Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment. To use the example in the article, if your investment doubled between 2009 and now, your $200k in a $1M home just became 1.2M. 6x growth beats out 3x growth in stocks in the same period.
Sure, you can be leveraged in other investments but (1) your interest won't be tax deductible, (2) your interest rates won't be nearly as low, and most importantly (3) you won't be able to borrow with no recourse (depends on the state law, but "no recourse" means your downside on a primary residence is limited to the equity in the home. If you default on the loan they can't come after your other assets.)
Does it mean renting is a bad idea? No. There are plenty of reasons it might make financial sense to rent. But articles like these should accurately discuss the financial upside of buying.
> Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment.
But if inflation is 3%, you're probably paying 3% (or more) interest on your loan.
So suppose your home costs X. You pay 0.2X downpayment and borrow 0.8X through your mortgage. The first year your home appreciates to 1.03X but you also pay around 3% of 0.8X = 0.024X in interest. So your gain is 0.03X appreciation - 0.024X interest = 0.006X: which is exactly 3% of your 0.2X downpayment! Looks like the leverage didn't help in this scenario at all.
Of course if you bought in the Bay Area a few years ago you made bank, but that's because the growth here happened to be much faster than inflation, even without leverage.
> Sure, you can be leveraged in other investments but (1) your interest won't be tax deductible, (2) your interest rates won't be nearly as low, and most importantly (3) you won't be able to borrow with no recourse
(3) is true, but you can buy stocks on margin, the interest is deductible as a business expense, and interest rates are often lower than mortgage rates.
What all professionals do, and what all potential home buyers should do, is run the actual numbers of expenses that is purely property taxes, interest, fees, expected maintenance, bills such as heating and electricity, and other related expenses not specifically reducing the amount of debt. That is the price of living in the house - compare that to renting a place.
The difference between owning and renting expenses, is what you should compare to the risk/reward analysis of the property value.
Expected maintenance, LOL. Just saying as an older guy if you're not factoring in HVAC replacements, roof replacements, driveway replacements, appliance replacements, even the expenses of major yard work, you will miss thousands per year on average. I'll see these estimates online where people laughably expect to spend less than $1K/yr on home maint, LOL I spend that much on the roof averaged by year, and I spent more than that on one clothes washer this month, and the average appliance is now carefully value engineered not to last more than a couple years. Try like $1K/month on average as an absolute minimum not the online typical $1K/yr which wouldn't even maintain the level of a crackhouse.
Also do not forget time. I only have 168 hours per week minus zillions of things, to enjoy life, and after all the subtractions often there isn't that much time left to enjoy. Yes if I need to replace the tiles in my bathroom I can save a little money doing it myself but even contracting out will be hours of work to design, decide, and coordinate, and who stays home to let the craftsmen into the house and its just a circus. When I rented a bachelor pad, ALL repair work consisted of verbally mentioning it to on site manager and magically things happened, I paid more rent than average for that privilege compared to people who have to sue their landlords for any little thing, but there is no escape from spending lots of time as a building superintendent if you own a house. Buying a house is getting a part time job as a landlord. Its not like the kitchen faucet magically knows its in a owned house so it'll never fail, vs a rental.
I mean, we have to realize the groupthink on HN is that cooking food for yourself is an intolerable waste of time compared to spending two hours in restaurants daily, so owning a house and having to dump many hours into the uncountable sufferings of home ownership must be completely unacceptable; rent a nice place and "invest" about five minutes a month into telling the manager what he needs to do.
The second to last measure is many lifestyles require real estate. Not everyone wants to live life with no capital goods other than a mobile phone. I'd be pretty unsatisfied with life without my table saw and lathe and garden and ham radio antennas and a couple other things that simply require land to be realistically practical, aka go buy a house and do your hobbies in it. For all practical purposes in the market I live in you can not have a dog while renting, for example.
A final measure not often mentioned is its just a fun experience to try; Its amusing to reread some of the complaints about home ownership rewritten to apply to having friends, or buying a pet, or having children, or traveling, or getting drunk. I didn't have kids because of an enormous amount of handwaving about how I'll be wealthy if they become child movie stars or historically kids in an agricultural setting were a net financial positive which should mean something in suburban 2010s or some equally ridiculous argument. Owning a house is a VERY expensive hobby, but if you have fun and can afford it and its not hurting anyone else, may as well try it...
I think this is a good post and a good perspective to take, but its worth pointing out you bought an expensive washing machine, though if its more reliable, then that's probably the better purchase. On good days I do like my house hobby.
I mainly bought a house because I kept having to move every year, renting flats in houses where they decided they wanted to sell, or move in themselves, etc. So now only the bank and the state can kick me out, and not relatively more capricious property owners.
Not so, I bought the cheapest washing machine I could get. I dropped about $1200 cash on a speed queen that'll last me maybe 20 years. Joe 6 pack finances a new LG every three years at 29.99% credit card interest for $600 and thinks I'm getting ripped off.
Its just like the situation with hiking boots, I can only afford the $250 boots that last many years, I'm not rich enough to afford the $100 boots that only last one year before falling apart. I can't afford to spend $100, I have to spend $250. Richer people than I, can buy themselves the $100 boots.
Also at some big box stores I've seen some masterful post sale salesmanship. New washer hoses cost $19 on the shelf but as part of the installation package they'll prevent your basement from being flooded for only $50 installed by our professionals (usually lower quality hoses too). Installation "only" costs $99 but you need the new hoses for $50 and fuel prices went up a decade ago so we still have our temporary $19.99 fuel surcharge on our deliveries. Oh you want the old washer hauled away, thats only $50 and they totally take care of the problem for you. Technically according to google search you can buy a box containing a LG top loader thats normally $770 for a mere $650, but unless you have time, skills, and a large vehicle that box of machinery won't wash any clothes for $650, add something like $220 worth of installation... Oh and thats 18 months financing but it only has a one year guarantee for parts and labor, which is comical... for a mere $150 you can get a five year guarantee which is about a quarter the lifespan of my speed queen, if and only if you also purchase installation services. Suddenly that "cheap" $650 washer is going to hit the credit card for over a kilobuck and its only going to last five years at best while providing plenty of repair work headaches. So figure twenty years of clothes washing costs $1200 with a speed queen or over $4000 with LG products... I'm not wealthy enough to buy $650 washers I can only afford the $1200 washers.
The cheap washers are not $650, that's still an expensive washer. The cheapest new washers are more like $350. And probably not any less reliable that the $650 washer, just less neat buttons, no glass top. Yeah, probably less reliable than the speed queen.
Hoses are quite the racket. Because of where I put the washer, I had to get extra long ones.
Or you can buy a Bosch for $400 on sale. One of the not fancy models and it'll last you 10 years easily. It's also serviceable if you need to repair it - not to the degree of a Speed Queen, but totally doable. It's also significantly cheaper to run compared to a Speed Queen. With that in mind you can probably buy 3 of them (including delivery) for the same price of a Speed Queen over a 20 year period.
In this day and age, with trustworthy online review sites like Consumer Reports, I find it is fairly easy to find quality products at a price somewhere in the middle.
Though 1k is a pretty naive estimate, 12k a year is just not right.
I'm having trouble coming up with any way to prove it wrong, besides common sense. Think of the price of appliances, and then think of how many you can get with 12k. Reshingling a roof tends to be around 5k, and lasts for 30 years.
I can't even imagine a scenario where you spend 12k a year.
It does depend on the age and condition of the house. I bought a fixer-upper about 20 years ago. But just as an example, I spent $16K on a small bathroom remodel last year--which was partially aesthetics but there was definitely plumbing work that had to be done. Another $1K on carpeting that was really old and scruffy. $4K on major tree trimming/removal. That's more than a typical year but that's the sort of expenses I have.
This year I'll have some new windows put in to replace very old ones that look like complete crap.
Arguably some of that is optional but it's pretty typical for me. $1K/month seems like a reasonable estimate for me. I imagine that a newer house could well be less.
Having owned a 2500 sq ft home on 0.25 acres, honestly 12k is totally within the realm of reason. A roof may last for 30 years, but odds are the home you are in has a roof that needs replacing sooner than that, so you only have 5-10 years to save for its replacement.
Also don't forget that the previous tenant let his kids shoot BBs at the siding, so the water has been leaking in causing it to wear faster and faster, your wife doesn't like how it looks like grandma's house, and for some reason the toilet in the master bath takes 10 minutes to refill the tank and it drives you nuts just often enough that you seriously consider ripping out the requisite walls just to re-run the old copper piping.
Oh and when you bought this home, did you already happen to have a lawn mower, edger, fertilizer spreader, and such? Are you planning on utilizing that extra space to build a raised garden and then realize half-way through that if you don't install an automated drip system you'll have sunk all those costs into a garden that dies the moment you leave on a 7-day family vacation?
Oh yea and the last owner definitely was heavy handed with the salt on the driveway, and you don't need to replace it now, but better put $100 a month into a savings fund for the inevitable replacement 5 years from now.
Not to mention that the cement that was poured to make the back porch has re-leveled itself at a 4 degree angle and when you host guests they bump the picnic table such that it always wobbles and spills everyone's drinks. Fortunately you don't have to excavate it and re-pour because there now exist companies that use advanced machinery to just backfill in extra concrete to level the pads, but it still is going to put you out $2k.
/end rant
Needless to say, as I look at our next home, I am realizing there is this delightful sweet-spot between home ownership and renting an apartment: townhomes in master-planned communities. The HOA covers building _and_ yard maintenance, but you have full creative power over the inside. No need to store shovels and lawn mowers, and your weekends are free to walk the park that is literally across the street (I'm looking at you, Daybreak, in South Jordan UT). Oh and the single-car garage isn't a big deal because transit is built straight to the community, and you are within walking distance to convenience stores and the pub.
It's basically "a house" with all the negative parts taken care of by paying the HOA who can deal with the economies of scale, making the cost very worth it if you are an engineer with a little bit of cash to spare each month.
A lot you mentioned should have been known when you bought the home (when you had it inspected).
Therefore, a lot of the improvements you made should have added value to the home. I'd consider improvements different then simple maintenance/random failures (your cement issue). The siding, roof, and driveway should have all been things you took into account when buying the house, so any improvements made there should have an immediate affect on the value of your house.
>Oh and when you bought this home, did you already happen to have a lawn mower, edger, fertilizer spreader, and such?
If you buy a house and legitimately have to worry about the $200 you'll spend on a lawn mower, then maybe buying isn't for you.
I own an old house and $1K/month is a pretty good guesstimate. I probably spend more than that but around $1K/month is probably around the point where, if I spent a lot less than that, I'd be going into maintenance debt.
I agree with your point that owning a house is a lot about lifestyle. I have a lot of sports gear, like canoes, that would be more difficult in an apartment setting. Yes, you can rent storage units but you definitely have to make compromises.
If you budget with $1k/yr for maintenance you're in for a bad ride. If you go with something like $2/sqft*year from the house is build, you're closer. But buy any 10-20 year old house and it will be far higher.
I would agree with your evaluation and propose an even more accurate prediction would include the aspect that a 50 gallon water heater or a dishwasher costs the same regardless of 1500 sqft or 6000 sqft so the ideal formula is probably some linear equation with a fixed amount plus a sqft amount. $1500 plus $1/sqft per year maybe a good start.
I've owned a non-new home for a few years now. I have all the records of repairs/maintenance. So far the average is less than $130/mo (that includes buying two microwaves and a washer)
My roof needs to be reshingled. That'll cost about $6K (got a bunch of estimates from roofers). Maybe $12K 20-30 years down the road for a full replacement. That'll likely be my biggest expense, which is not even $1K/yr, let alone a month.
My other appliances are old. Once I replace them, it will bump the average to at most $200/mo.
I don't do any repair work myself - always pay to get it done. You either have a huge house or live in a very expensive area (mine is above the national average).
Plumbing work, electrical work, trees that need trimming, kitchen or bathroom remodels (which may not be absolutely necessary but are part of a house not getting more and more rundown), painting, replacing windows and doors, furnace work including annual cleaning, etc. In a newer house in good condition, it may be less than $1K/month but it does add up over time. A lot of maintenance can be deferred but over 10+ years, there's a lot that needs to be done eventually.
How often is this needed? Unless your house is so old and not up to code...? To give you an idea, I lived in a place for 2 decades and it never needed electrical work.
>trees that need trimming
It's your property - you control how many trees and how big. If it's too costly just get rid of them. Having said that, I just trimmed two trees on my property over a month ago. An hour or two of work and the right tool. Of course, if my trees were much bigger I'd have to pay someone.
BTW, I did not assume yard work as part of the amount per month. Of course, everything (including HOA, yard, etc) needs to be factored in, but I thought you were talking only about maintenance of the house.
>kitchen or bathroom remodels
How often? My house is almost 20 years old and I can see it going at least another 20 years before any such work is needed.
>painting
I assume you mean exterior? I guess - how much you need depends on the type of house. Mine uses vinyl sidings - no paint needed. But yes, you need to paint a few other parts. For my house, this is once every so many years - and the estimate I got was under $1000.
>replacing windows and doors
20 years old and look like new - I think mine will last another decade or two.
>furnace work including annual cleaning
I get my furnace tuned every year - costs $85. I included that in my estimate of less than $130/mo. Don't forget water heater maintenance too!
As I said, I'm not pulling numbers out of nowhere. I actually did this analysis some months ago. I have all the numbers on how much I've spent repairing stuff and maintenance in my software. I added it all up and calculated the number I gave you. It was actually $100/mo, but since then I think I've replaced two appliances so I bumped it up to $130 (total cost of the appliances + install is under $1000 - divide it up by 48 months I've lived there).
I’m giving you my numbers as well. I haven’t kept close track but with big projects—which have included improvements—it’s been something more than $1k per month. But then it’s 200 years old and was in serious maintenance debt when I bought it.
>But then it’s 200 years old and was in serious maintenance debt when I bought it.
That's a pretty big disclaimer that you probably should have mentioned up front. Your choice of house is far from typical, and they make the costs some standard deviations from typical.
EDIT: In addition to mobility cited by a reply to this comment, another advantage is the saved opportunity cost of investment in real estate vs other markets.
Having been burned badly in the real estate meltdown, there is a lot more freedom in renting than buying. I'm just now getting slightly inclined to consider buying again, but it would have to be a whopping deal. I've enjoyed renting since at least 2010. I especially like the ability to call the landlord and tell them that the sink is leaking and they need to get it fixed. Or the water heater stopped working, come out and fix it... Nothing out of pocket for me.
When it comes to making a trade off for convenience vs. cost, I usually choose cost within reason and I also got burned by the real estate meltdown. I was in no hurry to buy.
But the rent where we were staying went from $1300 to $1800 within 3 years for a 3 bedroom, 1650 square foot apartment. We were able to buy a house, a brand new build 3000 square feet 5 bed/3.5 bath for $2000/month with only 3.5% down in a neighborhood zoned to top rated schools.
As far as convenience, we pay a lawn service $140/month to cut our grass and now that the home warranty is up (paid for by the builder), we pay about $700/year for a "home warranty" when anything breaks you just call them and pay a deductible. Is The warranty a good deal financially? Probably not, but it is convenient.
That is awesome and you are able to buy a house like that, especially a brand new build (to your liking). However, I want to mention it seems you are in the right place at the right time. Your case is an outlier in my opinion and I'm happy you are taking advantage of it. Especially considering that it is in a great school zone. I just felt that this isn't normal, even for the Midwest (which is where i can only imagine you are).
That is a neat 'home warranty' thing you have though. I've never seen that before. Whenever I own a home, that sounds enticing to have.
As far as being an outlier, it's not that our case is just an outlier, so is our house. We had to move further out into the suburbs to get that price. It's not a bad commute.
I'm not endorsing this particular provider. It's just the first one that comes up when you Google "Home Warranty"
When I was a landlord and owned three rental properties they were worth every penny.
Let me emphasize that buying one is statistically not a good deal and it usually makes more sense just to "self insure" and save for repairs. But it is more of a convenience thing.
Yes, but the rent will keep rising with market prices and we were living in the most sought after part of town -- the most affluent city in the state. The mortgage will never increase and is excellent inflation hedge. The property taxes may increase slowly but after 5-7 years, we can get rid of the approximate $300 a month in PMI.
We also have 1300 more square feet, a separate house with a yard instead of an apartment, 2 more bedrooms, 1-1/2 more baths, a separate office and we don't pay the mandatory $100 a month for crappy cable and capped internet from Comcast -- as part of the lease, you had to pay for cable. We pay $70 a month for gigabit internet from AT&T.
Heck I save $80/month by getting rid of my gym membership and converting one of the spare bedrooms to a gym.
> there is a lot more freedom in renting than buying
There are varying definitions of "freedom" to consider.
Sure, there is the freedom of being able to walk away after 12 months to someplace else.
But there is also the freedom of being able to plant a garden, or paint your room, or install shelving, or excavate a root cellar, or install a new doorknob, etc, without having to get express written permission from your landlord (which will almost always be no).
That is almost the entire reason that I like owning. The kitchen looks like I want it to look, the walls are the color I want them to be, the doorbell is wifi, I have a Nest thermostat, and if I don't like that there's a peach tree in the front yard I have it removed (true story!).
I think your point often gets missed in these conversations about rent vs buy.
You have two choices that masquerade as purely economic ones while ignoring the enormous lifestyle differences.
I rent a tiny room in the heart of NYC for the cost of probably a monthly mortgage payment on a nice house in upstate NY. For me there is really no alternative because my entire life revolves around my immediate walkable neighborhood.
The economics of rent vs buy matter but lifestyle and future expectations are too often downplayed in comparison.
That is true, but that is covered in the very last sentence. Renting is significantly less volatile, assuming the contract is reasonable for both sides. Buying a house is a risk/reward analysis of the value compared to the price difference, positive or negative, to renting.
That is not to say this is the only thing to consider. Often people know where they want to live and what size of property/house they need, and for many people that is only achievable by buying.
Rent control is only a thing in a few areas of the country. In most of the country, rent can increase at the end of a lease as much as the market will handle.
Only if the tenant leaved. If leaving loses the rent-control, the tenant will stay. The price is well below market rate, then they wouldnt even get roomates, harming the entire rental market on both ends: by removing profits from the owner and decreasing supply.
