what sucks is that any savings is taken by property taxes, especially in NJ, NY etc. And they go up every year. That alone is in many cases as much as rent (albeit on a smaller place, but still) http://www.nj.com/politics/index.ssf/2018/03/nj_towns_with_t... Hey, at least state officials will have nice pensions wen they retire.
Your property taxes and mortgage insurance are deductible where rent is not. If you look hard enough in NJ/NY areas you can find places where the principal is near the rent price and you deduct the rest. In the long run that works out to your favor.
Not everyone can afford such a situation and the new Trump tax changes don't help either. Just saying "I should rent" is irresponsible because you think you're bumping the state pension funds. When you rent you're helping an owner pay off their mortgage as well as the very taxes to pay that pension fund.
Rent is deductible for certain states. The new tax changes are going to be scary for some states, I would not buy until I have a comprehensive idea of what is coming.
As a technologist who is a part-time real estate investor, this article, like many others, fails to take into account the context of the situations that people can face. There are plenty of situations where buying is better than renting, and plenty where renting is better than buying.
One major concept that breaks the traditional buy/rent arguments is that today we have the internet which creates a new type of opportunity: to work in a different city than where the company is physically located. This greatly changes the dynamic and enables new types of opportunities. Want to see the world? Then don't buy because you could live in 10 countries over 10 years for the same price (or maybe even cheaper depending on where you would have bought).
Point being, there are times where buying is the responsible decision, but renting can also at times be the smart decision. Don't let articles like this influence your decision. Make a spreadsheet, really dig into what are the pros/cons. I've helped many friends do this, and sometimes buying was the right decision, and sometimes it wasn't. What are your life goals? What are your investment goals? There are so many variables at play.
Do what's best for you. I rented for 12 years before I bought. If I had bought earlier, I would have been less likely to move...moving helped me advance my career more quickly but meant I rented longer. In the long run that was the right thing for me as I was able to buy a bigger place in a more expensive area (NYC vs Dallas). For others that might not have been important or necessary. Just because one person has a negative experience doesn't mean that you will to. The responsible thing to do is to understand what _you want_ and make sure you're making the right decisions to make that happen. Buy or rent based on that, not the other way around!!!
> As a technologist who is a part-time real estate investor, this article, like many others, fails to take into account the context of the situations that people can face. There are plenty of situations where buying is better than renting, and plenty where renting is better than buying.
I think the article very adequately explained exactly what you're talking about. Did you read it all the way through? It's pretty long, but she definitely covers how individual situations vary. Her whole point is that buying based off of a cliche is wrong, and every person owes it to themselves to analyze their own situation to make that decision.
Sure everyone should take into account their own situation, but assuming that most situation are going to pay the minimum each month...the author's math is very misleading.
As a commitment averse 30-something perpetual renter I've always felt like I was "throwing money away" by renting - but having breakages, plumping, electricity, etc be someone else's problem was how I often justified it to myself. While I'm sure, like anything, the decision to rent or own is highly situational this article still gives me some hope that I haven't made every wrong decision when it comes to "build or buy".
I'm your age living in the NYC metro area and had the same feelings. I opted for a renovated co-op which only cost a few hundred K and has a maintenance charge under $1000/mo. that includes all utilities. By getting a co-op or condo you limit your responsibility to what's within the walls. Sure you'll have the occasional plumbing/electrical issue but for that you can hire a maintenance guy or neighbor. No need to worry about the big issues.
I've experienced the downside of this. If there's a major issue related to your unit, but it's the association's responsibility, you're at their mercy, hoping they'll act quickly. I had a rental unit sit empty for 5 months because of a slow-moving assocation that was reluctant to admit that certain work needed to be done. (Admittedly, I think I could've gotten it resolved _somewhat_ faster if I had been living in the unit myself, or at least lived nearby.)
At the moment, I'm renting a rather nice unit in a rather old building. I suspect it would probably be cheaper to buy the place and pay a mortgage, since rent is likely to rise aggressively.
But it's an old enough place that repair issues aren't just inconvenient - there's a possibility of serious damage, made incredibly expensive to address by historical preservation laws. If the owners get unlucky, they might well be on the hook for repairs costing much of the value of the house.
It's been on my mind a lot, and I really can't imagine buying a place of that age and expense. Either I'd be gambling on 100 year old fixtures, or the amount of money I'd need earmarked for repairs would more than wipe out the savings of renting.
The financial arguments assume one only pays the minimum mortgage payment amount. Many people add a bit extra each month which can quickly turn a 30 year mortgage into a 9-12 year mortgage.
It also ignores many of the other benefits of owning, such as having a lot more say over what you do with the propert and not always having to worry about rent increases or what happens when the lease ends.
The rent vs buy equation is never black and white but this article comes across as quite one sided.
> The financial arguments assume one only pays the minimum mortgage payment amount.
They also tend to ignore that mortgage repayments remain static while rent goes up, that interest payments goes down if you pay in advance (offset accounts) and that once it's all payed off your rent is $0.
A mortgage for a home within my means is one of the best financial decisions I've ever made.
> The financial arguments assume one only pays the minimum mortgage payment amount. Many people add a bit extra each month which can quickly turn a 30 year mortgage into a 9-12 year mortgage.
Wouldn't that actually make the trade-off worse as instead of putting money into a high-return asset (stocks) you directed it to a lower-returning asset (housing)?
Through complicated financial tools with all kinds of different tax implications, fees, and mental/time burden for management, yes a small subset of medium to high income people can attain similar returns on investment as a homeowner while renting in certain situations. But the very backbone of the American middle class has always been home ownership. It’s a simple, understandable investment which holds tangible value regardless of it’s current market price. The tax incentives in the US for the average wage earner are so heavily skewed toward home ownership that it is almost impossible to make it into the middle class any other way.
I'm not sure what's simple or understandable about a basic staple of life whose real value is skyrocketing. It's not at all clear whether the next generation will actually be able to afford housing at anywhere near current valuations. Maybe future Americans can afford to allocate a greater share of their incomes to housing, but the economic effects of the disappearance of all non-housing consumer spending (as mortgages approach 100% of paychecks) might not be great for home values. Who knows? Anyway, not simple.
He has a point. I learned this the hard way when I looked at the amortization tables when i bought my first house, it still stings when I think about it.
That said, mortgage interest is tax deductible, which lead to a decent refund this year. So assuming you’re not withholding income at your effective tax rate (but the usual 25-30%) you’ll get a fair amount of it back, which I don’t believe you would if you rent.
So yes, mortgages are throwing away money as well (less equity and reduction in tax liability)
There is an old story about a financial economist and passionate defender of the efficient markets hypothesis (EMH) who was walking down the street with a friend.
The friend stops and says, "Look, there is a $20 bill on the ground!"
The economist turns and coolly replies, "Can't be. If there was a $20 bill on the ground, somebody would have already picked it up."
