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Renting is Throwing Money Away, Right? (2015) (affordanything.com)
475 points by vinnyglennon 10 months ago | hide | past | web | favorite | 478 comments



These articles always ignore leverage.

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.


> Yeah, probably less reliable than the speed queen.

Sadly, according to an article HN sadly killed[0], the Speed Queen is no longer particularly good: https://thewirecutter.com/blog/speed-queen-washer/

[0]: https://news.ycombinator.com/item?id=16576899


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.


If you can't estimate the quality of things, buy the cheapest you get. Because nobody hinders someone selling you crap for double the price.


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.


This is Terry Pratchett's "Boots theory of wealth", placed in the mouth of Sam Vimes. Rock on.


A+ post.


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.


Except the 6000 sqft house has 2 water heaters, 2 or possibly 3 hvac systems and another bathroom or 3.


As another data point, I really enjoy home maintenance and improvement but totally understand why others may not.


I own a home built in 1927. Maintenance and renovation are similar to the costs of carrying a mutual fund.

I hire out most renovation, but don’t hire gardeners, etc. If you want a hands free lifestyle, that’s awesome but costly.


I usually see $5K/year as an estimate or some kind of percentage of the value of the home.


Sorry: $1K/month is ridiculous.

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.


>Plumbing work

Done some of that.

>electrical work

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.


But with renting there is no reward.

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"

https://www.ahs.com/home-warranty/

Average price is around $850.

https://www.homeadvisor.com/cost/inspectors-and-appraisers/p...

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.


$2000 mortgage $140 lawn care $58 warranty

Instead of paying the $1,800/month, you are now paying $2,200/month.


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 get to live closely with a bunch of cool people and not isolated in some house in a suburb. I think renting has a nice social benefit.

Plus, the mobility aspect to just pick up and leave gives me a ton of reassurance.

There is also the bonus that someone else has to fix the appliances and do maintanance than me.


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's exactly why, as a family man, I hate renting. You end up changing neighborhoods every few years, and none of your friends are permanent.


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.


There is mobility.


Also, rents go up all the time, especially while moving into a new flat.

If you rent a flat for 20-40 years, the rent won't change as much as when you move around every few years.

So you might end up with super low rent compared to the rest of the city after 10 years or so.


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.


Ah okay. I'm from Germany, where we have rent control everywhere.

But I also know a guy from NY who rented a flat for a few hundred bucks decades ago and now subrents it to other people for thousands.


What he is doing is probably illegal then (if he’s rent controlled). You can’t profit like that.


Gotta say I always found this incredible. Rent control is so stupid that even it has to put rules on not being used.

Who is being harmed by a rent-controllee sub-leasing? Literally no one. Because the harm to the owner is already made in the form of rent control.


> Who is being harmed by a rent-controllee sub-leasing? Literally no one.

The owner is harmed, because otherwise they could have gotten a new tenant and raised the rent back up to market rate.


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.


Ahh... Great point!


Your forgetting the tax write off of mortgage interest. Which needs to go into you equation no? That can be sizable.


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.

But that seems dishonest.


> But that seems dishonest.

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?


Why? Lending is a risk on both ends.


It's called a put option in the stock market.

In this case its priced into the risk of your loan and you bought it by being in the state and taking a loan there.


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.


That's a uniquely American benefit. Most Western mortgage-payers have to pay out of post-tax income.


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.


Mortgage interest is tax deductible in the Scandinavian countries and in the Netherlands IFAIK


From the article:

> 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.


We have it in the Netherlands as well, although it is gradually being phased out.


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.

The standard deduction is $24K for a couple.


As of 2018 in the USA, the tax write off is much smaller now, given that the standard deduction is so high.


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's no such thing as a margin call on a mortgage.


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.


Not on a typical residential mortgage, but commercial balloon mortgages often have a provision for the loan being called early.


... also many (most ?) seller-financed residential mortgages.


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.


5% is the norm in the United States, elsewhere it is a fraction of that. US consumers have become accustomed to being ripped off by realtors.


In Italy 5% is the norm as well.


> 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.

I've been a landlord, never again.


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.

Owning things adds friction one way or another.


A few notes:

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.


Property tax is deductible up to $10k.


eh... property tax AND state income tax.

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.


Did you read the article?

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."

Source: https://news.ycombinator.com/newsguidelines.html


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.


Your 15% leveraged return is only true if you have no borrowing costs. If you had a 4% mortgage you would actually be losing 1% the first year.

A leveraged return L = (asset return - ((1- %down) x loan) rate)/%down. With a 4% mortgage that's (3% - ((1 - 20% ) x 4%))/20% = -1%


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 are forgetting that you don't only get the leverage of the $1M, you also have to pay the loan for the full sum of $1M.

There is a section in the article about 'opportunity cost' which covers this.


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.


Can you get an interest only loan on a home in the USA?


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.


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.


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.


But the house usually does not go up 3% if you take inflation into account


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.


> better bet than renting with roommates

Why not both?


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.


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.


> These articles always ignore leverage. Generally, with 20% down you are leveraged 5:1.

Don't forget that leverage works both ways; it magnifies the downside as well.


> 6x growth beats out 3x growth in stocks in the same period

Was that a typo? Average market returns are much higher than that.


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.