If rent-control didn't have the restriction, then it wouldnt make a dent into rent prices, but it would clearly show that it is a mere transfer from the owner to the rent-controllee.
If its NYC it is indeed illegal and without a doubt unethical. You are only allowed to pass rent-controlled apartments to family members and those family members must liver there two years prior to transitioning the lease to them.
Except, say, you want to stay in NYC. Rent are ridiculous and continue not only to be ridiculous but become more and more ridiculous and unless you just happened to be in a rent controlled apartment, you are at a mercy of your landlord.
You may as well do 7/1 ARM or 7 year IOM and treat it as rent.
> But if inflation is 3%, you're probably paying 3% (or more) interest on your loan.
Not only that, leverage is risk. Buy a home in 2006, or in a city on the decline, and you may lose everything you put in. Leverage multiplies the losses as well as the gains.
That's fair. It definitely underscores the actual point of the article which is "You should run your own numbers rather than believe 'conventional wisdom'".
I'd love to see some analysis (perhaps a monte carlo sim) on how the "no recourse" angle plays out. I can only assume that a floor on losses skews the expected outcome significantly.
It underscores how little you should trust your own numbers (or numbers from strangers on the internet). Forget one small factor and the whole picture shifts a lot.
> how little you should trust your own numbers. Forget one small factor and the whole picture shifts a lot.
Though you should at least try run the numbers. Maybe you will forget an important detail but if you just go with your gut or an insufficiently specific recommendation from elsewhere you will likely miss many more important details.
The trick is to do some research first, and if possible have someone else look over your thoughts to see if they can spot an important omission. Be particularly careful if the sums add up in a way that closely confirms your original idea - your analysis might be unintentionally biased by subconscious filtering.
> or numbers from strangers on the internet
That is definitely something to be wary of. Too many people base decisions on simple advice without checking that the advice is even relevant to their specific situation. I've seen people in the UK dump figures into US targeted calculators with the thought that "the $<->£ is the same for every figure so it will all work out OK" without thinking that our tax regimes and other factors are quite different in ways that can have a large impact.
Exactly - so if I buy a Bay Area house, what numbers do I put in? Will it go up 10% a year, or down 10% a year? I can see either happening. Certainly doesn't have much to do with inflation.
Leverage still outperforms fixed interest payments. Rising home prices compound on previous years’ appreciation. Your leverage rides on the back of this compounding. In contrast, your interest payments are fixed on the value of the dollars the year the loan was written.
This was particularly true in the past, but i wouldnt bet much on this effect nowadays. Inflation is the true way to get this effect, but the dollar hasnt suffered inflation in decades.
The new effect we have is asset inflation: sure you payed 3% for this house, but this house cost a lot more. When interest rates raise, mortgages are more expensive but house values go down.
It is said that its better to buy in a high interest rate period at a low value, than a low interest rate at high value: in the former, you can re-fi later.
Note that this will be capped at interest on a value of $750k for houses bought starting this year, so less than before. I think the leverage angle is ignoring the fact that your equity can be wiped as well in a downturn. It's unlikely my index fund will go to zero (and if it does, we'll probably have bigger problems on our hands).
> leverage angle is ignoring the fact that your equity can be wiped as well in a downturn
I call that out when talking about "no recourse". If you leverage 5X in the stock market and invest $1M in index funds and the market drops by 30%, you are on the hook for the $100k beyond your $200k you lost. If you leverage 5X in a personal residence and the market drops by 30% (and you live in a no-recourse state), then you mail the keys to the bank and walk away. Very unique situation.
> If you leverage 5X in a personal residence and the market drops by 30% (and you live in a no-recourse state), then you mail the keys to the bank and walk away. Very unique situation.
It's not. The bank has calculated and accepted the risk and factored it into your interest rate and other charges. Considering it to be dishonest is financially equivalent to considering a (not fraudulent) insurance payout to be dishonest.
Think about it this way. The bank has effectively bought an insurance policy to protect itself against this event and is paying the premium out of your interest charges. Now does it seem dishonest?
In the US if you put down less than 20% the bank literally takes out an insurance policy called Primary Mortgage Insurnace for this risk and makes you pay for it.
"It's not. The bank has calculated and accepted the risk and factored it into your interest rate and other charges. Considering it to be dishonest is financially equivalent to considering a (not fraudulent) insurance payout to be dishonest."
That's not a true equivalency. Unless your loan has language or provisions for "mailing back the keys", doing so is an act of default and regardless of how well (or poorly) the lender(s) has/have hedged against the default you are breaking the agreement.
A real equivalency is stealing from walmart "because they can afford it". You shouldn't do that and you also shouldn't default on agreements you enter into.
> A real equivalency is stealing from walmart "because they can afford it"
That's not a real equivalent at all. Walmart could press charges and recoup their loss through legal action. Stealing from Walmart is illegal.
Defaulting on a contract is not illegal. That's precisely why we have contracts in the first place. It spells out what would happen in a default, and both parties voluntarily enter into the agreement. If one party is not happy with the terms of default then they shouldn't sign the contract.
In a no recourse default, it is literally spelled out in the contract: "If you default, the lender will not be come after your other assets".
> That's not a true equivalency. Unless your loan has language or provisions for "mailing back the keys", doing so is an act of default and regardless of how well (or poorly) the lender(s) has/have hedged against the default you are breaking the agreement.
It depends on what you mean by "breaking the agreement." The state of default, its triggers, and its consequences are part of the agreement. You are acting within the scope of the agreement by triggering that state.
If you write a program like this:
if (foo) { doX(); } else { doY(); }
does foo being false "break" the if statement? In a mortgage, it is (vastly simplified):
if (youKeepPaying) {
youGetToLiveInTheHouse();
} else if (youSendUsTheKeys) {
exit();
} else {
weWillSendTheSheriff();
}
If anything, the last condition is the exceptional one. The contract doesn't generally contemplate what happens if you stop paying but also refuse to leave the dwelling.
I absolutely agree it seems dishonest. But at the same time, it's in the contract. I'm aware of it, the bank is aware of it. They won't hesitate to foreclose on me if it's in their best interest according to the terms of the contract. Should I hesitate to take the action that is in my best interest?
Sure, but that's a "the government is giving home owners a tax discount to encourage home ownership" argument, not a "leverage can turn inflation-tracking assets into inflation-beating assets" argument.
As well as most Americans. You can either take the standard deduction of $24,000 as a couple or itemize. Most Americans don't buy homes where the interest is high enough to be over the standard deduction.
> As with all articles on Afford Anything, these high-level concepts can be applied anywhere. But specifics about laws, taxes, inflation, etc., are geared at a United States audience.
So I think it's fair to go ahead and mention US-specific counters to the arguments without specifying.
Not really. The average home price in the US is $200K (https://www.cnbc.com/2017/06/29/what-the-median-home-price-o...). You would have to buy a house with a mortgage of over $500K as a couple to make the interest more than the standard deduction. If you include the $10K cap on state taxes and property taxes, still with the average household income being 60K, most people won't be taking advantage of the mortgage interest deduction.
This used to be a bigger benefit. Now with Trump's new tax law, the standard deduction has been doubled to $24k, so to make it worthwhile to itemize your taxes, you need to pay at least that much in mortgage interest, which equates to a rather expensive house. The new tax law is a really good thing for renters, not so good for house-buyers.
I'm another one who was burned in the real estate collapse, and have been renting ever since. I was definitely not a trump voter, but I have to say his new tax plan looks like it's going to benefit me greatly.
Another thing I've noticed people haven't mentioned here is the freedom that comes with renting. As with many in the tech industry, I don't normally stay at a single job for 20 years, but instead I end up changing jobs every few years. If I buy a house convenient to work, and then end up having to get a new job that's across town, I either have a horrible commute or I rent out my place and go rent a new one. As a renter, I can just give notice and find a new place in a better location.
There is in Canada! Mortgages have 5-year terms, but 30 year amortization. When you renew at the end of your 5-year term, the mortgage company can ask for an appraisal and ask you to cough up enough money to maintain 80% loan-to-value.
That's even if you keep the exact same mortgage and bank.
Leverage cuts both ways, though. As someone who just sold their house, the costs are a percent of the sale. You don't get taxed on the sales (generally) but you will probably have to pay real estate sales costs. So yes, if your home increases by 3%, you've gained 15% growth on your investment, but if the sale cost is 5% of the the sale price, then things aren't so clear anymore.
The real calculation is the total monthly cost of ownership plus any sale prices on the buying and selling ends over the period, relative to the total costs of renting.
Over the 10 years we've owned our home, yes, it's been worth it to buy, because we can recoup money that would have gone to someone else.
However, over a short period, the sales costs would dwarf any returns we would get.
The sales costs are largely fixed on both ends, as a percent of home value, and diminish as a total percent of gains over the period of ownership. So the period of ownership is relevant.
This in turn is relevant because your mobility becomes relevant.
The previous market we were in too, was so overpriced relative to the rental cost that we actually saved money over the period by renting rather than buying. Then the Great Recession happened.
Either strategy makes sense depending on your mobility risk and the market. I don't think it's clear that one or the other is generally better.
> This in turn is relevant because your mobility becomes relevant.
you don't need to sell, just rent out the apartment when you move.
With the rental income, you can pay for a similarly priced location in the new place. Then, when the market fits, make the sale, and you've lost very little (if anything), except upkeep costs due to rental damage, etc.
The risks of renting property are not to be understated. Unless you have significant time, cash, and drive to deal with the myriad issues tenants can have and possibly lawyers, it can easily be a net loss especially with the stress involved.
You say just rent it out like renting doesn't have its own downsides like finding decent tenants, dealing with repairs, having to carry the mortgage when you have vacancies, dealing with evictions when they don't pay.
Even in a landlord friendly state it can take 2-3 months to evict someone for non payment. In some states I've heard that it can take a year.
This is also the downside of renting -- the other tenants can be lousy. Banks know this and will not lend in buildings without a minimum rate of owner occupied units.
I'd guess that one of the reasons home prices in 'nice' neighborhoods are so high (or HOAs charge high dues) is a sort of signaling, similar to nuptial gifts in animals, that you have your act together and are invested in being a good neighbor.
I could never see myself buying anything that's not a detached house. It seems like you have too many of the downsides of renting. When I was living in an apartment, a never once said, "if only I could buy this place and have to deal with people on each side of me".
But as far as buying in a high priced area or even renting in a high priced area, price does provide a filter.
renting out an apartment when you move does affect your options however because as such you will have the legal obligations of a landlord, and if not that because you have signed a deal with someone else to have those obligations on your behalf you will still need to pay those people and keep track of them.
Deductability of interest (and property tax) is a lot smaller than it was before with the new tax code. On a $1M house for a married couple, you might get ~$9k back but (in CA) that's offset by the $12k (EDIT: likely non-deductable due to SALT max) property tax.
Anyway, using my own calculator (https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul... with other defaults), the situation you describe only works if the market is offering a price/rent ratio of 14 (years) or less (which is true in much, but not all, of the country).
Regardless, there's a lot of added costs to ownership: property taxes, HOA fees, loss of leverage as you pay down mortgage, closing costs, etc.
Good point about the property tax deduction becoming much less valuable in high-income tax states like CA. It used to be the case that property tax was basically built-into the cost of renting. That is, your landlord pays property tax, gets to deduct some, and then passes the pro rata share onto each of the renters. This implicit property tax created an equivalence with the property tax that you would pay if you bought a home.
But we now find ourselves in a strange situation where businesses (i.e., landlords) can deduct property taxes but individuals cannot. So it shifts the balance in favor of renting because one major cost (at least in SF/LA/etc) is no longer deductible to most individual homeowners.
I found it odd that as the tax bill was winding its way through Congress, no one asked why businesses should be allowed to deduct SALT, but individuals should not be able to. I can't think of a good reason for this, and I am a (former) corporate tax lawyer.
Businesses get to deduct property taxes because they're earning income from the property. Individual owner-occupiers of property aren't earning any taxable income from the property.
Yes, individuals should get to deduct their property taxes... but only after they start paying income tax on imputed dividends.
Living in CA with near 10% marginal state income tax above $100k means that if you're buying a $1M home you're probably hitting the 10k without property tax.
In the beginning: "I empower you to conduct your own analysis and make your own decision, based on your own circumstances, rooted in logic and math."
And later "Your Special Snowflake circumstances don’t change the fact that everyone is responsible for analyzing their own variables. Don’t base the biggest purchase of your life on an intellectually lazy cliche."
> Please don't insinuate that someone hasn't read an article. "Did you even read the article? It mentions that" can be shortened to "The article mentions that."
Yes, and leverage can also cause more rapid destruction of personal net worth too. I could make leveraged purchases of other assets too and the examples would be the same. The no recourse thing is interesting, but it doesn't solve the problem of having to move, in which you have to either find a renter or pay a mortgage on an empty house. This seems to be effectively the same consequence.
How does the utility derived from the asset factor in? There's an argument that the cost of borrowing is also paid by a renter (passed through from the landlord). The true cost of borrowing would then be interest paid minus the corresponding portion of comparable rent.
The real point of the article stands. "Run your own numbers"
Was just about to mention leverage. I would also add that you'll be hard pressed to get a loan at mortgage-like rates if you wanted to put your money in the stock market.
The other important point is that buying a home is still very much the "American Dream" - it is the single best way for the middle class to create wealth simply because the entire system is geared (some people would use the word rigged) for home buying. Interest tax deductions, primary residence rules, etc.. etc... are all setup for you to take out this massive loan and buy a house. If you wait long enough, it will be worth your while.
When comparing asset classes, you should consider the returns of the underlying asset class independently, and then compare the potential returns with leverage. And also remember that leverage has a downside
In this example, stocks outperform real estate (not saying this is true, just referencing the article). So for buying a home with a mortgage to be better than buying stocks, the cost of debt must be significantly lower. Which is sort of counter intuitive -- if an asset gets better returns, shouldn't you be able to borrow against it more easily? -- but it may be the case
But the second point -- that leverage has a downside -- can hurt you here. If the distribution of housing returns is a bell curve with expected return equal to inflation, you have just as much chance of leveraging hurting you as helping you. Lots of people lost their homes in the recession, and in a lot of cases leverage made it way worse
So if you believe the numbers in the article, you shouldn't be over-leveraging your home compared to your income, and you should diversify your assets (another benefit of investing in things other than homes)
You don’t have to pay full. When you’re done, you can sell.
Buy for $500k, put down 100k as downpayment. Suppose it’s an interest only loan and you pay $1500 a month for all house costs. In 5 years you’ve paid 90k. If the house price doubles, you’re walking away with 410k.
Renting you’d be putting at least 2k a month, so total 120k. 190-120=70k.
For 70k in stock market to become 410k , that’s a 5.8X growth. Really hard.
In a booming market, with low interest rates, buying makes sense because of leverage.
Obviously you have to do the numbers for rent/buy scenarios and make a decision yourself. There is no right answer.
Yes that would be a nice profit, but to hope that your house price wil double in 5 years is pure speculation. True, you'll have a nice leverage, but when speculating the leverage goes both ways; if your house price drops 50% you'll see the other side of the leverage.
The article is not about short term speculation, it is about long term expected returns. Which tend to follow the inflation and the interest rate.
Odd I read the article and got the sense that it wasn't necessarily painting one side better than the other but tried to give an overview of the full financial picture. It missed details sure but the overarching point was "run your own numbers and look at your own situation and see what makes sense for you."
> But articles like these should accurately discuss the financial upside of buying.
I think the reason it didn't is because buying is the default "good" choice in most people's eyes and even if they don't understand some of the details you mentioned (I didn't know all that myself) the goal was to open a layperson's eyes to the broader landscape.
> Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment.
In a 30-year loan, it’d be actually less than 15%. It’s 15% the first year.
Calculating the compounded return, it’s 1.03^30 * 5, then you raise all of that to the (1/30) power. You get a 8.7% compounded annual return, assuming 20% down. Then I think you subtract the 3% inflation. 5.7% is better than just tracking inflation, of course.
The return is different if it’s not owner occupied, since you need 25% down and there’s capital gains tax. But then there’s cashflow, depreciation tax shelter, etc.
1,2,3 don't apply in Australia. Here are some things do that apply in Australia, that are advantages, but not sure about the US:
1. Primary Residence has no Capital Gains Tax
2. Can rent out Primary Residence for up to 6 years at a time and keep it exempt from CGT.
3. Pension eligibility ignores Primary Residence value. So you can own a $1m house, $0 cash and get the pension. But $100,000 cash and renting you are SOL.
I’m not following the leveraged point - why is a 3% increase equal to 15% growth?
In the Bay Area HOA fees plus property tax add up to nearly my existing rent even before considering a mortgage which has made me nervous to buy. I’d be banking entirely on the upward trajectory of the market for it to be a better bet than renting with roommates.
You have $100 - you buy a house worth $500. House goes up 3%, it is now worth $515. You invested $100, and have $115 in equity. Growth 15%. (that is ignoring other costs, obviously - just an attempt to explain the maths).
That is the power of leverage - you grow on the bit you own as well as the bit you owe.
Yes, but the purchase and loan are in nominal dollars. Taking GP's example numbers, a $500 house, bought with a $100 downpayment, in a house and general inflation environment of 3%pa, and an interest-only mortgage (to make the math napkin friendly)
You start with $100.
You buy a $500 house. $0 cash, $500 in asset, -$400 in liability.
A year passes. $0 cash, $515 in asset, -$400 in liability.
A year passes. $0 cash, $530.45 in asset, -$400 in liability.
After 30 years, $0 cash, $1213.63 in asset, -$400 in liability.
That $100 turned in ~$814 of equity in 30 years. That equity has the purchasing power as today's $335. Even though inflation and asset prices rose by 3%, your $100 grew in purchasing power at a CAGR of 4.11%.
Contrast that with an unleveraged investment that also rose exactly with 3% inflation.
You start with $100.
You buy a $100 bond. $0 cash, $100 in bond.
A year passes. $0 cash, $103 in bond.
A year passes. $0 cash, $106.09 in bond.
After 30 years, $0 cash, $242.73 in bond.
Unsurprisingly, that $243 30 years from now has the same purchasing power as $100 today.