I realize I'm analyzing a joke, but dollars on the street aren't assumed to exist in an arbitrage free economy because there aren't enough actors. The joke isn't saying that the theory is wrong, it's saying that the economist is wrong for applying it. In the case of housing markets, if anyone can borrow money to buy a house for less than they can make on renting that house, then there are enough people alive that they will do that.
Also, I should mention that this is the zero arbitrage principle and not the efficient market hypothesis. The efficient market hypothesis asserts that everything we know about the future value of a house is reflected in the current price of the house, which is also relevant to the discussion, but not what I was referring to.
You would still have supply and demand dynamics in an arbitrage free economy. If there is too much supply, no one's going to care what your mortgage is.
Plus principal, taxes, insurance, profit for homeowner, percentage for property manager, renter deposits, upkeep from the last renters who broke the gas lines, scratched your hardwood floors and fled, etc.
You're going to have a tough time finding a homeowner who will let you live in their house for less than their costs.
> You're going to have a tough time finding a homeowner who will let you live in their house for less than their costs.
That is true as to costs imposed by the renter (breaking the gas lines / scratching the floor), but completely false as to costs the landlord has to pay regardless. It doesn't matter what the property taxes are; the landlord will rent to you if he makes more money by renting than he would by not renting. If your rent doesn't cover his property taxes, then it sucks to be him - both of those quantities are negative, but you can still rent from him.
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.
When the goal is to have a roof over your head, between renting or buying, the better option is to buy. If the goal is to invest wisely, of course buying a house is worse than say something like an index fund. But the problem is: I can't sleep in an index fund. A house isn't a depreciating asset. Renting is not an asset at all. Mortgages are fixed. Rent tends to frequently increase, skyrocketing at worse.
This article takes the very common scenario: 30 yr mortgage at market interest rate to compare to renting. Even on these terms its still lopsided. What about the people who do 15 year mortgage? What about those with large down payments? What about those who pay a little extra to their mortgage each month?
The overall home market keeps with inflation, but in markets where the land is trending towards scarcity, you are poised to make money as what happened in my first home. I like to think those who were lucky to purchase a house in the valley area before the extreme scarcity made a nice profit if they decided to sell.
The author fails to find a third point: in many cases, owning is cheaper than renting, especially in my city and cities like it. Rent here is around 1300 for a 1 bedroom 500 - 900 sqft apartment, depending on where you live. If you want multiple bedrooms, well now you are in 1800-2000 territory for 1300 sqft. You can own a 1800 sqft house for about 850 a month. You can put away half of your savings from rent for unexpected expenses, and use the other half to pay the mortgage off sooner, or you can spend it, either way it's roughly half the cost.
This is the key thing! Obviously owning is cheaper than renting, as renters have to cover the costs of their landlord owning, and then some profit for them on top of that.
While this is mostly true, it’s important to understand that rents are not just “cost + profit.” They are market based. Sure, the market often pushes it towards something close to that formula, but it is not a guarantee, and many of the subtleties of buying vs renting are lost on those who reduce it to that formula.
Your landlord is probably not buying at the same instant he signs a lease with you, and he could be benefitting from economies of scale that you don't have by purchasing capital, homes, and maintenance services in bulk.
The market tends to decouple from that logic in an appreciating market.
My landlord bought the house I'm in about 10 years ago. His mortgage is a fixed monthly payment that's locked in from when my house was worth less than half it's current value. The rent for where I live tracks really closely to the mortgage rate it'd cost me to buy at it's current valuation. For any investor that bought a rental right now, they'd barely make anything per month. But for my landlord that bought 10 years ago, he nets $1k - $1.5k per month above his costs.
It's also not as straightforward in a depreciating market, either. In a depreciating market, some property owners may rent a property out at a loss, with the expectation that the monthly loss is temporary and less than the loss they'd take it they sold now.
>The market tends to decouple from that logic in an appreciating market.
I don't know how decoupled but I definitely know of cases where someone bought and has a good longterm tenant and that tenant gets a pretty good rate because they're profitable, a known entity, and low maintenance.
In the case of renting a SFH from a random person, that might be kind of true (but not all landlords make money off renting anyway), but consider:
- Your landlord may have a lot more capital to buy homes with no mortgage and the and ability to maintain homes cheaper than you can or remodel homes cheaper than you can.
- Your landlord might be a large apartment complex where the economics are different from SFH.
As sibling comments note, not necessarily due to appreciation being baked into housing costs.
Additionally, the owner and renter may have different risk tolerances where in the renter is comfortable putting cash in the stock market, the owner might want lower-risk, lower-yielding assets.
Finally due to tax distortions, the owner may have a better deal on their own house than a prospective new owner could get.
A house built today of a certain size can be purchased with a lower monthly payment than it can be rented, yes, for exactly the reason you describe.
A house built ten years ago, or twenty years ago, or thirty years ago, can often be rented much more cheaply than a house built today can be purchased.
An apartment of the same size as that hypothetical house might be higher or lower, since the economics of apartment buildings tend to be different.
A 1-bedroom or 2-bedroom apartment can quite often be rented more cheaply than a 3-bedroom house.
"owning is cheaper than renting" is exactly the sort of generalization that gets people into trouble. Every situation is slightly different.
False. Land isn't a depreciating asset, but according to U.S. tax law a house is indeed a depreciating asset.
EDIT: I'll rephrase and say "It's complicated". You can deduct depreciation on a house under some situations because structures are assumed to be depreciating. But a house can still appreciate and when you sell you may be on the hook for gains because of deducted depreciation.
> False. Land isn't a depreciating asset, but according to
To make such a bold refutal will require another source besides what the U.S. tax law says, because US tax law classifications aren't the same thing as market classifications. There are other reasons at play why tax law considers an asset to be of a certain type/category.
I am glad you qualified. Like you said it depends. If you live in downward trending market in a city/town/state where jobs are leaving and aren't keeping your house updated, yes you have a depreciating asset. If you bought in early next to a brand new man-made lake on the outskirts of a major metropolis, you could build a shed and make out like a bandit once the market surges. Most cases fall somewhere in between, on average, keeps up with inflation (the article cites Yale research in this regard). By keeping up with inflation, that by definition makes it not depreciating.
Your point about deduction that is how our economy works. The government pushes you into home ownership. Our economy is based on incentivizing debt. Path of least resistance. Work with your economy, not against it. It isn't hard to see this.
The author described how to calculate the ratio of sale price to average monthly rental to determine if owning is cheaper or more expensive than renting in your area. In some cities (including mine), owning tends to be cheaper. In other cities (including one in which I used to live), renting tends to be cheaper.
Reminds me of a Harvard Daily Stat from 2012, inspired by Zillow data, which comes to a different conclusion. The Zillow data was based on a larger sample size as compared to the article above, which I felt was too qualitative.
The Daily Stat: After Just a Few Years, Home Ownership Beats Renting[1]
In three-quarters of American towns and cities, it takes 3 years or less for a homebuyer to begin seeing savings over the cost of renting, according to a CNN report on data from Zillow[2].
