortgages vary, but it's been known to happen It's not a penalty per se, it's
just that if you pay twice as much as your next monthly payment, all you gain
is an extra month before your next payment is due. It's not a free-floating
line of credit--it's an agreement that you will pay this amount per month for
30 years, and there are no discounts for going faster than the schedule
requires.

Think of it in this way: as an investment, I'm making a secured loan to you
from which I am expecting a given return over the next 30 years. If you're
excited to pay me off in 5 years instead of 30, maybe we can make a deal
(quite often there's refinancing involved in that arrangement) but I got into
this deal expecting 30 years, not 5 years, of interest at that rate, and you
agreed to that, too.

~~~
sokoloff
Do you actually have (or have you read the terms on) such a mortgage?

Any additional amount I send in on mine is credited as "additional principal
payment" and reduces the amount owed (and hence the interest). If I had
<mumble> thousand dollars in hand, I could pay my mortgage off Monday without
any penalty, just five MONTHS into my refinance.

I have seen no-refinance-before-such-date mortgages, and while it's possible
that a mortgage with a prepayment of additional principal penalty or barring
exists, it's certainly not common in the US.

~~~
philwelch
OK, you're right--I goofed on this. If the delete/edit hadn't expired by now
I'd do something about it.

While a mortgage won't be structured this way, evidently an equity loan can,
and this I do know from personal experience.

------
earl
My experience may be useful only for sf, but I live in the city in a nice (by
my definition of nice: 100+ years old, solid wood floors, plaster walls,
detailed woodwork, thick aged wooden doors, handmade ironwork) apartment. My
landlord would like to sell the place to us, but our rent doesn't even cover
the mortgage with a $100K downpayment. By the time you add HOA fees,
insurance, taxes, and a 3-5% of value annual maintenance investment, my
landlord pays me some $800-$1000/month to live in his apartment. Which is fine
by me.

~~~
nopassrecover
In Australia we have a concept called negative gearing which allows you to
deduct that 800-1000/month off your income taxes.

~~~
jaybol
I assume you mean for the landlord to deduct his loss, correct?

~~~
pmccool
Insofar as negative gearing is a good thing, it's not a good thing for
renters.

Investors need to be losing money for negative gearing to do them any good,
and it won't magically turn that investment into something profitable.

It is helpful if they're speculating on a big capital gain. In fact that's one
of the recurring criticisms of negative gearing - that it encourages
speculation and inflates property prices, neither of which are good things for
renters.

People have, inevitably, used it to engage in various tax-reduction schemes,
with varying degrees of succes (see the 2004 Australian High Court case of
Hart v Commissioner of Taxation for an example of that _not_ working out).
This is not a good thing for renters either.

~~~
nopassrecover
Yeah it's a terrible thing now that it's in place but removing it now would be
even worse for renters.