Your math ignored both maintenance and property tax on the home. Let's say maintenance costs 1% a year and property tax is 3.5% a year. I'm choosing both numbers lower than likely reality to give your position an advantage and let's say that advantage covers any income tax benefit of paying the property tax. After those 30 years you have a $1214 asset that you've put a bit over $1170 into - that's the original $100 plus about $238 in maintenance and about $833 in property taxes. So your $100 investment has grown by about $44 while the stock investment in your example, after deducting 20% in cap gains, has grown by about $114.
The house by itself is a bad investment, factoring in mortgage interest makes it even worse, then factoring in not paying rent makes it significantly better. How much worse or better it is in the final analysis depends on factors that are outside of many our controls - jobs, family, local market, etc. The decision is not quite as cut & dry as many on this thread make it out to be.
Mostly because I can’t afford to buy anything big enough where I could have roommates (I haven’t been able to convince friends to go in on a place with me and don’t have super rich family).
I’d also have to buy far from Palo Alto which makes the commute worse and roommate finding harder.
One other key difference that makes leverage in stocks scarier: once you hit zero, you’re wiped out.
In your example, a 20% decline in stocks would wipe you out.
In principle, the same thing can happen to a home. But there are two reasons it isn’t as bad : 1) as long as you keep up the payments, the lender won’t foreclose you. 2) there’s a dampening effect in home sales - when demand softens, volume collapses. So a 20% decline doesn’t happen as often.
I owned a house in Redwood City during the 2008 collapse and ended up under-water in it for a while (negative equity). I just held on and it recovered nicely, and I sold it for a great profit in 2014. My stock broker would’ve never let me do that.
More broadly, buying is also an “option” to stay in the area long term. In a place like the SF Bay Area, where you just can’t tell what will happen next to house prices, that should be factored in as part of the value.
There are so many buts. For instance, but this doesn't work in other countries where you can't downpay so little or where you can't get that kind of credit on a house. Or, but what happens if you default and you live in the house? And I'm not so sure they can't come after your other assets without further protection. If they can't turn that house into money then they'll certainly try, or if you did just the slightest mistake and they find out about how to leverage that.
If you don't have 100+ hitmen with guns, 5 lawyers and a politician in your back pocket always assume they come after you.
In financial speak, leverage is always the source of ruin especially when taken to extreme levels (which mortgages do).
To attain that leverage, you pay a financial cost in terms of interest which btw - can be replicated in the market for much better returns and if you know your math and derivatives - for a much lower cost of capital (equity options and index futures) in a market that is highly liquid with transaction fees as low as single digit dollars.
Leverage only matters if your home appreciates (or depreciates!) in value relative to inflation. There is a very large section of the article devoted to explaining that on average, this does not happen.
The article states that since 2009 the stock market has tripled while housing markets have doubled. I'm just reassessing that example with 5x leverage.
I find it hard to believe if even the majority of housing markets have doubled. Economic growth mostly seems contained to a few established and up and coming cities.
Yeah one flaw with the OP is that you can’t compare against average housing returns. Buying a house or condo in Silicon Valley or New York is going to out perform the average due to supply, demand, and geography.
The OP is essentially really saying buy a total stock market fund instead of REIT, which isn’t that controversial.
In this case I'd argue that apples is "what an average person would do". That's the comparison the article is making.
Millions of Americans are leveraged in their homes. Relatively few trade on margin. I think that makes it a valid comparison, even if it's not a fair comparison.
The “pro renting” crowd has a lot of consistent falacies in arguments:
- Financial calculations ignore the leveraged nature of buying a home. Small increases in property value are multipled relative to your initial investment.
- Calculations also often assume someone just pays the minimum mortgage payment for the full term of the loan. Even small additional principal payments (which most mortgages allow without penalty) drastically reduces the duration of the loan and interest paid.
- “I don’t want to pay those high real estate taxes.” Renters still pay the same real estate taxes, it’s just baked into the rent and can’t be deducted from taxes.
- The tax system is very biased in a favor of home ownership. You basically get penalized at tax time if you don’t own your home as expenses both owners and renters “pay” (property taxes, mortgage interest) are only deductible for the property owner. This can make a huge difference. A renter paying $2000 a month in “after tax” money is spending a lot more than a home owner spending $2000 a month but paying the interest / propert tax portion of that 2k with pre-tax money!
- Capital gains from home ownership are also tax free (up to half a million in gains for couples).
I own my home in a relatively cheap COL area... I would rather rent. Houses nickel and dime you to death. The expenses pile up at both the front and back of the transaction... that is, when you buy and finally sell.
Please show me how the small increases in property value multiplies my initial investment. The problem is most people don't move sideways or down... they move up, thus negating any windfall in investment prowess. Timing, once again, can make or break you and timing is a fool's errand.
Renters don't always pay the taxes. There are several rentals in my neighborhood that are less than the mortgage. Once you cross a threshold of monthly rent, the market for available renters shrinks rapidly (Unless we are talking bay area). I mean... there are very few people spending $3000 a month in Phoenix renting.
I agree about the tax system bias toward home ownership... but there are ways to beat that. Starting or having a small business being #1. We could get into many ways to beat the tax system... but lets suffice to say that homeownership isn't really "beating" the tax system.
That "savings" on tax isn't savings... it is rent on top of rent... let that sink in.
People tend to move up as they establish and grow a family but then sideways or down in retirement. That equity stays even if you move up into a bigger house.
It’s not uncommon for someone say in an extensive Northeast community to retire to a warmer climate down south, sell their house, use the proceeds to buy something much nicer (in a low COL area) and cash out a nice payday from their equity.
It's not uncommon, but I doubt it applies to people who did not buy within commuting distance of a major city. The housing stock is old in the Northeast, the taxes high and getting higher, and unless there's more high paying jobs coming, there's no one to buy the houses.
> Please show me how the small increases in property value multiplies my initial investment.
You're leveraged 5x (say), so you get 5x as much growth. Just pulling numbers out of nowhere, let's imagine you buy a $200k house with 40k down; after ten years the house is worth a nominal $400k which is $300k in today's dollars. You've gained 100k on your initial 40k, whereas if you'd invested the $40k in the stock market at the same rate of return you'd only have made 20k.
You'd achieve the same thing by taking out a loan for $160k and putting it in the stock market (per the article, property and stocks grow at the same rate), but a) you can't - a bank won't lend you that much money to buy stocks, certainly not at the same low rates of interest, and b) if they did you'd be on the hook for the risk, with ordinary loans you don't have the non-recourse protection of a mortgage.
> The problem is most people don't move sideways or down... they move up, thus negating any windfall in investment prowess.
What's the connection? If you plan on buying a $600K house when you're 50 that will consume $600K, but that's true whether you rent or buy your current house.
> Renters don't always pay the taxes. There are several rentals in my neighborhood that are less than the mortgage.
It's pretty rare though, and seems like the market would generally adjust either way. Occasionally in a given market renting will be cheap enough to be worthwhile. But generally renting will be more expensive since you're competing with people who can't afford to buy.
> We could get into many ways to beat the tax system... but lets suffice to say that homeownership isn't really "beating" the tax system.
It's playing the system as intended rather than "beating" it, but the bottom line is: the government is willing to pay you $x (in tax deductions) to buy instead of renting. Tax incentives are one of the few sources of free money out there in investing: when you have the opportunity you jump at it.
> That "savings" on tax isn't savings... it is rent on top of rent... let that sink in.
>You're leveraged 5x (say), so you get 5x as much growth. Just pulling numbers out of nowhere, let's imagine you buy a $200k house with 40k down; after ten years the house is worth a nominal $400k which is $300k in today's dollars. You've gained 100k on your initial 40k, whereas if you'd invested the $40k in the stock market at the same rate of return you'd only have made 20k.
Your numbers work out because you made them up. The obvious problems:
In most of the country, a $200K house going up to $400K in 10 years is very unlikely. I live in a hot market. I compared the inflation adjusted change in value over 20 years, and it's about 1-2% above inflation. It's unlikely your $200K home will be worth $300K in today's dollars.
The rate of return of the stock market is considerably higher than real estate (over, say, 20 years). So assuming the "same rate of return" is a really bad assumption! Even right before the crash in 2008, over a 20 year period, stocks did better than real estate. I wonder if there is any 30 year period where stocks did not do better!
I'm not in the "renting is better" camp. However, for most people, the leverage will not work out (it has for me, but I just got lucky).
You haven't really gained 100k. You have gained 100k multiplied by your percentage of equity, i.e. the amount you have paid so far into your mortgage principal. Assuming it's a 30-year mortgage, that will be around 30%, so around 30k.
(And of course, the house price doubling in 10 years is a bit unrealistic unless you live in a booming area.)
> You haven't really gained 100k. You have gained 100k multiplied by your percentage of equity, i.e. the amount you have paid so far into your mortgage principal. Assuming it's a 30-year mortgage, that will be around 30%, so around 30k.
No, you've gained 100k. Your asset is worth $300k, your mortgage liability is $160k minus however much you've paid off; your book value is $140k (plus a bit) where before it was $40k. The bank may "own" the other 70% of your house but they don't get to increase your loan amount because it's gone up; you pocket 100% of the rise in the house's value (unless you end up defaulting on the mortgage).
That's not at all how selling a house works. When the price of your home changes, you pocket or lose the entire difference when you sell it. Your loan amount doesn't change with the housing market.
My renter pays for my mortgage which includes principal and interest, landlord insurance, and taxes. Not to mention an additional $380 a month and profit that I put towards the principal and my 401(k).
This is perhaps the biggest argument in favor of ownership. Unless your landlord is _losing_ money on the deal, the price of rent takes _all_ other costs of ownership into account and then adds more on top of that.
If you're renting, you most certainly _are_ losing money on the deal vs. what you'd pay if you owned _exactly_ the same property.
That's the simple logic of rent vs. buy, but as the article details, there are other considerations. Opportunity cost being one primary cost that you're not taking into account. To me the most important question is the most fundamental: "Am I a real estate investor?" - I am not, and the overwhelming majority of persons are not. And yet the moment we purchase a home, we become real estate investors. In my case the simple fact that I've only purchased one property in my entire life means that I'll do it with less education and awareness than my landlord did when he purchased the home I currently, comfortably, live in. I think my landlords own and rent more than a few properties, and they do a great job of managing them. I am not confident that I would manage this asset as well as the professionals do, and so I cannot claim that were I to buy this home from them with a mortgage, that I would gain anything. In my opinion this is the key fallacy within the argument favoring the Buy option.
If you intend to live in a home for the rest of your life then you're effectively short one home (or half a home if you're going to share). So I see buying your primary home as more like covering your short than making a positive investment in real estate.
This is an incredible way of putting it. I'm not sure if I like what it implies, though, but I'll definitely be mulling it over. It's not a perfect analogy to securities shorting, because no one is going to lend you a house to immediately sell, so effectively all us renters would actually be naked short-sellers!
Maybe there is a business model in lending out houses so people can short the housing market? Again, not sure how that would work since houses aren't fungible in the same way that securities are.
Lending out houses.. Explain. I'm intrigued. My long term goal (we're not counting my husband here) is to buy a townhouse, live in it for a few years, then rent it out and buy a free standing house - with a backyard! Now we'll have two or more rental properties in competitive markets hopefully bringing in some income. I've been extremely lucky with the house I own now. Good tenant that I did not raise the rent on at renewal. $380 is plenty for me. She knows my goal is to protect the house, not make money off of it, so maybe I'm not the best person for an example in real estate investment.
I own a stock. You think the price will go down. To make this bet, you borrow the stock from me. You then immediately sell it at the current price. Later, if the stock is down, you can buy it back at the new (lower) price, give it back to be, and pocket the difference. If, unfortunately for you, the stock's price has actually gone up, you have to either continue to pay for the carry on the position (essentially paying me rent for my stock), or else take the hit by buying the stock at a higher price, giving it back to me, and eating the difference.
The analogy doesn't quite work with houses, because they're not fungible. I don't care which specific share of stock I get back, because they're all the same. I DO care which specific house I get back if I rent it out to you. Furthermore, I would be REALLY mad if I rented you a house and you then sold it to someone else, since that is just flatly illegal.
Still, I wonder if a lot of the structural problem with housing markets is that there is insufficient short pressure. In other words, there is an obvious way to make the bet that prices will go up (buy one), but no obvious way of making the opposite bet, unless you already have a house, and decide to sell it and begin renting, which hardly anybody does.
How can we let ordinary people short housing in their area?
That's true, but your landlord may have bought for much cheaper a long time ago. That's not available to you right now. So renting could be cheaper than buying and the landlord makes a profit.
Prices are not set to guarantee profits for landlords. If it's a cold rental market, the owner of the property still would prefer to lose only a small amount, rather than having the unit sit empty and losing all of the fixed costs.
This cuts both ways though: the landlords will increase their profits when they can (when the market allows) to compensate for the risk they take on during "cold" times.
The rent being paid also includes other expenses that the landlord has, like marketing of the property, that the owners don't have.
Note how carefully the claim is written, rental income = PITI + insurance + taxes + 380 per month
With the implication that the ONLY costs of a house are PITI, insurance, and taxes. However, if you add in reasonable, even cheap values for yardwork/lawncare, roof depreciation and replacement, HVAC depreciation and replacement, and general refurbishment remodeling and replacement of interior surfaces, OP is losing a large amount of money per month. The gamble is, will OPs house appreciate in value more than OP is losing per month, or will OPs other investments made with 380 be able to keep up? OP can always walk away and mail the keys to the lender, of course, if it comes to that, so maybe extracting $400/month with the intent to foreclose when eventually necessary is a legit plan.
A lot of people treat normal household expenses as an unfair accident, as if replacing the old fashioned tank water heater every decade is some totally unpredictable meteor strike that should never be accounted for in the cost of ownership.
In general most models of home ownership hold water if the only expenses accounted for are annual or shorter term, but I spend roughly the same amount, maybe more, on average, of expenses of longer than annual duration. $15K every 15 years for a roof is not unpredictable meteor strike but is actually about $85/month. Built in dishwashers are designed to break down requiring replacement every three years, which isn't a disaster but is thirty bucks per month on average. A new 5K asphalt driveway every twenty years is not an unpredictable accident but is about $20/month. True, none of these are small bleeds are over $100/month or so, but the average house has well over a dozen of them. Figure about $1K to $2K per month of longer than annual term expenses.
Then there are remodeling costs. Its very difficult to sell a house with a 1970s kitchen. Most house kitchens seem to get remodeled every two decades for perhaps $25K each time. You can pretend that was an unpredictable uninsured natural disaster, but more realistically you need to save $105/month for the periodic kitchen remodel. Of course a stylish avocado color bathroom or shag carpet era living room will require similar amounts of money... The expense of "fashion" is around $500 per month for a typical house. You can do the elderly WWII or boomer thing and refuse to remodel your house, but the cost is coming out of the sales price eventually. Wood paneled shag carpet rec room in the basement ... people are going to make fun of stainless steel appliances and especially granite countertops the same way in 2030 or so, if not sooner.
There do exist weird pseudo-accidental problems. Planting a fast growing inappropriate tree in a dangerous location is the same thing as committing to spending $1K for a bonded insured tree service to chop it down and grind the stump. You can try to hand wave away that nobody could have known that cute little pine sprig on the property line could be a kilobuck liability a decade later, but uh, yeah, many people could tell that a big dead tree overhanging the neighbors house is going to be an expensive and entirely predictable problem, eventually.
Sure, but the landlord can also lose his/her shirt if the market is in a valley at the time they need to sell. Your comment ignores the fact that there is market risk for property owners.
You still had to put a downpayment that didn't go somewhere else for the whole length of your mortgage.
Also, if your rent covers your mortgage, I will assume that you were simply lucky enough that in your particular area the housing market rose more rapidly than in others (for example the bay area). But you didn't know this in advance and it could very well have gone the other way around.
Me? Oh, no my only payments were about $3,000 in the closing costs. I did NOT have to put down a sizable down payment because I got an FHA backed loan.
Your renter pays the market rate for rent for that property (in general). In your case, that happens to work out in your favor. But in a place like SF, a 2 bedroom apartment costs $1.5 million, which is ballpark $7k+ a month. I can rent a 2 bedroom for less than half that because the market is simply not paying $7k a month for 2 bedroom apartments.
I've also rented a house where my rent payment did not even cover the mortgage (I knew the landlords - they had bought in 2006 and were still waiting on the market to rebound so they could cash out and move on).
Actually, I screwed up there. I am charging below market rate. I was most concerned with finding a good tenant that would cover my fixed costs each month, plus $100 profit for repair, etc. My place got 4 applications within 12 hours of listing. If I'd known then what I know now, I would've priced it $3-400 more!
This can certainly happen but it's definitely uncommon bordering on rare, especially for folks who keep paying (or with whom you're willing to work out a deal). And running credit and background checks on prospective renters goes a long way toward eliminating folks who are going to be prone to stop paying a lease halfway through.
Mortgage insurance doesn't protect you, it protects the bank. The bank can still foreclose just as fast, they are just guaranteed to get their money if the price they sell the home for is less than the amount you owe.
But it still only takes one bad tenant or one good tenant that comes on hard times to cause you to lose all of the profit.
Exactly. Someone buying a home for a million dollars typically isn’t buying that from scratch. They sell an existing home, roll their equity into the new property and trade up. People can argue forever if real estate is a good investment (relative to other investments) but on the home you live in if you rent your whole life you get nothing at retirement. If you own you do slowly but surely build up a real asset over time.
The best argument for owning in a given market over the long term is that if you rent you’re only winning if the landlord is losing money. The whole reason the landlord is renting to you is that you more than cover the cost of owning the property.
In your example you cite when you get to retirement and have 'nothing', what you should have is a diversified portfolio of investments that would have given you a less risky place to put the money that you haven't put into property.
The best argument I've heard is that one thing owning property does do is focus you on saving towards something in a way that saving towards 'the future' doesn't.
> Financial calculations ignore the leveraged nature of buying a home. Small increases in property value are multipled relative to your initial investment.
This is absolutely true, though it is also hard to account for that risk, which also leveraged the down side:
Toronto is experiencing a 30% drop right now which probably means that for the last 3 years of home buyers, they are all having a mortgage higher then their property value. They actually have lost a lot of money and paid interest for it.