Factoring in such costs as mortgages, rents, down payments,
commissions, taxes, and maintenance, Zillow calculates that the "breakeven horizon" is as low as two years in some areas. But in New York City, which has some of the nation's highest rents, it still takes more than a decade before ownership makes more financial sense than renting.
I'd be curious how that stat changes if weighted by population rather than municipality.
The article acknowledges that the calculus is vastly different for major metropolitan areas like SF or NYC. Thing is - a good portion of the population lives in those major metropolitan areas. It doesn't do much good to know that buying beats renting in, say, Kansas or Tennessee if you happen to live in SF or NYC.
Similarly, I wonder how they'd compare either strategy to the "Move to SF or NYC for 10 years, make bank, live cheaply, then buy 5 houses in Kansas or Tennessee, living in one and renting the rest out. Never work again."
I resisted buying for years, but last year my wife convinced me we should buy a condo and I don’t regret it. We bought a unit with the same square footage as the place we rented, in a better location, and mortgage + property taxes + insurance is less than what we paid in rent, and that rent was only going to continue increasing every year. With a mortgage we fixed our biggest monthly expense.
I think the article did touch on that, and honestly it was a whole big deal just to say "it depends on your situation" and in the associated costs section included break even costs, which I don't think is a good measure.
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% 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 $$$$...
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.
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.
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.
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% 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
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.
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.
I own because I like knowing I can modify my living space however I like. I took out a bedroom to make a home theater, could never do that renting. There are definitely advantages to home ownership psychologically that can’t be defined in a dollar figure.
His main point though was that renting isn’t throwing money away. I say if renting is the better option for you then who cares?
Yep - that was a huge deal for me (wanting workshop/garage space). Apart from that, renters rights can really vary around the world, in Australia it's pretty bad. Depending on the landlord, you can get fairly frequent inspections with as little as 24 hours notice, generally can't have pets, are often on a 6 or 12 month lease and can't always renew (if the landlord sells and the new owners don't want to keep you on...
I much prefer owning, and my interest is $100 less per week than what the previous owners rented my place out for before I bought it. If the value of the house keeps up with inflation by the time I sell I'll be very happy. (We don't have capital gains tax on primary residences either, or land tax so that's nice).
An additional point to remember is that many, perhaps most, landlords will put as little money into their property as possible. After all, it's an investment, not a living space. As a renter, I had problem such as:
* The roof was leaking, and the landlord patched it ... poorly.
* The heat exchanger in the furnace was cracked and letting CO into the living space. He refused to fix it for over two weeks as I fought him. At the time I was young and did not know better, but this literally could have killed us.
* Our microwave broke, and the landlord refused to repair it. I was not allowed to replace it.
* Our water heater failed. It took our landlord over 3 weeks to replace it.
We finally decided to move and were able to purchase a house for $235k that was literally twice the size for $200/mo less than we were paying in rent. We lived there for 7 years and sold it for $417k. I am pretty sure we could not have invested the $200/mo savings (about $17k) for 7 years and made close to $170k in profits.
Look at the author's "history of home prices" graph (that amusingly is from 2006)
The author cites that graph, then goes on to make the claim that housing costs rise with inflation. The graph certainly doesn't look like any reasonable measure of inflation I have ever seen.
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.
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.
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.
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?
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.
Sure, but that's a "the government is giving home owners a tax discount to encourage home ownership" argument, not a "leverage can turn inflation-tracking assets into inflation-beating assets" argument.
As well as most Americans. You can either take the standard deduction of $24,000 as a couple or itemize. Most Americans don't buy homes where the interest is high enough to be over the standard deduction.
> As with all articles on Afford Anything, these high-level concepts can be applied anywhere. But specifics about laws, taxes, inflation, etc., are geared at a United States audience.
So I think it's fair to go ahead and mention US-specific counters to the arguments without specifying.
Not really. The average home price in the US is $200K (https://www.cnbc.com/2017/06/29/what-the-median-home-price-o...). You would have to buy a house with a mortgage of over $500K as a couple to make the interest more than the standard deduction. If you include the $10K cap on state taxes and property taxes, still with the average household income being 60K, most people won't be taking advantage of the mortgage interest deduction.
This used to be a bigger benefit. Now with Trump's new tax law, the standard deduction has been doubled to $24k, so to make it worthwhile to itemize your taxes, you need to pay at least that much in mortgage interest, which equates to a rather expensive house. The new tax law is a really good thing for renters, not so good for house-buyers.
I'm another one who was burned in the real estate collapse, and have been renting ever since. I was definitely not a trump voter, but I have to say his new tax plan looks like it's going to benefit me greatly.
Another thing I've noticed people haven't mentioned here is the freedom that comes with renting. As with many in the tech industry, I don't normally stay at a single job for 20 years, but instead I end up changing jobs every few years. If I buy a house convenient to work, and then end up having to get a new job that's across town, I either have a horrible commute or I rent out my place and go rent a new one. As a renter, I can just give notice and find a new place in a better location.
> 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.
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.
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.
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.
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.
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.
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.
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.
Having been burned badly in the real estate meltdown, there is a lot more freedom in renting than buying. I'm just now getting slightly inclined to consider buying again, but it would have to be a whopping deal. I've enjoyed renting since at least 2010. I especially like the ability to call the landlord and tell them that the sink is leaking and they need to get it fixed. Or the water heater stopped working, come out and fix it... Nothing out of pocket for me.
When it comes to making a trade off for convenience vs. cost, I usually choose cost within reason and I also got burned by the real estate meltdown. I was in no hurry to buy.
But the rent where we were staying went from $1300 to $1800 within 3 years for a 3 bedroom, 1650 square foot apartment. We were able to buy a house, a brand new build 3000 square feet 5 bed/3.5 bath for $2000/month with only 3.5% down in a neighborhood zoned to top rated schools.
As far as convenience, we pay a lawn service $140/month to cut our grass and now that the home warranty is up (paid for by the builder), we pay about $700/year for a "home warranty" when anything breaks you just call them and pay a deductible. Is The warranty a good deal financially? Probably not, but it is convenient.
That is awesome and you are able to buy a house like that, especially a brand new build (to your liking). However, I want to mention it seems you are in the right place at the right time. Your case is an outlier in my opinion and I'm happy you are taking advantage of it. Especially considering that it is in a great school zone. I just felt that this isn't normal, even for the Midwest (which is where i can only imagine you are).
That is a neat 'home warranty' thing you have though. I've never seen that before. Whenever I own a home, that sounds enticing to have.
As far as being an outlier, it's not that our case is just an outlier, so is our house. We had to move further out into the suburbs to get that price. It's not a bad commute.
I'm not endorsing this particular provider. It's just the first one that comes up when you Google "Home Warranty"
When I was a landlord and owned three rental properties they were worth every penny.
Let me emphasize that buying one is statistically not a good deal and it usually makes more sense just to "self insure" and save for repairs. But it is more of a convenience thing.