Oh I didn’t realize those gains were leverage adjusted. But shouldn’t you compare to trading on margin to be apples to apples?


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.

What are you talking about?


>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've gained 100k on your initial 40k

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.


The way it works with securities is:

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?


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.

Assuming you could have made the same down-payment and gotten the same deal on a mortgage as the landlord.


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.


Here in Toronto landlords are actually paying above the rent in order to meet their mortgage/insurance obligations.

https://betterdwelling.com/cibc-over-44-of-toronto-condo-inv...


Oversimplified statement.

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).

So as the article says - it all depends.


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!


Until your renter stop paying and if takes you three to six months to evict them or until they trash the place and you have to pay for repairs.

Been there. Done that.


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.


Things happen. People lose their jobs and according to most banking standards, they expect a 75% occupancy rate when considering rental income.

It only takes one bad tenant who doesn't pay for 3 months over 3 or four years and repair costs to wipe out all of your profit.


Mortgage insurance. It's requires for my FHA loan, but I've also paid 3 months ahead on my mortgage to give me additional breathing room.


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.


Isn't there insurance for this exact kind of thing?


Insurance for vacancies and dealing with non paying tenants -- no.


> The problem is most people don't move sideways or down... they move up, thus negating any windfall in investment prowess.

But the investment is what allows moving up, no?


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.


In the US there are only a few areas that have rent control. Most landlords can charge what they want after a year (or whenever the contract expires).


> Small increases in property value are multipled relative to your initial investment.

But don’t forget that leverage works both ways. Small declines can wipe you out.


> The tax system is very biased in a favor of home ownership.

With the recent tax changes including increased standard deduction, SALT cap and mortgage deduction cap, this bias is greatly reduced.


There's detailed calculators to handle all the issues you bring up: https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul...

Also, it's a trade-off. In some markets, buying wins. In others, renting wins. I personally found it hard to justify buying in expensive parts of the Bay Area: https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...


Everyone I know that's wealthy owns lots of real estate.

That's the difference between stocks and properties, at least property is real.

Why do drug dealers, foreign nationals, and the ultra wealthy park their money in big city properties? Tangible value.


>>Why do drug dealers, foreign nationals, and the ultra wealthy park their money in big city properties? Tangible value.

The real answer: because real estate is an extremely convenient money laundering tool.


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.


What's your threshold for wealthy? I know plenty of younger millionaires (via tech) who don't have real estate other than perhaps REITs.


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).


but it varies quite a bit based on location. It all depends on the Rent to own ratio in that area, which can vary quite a bit.


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..


How fairly are market values calculated?


True, but I excluded unlikely events like an eminent domain takeover, asteroid strike, etc in my cost-benefit analysis.

An earthquake related eviction is probably most likely, but that'd be the case whether I own or rent.


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.

Some propaganda from LKAB for the interested: https://samhallsomvandling.lkab.com/en/


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.

[0]: http://www.richdad.com/Resources/Rich-Dad-Financial-Educatio...


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.


Wow, where do you live?

30 days seems really short for owner move-in; CA is 60 days (at least if you've been there a year)


>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.

Depends on the regulations in your state and the rules of your HOA.


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?


Yes, and what if you are shot to death?

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!


Ya, sometimes there is more things to consider than just the money, depending on your priorities.


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.


To be fair, not long ago 24 months was the common loan term.

Now people are getting 7 year and even 9 year loans. We live in a time when you can finance a 400$ watch for 2 years.

The renewed focus on chipping away at people’s monthly income is almost impressive.


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.


How much would it cost you to find out who the most reliable mechanics in the city are? And to learn the (very, very) basic maintenance skills?

I think paying $1000 for that knowledge would more than cover it. Why pay a lot more not to gain that knowledge?


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.


Until you get a new job where the commute is causing you to put more miles on your car than the lease allows....


In life people make mistakes. Picking the wrong finance option for the first car is a relatively small one. :)


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


they get approved for a new mortgage every time they move while the old one isnt even 10% paid off?


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.


I don't know of many lenders that will give you a mortgage with 10% down.


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.


Really? In UK it's not unusual to get approved with as little as 5%.


I'm guessing in the UK 30-year fixed-rate mortgages are not the norm.


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.


The article takes tax deduction into account in the calculations. It also discusses most of the other things you mention as well


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.


So what are you arguing? You’ve just posed exactly the same questions we already had but in a cow theme.


He is arguing that it is not clear that "buying cow is obviously better". Because many people really do argue like that when it comes to rent vs. buy.


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".


This analogy is not correct. The correct analogy is renting a cow vs owning a cow, not owning a cow versus purchasing it's by product.


A cow is not the same as a freehold property. Land does not age (except maybe near the sea), and houses generally last a very long time.


> Land does not age

Tell it to the pastoral nomads who used to live in what is now the Sahara.


Also, running a dairy farm requires some economy of scale that renting a house doesn't


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.

https://www.globalpropertyguide.com/Europe/United-Kingdom/pr... : note that 10 years ago was the very end point of the housing boom which is why Ireland and Spain look so bad on this chart.


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


You are missing that the seller pays both his realtor and the buyers realtor


Why does the buyer need their own realtor for just buying a normal house?


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.


How are buying agents compensated in the UK?


You wouldn't typically use one.


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.


Ouch that does sound like a lot of money!

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 $$$$...

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