> - “I don’t want to pay those high real estate taxes.” Renters still pay the same real estate taxes, it’s just baked into the rent and can’t be deducted from taxes.
This is a nuanced economic topic: property taxes don't transfer to rent quite right. Rent is not that elastic to tax changes, while property values are. The rest of the comments you mention about tax exemption for being a homeowner is true and pretty ridiculous.
EDIT: looking into toronto's case, it seems to particular about restrictions or otherwise. The point in general is that the leverage works both ways, so there is exposure.
> - “I don’t want to pay those high real estate taxes.” Renters still pay the same real estate taxes, it’s just baked into the rent and can’t be deducted from taxes.
It's quite common to rent a house when it is worth X, and for that rent to remain nearly the same even if the house becomes worth X+Y. Due to common restrictions on how much rent can be increased year to year, the taxes on the house can (and often do) grow considerably for the owner, while the rent stays nearly the same. In this very common scenario, the taxes are not at all baked into the rent and the owner starts to lose out until you move and they can raise the rent considerably for a new renter.
In other words, renting does in fact protect renters from a rise in property values when real estate tax enters the equation.
The flip side, of course, is when property loses value, the renters potentially lose out since they continue to pay based on prior taxes.
I should add that the pros and cons are often local to the country you live. In many places, Germany for example, mortgage tax is not deducted from income tax. Which is perhaps why half the population in Germany rents a house for most of their lives.
The article does mention this as a special case, though. Owning property is a perfectly good way to store value, because property crashes don't always track market crashes and because property values recover even from heavy declines.
Notably, all the people you're listing got wealthy, then bought property to diversity their investments. It's a very different situation than buying property in hopes of gaining wealth.
Most all of them bought houses leveraged and with inflation and 10-20% down, being paid off by renters, they have millions in property.
My neighbor lives in Europe most the year, just comes back a few times to check on houses. Has 2 homes in Europe too. That money was built by judiciously buying and maintaining the properties over ~4 decades while trying to minimize costs. This was as a self funded real estate agent. Not someone born with money.
There's a healthy mix of people I've known that have built almost all their net worth in real estate. In fact, most my programming friends that bought after the .com bust in SF and the great recession in 2008-2010 have more than doubled their single home investments.
Depends on the area. Wealthy in SF/LA/NYC is very different than wealthy in KC/OKC/DFW. Mostly it's how far your dollar goes (can you live off your investments alone).
There's another intangible benefit to owning if you know you're going to stay in the area long term -- you can't be forced out of your home.
I was forced out of one home I rented due to owner move-in, which led to a stressful 30 days of trying to find a new apartment in a tight housing market. We managed to find a place outside of the city, but close enough to transit for a manageable commute. And rent was about the same, though for an apartment half the size.
And then, as housing prices continued to rise, that apartment raised the rent 25%. Fortunately, they gave us 60 days notice, so we started looking around for an affordable home to purchase (even farther away, but still near transit), and found one where the PITI+HOA was less than the new rent would have been.
Rents have continued to rise (as have home prices, our home is now worth about twice what we paid for it 5 years ago, this market doesn't seem sustainable, but hopefully after the next crash we won't be underwater on the mortgage).
There's another intangible benefit to owning if you know you're going to stay in the area long term -- you can't be forced out of your home.
Well, you can. The city decides to put in a new subway line and your house is where they want to build a station. Or (depending on your local laws) the other members of your strata corporation vote to sell the building to a developer who wants to tear it down and build a tower.
But sure, it's far less common for someone to be forced out of a home they own, and when it does happen there's typically years of notice.
Well, in that very obscure case, you are generally legally obligated to something like 110% of market value, so you can't really compare that to e.g. being thrown out because tony said so..
They're currently closing down one and moving one town respectively in my county. It doesn't matter if you own or rent here, not when there's ore in the ground.
There's other intangible benefits too. Buying a house is enforced saving. When people have money spare they typically spend it. If as the author suggests people instead invest in the stock market there is constant temptation not to put the money in there in the first place or take the money out because you want to buy something shiny.
You can use owning a home as a way of bringing stability. So instead of making plans for a year at a time you can make 5 year plans based on living where you are.
However there's a quote from 'Rich Dad Poor Dad' [0] that your primary residence is a liability. So where as it makes sense to buy there's no point in buying a massive expensive house because it doesn't bring in any income. Buy one that fits your needs with possibly some minimum room for expansion.
That's one of the further benefits of having bought - if you find the perfect area but your family expands you can modify the house that you're in and stay in exactly the same place.
I think that enforced saving is one of the biggest advantages.
Separately, where I live in Australia, there are transactional costs (mostly stamp duty) that make getting in and out of a house a bit of an extra imposition. I remember about 20 years ago, it was suggested that (generally speaking) if you were likely to stay put for about 5+ years, you were better off buying than renting. Otherwise, typically blue chip buys on the stock market with the discipline to keep investing was a better bet.
This is an important piece that is often overlooked. My wife and I rented a house in 2010 from a builder who wasn't able to sell it after the property bubble burst. After our first year term was up, they agreed to renew the lease, only to call us back a week later and say that "although the mortgage was current on the property, the bank was calling up the loan" and that we needed to vacate in 30 days. (Our best guess is that the bank decided to seize the house due to non-payment of another mortgage held by the company.)
As a result we had to scurry to find another house available for rent, which put us in a terrible position to comparison shop or negotiate on the rent. We were fortunate enough to find something that would work for us, but I think we overpaid substantially for a few years.
The strictly financial part of the calculation is important, but personal cost of volatility may be even more important for those in a position to choose to rent or buy. I suggest it should also give pause to those who plan to build extensive social capital somewhere long term, but continue to rent.
I view real estate ownership as a personal hedge. As we've seen in San Francisco from displacement of those in less lucrative sectors, rent that floats exposes you directly to the prosperity -- and inflation -- of all sectors in a region: in the future, that sector may not be your own. Property taxes expose you to this effect, but it is attenuated in magnitude (doubly so by California's Prop 13). The inflation of rents rendering your employment in a sector in a place obsolete is not so important if you can pick up and move, but it can prove socially expensive (and not priced in) if you have roots, are a contributor to civil society and/or have children. I feel badly for lifetime-renters-by-necessity those whose social capital is wiped out by these fluctuations without any compensation.
As I see it, buying reduces the cross section of your outgoing flows to more radical local fluctuations, binding it to fixed or more moderate internationally-floating indicators (like ten-year treasuries, or LIBOR).
Notably, no major family outgoing flow is so volatile: groceries have similar costs nationwide. Many other goods are globalized, have substitute options, and little friction: housing stands out as the big exception.
I also suggest that marriage-house-children is not mere tradition, though it is that too. It is also a recognition of the increases in cost of volatility to the family unit: finding mutual job opportunities, and then the complexity of transplanting a child.
> I view real estate ownership as a personal hedge.
It’s also a solution to the problem of most people having no self control.
Put $X into a separate untouchable savings/investment account without fail every month sounds simple but most wont do it. Instead they’ll keep raising their monthly misc spending and the money will disappear.
Change it to “do this or lose the roof over your head plus your down payment” and suddenly your success rate skyrockets.
What if you build "social capital" in a place where most people rent... then situation changes and most of your social contacts move away, because it's no more economically feasible to live there? What happens to your social capital then?
It's very unlikely that all your contacts and family and friends are going to move away all at once. As some people leave presumably new ones are also coming along.
I recently did the math on this myself, I just sold my Condo and right now I am renting while looking for a house. I have all cash so I can ignore interest rates which makes it easier, I also have a pretty good wealth manager so I have a pretty good idea of what my return will be if I invest the money in stocks and bonds and rent rather than buying a house. For me, renting comes out ahead strictly looking at the dollars over time, by a pretty good margin.
But, guess what, I am buying a house anyway for one very simple reason. I want to own my house and be able to do whatever I want. I am getting a place with a big basement and it will be my dream lab, with all my computers, 3D printer, test equipment, soldering station and so on. I could never set something like that up in an apartment. To me that is more important than the money.
In Dallas, renting is generally more expensive than buying, and yet I'm still happily renting. In fact, I'm moving next month from my current 3-bedroom 1500 sq ft apartment to a (slightly-nicer) 2-bedroom 850 sq ft apartment, and cutting my monthly payment by more than a third. I previously rented a 3-bedroom 1500 sq ft house that was slightly more than the big apartment, and before that I owned an even bigger house for 13 years.
I know the numbers make it a good idea for me to buy, but I'm renting an apartment anyway, and enjoying the flexibility. If I still owned a 1500 sq ft house with three bedrooms for my kids, I'd be "stuck" with that house and the associated costs now that they've grown up and moved out. Instead I get to downsize as easily as signing a different lease, and I still have no maintenance responsibilities. To me, that is more important than the money!
Your wealth manager might be good, but you have no idea what your return will be from stocks or bonds.
The only more-or-less guarantee you can have is about half of the official rate of inflation, and you don’t get there with stocks and very rarely with bonds.
This same principal can be applied to buying or leasing a car. When I first graduated college and had my first "adult" job I wanted to purchase my first car. The general mantra I heard was "Leasing is throwing money away". I ended up financing my first car, (used) thinking I was making the correct financial decision.
The problem with someone fresh out of college buying or financing a car is they really have no idea what they're next 3-5 years have in store (change in cities, jobs, etc).
My friends who went the leasing option were making considerably lower monthly payments and were able to move on to another car at the end of the year with no difficulty, or could move to another city without carrying a multi-year financial obligation.
I ended up moving to Europe before I had even completely paid off the car and had to sell it at a loss.
I wish I could go back and simply lease a car for my first few years out of school before I figured out where my career would take me.
If you had moved to Europe with a lease, you probably wouldn't have been able to hand over the car and walk away (unless you were at a certain point in the lease), so you would have been on the hook for the lease payments.
True, but the average term of a lease is only 24-36 months while the length of term for financing a car is 60-84 months. (I had a 72 month plan). So you can get out of a lease much earlier, and if you do exit early, you typically only have to make the next 6 months of payments.
A 6 year finance plan is quite a long term. I financed my first car over a 3 year term. You could equally have taken out a 72 month lease and been stuck in the same (possibly even worse) situation.
> if you do exit early, you typically only have to make the next 6 months of payments.
Two things here. 1) I doubt that most leases will let you terminate the contract that early, and 2) if you can, you still have 6 months of payments, which if you compare to the loss you made on your car selling it, the numbers probably compare (deliberately).
Ultimately, you made medium term financial commitment and that's a bad decision if you need to exit it early.
A 3 year term would not have been possible at my then current salary to finance the car. The standard term period (when I was buying) was 5-5.5 years.
In hindsight its easy to look back on what I could have done differently, but I guess that's point. When first graduating, I wouldn't recommend entering into even a medium term financial commitment as things can change so quickly within your first few years in the professional world.
You could have also purchased a used vehicle at a 3 year term. I bought a new vehicle out of college and paid an high interest rate with expensive insurance over a 5 year term. It would have been great to reinvest that savings into the future.
That is not even the worst of it. There are people leasing vehicles (more expensive vehicles then they could buy) without saving the money they need to put down on a new vehicle after the term is up. Worse yet they drive the car past the mileage limits and then after the term is up they then roll the old lease into the financing for a new lease. It is a vicious cycle.
If you're talking about leasing/financing, then I'm assuming you're getting a new car. Why does your first car out of college have to be a new car ? Why not just buy a cheap used car outright ? You can get something that'll last you a couple of years for €1000.
Often when you're living month-to-month without savings it's feasible to buy a new car but not a used one.
The loan terms on new cars are usually more favorable and you don't have to worry as much about something expensive on the car failing and leaving you without transportation.
I was a couple months out of college when the old car I owned needed about $3000 in repairs that I didn't have. My options were payday loan, buy a new car, or buy a much cheaper used car and hope that it didn't end up needing $3000 in repairs.
New car was the easy choice, and I fully understood at the time that if I could scrape together $3000 it would be much better to repair the car I owned.
It's like buying cheap sneakers from Walmart that you know won't last. Doesn't matter if it's a bad decision if that's all you can afford.
So I can tell you the rationale for why my sister is getting a brand new car straight after uni - she lives in a foreign country, with no family/friends around and zero car maintenance skills. So it's far easier to buy a new car on a very low monthly finance, where she knows that if anything happens she has warranty for 4 years + full assistance, no need to risk getting ripped off at some random garages. Plus the car is far far safer than some old beater you could buy for little money, which means the insurance at her young age is really cheap. I fully support that decision.
I did buy a used car, just a more recent, nicer model. At the time, I thought I would hold on to this car for years, so I went for a step up in quality as well.
After working low level internships and restaurant jobs, its easy to get a little too ambitious at age 22 when you sign that first contract with an annual salary.
A good way of looking at the “hidden cost” of buying your home- when you get a mortgage to buy a house, you’ve simply shifted from renting your home to renting the money used to buy your home.
Since your house and that cash are (sorta definitionally) worth the same amount, which you do makes less of a difference than you would think. (And no, it doesn’t matter that the mortgage money is “rent to own”- as the article points out, a home-renter could have just as easily been putting that extra cost into stocks the whole time.)
This is the best way to think about it. You're renting the money and choosing to invest it in a house.
Of course no one would ever give you half a million in cash with a 50k deposit, so even if there was a better place to investment the money (e.g. stocks) you couldn't put it there anyway.
A mortgage is probably the only way a common person can get this kind of leverage and invest in any asset class. It's really unlikely you have access to some other capital at a cheaper rate (even though a mortgage at 90% loan to value can be expensive, it's almost always the cheapest form of a "normal" person will get), so it usually makes sense to get one.
I guess the main determinant should be mobility. If you are 23 and you dont have a career yet, want to go to a law or medical school, do your phd or whatever then chances are next 5-10 years you will be moving a lot and have no idea where you will end up settling down. In such cases having had committed to such an investment is a bad idea. But if you are 30 years old registered nurse married to your high school sweetheart who is a teacher and dont plan moving anywhere then buying is absolutely a safer bet.
I dont know about other parts of the country but here most of the good areas of North East region mortgage is cheaper than rent. Most people buy a 4 bed 2 bath house and sublet the top floor or something making sometimes more than half of their mortgage payments from subletting.
I think its an awesome investment if you purchase it at the bottom of the market, not on the peak, even if you buy at the peak over the course of 30 years you will end up having made a good investment unless your town goes to shit for some reason.
And just like any market, housing markets goes through ups and downs and since its such a long term investment you are better off holding off 5-10 years to wait for the lows of the market meanwhile saving up for the down payment.
Several of my friends have bought a new house whenever they move, and rent our their prior house instead of selling. It has worked out really well for them. Past performance is no guarantee of future returns, of course, but it's worth considering
Since they rent the property they’re leaving behind, the rent counts towards their income. Strictly speaking there’s a delay for the rent to qualify but you get the general idea.
There are tons of lenders who will give you a mortgage with < 10%. They're much more concerned with income than a down payment because you're paying PMI.
Mortgage interest tax deduction, especially for high-tax-bracket people, is often a major factor in calculating returns and should not be looked over for any 'opportunity cost' based arguments. It's also worth noting that most people, compared to a mortgage, don't have access to similar financing at similar interest rates for any other kind of investment/venture and have no hope of breaking out of a month-to-month living situation. 15 years may seem long, but eventually owning a home & not paying rent during retirement, having an asset to borrow against for a child's college or a health emergency, is a decent prospect for most people.
Since housing is an emotional subject, let's try to argue by analogy.
I regularly buy lots of dairy products. Milk, yogurt, cheese. Why shouldn't I save some money and buy myself a cow instead? That way, I could satisfy all my dairy needs, and maybe even have some extra milk to sell to my neighbors. No more making the dairy farmers rich at my expense.
Now, assume that I sell my cow ten years later. And let's say that cattle prices grow 3% annually. (As we all know, cattle prices can only go up.) Will my cow investment yield me a 3% annual profit, given that my cow has gotten older and I must have made significant investments to feed it and keep it healthy?
Not really related, but I'll bet most people don't know that in many places you can by a "cow share". Basically you buy a percentage of the cow's output for the rest of its life. The farmer milks it, takes care of it and gives you the milk. In some places it is illegal, but in other places it's the easiest way to get raw milk (which may be important if you make your own cheese, among other things).
In this kind of arrangement, it's a derisking tool for the farmer. The share holder is paying upfront for the cow (and possibly even for maintenance). For the share holder it's a way to lock in availability (more than price) of a difficult to get resource. There are similar arrangements for things like hops in homebrewing. Some big clubs will essentially buy futures for hops in order to lock in availability and price for really hard to get hops. In this case it can really pay off because the price can skyrocket (multiples) if a particular hop because suddenly popular one year.
The analogy seems obviously flawed. You can get the world's best cow and give it the world's highest standard of care but there's no way it's going to live over 100 years.
Additionally, while I don't want to downplay home maintenance, I don't think it's as big a responsibility as taking care of and regularly milking a cow. And it's not like you might have a week here and there where you don't really need lodging.
Actually you perfectly illustrated why it's in fact great analogy - nobody listens to other side's argument, everyone is "obviously right". Or other side's arguments "obviously flawed".
If you have enough land for the cow to eat grass (note we are carefully not counting the cost of this land) you can milk the cow by hand: the only equipment needed is what you probably already have in your kitchen anyway, and a few bottles of "cow lotions" (some are cleaners but in any case cheap).
Running a dairy farm with 3000 cows has a lot of economy of scale but that is mostly time. And happy cows - cows much prefer their comfortable barn year round to being outside in the weather.
Usually before those 10 years are up you would have eaten the cow due to declining milk production. Whereas, in large areas of the West, a house will have gone up in value over that time. Unless there's a systemic crisis.
Mr Gates said: "These chickens are multiplying on an ongoing basis so there's no investment that has a return percentage anything like being able to breed chickens." http://www.bbc.com/news/world-africa-36487536
Home buyers often overlook the cost of selling their home when considering if renting is cheaper. That is 6% in realtors fees and another 2-3% in closing costs. Renting is a great deal if you are not going to live somewhere for 5+ years before moving
6% for realtors fees is outrageous! I had no idea it was anything like that in the US.
Here in the UK, it’s about 1.5%. That can often be haggled down to 1% if you have an expensive house that’s desirable enough to sell itself. And even that is getting majorly distributed by online agents, who are offering a flat fee service rather than % of property, which can be an enormous saving.