Yes, but the rent will keep rising with market prices and we were living in the most sought after part of town -- the most affluent city in the state. The mortgage will never increase and is excellent inflation hedge. The property taxes may increase slowly but after 5-7 years, we can get rid of the approximate $300 a month in PMI.
We also have 1300 more square feet, a separate house with a yard instead of an apartment, 2 more bedrooms, 1-1/2 more baths, a separate office and we don't pay the mandatory $100 a month for crappy cable and capped internet from Comcast -- as part of the lease, you had to pay for cable. We pay $70 a month for gigabit internet from AT&T.
Heck I save $80/month by getting rid of my gym membership and converting one of the spare bedrooms to a gym.
> there is a lot more freedom in renting than buying
There are varying definitions of "freedom" to consider.
Sure, there is the freedom of being able to walk away after 12 months to someplace else.
But there is also the freedom of being able to plant a garden, or paint your room, or install shelving, or excavate a root cellar, or install a new doorknob, etc, without having to get express written permission from your landlord (which will almost always be no).
That is almost the entire reason that I like owning. The kitchen looks like I want it to look, the walls are the color I want them to be, the doorbell is wifi, I have a Nest thermostat, and if I don't like that there's a peach tree in the front yard I have it removed (true story!).
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.
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.
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...
If you budget with $1k/yr for maintenance you're in for a bad ride. If you go with something like $2/sqft*year from the house is build, you're closer. But buy any 10-20 year old house and it will be far higher.
I would agree with your evaluation and propose an even more accurate prediction would include the aspect that a 50 gallon water heater or a dishwasher costs the same regardless of 1500 sqft or 6000 sqft so the ideal formula is probably some linear equation with a fixed amount plus a sqft amount. $1500 plus $1/sqft per year maybe a good start.
I 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.
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.
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.
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.
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've owned a non-new home for a few years now. I have all the records of repairs/maintenance. So far the average is less than $130/mo (that includes buying two microwaves and a washer)
My roof needs to be reshingled. That'll cost about $6K (got a bunch of estimates from roofers). Maybe $12K 20-30 years down the road for a full replacement. That'll likely be my biggest expense, which is not even $1K/yr, let alone a month.
My other appliances are old. Once I replace them, it will bump the average to at most $200/mo.
I don't do any repair work myself - always pay to get it done. You either have a huge house or live in a very expensive area (mine is above the national average).
Plumbing work, electrical work, trees that need trimming, kitchen or bathroom remodels (which may not be absolutely necessary but are part of a house not getting more and more rundown), painting, replacing windows and doors, furnace work including annual cleaning, etc. In a newer house in good condition, it may be less than $1K/month but it does add up over time. A lot of maintenance can be deferred but over 10+ years, there's a lot that needs to be done eventually.
How often is this needed? Unless your house is so old and not up to code...? To give you an idea, I lived in a place for 2 decades and it never needed electrical work.
>trees that need trimming
It's your property - you control how many trees and how big. If it's too costly just get rid of them. Having said that, I just trimmed two trees on my property over a month ago. An hour or two of work and the right tool. Of course, if my trees were much bigger I'd have to pay someone.
BTW, I did not assume yard work as part of the amount per month. Of course, everything (including HOA, yard, etc) needs to be factored in, but I thought you were talking only about maintenance of the house.
>kitchen or bathroom remodels
How often? My house is almost 20 years old and I can see it going at least another 20 years before any such work is needed.
>painting
I assume you mean exterior? I guess - how much you need depends on the type of house. Mine uses vinyl sidings - no paint needed. But yes, you need to paint a few other parts. For my house, this is once every so many years - and the estimate I got was under $1000.
>replacing windows and doors
20 years old and look like new - I think mine will last another decade or two.
>furnace work including annual cleaning
I get my furnace tuned every year - costs $85. I included that in my estimate of less than $130/mo. Don't forget water heater maintenance too!
As I said, I'm not pulling numbers out of nowhere. I actually did this analysis some months ago. I have all the numbers on how much I've spent repairing stuff and maintenance in my software. I added it all up and calculated the number I gave you. It was actually $100/mo, but since then I think I've replaced two appliances so I bumped it up to $130 (total cost of the appliances + install is under $1000 - divide it up by 48 months I've lived there).
I’m giving you my numbers as well. I haven’t kept close track but with big projects—which have included improvements—it’s been something more than $1k per month. But then it’s 200 years old and was in serious maintenance debt when I bought it.
>But then it’s 200 years old and was in serious maintenance debt when I bought it.
That's a pretty big disclaimer that you probably should have mentioned up front. Your choice of house is far from typical, and they make the costs some standard deviations from typical.
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.
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.
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.
I’m not following the leveraged point - why is a 3% increase equal to 15% growth?
In the Bay Area HOA fees plus property tax add up to nearly my existing rent even before considering a mortgage which has made me nervous to buy. I’d be banking entirely on the upward trajectory of the market for it to be a better bet than renting with roommates.
You have $100 - you buy a house worth $500. House goes up 3%, it is now worth $515. You invested $100, and have $115 in equity. Growth 15%. (that is ignoring other costs, obviously - just an attempt to explain the maths).
That is the power of leverage - you grow on the bit you own as well as the bit you owe.
Yes, but the purchase and loan are in nominal dollars. Taking GP's example numbers, a $500 house, bought with a $100 downpayment, in a house and general inflation environment of 3%pa, and an interest-only mortgage (to make the math napkin friendly)
You start with $100.
You buy a $500 house. $0 cash, $500 in asset, -$400 in liability.
A year passes. $0 cash, $515 in asset, -$400 in liability.
A year passes. $0 cash, $530.45 in asset, -$400 in liability.
After 30 years, $0 cash, $1213.63 in asset, -$400 in liability.
That $100 turned in ~$814 of equity in 30 years. That equity has the purchasing power as today's $335. Even though inflation and asset prices rose by 3%, your $100 grew in purchasing power at a CAGR of 4.11%.
Contrast that with an unleveraged investment that also rose exactly with 3% inflation.
You start with $100.
You buy a $100 bond. $0 cash, $100 in bond.
A year passes. $0 cash, $103 in bond.
A year passes. $0 cash, $106.09 in bond.
After 30 years, $0 cash, $242.73 in bond.
Unsurprisingly, that $243 30 years from now has the same purchasing power as $100 today.
Your math ignored both maintenance and property tax on the home. Let's say maintenance costs 1% a year and property tax is 3.5% a year. I'm choosing both numbers lower than likely reality to give your position an advantage and let's say that advantage covers any income tax benefit of paying the property tax. After those 30 years you have a $1214 asset that you've put a bit over $1170 into - that's the original $100 plus about $238 in maintenance and about $833 in property taxes. So your $100 investment has grown by about $44 while the stock investment in your example, after deducting 20% in cap gains, has grown by about $114.
The house by itself is a bad investment, factoring in mortgage interest makes it even worse, then factoring in not paying rent makes it significantly better. How much worse or better it is in the final analysis depends on factors that are outside of many our controls - jobs, family, local market, etc. The decision is not quite as cut & dry as many on this thread make it out to be.