At 6% it seems a market with a huge amount of fat, just asking for a new player to come and disrupt
They technically dont, but if youre an engineer like me who is working full time, having someone work for you to do all the annoying parts of buying a house for free its a no brainer. If the seller is paying why wouldnt I use one?
Since you are paying the seller immediately before they pay the agent, "the seller is paying" seems like a technicality. In theory, if you could remove the seller's obligation to pay that additional 3%, you could get up to a 3% discount on the house.
To add to this the UK market is beautifully transparent, with streets of very similar architecture / size houses or apartments to compare to. You can nail down the price you'd expect to pay, and it is very British to go in and make an offer with the agent, with no buyers agent. I didn't know such things existed until recently by watching shows like "Million Dollar Listing New York" etc.
This is very country-specific. I sold a flat in Scotland at the end of last year. I think I paid a flat-fee of about £2000 for a solicator to create the home-report/brochure, handle the necessary paperwork, post advert(s) online & arrange viewings, etc.
I'm sure the fee was probably calculated based on the sale price, but the idea of paying 6% of the sale-price is very alien to the UK at least, and I suspect Europe too (though in Finland I've just bought a couple of places, never sold one.)
The costs of buying a house in Belgium is ridiculous. It's 10% tax, lawyers cost about 5x more. If you put an offer down you're on the hook for 10% of the price if you pull out.
Indeed. It's quite hard to make a profit from selling your own home in Belgium unless you have lived there for a long time. However, it appears that these extra costs are what prevents the Belgian housing market from inflating the way it does in the UK or US, eventually resulting in lower costs for both renters and buyers. A three bedroom house in a desirable suburb of Brussels costs less than a 50 sq m one-bedroom flat in an undesirable area of London.
Yup transaction costs are outrageous in Belgium. I blame it on the continued 19th century practice of upper crust families parking their more dimwitted members in civil law notary positions, guaranteeing them a respectable income without giving them the ability to cause too much harm. Seats for those offices are still getting hawked around today (expensive to claim one!).
All kidding aside, yes, the high transaction costs are a real break on speculation in the housing market there.
I do recall that in the two Finnish places I bought my offer also had a penalty clause - if I pulled out for any reason other than "failure to find financing" I had to pay €6,000 or so.
(I wouldn't have made an offer had I not intended to follow-through, but it was still a little scary to imagine having to pay out!)
In NL that is 10% of the purchase price, and gets hold in escrow. That works out well, the sellers are most likely making a similar commitment buying their new house.
That's crazy, in Australia conveyancing is pretty competitive, there are fixed price packages for something like $800 to $1200...
Most contracts here do have a 10% deposit, but they're usually conditional on finance, building inspections etc. so you have two weeks or so to pull out before it goes unconditional.
> 6% in realtors fees and another 2-3% in closing costs
It certainly varies by region, but in my area most realtors have been pressured down to 5% by Redfin and other competition. Closing costs (which aren't really percentage based) were between a quarter and half a percent on a $700k home.
Not only that, but by the time you are ready to sell, you will have some expenses toward the "freshening up" of the place. Paint, minor drywall repair, cleaning, curb appeal shit... etc. It all costs $$$$...
As a technologist who is a part-time real estate investor, this article, like many others, fails to take into account the context of the situations that people can face. There are plenty of situations where buying is better than renting, and plenty where renting is better than buying.
One major concept that breaks the traditional buy/rent arguments is that today we have the internet which creates a new type of opportunity: to work in a different city than where the company is physically located. This greatly changes the dynamic and enables new types of opportunities. Want to see the world? Then don't buy because you could live in 10 countries over 10 years for the same price (or maybe even cheaper depending on where you would have bought).
Point being, there are times where buying is the responsible decision, but renting can also at times be the smart decision. Don't let articles like this influence your decision. Make a spreadsheet, really dig into what are the pros/cons. I've helped many friends do this, and sometimes buying was the right decision, and sometimes it wasn't. What are your life goals? What are your investment goals? There are so many variables at play.
Do what's best for you. I rented for 12 years before I bought. If I had bought earlier, I would have been less likely to move...moving helped me advance my career more quickly but meant I rented longer. In the long run that was the right thing for me as I was able to buy a bigger place in a more expensive area (NYC vs Dallas). For others that might not have been important or necessary. Just because one person has a negative experience doesn't mean that you will to. The responsible thing to do is to understand what _you want_ and make sure you're making the right decisions to make that happen. Buy or rent based on that, not the other way around!!!
> As a technologist who is a part-time real estate investor, this article, like many others, fails to take into account the context of the situations that people can face. There are plenty of situations where buying is better than renting, and plenty where renting is better than buying.
I think the article very adequately explained exactly what you're talking about. Did you read it all the way through? It's pretty long, but she definitely covers how individual situations vary. Her whole point is that buying based off of a cliche is wrong, and every person owes it to themselves to analyze their own situation to make that decision.
Sure everyone should take into account their own situation, but assuming that most situation are going to pay the minimum each month...the author's math is very misleading.
As a commitment averse 30-something perpetual renter I've always felt like I was "throwing money away" by renting - but having breakages, plumping, electricity, etc be someone else's problem was how I often justified it to myself. While I'm sure, like anything, the decision to rent or own is highly situational this article still gives me some hope that I haven't made every wrong decision when it comes to "build or buy".
I'm your age living in the NYC metro area and had the same feelings. I opted for a renovated co-op which only cost a few hundred K and has a maintenance charge under $1000/mo. that includes all utilities. By getting a co-op or condo you limit your responsibility to what's within the walls. Sure you'll have the occasional plumbing/electrical issue but for that you can hire a maintenance guy or neighbor. No need to worry about the big issues.
I've experienced the downside of this. If there's a major issue related to your unit, but it's the association's responsibility, you're at their mercy, hoping they'll act quickly. I had a rental unit sit empty for 5 months because of a slow-moving assocation that was reluctant to admit that certain work needed to be done. (Admittedly, I think I could've gotten it resolved _somewhat_ faster if I had been living in the unit myself, or at least lived nearby.)
At the moment, I'm renting a rather nice unit in a rather old building. I suspect it would probably be cheaper to buy the place and pay a mortgage, since rent is likely to rise aggressively.
But it's an old enough place that repair issues aren't just inconvenient - there's a possibility of serious damage, made incredibly expensive to address by historical preservation laws. If the owners get unlucky, they might well be on the hook for repairs costing much of the value of the house.
It's been on my mind a lot, and I really can't imagine buying a place of that age and expense. Either I'd be gambling on 100 year old fixtures, or the amount of money I'd need earmarked for repairs would more than wipe out the savings of renting.
In the housing market there is a useless but with big influence 3rd party that became so ordinary that nobody questions it anymore.
In eastern europe after comunist regimes fall houses were
very cheap and nobody needed a loan to buy one, they could collect the money in just a few years, this has changed after eu banking entered the markets and loaning become something ordinary to buy a house just like in the west this lead to an average of 10x increase in prices.
If banks will be allowed only to loan money to businesses then the supply and demand alone will adjust the housing market to real buying power, this will also lead to more money being pumped into economy instead of keeping artifical economic bubbles.
Walls became the new gold for "investment" banks to keep their money, this mechanism is enforced through artifical goverment scarcity and bank loaning.
Another factor I found missing from this article was the inflation of rent prices over time. Back when I did my own rent vs. buy analysis, I found mostly as the author did. However, the key argument in favour of buying ended up being that rent increases seem to far-exceed inflation.
I could only find US trends for the period of 1940-2000 but, over that time, rents increased 5.32% per year compared to inflation of approx. 3.5% per year.
What this means is that if I don't buy a house now, and trends continue, the space that I was renting last year for $1500/mo will cost approx. $5,600/mo in real dollars in 2042 (a 25-year projection) or $2,360/mo in inflation-adjusted dollars.
This is just one more factor in a complex decision but it seems important to the cost-benefit analysis.
I implore you to find the data and run the numbers yourself if you're trying to decide but my prior research did not paint a good picture for life-long renters.
Edit: It's worth acknowledging that rent protections exist and can keep rents steady for some. However, these usually require that a tenant never moves which is an assumption the author made a good argument against.
This is the biggest weakness of the article, I think.
Rent growth is included in the Rachel/Owen example, but it's set at 2%/year to get the 15 year equilibrium. And during the P/R discussion, that rate is implicit in the analysis of what's an acceptable P/R to buy at. But rent growth is obviously tied to housing price growth - the highest P/R markets range from 5% to 10% per year of rent increases, which is exactly what's driving renters to demand housing at high prices.
On a more theoretical level, we can observe that the article uses national averages to show that housing prices track inflation. That only holds where new housing stock is built to match rising populations. More accurately housing prices track (inflation + population growth - new stock), substantially changing a lot of these conclusions.
I bought my first house in 1999. It costs less for the remaining mortgage than renting a 1br apartment in my city and has for about a decade.
The interest is so low now I don't even get the write off and just use the standard deduction.
The house has more than doubled in "value" (based on comps) as well. I'd still have been paying the same money to rent, but it would have gone up an average of 5%/year.
The down side is I have had to pay to replace the roof, hot water tank, and HVAC, but that's all been recent fixes.
The New York Times has a fairly detailed rent-vs-buy calculator that makes it easy to see the effects of changing some of the variables the author talks about in the article.
This is sadly a bit outdated - the 2018 tax code changes significantly hit the owning case in certain markets and the NYT calculator may view owning as ~10% better than it should be for high-income married individuals.
Yeah, running that tool produces exactly the opposite conclusion from the article. Renting is easily 50% higher than the break-even price provided.
An interesting experiment: go back and use the article's numbers for "what does the future hold?" That is, 2% home price growth, 2% rent growth, 8% investment returns. For me, those numbers say I could rent for $5,000 and come out ahead. Using the recent-history numbers for where I live, the price craters to $1,500.
I know the article says "circumstances may vary" a dozen times, but I think it's still pretty misleading, especially the P/R section. High and rising housing prices go hand in hand with large rent increases, and rent growth dominates pretty much everything else in this calculation.
I live outside of DC now and it's very expensive. Rent is constantly being pushed up and up, no matter how good of a tenant you are. I'm hoping to buy again later this year to lock in a stable monthly payment.
I own because I like knowing I can modify my living space however I like. I took out a bedroom to make a home theater, could never do that renting. There are definitely advantages to home ownership psychologically that can’t be defined in a dollar figure.
His main point though was that renting isn’t throwing money away. I say if renting is the better option for you then who cares?
An additional point to remember is that many, perhaps most, landlords will put as little money into their property as possible. After all, it's an investment, not a living space. As a renter, I had problem such as:
* The roof was leaking, and the landlord patched it ... poorly.
* The heat exchanger in the furnace was cracked and letting CO into the living space. He refused to fix it for over two weeks as I fought him. At the time I was young and did not know better, but this literally could have killed us.
* Our microwave broke, and the landlord refused to repair it. I was not allowed to replace it.
* Our water heater failed. It took our landlord over 3 weeks to replace it.
We finally decided to move and were able to purchase a house for $235k that was literally twice the size for $200/mo less than we were paying in rent. We lived there for 7 years and sold it for $417k. I am pretty sure we could not have invested the $200/mo savings (about $17k) for 7 years and made close to $170k in profits.
Yep - that was a huge deal for me (wanting workshop/garage space). Apart from that, renters rights can really vary around the world, in Australia it's pretty bad. Depending on the landlord, you can get fairly frequent inspections with as little as 24 hours notice, generally can't have pets, are often on a 6 or 12 month lease and can't always renew (if the landlord sells and the new owners don't want to keep you on...
I much prefer owning, and my interest is $100 less per week than what the previous owners rented my place out for before I bought it. If the value of the house keeps up with inflation by the time I sell I'll be very happy. (We don't have capital gains tax on primary residences either, or land tax so that's nice).
There are a lot of short term periods where renting certainly makes more sense than buying. However over a lifetime it’s extremely hard to make the numbers work out if you only ever rent vs someone that conservatively owns.
That of course also ignores all the non-financial benefits of owning. Many people just want to own their little part of the world and make it fit just for them—decor, style, renovation, landscaping, etc. and you just can’t get that from renting. Being a lifetime renter is just not a lifestyle most people want—-hence the aspirational nature of home ownership.
That's really the thing. At some point, many/most people want a place that's their own which they can modify to their liking. And many of them will want a house of the sort that's difficult to rent long-term. And eventually, when retiring or looking towards retirement, they're going to want to live somewhere that can't be sold out from under them or have rent raised to the point they can't afford to live there any longer.
This IMO is the real rent/buy calculation. Do you value being able to pick up and move across the country without having to deal with owning a piece of property? Or do you want to own something that you can make your own with a fairly predictable monthly bill--except when something breaks?
Very large and unexpected things do happen. About 10 years ago, I ended up with about a $60K bill to correct a chimney that was basically collapsing and pulling the house down with it.
But I agree with your general point. In the case of my paid-off house, I figure it's about [EDITED] $1K per month (counting some big projects) for upkeep (depending on how you count things that are nice-to-dos rather than strictly necessary) plus taxes and insurance. It is a very old house (early 1800s) so maintenance is probably a bit higher than a more modern house would be.
That kind of thing isn't covered by most insurance unless it is caused by a covered kind of event, and the additional cost of insurance to cover it would, of necessity, exceed the expected cost without insurance because insurance companies need to meet all covered costs, plus administration costs, plus turn a profit.
Insurance makes certain costs more predictable at the cost of making them more expensive.
Some people want their flower garden arranged their way. Some people want a shed to hold their antique car in. Some people want plastic pink flamingos in front of their window. Some people want ...
On the other side some people want to move every year. Some people want nothing to do with maintenance. Some people need a bed and a shower and will not be home for anything else.
The above are all valid choices. What makes sense for you does not have to make sense for somebody else.
Renting or owning from a purely financial point of view is a relatively straightforward problem and is answered quite nicely with the NY Times Rent vs. Buy calculator (with the caveat that the calculator has not been updated to reflect the new tax laws).
That being said, the biggest reasoning mistakes I run across are:
1. "You pay the landlords expenses plus some profit." Not true. The rental market is just that - a market that fluctuates with supply and demand. There are plenty of landlords who are losing money on their rental property.
2. "Once I have paid off my house I'm done paying for housing." Not true - you still have taxes, insurance, and maintenance whose costs will most likely increase over time.
3. Forgetting about the opportunity costs. Great - you paid off your mortgage. Now you have $500k in equity. Guess what - if you took that $500k and put it in a 5 year treasury you can earn a risk free 3% or 15k/year on that money. Better yet stick it in a broad based index fund and you will grow 6% albeit with more risk. That's your opportunity cost of your equity.
Overall this is such an emotional subject for most. I'm personally glad to see some push-back on the "buying is always better" argument because its been dogma for some time.
> There are plenty of landlords who are losing money on their rental property.
Only until your current lease term expires, at which point your housing costs will unexpectedly rise (and sometimes quite dramatically). Unless you live in such an undesirable location that the landlord is desperate for any tenant, they aren't crazy enough to agree to a lease on which they'll lose money.
Not true. Landlords may prefer to forgo a new tenant and keep rent increases reasonable for many reasons. The cost of tenant turnover can be very high. They may not want to take the risk of a new tenant over a know good tenant. The local rental market may not support a rent increase.
I have been a landlord and not raised rents many times. I have also been a renter and have had no rent increases or very modest rent increases for many years while renting.
A lot of what he says is correct, but this is a critical point. Buy, with a standard compound rate mortgage, and you essentially freeze your rental payment. Yes, for the first few years of the mortgage you won't pay back much equity - but you can compensate for that if you overpay your mortgage (make sure terms and conditions allow you to do this without penalty), say by the amount your rent would have otherwise increased. Do that, and you can make quite a dramatic difference in the cost, and the duration of the mortgage...further reducing your rent.
Broadly, house prices track the money supply growth, and money supply growth is approximately 2x a decade in the USA. Unless you're moving a lot, it is usually better to buy if you can.
You're right, I didn't get that far... but what he does is actually worse.
He assumes a 2% increase in rent (no, just no) - rents track real estate increases quite well too, the common link is the cost of the landlord's mortgage to buy the property, and an ROI of 8% on an MMF. Also no.
All of this is linked back to monetary expansion - in periods of high inflation, when you also get high returns on MMF's, your rent is equally increasing rapidly. In periods of low inflation, you don't get those kinds of return without unacceptable risk.
> He assumes a 2% increase in rent (no, just no)... and an ROI of 8% on an MMF. Also no.
I don't think the example was an MMF - isn't it a whole-market index fund? (The link under that phrase doesn't really clarify, it's just a driver for internal traffic.)
Even so, I just checked examples for those, and that class of fund has been earning about 6.5%. That's quite a difference from 8%
The 2% rate on rent isn't insane as a national average, but failure to break it down still invalidates large parts of the article.
In particular, the P/R section is ruined by that assumption. We're told that at P/R ~15 Owen and Rachel break even, and at P/R >20 Owen loses badly. But high P/R is basically inextricable from rapidly increasing rents. San Francisco, with national-high P/R of 45, has seen 10% average rent increases. Boston, with P/R of 28, has been averaging 4% rent increases.
Individual circumstances vary, of course, but the toy example is rendered seriously misleading by overstating market returns while ignoring the fact that rent growth is guided by home price growth.
> You hold a 5 percent fixed-rate 30-year mortgage
Wait, are you Americans paying 5% interest on mortgage, whitout even counting insurance? For real?!
Edit: Having looked at other comments in this thread, it looks like interest are taxe-deductible, which makes it more affordable, but that's also really weird: it means the gouvernment subsidizes financial institutions to charge American consumers a lot more than the normal prize …
The US has 30 yr fixed rate mortgages which is only made possible by the presence of government sponsored entities like Fanny Mae and Freddy Mac in the market.
The very low interest rates charged for short fixes that we see in most of the world reflect current low borrowing costs for banks. American interest rates reflect forecast borrowing costs over the length of the loan. That's why they're much higher, they price in the expectation that over the 30 year loan period, base rates will revert back up to historically typical levels.
Your explanation sounds logical, but it doesn't hold in practice: In France, you can also have 30-year fixed-rate loans and the interest rate is a bit below 2% (without counting loan insurance, a bit above 2% if you count it).
>but that's also really weird: it means the gouvernment subsidizes financial institutions to charge American consumers a lot more than the normal prize…
Yeah, it sucks, and it's 10x worse with student loans.
US mortgage rates are generally quoted for 30 year fixed rates (about 4.5% currently.) Rates in the U.K. are much lower but those tend to be variable rates which will increase in line with central bank interest rates when those economies begin to recover.
I've just signed a 3-year fixed term @ 1.49% (at which point i'll then have to find another...). I'm pretty amazed at how different it seems to be in the US.
The 30-year fixed-rate mortgage is a result of substantial government intervention in response to a bunch of people losing their homes in the Great Depression. Prior to that, the US system was more similar to what I've heard of in other countries. https://www.marketplace.org/2013/11/25/sustainability/who-th...
interest rates vary pretty widely around the world. Im guessing you might be in Europe where rates are pretty low still. In Australia they never dropped anything like they did in Europe. If you're lucky you can get a loan around 3.9% but lots of ppl are close to 5% here and you can only tax deduct it if its an investment property
The amount is very low, and I'm sure there are fees that will eat any "profit".
It's important to understand the it's not the bank that lend you the money to buy your house, at least not directly. You home is financed by bonds, issued by a sort of credit union. Investors then buy those bonds, pensions funds for instance. The Danish housing marked is extremely stable, so it's a safe place to put your money. So some investors will be willing to take a small lose on buying bonds in homes, in return for safety.
(I wrote the payment plans calculator for asset based finances for a major financial services company, so I'm not unversed in the matter)
Having been a renter for a long time and a home owner for the last decade, I can tell you that the latter is far better than the former.
- The best thing: No Landlord! to tell you what you can or cannot do, fight over for repairs, or be at the whim of eviction (this will depend on the jurisdiction, but in most cases a landlord that wants you out e.g. to go live there herself will manage to evict you)
- Investing always carries risk. Any investor will tell you that the very best thing you can invest in is the thing that you enjoy, as that is always a gain no matter what the financial outcomes of the investment. That said, you should match your wants to your means. I would say go for a payment plan you are fairly guaranteed to be able to make, rather than gambling on getting substantially more income in the future than you are making now. You can do this by selecting a conservative formula (went for a fixed payment, variable capped run-time myself)
- I don't see why the author feels the need to be so derogatory to his readers with his frankly childish 'special snowflake' diatribes
Reminds me of a Harvard Daily Stat from 2012, inspired by Zillow data, which comes to a different conclusion. The Zillow data was based on a larger sample size as compared to the article above, which I felt was too qualitative.
The Daily Stat: After Just a Few Years, Home Ownership Beats Renting[1]
In three-quarters of American towns and cities, it takes 3 years or less for a homebuyer to begin seeing savings over the cost of renting, according to a CNN report on data from Zillow[2].
Factoring in such costs as mortgages, rents, down payments,
commissions, taxes, and maintenance, Zillow calculates that the "breakeven horizon" is as low as two years in some areas. But in New York City, which has some of the nation's highest rents, it still takes more than a decade before ownership makes more financial sense than renting.
I'd be curious how that stat changes if weighted by population rather than municipality.
The article acknowledges that the calculus is vastly different for major metropolitan areas like SF or NYC. Thing is - a good portion of the population lives in those major metropolitan areas. It doesn't do much good to know that buying beats renting in, say, Kansas or Tennessee if you happen to live in SF or NYC.
Similarly, I wonder how they'd compare either strategy to the "Move to SF or NYC for 10 years, make bank, live cheaply, then buy 5 houses in Kansas or Tennessee, living in one and renting the rest out. Never work again."
I resisted buying for years, but last year my wife convinced me we should buy a condo and I don’t regret it. We bought a unit with the same square footage as the place we rented, in a better location, and mortgage + property taxes + insurance is less than what we paid in rent, and that rent was only going to continue increasing every year. With a mortgage we fixed our biggest monthly expense.
I think the article did touch on that, and honestly it was a whole big deal just to say "it depends on your situation" and in the associated costs section included break even costs, which I don't think is a good measure.
We've been living in an era of low inflation for quite some time. When inflation becomes more of a real issue again, renting is really going to look like a poor decision next to buying as rents skyrocket. What if this happens as you're getting ready to retire?
The calculations in the article assume PMI (not putting 20% down) and making minimum payments. Purchasing a dwelling this way adds risk and expense. It's better to wait until you have at least 20% to put down (AND 6 months of living expenses saved up), as you then avoid PMI and prove to yourself that you actually have the means to take on the purchase of a dwelling. Get the 30 year mortgage, but plan on paying it off in 10 - 15 years. Its also better to wait until the market is a buyers market.
Since purchasing a home, I've always paid less than I would have if I rented. Its now paid off and I don't have to worry about it. Freedom feels really good.
To me, renting vs. buying is a bit like AWS vs. own bare metal in a rack.
With AWS, you can have 1G RAM or 10000G RAM or anything in between, you can move between data centers without much trouble, and you can cancel virtually anytime. Once you spent $$$ on your own metal, you're stuck with it.
Renting gives so much flexibility, and even if it's a bit more expensive in the long run, flexibility pays. Of course, there are scenarios when you don't want to rent e.g. having kids or elderly parents living together.
Two things this also ignores that for me work out in favor of renting right now (in Seattle).
1) The options for renting and owning are not the same. We have a ~1300ft apartment that is just a bit too big for us; it is on the 4th floor and has an expansive view and southern exposure, which is rather important for me. There's transit access and groceries/coffee/etc. walking distance.
Condos in Seattle are few, esp. in new buildings. Most of the houses are far from stuff, are by definition on street level so even under ideal conditions few have lots of air and view, and vast majority are too big...
So, I'm going to be paying extra for sqft we won't use (we already have unused, unfurnished corners in 1300sqft), the yard that for me is a net negative (maintenance), and loss of quality in other dimensions (relatively worse view and light).
If my apartment was a condo, I'd seriously consider buying it. As is, it's hard to find a house that is not much more expensive than rent while ALSO being worse.
2) I haven't done the math for this, but in the end, you die. I don't care how much I'm worth when I die as long as it's >= 0. So, leaving aside the case of getting lucky with well-above-inflation appreciation (still, did houses in Bay Area appreciate that much faster than stock market since 2000 or 2009?)... one could sell the house in Seattle and retire to Vegas if he were living in Seattle for job market access only. However, in that case one can probably retire early and move to Vegas without caring for job market access, on the difference from the house prices. If one were rooted in the community, selling the house and downsizing is not an option (in fact I've heard older people in Seattle complain about this - the value and property taxes go up and up but they never want to sell out of the community so the appreciation is a negative for them). There are various scenarios possible, and it's not clear that the net worth in 30 years is well, worth it - liquid; you may have little time left to use it, or not even want to sell.
The topic is almost esoteric, in a sense that they are "true believers" on both sides that always have the next argument ready why the other side can't be right. My conclusion is: the whole thing is a classic bet. If house prices develop really well, you are better off, if not you might be better off renting (assuming you are comparing same lifestyles). That's like forecasting the stock market.
And there's also a bet on mobility versus stability. Something comes up in a year or two that makes you want to move? Renting was the better choice. End up staying in the same place for a few decades and customize a lot of things to your liking? Buying was.
Personally, I think this is the biggest factor compared to a lot of financial calculations that people argue over endlessly of which many of the inputs are ultimately speculative at best.
I rent, and pay about 2% of the value of the property in a year. I get around 8% on shares over the last ten years.
Renting is an absolute no-brainer for me. People are shocked when I tell them how much return I get on my savings vs how much my rent is, especially when I tell them where I live (a 'premium' part of London).
Your numbers don't add up. You live in a premium location, I guess a nice part of zone 2? So let's say 1mn GBP for a 3 bedroom house.
You pay 20k/year in rent (2%) = 1666/month for a 1mn property?
Then you're getting an incredible bargain. You can only get a 1 bedroom flat for about that in a good part of London. A 3 bedroom house would be closer to 3k/month, so really you're looking at 4-5%/year. So the difference in performance is only 2-3%, which would be offset by the gains you'd make in house prices from owning your own place.
That's not possible, you're not getting a place for 2% of purchase value on the open market. There are no £1mn properties available for £1,666/month, or £500,000 places for £833/month, it's more than double that everywhere in London
A mortgage payment is a lot lower than current market rent, however. (I bought a 4 bedroom house in London and we pay about £1200 per month mortgage on that, although we actually overpay to decrease the principal faster).
Part of the reason I was able to buy, of course, was that I had saved a bunch of money, some of it invested in shares. Most people renting probably don't save as much as I habitually do, mind.
> A mortgage payment is a lot lower than current market rent, however.
How do you figure? Rents in London are substantially cheaper than a mortgage. In my current house, a mortgage with 10% down would be around 30% larger than the rent I'm paying. Unless you bought 5-10 years ago, but that's not really a fair comparison.
I don’t understand why you are arguing in favour of renting with those numbers.
You pay more in rent than you would do for a mortgage, and you earn less from your shares than you would do from London property price rises... what’s the upside of renting in your case?
In 1995, I rented an apartment and kept it for 10 years at about $1000 per month. Total invested: $120,000.
Had I purchased in about 1998 or '99 when I was single, making good money doing hourly contracting, my then-$200K property would have risen to $500K by 1995 (in the area that I was house hunting). By today it would be $700K or more.
I was ill-advised by parents to not buy ("Not a good investment and you don't know where you'll be in five years") and I foolishly listened to them.
Now I own a couple of houses but with a lot of years left on the mortgages. Oh, how I wish I'd listened to my gut instead of lazily putting off purchasing! Today I'd have a positive net worth of probably over $1 million, instead of probably half or one third of that.
To young people in their 20s-30s, I strongly recommend getting some property. Buy the least expensive condo in the best neighborhood you can find, preferably with great schools (whether you have children yet is irrelevant). Live in it a while, then try to buy a standalone house with a bit of land--either trade up or, preferably, hang onto the condo and rent it out. There are cycles in real estate, but over the long haul, prices go up.
The best time to buy a house is 20 years ago. The second best time is today. Words of wisdom that are as true now as they were 50 or 100 years ago.
When the goal is to have a roof over your head, between renting or buying, the better option is to buy. If the goal is to invest wisely, of course buying a house is worse than say something like an index fund. But the problem is: I can't sleep in an index fund. A house isn't a depreciating asset. Renting is not an asset at all. Mortgages are fixed. Rent tends to frequently increase, skyrocketing at worse.
This article takes the very common scenario: 30 yr mortgage at market interest rate to compare to renting. Even on these terms its still lopsided. What about the people who do 15 year mortgage? What about those with large down payments? What about those who pay a little extra to their mortgage each month?
The overall home market keeps with inflation, but in markets where the land is trending towards scarcity, you are poised to make money as what happened in my first home. I like to think those who were lucky to purchase a house in the valley area before the extreme scarcity made a nice profit if they decided to sell.
The author fails to find a third point: in many cases, owning is cheaper than renting, especially in my city and cities like it. Rent here is around 1300 for a 1 bedroom 500 - 900 sqft apartment, depending on where you live. If you want multiple bedrooms, well now you are in 1800-2000 territory for 1300 sqft. You can own a 1800 sqft house for about 850 a month. You can put away half of your savings from rent for unexpected expenses, and use the other half to pay the mortgage off sooner, or you can spend it, either way it's roughly half the cost.
This is the key thing! Obviously owning is cheaper than renting, as renters have to cover the costs of their landlord owning, and then some profit for them on top of that.
The market tends to decouple from that logic in an appreciating market.
My landlord bought the house I'm in about 10 years ago. His mortgage is a fixed monthly payment that's locked in from when my house was worth less than half it's current value. The rent for where I live tracks really closely to the mortgage rate it'd cost me to buy at it's current valuation. For any investor that bought a rental right now, they'd barely make anything per month. But for my landlord that bought 10 years ago, he nets $1k - $1.5k per month above his costs.
It's also not as straightforward in a depreciating market, either. In a depreciating market, some property owners may rent a property out at a loss, with the expectation that the monthly loss is temporary and less than the loss they'd take it they sold now.
>The market tends to decouple from that logic in an appreciating market.
I don't know how decoupled but I definitely know of cases where someone bought and has a good longterm tenant and that tenant gets a pretty good rate because they're profitable, a known entity, and low maintenance.
While this is mostly true, it’s important to understand that rents are not just “cost + profit.” They are market based. Sure, the market often pushes it towards something close to that formula, but it is not a guarantee, and many of the subtleties of buying vs renting are lost on those who reduce it to that formula.
As sibling comments note, not necessarily due to appreciation being baked into housing costs.
Additionally, the owner and renter may have different risk tolerances where in the renter is comfortable putting cash in the stock market, the owner might want lower-risk, lower-yielding assets.
Finally due to tax distortions, the owner may have a better deal on their own house than a prospective new owner could get.
A house built today of a certain size can be purchased with a lower monthly payment than it can be rented, yes, for exactly the reason you describe.
A house built ten years ago, or twenty years ago, or thirty years ago, can often be rented much more cheaply than a house built today can be purchased.
An apartment of the same size as that hypothetical house might be higher or lower, since the economics of apartment buildings tend to be different.
A 1-bedroom or 2-bedroom apartment can quite often be rented more cheaply than a 3-bedroom house.
"owning is cheaper than renting" is exactly the sort of generalization that gets people into trouble. Every situation is slightly different.
In the case of renting a SFH from a random person, that might be kind of true (but not all landlords make money off renting anyway), but consider:
- Your landlord may have a lot more capital to buy homes with no mortgage and the and ability to maintain homes cheaper than you can or remodel homes cheaper than you can.
- Your landlord might be a large apartment complex where the economics are different from SFH.
Your landlord is probably not buying at the same instant he signs a lease with you, and he could be benefitting from economies of scale that you don't have by purchasing capital, homes, and maintenance services in bulk.
False. Land isn't a depreciating asset, but according to U.S. tax law a house is indeed a depreciating asset.
EDIT: I'll rephrase and say "It's complicated". You can deduct depreciation on a house under some situations because structures are assumed to be depreciating. But a house can still appreciate and when you sell you may be on the hook for gains because of deducted depreciation.
> False. Land isn't a depreciating asset, but according to
To make such a bold refutal will require another source besides what the U.S. tax law says, because US tax law classifications aren't the same thing as market classifications. There are other reasons at play why tax law considers an asset to be of a certain type/category.
I am glad you qualified. Like you said it depends. If you live in downward trending market in a city/town/state where jobs are leaving and aren't keeping your house updated, yes you have a depreciating asset. If you bought in early next to a brand new man-made lake on the outskirts of a major metropolis, you could build a shed and make out like a bandit once the market surges. Most cases fall somewhere in between, on average, keeps up with inflation (the article cites Yale research in this regard). By keeping up with inflation, that by definition makes it not depreciating.
Your point about deduction that is how our economy works. The government pushes you into home ownership. Our economy is based on incentivizing debt. Path of least resistance. Work with your economy, not against it. It isn't hard to see this.
The author described how to calculate the ratio of sale price to average monthly rental to determine if owning is cheaper or more expensive than renting in your area. In some cities (including mine), owning tends to be cheaper. In other cities (including one in which I used to live), renting tends to be cheaper.
When you have kids it's nice to own because you know what school district you'll be in and knowing you are unlikely to be forced to move you can provide some stability for them. I never considered that aspect until I got there myself.
> You hold a 5 percent fixed-rate 30-year mortgage.
Is that really so? I've read that the mortgage interest rates are around 2-3% in Europe (by the way, in Russia they start from 9%-11% and can be as high as 15%).
> A house in 1897 cost the same as a house in 1997, adjusted for inflation.
It is hard to believe, given new technologies that are supposed to make it cheaper.
Also what the author didn't take into account - she assumes that she will be able to work forever. But what if you get too old and won't be able to do your job well? What if you get sick? What if you get fired? What if there is a financial crisis? What if the company you work at shuts down?
In all of these cases, a renter will be kicked out on the street (I know in some countries like Finland the government provides free apartment for people who don't have money, but I assume in US you'll have to live in the street). But if you own a house then you can live there even if your income drops. You can live without renovations, you can consume less electricity, you can ask for a tax deduction, you can rent out a room.
Also, an owner can leave a house or an apartment to his children.
The author writes about opportunity cost, that you can invest your money. But it is very high risk. If you invest into a private fund, it can become a bankrupt any time, if you invest into something government-related, tough luck if the national currency crashes. Investing into a house looks like a more safe option.
Of course, there are downsides to the mortgage. If you buy a house or an apartment, it will be probably not in the best location, far away from the center of the city in an undeveloped area, no good transportation around. Because the good ones are too expensive.
> But if you own a house then you can live there even if your income drops.
This is assuming you payed off the mortgage, no? Otherwise, at least by the 10 year example given on the article, you’re busted since you can’t make mortgage payments...
In some countries "mortgage vacation" is mandated by law. You can just stop paying it for 6-12 months if shit hits the fan. Some banks allow re-financinng to prolong mortgage and lower monthly payments too. There're insurances that cover your mortgage if you loose your incomes for legitimate reason (injury, company downsizing etc). Neither of those exist when renting..
>> A house in 1897 cost the same as a house in 1997, adjusted for inflation.
>It is hard to believe, given new technologies that are supposed to make it cheaper.
I'm not sure if this is really true but it wouldn't surprise me. A "house" actually has more stuff these days. Structurally engineered lumber that will last longer. Inspections to ensure it will survive the disasters in $localArea. Larger square footage. Granite counter tops. Fancy HVAC systems that are increasingly more complex and higher efficiency. I bet on a per-square-foot basis house. Not to mention most the price of house purchase is the land-value, which is probably even higher than historical norms in desirable areas.
> I've read that the mortgage interest rates are around 2-3% in Europe
From what I understand, these aren't fixed rate 30-year. The rate can change year to year. The US is unique in offering one interest rate that will be consistent for 30 years.
FYI my wife and I signed for a mortgage 4 months ago here in France for our new home. 325k€, 25-year, 1.66% interest rate, 0.8% insurance rate for complete coverage of the both of us. Both fixed rates.