Mostly because I can’t afford to buy anything big enough where I could have roommates (I haven’t been able to convince friends to go in on a place with me and don’t have super rich family).
I’d also have to buy far from Palo Alto which makes the commute worse and roommate finding harder.
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.
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.
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.
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."
The article states that since 2009 the stock market has tripled while housing markets have doubled. I'm just reassessing that example with 5x leverage.
I find it hard to believe if even the majority of housing markets have doubled. Economic growth mostly seems contained to a few established and up and coming cities.
Yeah one flaw with the OP is that you can’t compare against average housing returns. Buying a house or condo in Silicon Valley or New York is going to out perform the average due to supply, demand, and geography.
The OP is essentially really saying buy a total stock market fund instead of REIT, which isn’t that controversial.
In this case I'd argue that apples is "what an average person would do". That's the comparison the article is making.
Millions of Americans are leveraged in their homes. Relatively few trade on margin. I think that makes it a valid comparison, even if it's not a fair comparison.
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.
Leverage cuts both ways, though. As someone who just sold their house, the costs are a percent of the sale. You don't get taxed on the sales (generally) but you will probably have to pay real estate sales costs. So yes, if your home increases by 3%, you've gained 15% growth on your investment, but if the sale cost is 5% of the the sale price, then things aren't so clear anymore.
The real calculation is the total monthly cost of ownership plus any sale prices on the buying and selling ends over the period, relative to the total costs of renting.
Over the 10 years we've owned our home, yes, it's been worth it to buy, because we can recoup money that would have gone to someone else.
However, over a short period, the sales costs would dwarf any returns we would get.
The sales costs are largely fixed on both ends, as a percent of home value, and diminish as a total percent of gains over the period of ownership. So the period of ownership is relevant.
This in turn is relevant because your mobility becomes relevant.
The previous market we were in too, was so overpriced relative to the rental cost that we actually saved money over the period by renting rather than buying. Then the Great Recession happened.
Either strategy makes sense depending on your mobility risk and the market. I don't think it's clear that one or the other is generally better.
> This in turn is relevant because your mobility becomes relevant.
you don't need to sell, just rent out the apartment when you move.
With the rental income, you can pay for a similarly priced location in the new place. Then, when the market fits, make the sale, and you've lost very little (if anything), except upkeep costs due to rental damage, etc.
You say just rent it out like renting doesn't have its own downsides like finding decent tenants, dealing with repairs, having to carry the mortgage when you have vacancies, dealing with evictions when they don't pay.
Even in a landlord friendly state it can take 2-3 months to evict someone for non payment. In some states I've heard that it can take a year.
This is also the downside of renting -- the other tenants can be lousy. Banks know this and will not lend in buildings without a minimum rate of owner occupied units.
I'd guess that one of the reasons home prices in 'nice' neighborhoods are so high (or HOAs charge high dues) is a sort of signaling, similar to nuptial gifts in animals, that you have your act together and are invested in being a good neighbor.
I could never see myself buying anything that's not a detached house. It seems like you have too many of the downsides of renting. When I was living in an apartment, a never once said, "if only I could buy this place and have to deal with people on each side of me".
But as far as buying in a high priced area or even renting in a high priced area, price does provide a filter.
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.
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.
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.
> 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.
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.
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.
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)
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.
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.
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.
Rent payments are set high enough to pay the owner's mortgage and give them a profit. If you already need to pay a mortgage, why not buy the house to get the interest deductions and equity?
Rent can never be lower than mortgage payments for the same property because then the bank would never give out mortgages and would just buy up all the properties.
Rent can be higher than the mortgage payment of a portion of the house, but not to the mortgage payment of the entirety of the house.
Rent can never be lower than mortgage payments for the same
property because then the bank would never give out
mortgages and would just buy up all the properties.
That's not how things work. Banks give out mortgages based upon the repayment ability and credit-worthiness of each borrower. The mortgage amount won't be too far out of line of comparables.
---
Rent can be higher than the mortgage payment of a portion
of the house, but not to the mortgage payment of the
entirety of the house.
Who says so? Even one tenant in a multi-family home can pay for the entirety of the mortgage.
If you own and rent out a single-family home, you most certainly can charge rent higher than the entirety of your mortgage payment! Sometimes, landlords without mortgages rent out their property...
> That's not how things work. Banks give out mortgages based upon the repayment ability and credit-worthiness of each borrower. The mortgage amount won't be too far out of line of comparables.
The banks most trusted debtor is itself: if buying up property were so fruitful with no labor and above rent the bank would not need to invest a single dime into offering mortgages and would just buy the houses itself.
> Who says so? Even one tenant in a multi-family home can pay for the entirety of the mortgage.
Its just logical: if money is cheaper to borrow than to pay rent, then nobody pays rent and all borrow money. Fundamentally the one that can do this the most is the bank.
What is often not taken into account in terms of landlorship is that you have occupancy rates, brokers that have to find you clients, communication with tenants, etc etc. But even accounting for moderate work, if the mortgage had a lower rate than the cost of rent, and no cost of acquisition, there would be no renters.
People often don't take property cycles in to account and they can be a huge factor in many markets and semi predictable. When stuff is cheap (price to wages) and going up buying is a no brainer. When it's expensive and topping out its questionable.
The New York Times has a fairly detailed rent-vs-buy calculator that makes it easy to see the effects of changing some of the variables the author talks about in the article.
Yeah, running that tool produces exactly the opposite conclusion from the article. Renting is easily 50% higher than the break-even price provided.
An interesting experiment: go back and use the article's numbers for "what does the future hold?" That is, 2% home price growth, 2% rent growth, 8% investment returns. For me, those numbers say I could rent for $5,000 and come out ahead. Using the recent-history numbers for where I live, the price craters to $1,500.
I know the article says "circumstances may vary" a dozen times, but I think it's still pretty misleading, especially the P/R section. High and rising housing prices go hand in hand with large rent increases, and rent growth dominates pretty much everything else in this calculation.
I live outside of DC now and it's very expensive. Rent is constantly being pushed up and up, no matter how good of a tenant you are. I'm hoping to buy again later this year to lock in a stable monthly payment.
This is sadly a bit outdated - the 2018 tax code changes significantly hit the owning case in certain markets and the NYT calculator may view owning as ~10% better than it should be for high-income married individuals.
There's another intangible benefit to owning if you know you're going to stay in the area long term -- you can't be forced out of your home.
I was forced out of one home I rented due to owner move-in, which led to a stressful 30 days of trying to find a new apartment in a tight housing market. We managed to find a place outside of the city, but close enough to transit for a manageable commute. And rent was about the same, though for an apartment half the size.
And then, as housing prices continued to rise, that apartment raised the rent 25%. Fortunately, they gave us 60 days notice, so we started looking around for an affordable home to purchase (even farther away, but still near transit), and found one where the PITI+HOA was less than the new rent would have been.
Rents have continued to rise (as have home prices, our home is now worth about twice what we paid for it 5 years ago, this market doesn't seem sustainable, but hopefully after the next crash we won't be underwater on the mortgage).
There's another intangible benefit to owning if you know you're going to stay in the area long term -- you can't be forced out of your home.
Well, you can. The city decides to put in a new subway line and your house is where they want to build a station. Or (depending on your local laws) the other members of your strata corporation vote to sell the building to a developer who wants to tear it down and build a tower.
But sure, it's far less common for someone to be forced out of a home they own, and when it does happen there's typically years of notice.
Well, in that very obscure case, you are generally legally obligated to something like 110% of market value, so you can't really compare that to e.g. being thrown out because tony said so..
They're currently closing down one and moving one town respectively in my county. It doesn't matter if you own or rent here, not when there's ore in the ground.
There's other intangible benefits too. Buying a house is enforced saving. When people have money spare they typically spend it. If as the author suggests people instead invest in the stock market there is constant temptation not to put the money in there in the first place or take the money out because you want to buy something shiny.
You can use owning a home as a way of bringing stability. So instead of making plans for a year at a time you can make 5 year plans based on living where you are.
However there's a quote from 'Rich Dad Poor Dad' [0] that your primary residence is a liability. So where as it makes sense to buy there's no point in buying a massive expensive house because it doesn't bring in any income. Buy one that fits your needs with possibly some minimum room for expansion.
That's one of the further benefits of having bought - if you find the perfect area but your family expands you can modify the house that you're in and stay in exactly the same place.
I think that enforced saving is one of the biggest advantages.
Separately, where I live in Australia, there are transactional costs (mostly stamp duty) that make getting in and out of a house a bit of an extra imposition. I remember about 20 years ago, it was suggested that (generally speaking) if you were likely to stay put for about 5+ years, you were better off buying than renting. Otherwise, typically blue chip buys on the stock market with the discipline to keep investing was a better bet.
This is an important piece that is often overlooked. My wife and I rented a house in 2010 from a builder who wasn't able to sell it after the property bubble burst. After our first year term was up, they agreed to renew the lease, only to call us back a week later and say that "although the mortgage was current on the property, the bank was calling up the loan" and that we needed to vacate in 30 days. (Our best guess is that the bank decided to seize the house due to non-payment of another mortgage held by the company.)
As a result we had to scurry to find another house available for rent, which put us in a terrible position to comparison shop or negotiate on the rent. We were fortunate enough to find something that would work for us, but I think we overpaid substantially for a few years.
Renting or owning from a purely financial point of view is a relatively straightforward problem and is answered quite nicely with the NY Times Rent vs. Buy calculator (with the caveat that the calculator has not been updated to reflect the new tax laws).
That being said, the biggest reasoning mistakes I run across are:
1. "You pay the landlords expenses plus some profit." Not true. The rental market is just that - a market that fluctuates with supply and demand. There are plenty of landlords who are losing money on their rental property.
2. "Once I have paid off my house I'm done paying for housing." Not true - you still have taxes, insurance, and maintenance whose costs will most likely increase over time.
3. Forgetting about the opportunity costs. Great - you paid off your mortgage. Now you have $500k in equity. Guess what - if you took that $500k and put it in a 5 year treasury you can earn a risk free 3% or 15k/year on that money. Better yet stick it in a broad based index fund and you will grow 6% albeit with more risk. That's your opportunity cost of your equity.
Overall this is such an emotional subject for most. I'm personally glad to see some push-back on the "buying is always better" argument because its been dogma for some time.
> There are plenty of landlords who are losing money on their rental property.
Only until your current lease term expires, at which point your housing costs will unexpectedly rise (and sometimes quite dramatically). Unless you live in such an undesirable location that the landlord is desperate for any tenant, they aren't crazy enough to agree to a lease on which they'll lose money.
Not true. Landlords may prefer to forgo a new tenant and keep rent increases reasonable for many reasons. The cost of tenant turnover can be very high. They may not want to take the risk of a new tenant over a know good tenant. The local rental market may not support a rent increase.
I have been a landlord and not raised rents many times. I have also been a renter and have had no rent increases or very modest rent increases for many years while renting.
To be fair, I know a ton of people in their 20s who took advice from people in their 60s and now have mounds of student debt and no career.
I'm not saying buying a home won't work out well. I'm just saying that the baby boomers seem to have had a unique path towards financial stability that doesn't appear to be sustainable for the generations that followed.
You're ignoring the folks where that doesn't work out.
I had plenty of friends who lost $100K down payments during the housing crisis and are now starting all over again. The ones who rented had zero issues.
496 comments
[ 4.1 ms ] story [ 575 ms ] threadNot everyone can afford such a situation and the new Trump tax changes don't help either. Just saying "I should rent" is irresponsible because you think you're bumping the state pension funds. When you rent you're helping an owner pay off their mortgage as well as the very taxes to pay that pension fund.
Is there any particular neighborhoods you're willing to share?
One major concept that breaks the traditional buy/rent arguments is that today we have the internet which creates a new type of opportunity: to work in a different city than where the company is physically located. This greatly changes the dynamic and enables new types of opportunities. Want to see the world? Then don't buy because you could live in 10 countries over 10 years for the same price (or maybe even cheaper depending on where you would have bought).
Point being, there are times where buying is the responsible decision, but renting can also at times be the smart decision. Don't let articles like this influence your decision. Make a spreadsheet, really dig into what are the pros/cons. I've helped many friends do this, and sometimes buying was the right decision, and sometimes it wasn't. What are your life goals? What are your investment goals? There are so many variables at play.
Do what's best for you. I rented for 12 years before I bought. If I had bought earlier, I would have been less likely to move...moving helped me advance my career more quickly but meant I rented longer. In the long run that was the right thing for me as I was able to buy a bigger place in a more expensive area (NYC vs Dallas). For others that might not have been important or necessary. Just because one person has a negative experience doesn't mean that you will to. The responsible thing to do is to understand what _you want_ and make sure you're making the right decisions to make that happen. Buy or rent based on that, not the other way around!!!
I think the article very adequately explained exactly what you're talking about. Did you read it all the way through? It's pretty long, but she definitely covers how individual situations vary. Her whole point is that buying based off of a cliche is wrong, and every person owes it to themselves to analyze their own situation to make that decision.
But it's an old enough place that repair issues aren't just inconvenient - there's a possibility of serious damage, made incredibly expensive to address by historical preservation laws. If the owners get unlucky, they might well be on the hook for repairs costing much of the value of the house.
It's been on my mind a lot, and I really can't imagine buying a place of that age and expense. Either I'd be gambling on 100 year old fixtures, or the amount of money I'd need earmarked for repairs would more than wipe out the savings of renting.
It also ignores many of the other benefits of owning, such as having a lot more say over what you do with the propert and not always having to worry about rent increases or what happens when the lease ends.
The rent vs buy equation is never black and white but this article comes across as quite one sided.