The rates were actually going up at that time - if we could have borrowed 6 months earlier we would likely have had even better rates. Also if you can borrow for a shorter period of time the rates get much lower.
You can get variable and fixed rate mortgages in the UK, fixed typically have higher interest rates but obviously variable can outpace it depending on markets.
I know in Canada the longest mortgage term you can get is 10-years and you pay a substantial premium over 5 years. Mortgages are still amortized over 30.
What that means is if interest rates go from 2% to 6% over a 5 year period, you have to renew your mortgage at the much higher rate.
In the US, if you never move, your mortgage payment might never change for 30 years.
People often fail to take into account that risk has a value. I did some quantitative analysis (most of that is BS but that's another story) for a gig and it was big eye opener.
People talk like:
"Well property praises will always go up. It's a good investment yada yada" but there is a risk that they won't (which often is a sore point). There's even a risk they'll crash. Many people (at least in Sweden) is so over leveraged that it wouldn't take that much for the bank to require a mortgage holder to put in more money to cover the decreased value of the property.
How large risk for a "catastrophic decrease" varies but taking that risk is a cost in itself. It's the same as with insurance, the less healthy/more risk you are the more it costs.
With renting you might not have the upside of investment, but you also don't have to bear the "cost" of that risk
> so over leveraged that it wouldn't take that much for the bank to require a mortgage holder to put in more money to cover the decreased value of the property
That's an interesting contract. For a primary mortgage that would be very unusual in the US. (For a secondary line of credit against the home, the bank would likely freeze the line of credit if the value dropped too far.)
I'm not super familiar with how it works in the US. But here you loan against the value of your property. If the value plunges you no longer have coverage for your loan and the bank may ask you to cover the difference. This happened in the 90's in Sweden where many even were forced to sell their homes when they couldn't pay.
Many home owners I've talked with is not aware of that this is even a possibility and refuse to acknowledge the risk. I guess it's one of those thing one rather not think about :) Another major difference is that in Sweden, in contrast to the US you can't simply give up the keys to you home and be rid of the debt (as I think it is in the US) but it stays with you.
It depends on the state, but at least in California there is "no recourse", which means that if you default on the loan, the bank cannot come after your other assets.
Also renovation work... That’s often an under-accounted risk but if you own a flat you could well be forced at some point to cash out vast amounts of money so that your equity just don’t loose value.
If you rent you just wait for the landlord to pay or you move to a better flat if bad maintenance become unbearable.
Through complicated financial tools with all kinds of different tax implications, fees, and mental/time burden for management, yes a small subset of medium to high income people can attain similar returns on investment as a homeowner while renting in certain situations. But the very backbone of the American middle class has always been home ownership. It’s a simple, understandable investment which holds tangible value regardless of it’s current market price. The tax incentives in the US for the average wage earner are so heavily skewed toward home ownership that it is almost impossible to make it into the middle class any other way.
I'm not sure what's simple or understandable about a basic staple of life whose real value is skyrocketing. It's not at all clear whether the next generation will actually be able to afford housing at anywhere near current valuations. Maybe future Americans can afford to allocate a greater share of their incomes to housing, but the economic effects of the disappearance of all non-housing consumer spending (as mortgages approach 100% of paychecks) might not be great for home values. Who knows? Anyway, not simple.
There is an old story about a financial economist and passionate defender of the efficient markets hypothesis (EMH) who was walking down the street with a friend.
The friend stops and says, "Look, there is a $20 bill on the ground!"
The economist turns and coolly replies, "Can't be. If there was a $20 bill on the ground, somebody would have already picked it up."
I realize I'm analyzing a joke, but dollars on the street aren't assumed to exist in an arbitrage free economy because there aren't enough actors. The joke isn't saying that the theory is wrong, it's saying that the economist is wrong for applying it. In the case of housing markets, if anyone can borrow money to buy a house for less than they can make on renting that house, then there are enough people alive that they will do that.
Also, I should mention that this is the zero arbitrage principle and not the efficient market hypothesis. The efficient market hypothesis asserts that everything we know about the future value of a house is reflected in the current price of the house, which is also relevant to the discussion, but not what I was referring to.
You would still have supply and demand dynamics in an arbitrage free economy. If there is too much supply, no one's going to care what your mortgage is.
Plus principal, taxes, insurance, profit for homeowner, percentage for property manager, renter deposits, upkeep from the last renters who broke the gas lines, scratched your hardwood floors and fled, etc.
You're going to have a tough time finding a homeowner who will let you live in their house for less than their costs.
> You're going to have a tough time finding a homeowner who will let you live in their house for less than their costs.
That is true as to costs imposed by the renter (breaking the gas lines / scratching the floor), but completely false as to costs the landlord has to pay regardless. It doesn't matter what the property taxes are; the landlord will rent to you if he makes more money by renting than he would by not renting. If your rent doesn't cover his property taxes, then it sucks to be him - both of those quantities are negative, but you can still rent from him.
All I know is I put 10% down, had tenants pay the mortgage by renting out the three other rooms while I lived in the other one and sold it 3 years later for 100k more than I owed. My outlay was close to nothing on a net basis and it proved to be a really great tax shelter when I got a raise.
Also I was able to set roots down and get to know the city and feel some semblance of ownership in the town. That and my mortgage never rose except for when the value of my home rose with taxes.
We can certainly debate the financial benefits of owning vs. renting. It's an important angle to consider and this article is simply challenging the automatic assumption that ownership is financially always the sounder choice.
However, we might want to also consider other dimensions, like the social benefits of owning vs. renting. Is it really good for us as individuals and for society in general when property is concentrated in the hands of relatively few people? It's one thing to have a relatively large number of property owners who both rent their properties out and rent their own living space. It's a totally different thing when, say, several moguls and the government own 75% of the apartments in a city.
Also, while mobility is important for some, others form communities, and still others don't have that option or desire to move around. When you don't own, you don't really have skin in the game. If something sucks, you leave. When you own, you've put in your chips. You've bought a stake in the community. You're going to care more about both the property you live in and the neighborhood. If the market takes a turn locally, there will exist a greater incentive to make the changes necessary to buck the turn instead of just moving. If the schools suck, and you care about education, ownership is more likely to create the incentive to improve them. If you rent, you move to another district. For some, that move makes sense. But for many, it makes greater sense to improve what's around them.
In other words, the assumption that owning a house is primarily or solely an investment can be challenged as a narrow view of ownership.
He has a point. I learned this the hard way when I looked at the amortization tables when i bought my first house, it still stings when I think about it.
That said, mortgage interest is tax deductible, which lead to a decent refund this year. So assuming you’re not withholding income at your effective tax rate (but the usual 25-30%) you’ll get a fair amount of it back, which I don’t believe you would if you rent.
So yes, mortgages are throwing away money as well (less equity and reduction in tax liability)
Some of the countries with the lowest homeownership rates [1] are also amongst the most financially secure on the planet. In Switzerland only 43% of households own their home and swiss households are, on average, way more secure than their american counterparts.
I agree with freddie_mecury I am not sure I see the argument or what you mean by "financially secure". But if I can guess at your point I would say that if "financially secure" means having cash then it would make sense that higher percentage renter countries would be that.
Another point I'd like to add is the US isn't far from Switzerland on that list. Also Singapore being in the #2 spot with 90% home ownership, but in my opinion Singapore is considered a wealthy country[1] with a GDP close to the US.
And lastly I will say that the sample size on is limited to about 25% of countries in the world, though there are most of the developed ones.
Homeownership isn't necessary to achieve financial security and/or build equity. The idea that it is, all the time, everywhere, a necessary step does not hold. In countries where the state does not heavily subsidize homeownership via tax incentives (Switzerland or Germany by contrast with USA or France), many households choose to invest in other assets. On the contrary, the fact that states have to subsidize homeownership to make it a competitive investment for households (at the expense of renters paying taxes and not benefitting from incentives), is evidence that in a tax-neutral environment, homeownership doesn't make much sense.
Singapore is misleading, because 82% of the population actually lives in public housing (HDB). I suppose they're counted as "homeownership" because they are leased for 99 years [1], but that's a strong authoritative state with central planning and management of housing. Lease doesn't build that much equity because at you get closer to the term the value of the lease naturally declines. And you're not free to sell or buy to who you want.
> - Finding an alternative investment, coupled with a rent payment?
This is the part I don't get. That would require renting to be cheaper per month than having a mortgage, yet it will always be more expensive for the same property because the landlord is paying the mortgage* plus marking up the price to make a profit.
*Or at least charging the equivalent market value since there will be other landlords in the city who are paying a mortgage
It really depends on the local price:rent multiple. In some places the price gets driven up because landlords are counting on future capital appreciation rather than cash flows from rent.
" The gross rental yield on the average London property last year stood at 3.5 per cent, according to research from Deutsche Bank. In other words, a landlord buyer at these levels, according to the bank, will typically require 200 years to pay off their mortgage after tax and interest are taken into account using only the cash flows from their property, assuming a 65 per cent loan-to-value ratio, a 35-year mortgage term and a constant rate of interest."
https://www.ft.com/content/922574d8-5cc4-11e7-b553-e2df1b0c3...
In other words - the landlords are taking a levered risk that renters are not.
Housing is very location-dependant so that may very well be the case in your city, but not all cities are like this. Renting in my city is cheaper than a mortgage (even without accounting for property taxes). There are multiples reason that can explain this, such as local laws, popular knowledge ("renting is throwing money away!"), no understanding of opportunity cost, anything not paid on rent would be spent elsewhere, and a general lust for house.
That is why it's very important to have a critical mind when evaluating a decision such a buying a property, as no two situations are the same. In some case it absolutely makes sense to buy, in others not. There's also non-financial reasons for buying, but discussions like this is strictly about financial reasoning.
The financial arguments assume one only pays the minimum mortgage payment amount. Many people add a bit extra each month which can quickly turn a 30 year mortgage into a 9-12 year mortgage.
It also ignores many of the other benefits of owning, such as having a lot more say over what you do with the propert and not always having to worry about rent increases or what happens when the lease ends.
The rent vs buy equation is never black and white but this article comes across as quite one sided.
> The financial arguments assume one only pays the minimum mortgage payment amount. Many people add a bit extra each month which can quickly turn a 30 year mortgage into a 9-12 year mortgage.
Wouldn't that actually make the trade-off worse as instead of putting money into a high-return asset (stocks) you directed it to a lower-returning asset (housing)?
> The financial arguments assume one only pays the minimum mortgage payment amount.
They also tend to ignore that mortgage repayments remain static while rent goes up, that interest payments goes down if you pay in advance (offset accounts) and that once it's all payed off your rent is $0.
A mortgage for a home within my means is one of the best financial decisions I've ever made.
If you think about this from a system or landlord's perspective, it's much easier. You don't need to do lots of accounting, just consider the system:
Your cost to live there is the same as as the landlord's, except for 1. Landlord's profit 2. Mortgage transaction costs and 3. Efficiencies through shared expenses.
For #1, You have the power to shop around.
For #2, You want to find a place where the landlord has owned or plans to own for a long-time, so e.g. the realtor's fee has long since been amortized.
For #3, One larger, more efficient heater is better than a bunch of smaller ones. Same goes for insulation. Industrial appliances like washers and driers mean cheaper cost per use.
Optimizing the system is about balancing your landlord's fees for running the house against your own opportunity cost to run your house as a hobby, with two credits in your favor for shared resources and buried expenses like realtor's fees. If you're handy, or have a partner who can work from home, running the house as a hobby is easier. If you or all partners work out of the home, your non-work time is much more valuable and running the house as a hobby is much more difficult.
This is one of the most annoyingly formatted and written articles. So antagonistic and condescending, with not-as-funny-as-you-think jokes and images inbetween, half a dozen single sentence, hell, single line paragraphs with white space inbetween, constant repetition and using up half my screen width.
As for content, meh. The point of the story is: it depends. Renting isn't throwing away money in every situation, fair enough. But it begs the question, what reasonable assumptions can be made for your situation. And here the author mostly fails to deliver, as it builds on a tens of assumptions without rooting them in evidence, or only partially.
So the author will happily use a timeframe of multiple decades to show interest rates are historically quite high, and thus a 5% rate is warranted, but then disregards a historical timeframe of a few decades and just assumes houses will appreciate 2% per year (!) and inflation is also 2% a year, aka houses haven't appreciated in real terms at all. Despite the fact the timeframe she uses for interest rates, shows housing prices vastly outpace inflation.
In short, awfully written, with a very basic point: it depends on assumptions, and then pulls assumptions out of thin air (no surprise, as the story ends with the buyer/renter being exactly as well off, indicating the author picked assumptions accordingly) without evidence, which often aren't even realistic in the first place.
But yes, agreed, renting certainly isn't always throwing away money. And dropping out of school certainly isn't always a bad thing. And amputating your leg certainly isn't in every single case bad for you, it can sometimes be good, like when you have gangrene. But all of that is silly without seriously talking about assumptions, taking 10 pages of antagonistic writing to tell someone to run their own numbers is beyond me.
What I really want as a renter is not to buy a house but to protect myself from rises in the residential housing market in whatever area I'm living. I want to invest a portion of my income that will grow when the housing market grows.
That way I can continue renting but hedge against big swings should I want to buy in the future.
Isn’t the idea that you don’t worry about it? You’ll still have your home.
On the other hand, if the market explodes and renters who are paying prices below market start getting forced to pay more or move out, you’re left with no options
How does a drop in the local housing market lead to you losing your job? A general market crash causes many people to lose their jobs, it doesn’t discriminate against homeowners.
The renters are probably in a worse position in that case too, stop paying rent for a month and you’ll be evicted the next month. Stop paying your mortgage and the bank will at least work with you for a little longer.
Around here most management companies probably wouldn’t care.
These aren’t small mom and pop operations but companies with straightforward rules. You’d probably get an eviction notice before a human was in the loop.
Sometimes the cause is a loss of employment at a large local employer, and the effect is a drop in the local housing market as former employees try to sell and move to places with a better job outlook.
This is a really poorly written and exaggerate article. I purchased a home in 2015, I had to pay $3000 to close with no further down payment. After three years I had to move for work. I'm now renting that house out, and earning $380 a month in profit. That house is mine. Our use that profit to pay extra on the principal and contribute to my 401(k). Someday, that house will be paid for, and it will be all mine. Then any profits will be completely mine, minus taxes and insurance of course. Renting puts you at the financial wims of someone else. How often do you see a rental company lowering your rent? By owning, you know that your monthly outlay is going to be very stable. That makes it a lot easier for financial planning, not just now, but for when we are older. Who wants to be 65 and still renting?
If you are not a local landlord, that increases all of the other risks of being a landlord - bad tenants, tenants who don't pay and a drawn out eviction process, vacancies, etc.
If you are a long distance landlord and have a third party take care of all that for you, you end up paying around 10% of the rent per month and at least 50% of the first months rent for a new tenant for them to find one for you.
After my experience with being a landlord, I said the only way I would do it again was if it was some type of multi unit deal and I could afford a 75% occupancy rate, and someone else to manage it.
> not living in the home as their primary residence.
Which makes it disingenuous to the initial headline.
> Renting Is Throwing Money Away Right?
Yes. Given a choice, you always want to own (or at least be building equity). That's the nature of the phrase in the headline. Having money act as an investment (growing/working) for you is preferable to not.
Look at the author's "history of home prices" graph (that amusingly is from 2006)
The author cites that graph, then goes on to make the claim that housing costs rise with inflation. The graph certainly doesn't look like any reasonable measure of inflation I have ever seen.
Love that article, This is one of my favorite dinner conversation and I'm always shocked to see how most people never question the whole "buying a house" social construct.
Once you do the math, you start to realize that most of it is a fallacy, and that in most cases you are way better off renting a place.
Something else that people forget is that they tend to buy a house way bigger than what they actually need. Typically a young couple would be ok living in a one bedroom, but usually would prefer to buy a house with 3 bedrooms.
This means that they are now paying a mortgage (and downpayment) for something way bigger than what they need and therefore losing an even bigger opportunity cost.
While I like the idea of doing the math for such impactful decisions, it's probably not that easy to get correct constants/values to do it so you get meaningful numbers.
For example in Austria (europe) renting prices went up ~25% in the last 4 years or so, so the 2% inflation correction (per year) the author assumes is probably wrong for many countries/cities.
At the same time rent (in Austria) includes several cost factors such as water supply, garbage, insurances for the house,... whereas the cost of your house's mortgage does not.
What I'm saying is: If you do the math it only makes sense to do it in such a detailed way that you get meaningful results.
This is why I eventually bit the bullet and purchase the home. I didn't want to be 65 years old trying to deal with increasing rent on a fixed income in retirement.
To be fair, you may want to retire somewhere different from where you live when you're working--and may want, for example, a smaller place that requires less maintenance. But, yes, there's a strong argument for the desirability of owning your own place if you're a healthy 65 year old because you don't want to one day wake up and find you need to move in a couple months because an owner has sold a building.
These articles sincerely freak me out. I just bought a house and frankly, I have second thoughts. But the entire subject is so polarized, I really have a hard time resolving whether or not it was a wise investment.
"You hold a 5 percent fixed-rate 30-year mortgage"
Yeah, no. I know that many people may have loans of this size and I never understood it. And it is of course a reason for high prices.
When my parent's bought a house a typical mortgage was paid off in maybe 10 years.
I myself took a loan of 12 years. And not at 5% percent! The real rate is about 0.2% at the moment (and has been 1-2% during the ten years I've been paying).
After paying this reasonably sized loan I can buy another house with a similar loan.
I have also heard of 60 year loans! (eg. sweden). Now that is indeed stupid and throwing money away.
The way they changed the standard deduction and personal exemptions for 2018, for most people the tax deduction from their mortgage won't be worth it. It will be better to take the standard deduction instead of itemize. I had to adjust my tax withholding this year otherwise I would have owed a few thousand next year (compared to the few thousand return I received this year).
The whole tax benefit for owning a home is gone. Not only is there no benefit, you are now penalized.
There are so many factors to take into account. When you buy, you buy generally bigger than what you would rent because you buy for the future, you rent for the present. Bigger houser means also more maintenance costs and more taxes. Inflation does not always work: the value of a house getting older and outdated may decrease. The environment may degrade. OTOH, when renting, it is psychologically harder to spare. With a mortgage, you have no choice.