The author literally states that they are a homeowner themselves.
https://affordanything.com/how-we-made-43211-67-in-passive-i...
They also tend to ignore that mortgage repayments remain static while rent goes up, that interest payments goes down if you pay in advance (offset accounts) and that once it's all payed off your rent is $0.
A mortgage for a home within my means is one of the best financial decisions I've ever made.
Wouldn't that actually make the trade-off worse as instead of putting money into a high-return asset (stocks) you directed it to a lower-returning asset (housing)?
That said, mortgage interest is tax deductible, which lead to a decent refund this year. So assuming you’re not withholding income at your effective tax rate (but the usual 25-30%) you’ll get a fair amount of it back, which I don’t believe you would if you rent.
So yes, mortgages are throwing away money as well (less equity and reduction in tax liability)
The friend stops and says, "Look, there is a $20 bill on the ground!"
The economist turns and coolly replies, "Can't be. If there was a $20 bill on the ground, somebody would have already picked it up."
Also, I should mention that this is the zero arbitrage principle and not the efficient market hypothesis. The efficient market hypothesis asserts that everything we know about the future value of a house is reflected in the current price of the house, which is also relevant to the discussion, but not what I was referring to.
You're going to have a tough time finding a homeowner who will let you live in their house for less than their costs.
That is true as to costs imposed by the renter (breaking the gas lines / scratching the floor), but completely false as to costs the landlord has to pay regardless. It doesn't matter what the property taxes are; the landlord will rent to you if he makes more money by renting than he would by not renting. If your rent doesn't cover his property taxes, then it sucks to be him - both of those quantities are negative, but you can still rent from him.
This article takes the very common scenario: 30 yr mortgage at market interest rate to compare to renting. Even on these terms its still lopsided. What about the people who do 15 year mortgage? What about those with large down payments? What about those who pay a little extra to their mortgage each month?
The overall home market keeps with inflation, but in markets where the land is trending towards scarcity, you are poised to make money as what happened in my first home. I like to think those who were lucky to purchase a house in the valley area before the extreme scarcity made a nice profit if they decided to sell.
The author fails to find a third point: in many cases, owning is cheaper than renting, especially in my city and cities like it. Rent here is around 1300 for a 1 bedroom 500 - 900 sqft apartment, depending on where you live. If you want multiple bedrooms, well now you are in 1800-2000 territory for 1300 sqft. You can own a 1800 sqft house for about 850 a month. You can put away half of your savings from rent for unexpected expenses, and use the other half to pay the mortgage off sooner, or you can spend it, either way it's roughly half the cost.
This is the key thing! Obviously owning is cheaper than renting, as renters have to cover the costs of their landlord owning, and then some profit for them on top of that.
My landlord bought the house I'm in about 10 years ago. His mortgage is a fixed monthly payment that's locked in from when my house was worth less than half it's current value. The rent for where I live tracks really closely to the mortgage rate it'd cost me to buy at it's current valuation. For any investor that bought a rental right now, they'd barely make anything per month. But for my landlord that bought 10 years ago, he nets $1k - $1.5k per month above his costs.
It's also not as straightforward in a depreciating market, either. In a depreciating market, some property owners may rent a property out at a loss, with the expectation that the monthly loss is temporary and less than the loss they'd take it they sold now.
I don't know how decoupled but I definitely know of cases where someone bought and has a good longterm tenant and that tenant gets a pretty good rate because they're profitable, a known entity, and low maintenance.
- Your landlord may have a lot more capital to buy homes with no mortgage and the and ability to maintain homes cheaper than you can or remodel homes cheaper than you can.
- Your landlord might be a large apartment complex where the economics are different from SFH.
Additionally, the owner and renter may have different risk tolerances where in the renter is comfortable putting cash in the stock market, the owner might want lower-risk, lower-yielding assets.
Finally due to tax distortions, the owner may have a better deal on their own house than a prospective new owner could get.
The Bay Area is an example where renting is much cheaper than owning: https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...
A house built ten years ago, or twenty years ago, or thirty years ago, can often be rented much more cheaply than a house built today can be purchased.
An apartment of the same size as that hypothetical house might be higher or lower, since the economics of apartment buildings tend to be different.
A 1-bedroom or 2-bedroom apartment can quite often be rented more cheaply than a 3-bedroom house.
"owning is cheaper than renting" is exactly the sort of generalization that gets people into trouble. Every situation is slightly different.
My landlord bought the condo I live in 10 years ago when it was worth maybe 30% of what it is today.
My rent right now is ~40% of what my mortgage would be if I bought the place.
We're both happy!
False. Land isn't a depreciating asset, but according to U.S. tax law a house is indeed a depreciating asset.
EDIT: I'll rephrase and say "It's complicated". You can deduct depreciation on a house under some situations because structures are assumed to be depreciating. But a house can still appreciate and when you sell you may be on the hook for gains because of deducted depreciation.
To make such a bold refutal will require another source besides what the U.S. tax law says, because US tax law classifications aren't the same thing as market classifications. There are other reasons at play why tax law considers an asset to be of a certain type/category.
I am glad you qualified. Like you said it depends. If you live in downward trending market in a city/town/state where jobs are leaving and aren't keeping your house updated, yes you have a depreciating asset. If you bought in early next to a brand new man-made lake on the outskirts of a major metropolis, you could build a shed and make out like a bandit once the market surges. Most cases fall somewhere in between, on average, keeps up with inflation (the article cites Yale research in this regard). By keeping up with inflation, that by definition makes it not depreciating.
Your point about deduction that is how our economy works. The government pushes you into home ownership. Our economy is based on incentivizing debt. Path of least resistance. Work with your economy, not against it. It isn't hard to see this.
The Daily Stat: After Just a Few Years, Home Ownership Beats Renting[1]
In three-quarters of American towns and cities, it takes 3 years or less for a homebuyer to begin seeing savings over the cost of renting, according to a CNN report on data from Zillow[2].
Factoring in such costs as mortgages, rents, down payments, commissions, taxes, and maintenance, Zillow calculates that the "breakeven horizon" is as low as two years in some areas. But in New York City, which has some of the nation's highest rents, it still takes more than a decade before ownership makes more financial sense than renting.
[1] Harvard Daily Stat, 9/12/2012 [2] http://money.cnn.com/gallery/real_estate/2012/09/06/buy-rent...
The article acknowledges that the calculus is vastly different for major metropolitan areas like SF or NYC. Thing is - a good portion of the population lives in those major metropolitan areas. It doesn't do much good to know that buying beats renting in, say, Kansas or Tennessee if you happen to live in SF or NYC.
Similarly, I wonder how they'd compare either strategy to the "Move to SF or NYC for 10 years, make bank, live cheaply, then buy 5 houses in Kansas or Tennessee, living in one and renting the rest out. Never work again."
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.
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.)
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!)
All kidding aside, yes, the high transaction costs are a real break on speculation in the housing market there.
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.
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
His main point though was that renting isn’t throwing money away. I say if renting is the better option for you then who cares?