It's less important to point out that bad real-estate deals exist. No one is debating that. Nor is anyone debating the sliding scale that shows your first year is mostly interest. ASLO, no one (even the OP) is debating (assuming you are savvy enough to avoid a bad deal) that in 30 years, home owners have a massive nest-egg, not to mention 30 years of effectivley fixed monthly payments (even if taxes go up slightly).
It really depends on your situation. If you can afford to buy, and plan to live at least in the short term in that property, I think buying is a good thing. If you need flexibility and want to move around, or you can’t afford to buy, then renting is better. Personally I think buying is the best thing in the long term, and by long-term anything longer than five years. Rent keeps going up. A mortgage doesn’t really change that much.
A point that is not mentioned is being smart about where you buy your house. If you can do some research and estimate the future demand for the area you are buying, buy a place with more of the cash going into the land value than the residence, not buy brand new (generally) etc. then your carefully chosen residence/investment might beat the stock market especially when leverage is applied.
I bought my first flat (got a mortgage on my first flat - £34.5k) in the mid nineties, I moved once, and now have no mortgage and a house worth £250k. If I had rented, I doubt I would now have savings to that amount.
Also I'm kind of a saddo who likes being able to change my home to how I like it.
People who rent often seem embittered by the experience, and angry that houses are too expensive to buy.
There's another post recently that's discussing the same topic. For an FHA back 30 year fixed mortgage, you don't need to put down 20%. I think the most I had to put down for my house was about $3000. It's turned out to be the best investment of my life, because I had to move away and so I am renting it out and make a nice profit each month.
Here in the bay area, you can Think of it as the cost of employment. When you work at Google and get paid X, roughly 50% goes to rent. But, as long as the rest of the 50% is enough to live comfortably and build large assets, then it's still a good deal. Then when you've built up enough assets, leave and retire somewhere.
To be fair, I know a ton of people in their 20s who took advice from people in their 60s and now have mounds of student debt and no career.
I'm not saying buying a home won't work out well. I'm just saying that the baby boomers seem to have had a unique path towards financial stability that doesn't appear to be sustainable for the generations that followed.
You're ignoring the folks where that doesn't work out.
I had plenty of friends who lost $100K down payments during the housing crisis and are now starting all over again. The ones who rented had zero issues.
If you are renting, you are renting it from someone who owns the place. I am going to assume that whoever is the owner will at least break even, but more likely will make a profit off the rent income. Therefore, buying is cheaper than renting.
Can anyone explain to me what's wrong with this argument?
Assume, for a moment, a situation where buying is more expensive for the first five years, but then becomes cheaper (as rents rise, but the amount you repay on the mortgage stays static).
In that situation people buying to rent will make a profit after about ten years. It's therefore not worth it for the short term.
Also, buyers are responsible for maintenance on the building, and for some maintenance, which renters aren't.
So there are trade offs.
(Also, a landlord has to find renters, deal with some of them not paying, invest time and effort into managing their small business, etc)
Why would it be such a special market that every seller is guaranteed to at least break even, when that doesn't hold in any other market?
The market rent isn't whatever it takes for every owner to make a profit.
In particular, not every owner will have the same cost of capital or the same expenses.
Imagine one owner who paid off the mortgage years ago and is able to rent a unit for $200 while another owes the bank 100% of the value at 5% interest and needs to charge $300 just to break even.
In downturns you can leave without losing a penny. But the owner can't, as a sunking market already means some lost value.
This is a risk, you can basically price it.
Real estate and renting is usually thought as a very efficient market, so it quickly adjusts to new equilibria. But that just means it's flaws (differences from ideal market and from market clearing) are usually the same as the context (regulations, population flows, regional economy) they are embedded in.
The whole article is a statistical fallacy. You should never compare "average" growth rates but extreme outcomes. What is the best possible outcome and the worst one in case of renting and in case of mortgage?
P.S. Read Nassim Taleb (and Daniel Kahneman) for the sake of reason.
People often don't take property cycles in to account and they can be a huge factor in many markets and semi predictable. When stuff is cheap (price to wages) and going up buying is a no brainer. When it's expensive and topping out its questionable.
Article assumes that if you're a renter, you don't pay insurance.
Which is true for a lot of renters; but they will lose everything if the place burns down. The landlord's policy will not cover the belongings of the renters.
Renting = paying 'premium' to stay flexible. The reason I don't care about buying is that I don't even know which country I want to live in next year. Also i prefer to not have dept, for whatever reason.
Nothing could be better suited to the Boomer condition than buying real estate, so for the class of people who would rather die than think which is the ideal for most americans, cliches about buying always being better than renting ARE true if you're propagandizing legacy boomers about how wise they were to follow the herd a long time ago and BTW here is some delicious clickbait advertisements etc. For everyone else, yeah, not so much.
Schillers graph and assumption miss the point that we're in a long term multi decade credit crisis where the $ of GDP per $ of (new or existing) debt is collapsing. That leads to collapsing interest rates because you can't squeeze blood from a stone, low rates of investment return, hyper focus on risk control and limitation outside VC type gambling, etc. And housing prices are based on a constant $X/month being available to dump into mortgage (or rent) payments, so collapsing interest rates from normal levels when a gen-Xer was a kid to insane low levels now mean insane high real estate prices. House purchasers do not rationally evaluate the worth of a house like Graham and Dodd securities analysis from the 30s... Its a simpler calculation, I make the 95th percentile of income or whatever, I can afford $X/mo the COMMISSIONED real estate agent found me a great home which is also at the 95th percentile of luxury and quality and neighbors which costs $(X1.1)/mo (see comment about being commissioned salespeople, LOL) and at insane present interest rates $(X1.1)/mo magically turns into some insane and detached from reality purchase price. You're always buying the biggest loan you can afford, to live in the same house you'd live in regardless of current interest rate. And if you individually are a cash buyer or some other situation, it doesn't matter the market is swamped with loan buyers who control the price of the market regardless of your different personal situation.
We have too much debt for the size of economy we have, and the aging of generational shifts result in new leading and declining markets, leading to crazy weirdness. That's the current bubble economy in one line.
The main financial puzzle of life in the 10s, 20s, and beyond, is how to profitably short, or at least not get stuck in the carnage, of the post Boomer era in ... everything. Having a giant dollar value illiquid asset stuck like a millstone around your neck is probably not the best strategy for the future even if it was the best strategy for the past, that's all the article is really saying. Leverage is always only numerically illustrated by rising prices; post boomer the prices will fall.
Rent payments are set high enough to pay the owner's mortgage and give them a profit. If you already need to pay a mortgage, why not buy the house to get the interest deductions and equity?
Rent can never be lower than mortgage payments for the same property because then the bank would never give out mortgages and would just buy up all the properties.
Rent can be higher than the mortgage payment of a portion of the house, but not to the mortgage payment of the entirety of the house.
Rent can never be lower than mortgage payments for the same
property because then the bank would never give out
mortgages and would just buy up all the properties.
That's not how things work. Banks give out mortgages based upon the repayment ability and credit-worthiness of each borrower. The mortgage amount won't be too far out of line of comparables.
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Rent can be higher than the mortgage payment of a portion
of the house, but not to the mortgage payment of the
entirety of the house.
Who says so? Even one tenant in a multi-family home can pay for the entirety of the mortgage.
If you own and rent out a single-family home, you most certainly can charge rent higher than the entirety of your mortgage payment! Sometimes, landlords without mortgages rent out their property...
> That's not how things work. Banks give out mortgages based upon the repayment ability and credit-worthiness of each borrower. The mortgage amount won't be too far out of line of comparables.
The banks most trusted debtor is itself: if buying up property were so fruitful with no labor and above rent the bank would not need to invest a single dime into offering mortgages and would just buy the houses itself.
> Who says so? Even one tenant in a multi-family home can pay for the entirety of the mortgage.
Its just logical: if money is cheaper to borrow than to pay rent, then nobody pays rent and all borrow money. Fundamentally the one that can do this the most is the bank.
What is often not taken into account in terms of landlorship is that you have occupancy rates, brokers that have to find you clients, communication with tenants, etc etc. But even accounting for moderate work, if the mortgage had a lower rate than the cost of rent, and no cost of acquisition, there would be no renters.
This article actually made me think quite a bit! I'll read it again an do the math when I'll search for a new place to live, and when I'll have some cash to invest.
Bad assumptions in the article. Firstly, rent in major cities (like where many of us live) is higher, sometimes much higher, than the mortgage payments for similar properties (home prices in my area give a mortgage payment of around 1500... rents are at 3k).
Secondly, you can get homes for way less than 20% down without huge jumps in total cost these days through various programs. The people making the choice between renting and buying are those who would be taking advantage of programs like FHA loans.
* Every house paying to own and store all the tools for maintaining a yard.
* Every home owner spending 1-4 hours each maintaining said yard, when economies of scale make outside labor about 400% more efficient. Unfortunately, much of these savings don't apply when 20% of the houses in a neighborhood outsource, and they all use 8 different companies.
* The ridiculous cost of building, heating, cooling, and maintaining an 8 sided cube (read: house) vs when building them adjacent to each other (read: townhouse) and pooling resources for half the maintenance.
* Every house even having its own yard, as opposed to plotting residential spaces with a shared "small park" adjacent to 4-10 residences, with even larger parks dispersed throughout. (Those houses with a tiny yard the breadth of a human wingspan are exempt from this criticism.)
I swear whoever is designing rural areas needs to take a look at master-planned communities like Daybreak in South Jordan, UT [1]. Sure some folks may have a libertarian, give me some land leave me alone I'll take care of myself kind of mindset, but we humans evolved in tribes. We need to build more communities that encourage random interactions with the other homo sapiens around us, while getting rid of this wasteful (both economically and from a time-wasting perspective) emphasis on owning a home and maintaining a yard.
another thing this article fails to address is what is the supply of homes in a given region and how wealthy are people there. if you take mountain view where google is headquartered there are many wealthy people near by thanks to rising stock prices of goog, fb, aapl, Netflix etc. because of this and the lack of homes getting built house prices are just going up.
in 2017 less than 250 single family homes sold in mountain view. just put that in perspective. 250. thousands started working at google but only 250 homes sold. and the average days on market for a home was: ~10 days.
if these firms continue making money and if they continue to see their stock prices going up then you'll continue to see house prices rise in these markets.
articles like these fail in markets like mountain view / Palo Alto. they probably make more sense for markets that have abundant housing like Las Vegas / Denver.
i would say both renting and buying a house are bad ideas. when you rent, you have to pay a huge amount of money to pay for your landlords premium gasoline for his lambo. when you buy (in a city), you are having to take on the cost of every other person who bought before you -- nobody ever willingly sells a house for less than they bought it, so houses are like ratchets that go up and up and up in price. when you buy a house in a city you are also paying for someones premium gasoline. its an endless cycle of people buying the house and making it more expensive.
i would say that buying a remote home is where its at. with solar power, electric cars, self driving (even in its current state), and the soon-to-be mesh of satellites that will provide decent internet to every corner of the globe, along with a whole lot of other things, remote land and home ownership is a very exciting prospect indeed.
most of the cost of a house in a city or heavily populated area is in the land (location) and in paying for the profit margin of all the buyers who came before you. so building your own house on remote land is extremely affordable because there were few previous owners and its not close to anything -- you dont need financing like with a regular house.
i saw a story, i believe it was here actually, about a woman who bought a cheap house somewhere remote but good, and just did a four hour commute on the train. you can make just about anything work. and from my perspective, having your own land and a place to sleep that is truly your own is so fundamental and vital that extreme measures feel justified.
i currently share an apartment with a bunch of people. our complex holds at least 200 or 300 units. at an average of two thousand dollars for each unit, all 200 of them. the people who own this complex bring in almost half a million dollars every month before taxes. a while ago, a pipe broke in our kitchen -- a pipe behind a wall, underground that carries sewage. our entire kitchen and dining area were flooded with foul water. it took them almost a month to even get someone to look at it, even though i visited the office every day to remind them that half of my home was flooded with foul water. their response was that getting a plumber to do a job like this is very expensive, so they had to go though a bidding process instead of just hiring someone asap. i dont have a lot of money or free time so i was powerless in this situation. eventually, the pipe was fixed. when you rent, you are powerless. the power dynamic is obvious both in principle and in experience. why then are so many people eager to enter into this demented arrangement in which they are essentially a modern peasant?
i think everyone should own some kind of house somewhere because there is absolutely nothing worse than getting stuck without somewhere to stay. life is chaotic, rent is very expensive in many areas and housing can be difficult to come by and there have been times when i almost wasnt able to find housing. definitely one of the worst feelings ive ever experienced. unlike some people, i have no nets to catch me. if i had a remote home, not finding housing in the city would transform from a ulcer-inducing nightmare into a short vacation back to the country while keeping an eye out for good housing on craigslist.
This post is full of the kinds of flawed arguments that usually accompany pro-rent arguments -- which do a real disservice in identifying those cases where the answer is "No".
Breaking down the problems by section:
Equity
"Here’s the rub: Only a small slice of your mortgage payment builds equity."
There you go, the article defeats itself not even a full screen below the correct answer.
If you rent, 0% of your monthly payments build equity.
If you own, X% of your monthly payments build equity.
X > 0
It attempts to list all the parts of a mortgage payment as if itemizing it makes the equity earned meaningless.
Your mortgage consists of four parts:
Principal (the equity-building piece)
Interest
Taxes
Insurance
This is basically correct, but the case for "Your rent consists of the same four parts + two additional parts where the property owner may make a profit off of you as well as some additional money to cover various expenses that they'd rather not pay for out of pocket."
Again, nothing in this section invalidates that building equity is better than not.
One way of thinking about renting is that you pay all of this, plus the extra stuff and in the end you've built equity for somebody else and none for you.
Opportunity cost
I didn't bother to read this to be honest, these sections are almost entirely filled with notions that "if I just invested my money in horse farms or leverage backed security instruments I'd make more money in the long run" blah blah blah. The logical flaw in these are usually pretty easy to spot as they involve a scenario setup that's not like-for-like (meaning the same house as a renter vs. as a buyer) and focus on weird time frames like the lifetime of the loan not the life of the person.
In other words, at the end of 30 years, the rent may have made more money in some scenario of a perfect investor, but then they still have to rent to have a place to live. The homeowner now owns their property free and clear and can do all kinds of things with it, and their now future income is entirely liquid.
Should I rent of buy
Do what you want! But don't follow the flawed arguments in this blog. Here's what it really comes down to, do you want your money to be more liquid and your location to be more mobile? Then rent.
Do you want to own large amounts of assets that can be liquidated in a few months (in most places) or that you can live in virtually free in the future? Then buy.
Bonus: if you buy, you can end up in a situation where you just have other people literally giving you money to pay your mortgage away...it's called being a landlord. You can even do it with parts of your property, like a bedroom or a basement. Over time you can own a property outright, rent it out, and use that rent to service another mortgage in a property where you live meaning you live virtually free and accrue assets at a frightening rate.
edit once again, here's probably the best post written on the subject.
> In other words, at the end of 30 years, the rent may have made more money in some scenario of a perfect investor, but then they still have to rent to have a place to live. The homeowner now owns their property free and clear and can do all kinds of things with it, and their now future income is entirely liquid.
Not perfect investor, any investor that put their money in an index fund. Vanguard had a trillion and a half assets in 2010~ and those assets tripled while houses doubled.
Edit: I took a look at the link you provided below and its not thorough. The author should have found something weird in the fact that in the calculations he concludes that being a property owner is 1.6 million richer than the renter, and not meaning that inequivocally everyone would conclude that renting is so bad it should be illegal.
The most glaring mistakes are that he takes mortgage payments and renting as the same, which cant be true in a reasonable market, and that the renter starts with 0 while the mortgage taker starts with the downpayment.
> Not perfect investor, any investor that put their money in an index fund. Vanguard had a trillion and a half assets in 2010~ and those assets tripled while houses doubled.
You are still making the typical errors. Here, I'll put it in simple terms and maybe this will help the scales fall from your eyes about why real estate is a very popular investment strategy and real estate investors aren't all just a bunch of morons who should have pumped their money into Vanguard index funds.
As a renter, YOU ARE BUYING SOMEBODY ELSE'S PROPERTY FOR THEM.
You always have a a due to pay rent. There is no way too avoid that. When you buy a property you become the recipient of the rent you pay: if you pay rent to yourself, you still have to take it from your paycheck, and the landlord gets his profit. If you dont, then the landlord(yourself) is giving you a place for free.
This explanation is practical in the following sense: you are thinking of buying property, and on the same block you see 2 houses that are identical in every regard except one: one is offered at rent at below market price. Which is the best strategy?
How can you expect anyone to take you seriously when you outright say you didn't read large portions of the article and then try to make a point on how those very points are flawed?
what sucks is that any savings is taken by property taxes, especially in NJ, NY etc. And they go up every year. That alone is in many cases as much as rent (albeit on a smaller place, but still) http://www.nj.com/politics/index.ssf/2018/03/nj_towns_with_t... Hey, at least state officials will have nice pensions wen they retire.
Your property taxes and mortgage insurance are deductible where rent is not. If you look hard enough in NJ/NY areas you can find places where the principal is near the rent price and you deduct the rest. In the long run that works out to your favor.
Not everyone can afford such a situation and the new Trump tax changes don't help either. Just saying "I should rent" is irresponsible because you think you're bumping the state pension funds. When you rent you're helping an owner pay off their mortgage as well as the very taxes to pay that pension fund.
Rent is deductible for certain states. The new tax changes are going to be scary for some states, I would not buy until I have a comprehensive idea of what is coming.
Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment. To use the example in the article, if your investment doubled between 2009 and now, your $200k in a $1M home just became 1.2M. 6x growth beats out 3x growth in stocks in the same period.
Sure, you can be leveraged in other investments but (1) your interest won't be tax deductible, (2) your interest rates won't be nearly as low, and most importantly (3) you won't be able to borrow with no recourse (depends on the state law, but "no recourse" means your downside on a primary residence is limited to the equity in the home. If you default on the loan they can't come after your other assets.)
Does it mean renting is a bad idea? No. There are plenty of reasons it might make financial sense to rent. But articles like these should accurately discuss the financial upside of buying.