I much prefer owning, and my interest is $100 less per week than what the previous owners rented my place out for before I bought it. If the value of the house keeps up with inflation by the time I sell I'll be very happy. (We don't have capital gains tax on primary residences either, or land tax so that's nice).
* The roof was leaking, and the landlord patched it ... poorly.
* The heat exchanger in the furnace was cracked and letting CO into the living space. He refused to fix it for over two weeks as I fought him. At the time I was young and did not know better, but this literally could have killed us.
* Our microwave broke, and the landlord refused to repair it. I was not allowed to replace it.
* Our water heater failed. It took our landlord over 3 weeks to replace it.
We finally decided to move and were able to purchase a house for $235k that was literally twice the size for $200/mo less than we were paying in rent. We lived there for 7 years and sold it for $417k. I am pretty sure we could not have invested the $200/mo savings (about $17k) for 7 years and made close to $170k in profits.
The author cites that graph, then goes on to make the claim that housing costs rise with inflation. The graph certainly doesn't look like any reasonable measure of inflation I have ever seen.
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.
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.
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.
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.
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.
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?
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.
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".
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:
does foo being false "break" the if statement? In a mortgage, it is (vastly simplified): 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.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.
> 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.
The standard deduction is $24K for a couple.
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.
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 even if you keep the exact same mortgage and bank.
The difference between owning and renting expenses, is what you should compare to the risk/reward analysis of the property value.
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.
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.
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.
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.
The owner is harmed, because otherwise they could have gotten a new tenant and raised the rent back up to market rate.
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.
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.
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 a neat 'home warranty' thing you have though. I've never seen that before. Whenever I own a home, that sounds enticing to have.
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.
Instead of paying the $1,800/month, you are now paying $2,200/month.
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 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).
You may as well do 7/1 ARM or 7 year IOM and treat it as rent.
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.
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.
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 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.
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.
Hoses are quite the racket. Because of where I put the washer, I had to get extra long ones.
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
I hire out most renovation, but don’t hire gardeners, etc. If you want a hands free lifestyle, that’s awesome but costly.
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.
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.
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.
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.
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'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).
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).
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.
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.
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%
The real point of the article stands. "Run your own numbers"
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.
> 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.
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.
That is the power of leverage - you grow on the bit you own as well as the bit you owe.
Contrast that with an unleveraged investment that also rose exactly with 3% inflation.
Unsurprisingly, that $243 30 years from now has the same purchasing power as $100 today.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.
Why not both?
I’d also have to buy far from Palo Alto which makes the commute worse and roommate finding harder.
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.
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.
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.
Yes, individuals should get to deduct their property taxes... but only after they start paying income tax on imputed dividends.
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."
Source: https://news.ycombinator.com/newsguidelines.html
Was that a typo? Average market returns are much higher than that.
The OP is essentially really saying buy a total stock market fund instead of REIT, which isn’t that controversial.
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.
There is a section in the article about 'opportunity cost' which covers this.
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.
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.
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.
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.
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.
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.
But as far as buying in a high priced area or even renting in a high priced area, price does provide a filter.
Owning things adds friction one way or another.
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.
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.
If you don't have 100+ hitmen with guns, 5 lawyers and a politician in your back pocket always assume they come after you.
Don't forget that leverage works both ways; it magnifies the downside as well.
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)
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.
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.
Rent can be higher than the mortgage payment of a portion of the house, but not to the mortgage payment of the entirety of the house.
---
Who says so? Even one tenant in a multi-family home can pay for the entirety of the mortgage.If you own and rent out a single-family home, you most certainly can charge rent higher than the entirety of your mortgage payment! Sometimes, landlords without mortgages rent out their property...
The banks most trusted debtor is itself: if buying up property were so fruitful with no labor and above rent the bank would not need to invest a single dime into offering mortgages and would just buy the houses itself.
> Who says so? Even one tenant in a multi-family home can pay for the entirety of the mortgage.
Its just logical: if money is cheaper to borrow than to pay rent, then nobody pays rent and all borrow money. Fundamentally the one that can do this the most is the bank.
What is often not taken into account in terms of landlorship is that you have occupancy rates, brokers that have to find you clients, communication with tenants, etc etc. But even accounting for moderate work, if the mortgage had a lower rate than the cost of rent, and no cost of acquisition, there would be no renters.
https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
An interesting experiment: go back and use the article's numbers for "what does the future hold?" That is, 2% home price growth, 2% rent growth, 8% investment returns. For me, those numbers say I could rent for $5,000 and come out ahead. Using the recent-history numbers for where I live, the price craters to $1,500.
I know the article says "circumstances may vary" a dozen times, but I think it's still pretty misleading, especially the P/R section. High and rising housing prices go hand in hand with large rent increases, and rent growth dominates pretty much everything else in this calculation.
shameless plug for my own: https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul...
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).
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.
An earthquake related eviction is probably most likely, but that'd be the case whether I own or rent.
Some propaganda from LKAB for the interested: https://samhallsomvandling.lkab.com/en/
30 days seems really short for owner move-in; CA is 60 days (at least if you've been there a year)
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...
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.
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.
Depends on the regulations in your state and the rules of your HOA.
That being said, the biggest reasoning mistakes I run across are:
1. "You pay the landlords expenses plus some profit." Not true. The rental market is just that - a market that fluctuates with supply and demand. There are plenty of landlords who are losing money on their rental property.
2. "Once I have paid off my house I'm done paying for housing." Not true - you still have taxes, insurance, and maintenance whose costs will most likely increase over time.
3. Forgetting about the opportunity costs. Great - you paid off your mortgage. Now you have $500k in equity. Guess what - if you took that $500k and put it in a 5 year treasury you can earn a risk free 3% or 15k/year on that money. Better yet stick it in a broad based index fund and you will grow 6% albeit with more risk. That's your opportunity cost of your equity.
Overall this is such an emotional subject for most. I'm personally glad to see some push-back on the "buying is always better" argument because its been dogma for some time.
Edit: fixed typo
Only until your current lease term expires, at which point your housing costs will unexpectedly rise (and sometimes quite dramatically). Unless you live in such an undesirable location that the landlord is desperate for any tenant, they aren't crazy enough to agree to a lease on which they'll lose money.
I have been a landlord and not raised rents many times. I have also been a renter and have had no rent increases or very modest rent increases for many years while renting.
The ones who made a point to buy instead of renting their entire lives are laughing all the way to the bank.
The ones who are still renting are still working nearly full time and will probably be doing so until the day that they die.
Buying and committing to a mortgage forces you to save money for your future, plain and simple.
To be fair, I know a ton of people in their 20s who took advice from people in their 60s and now have mounds of student debt and no career.
I'm not saying buying a home won't work out well. I'm just saying that the baby boomers seem to have had a unique path towards financial stability that doesn't appear to be sustainable for the generations that followed.
I had plenty of friends who lost $100K down payments during the housing crisis and are now starting all over again. The ones who rented had zero issues.