Is it better to buy or rent?(nytimes.com)
nytimes.com
Is it better to buy or rent?
http://www.nytimes.com/interactive/2015/06/17/upshot/100000002894612.app.html?smid=fb-nytimes&smtyp=cur&_r=0
104 comments
Important comment from an earlier thread: don't ignore the human factor. Buying instead of renting forces you to live more frugal, which is a reason why people who buy are often better off financially when they retire.
> Buying instead of renting forces you to live more frugal
As a home owner, I'm going to ask someone to elucidate on this sentiment.
As a home owner, I'm going to ask someone to elucidate on this sentiment.
Here is my take....
1. People think they can afford to buy a place at $X
2. People find a place at $X+Y and say "it'll be tough, but I love this place"
3. People find out actually owning a house costs $X+$Y+$Z and they can barely make their house payments and supporting costs
4. Eventually (after enough mortgage payments) your principal payments become large enough to take on the form of "forced savings"
I think this might work for some, but there are plenty of examples where people lose their homes because they underestimated the costs. Someone get sicks and goes on LT disability at 60% of their salary and end up missing mortgage payments.
1. People think they can afford to buy a place at $X
2. People find a place at $X+Y and say "it'll be tough, but I love this place"
3. People find out actually owning a house costs $X+$Y+$Z and they can barely make their house payments and supporting costs
4. Eventually (after enough mortgage payments) your principal payments become large enough to take on the form of "forced savings"
I think this might work for some, but there are plenty of examples where people lose their homes because they underestimated the costs. Someone get sicks and goes on LT disability at 60% of their salary and end up missing mortgage payments.
This is not the reality for the vast majority of homeowners. Banks are very good at estimating these costs, and they will decline loans that are too large for the homeowner to maintain a financial margin of safety.
I anticipate the objection that the financial crisis proves me wrong. Well, even at the worst of the crisis, annual foreclosure rates were under 10% (i.e. 90+% of mortgages were stable). And, banks have certainly further tightened up their underwriting since then.
I anticipate the objection that the financial crisis proves me wrong. Well, even at the worst of the crisis, annual foreclosure rates were under 10% (i.e. 90+% of mortgages were stable). And, banks have certainly further tightened up their underwriting since then.
Even in this case, isn’t there a reasonably good chance the person could have sold it for 10% more than ($X+$Y+$Z)[1] at the time of the crisis? The lender and the loaner will part with the equity based on the mortgage payments over the years.
Based on cursory look into Redfin data, homes in the Bay Area are vanishing in 5-12 days, selling at 100-300K above the listed price.
[1] I hope we don’t cite recession here.
Based on cursory look into Redfin data, homes in the Bay Area are vanishing in 5-12 days, selling at 100-300K above the listed price.
[1] I hope we don’t cite recession here.
In the bay area over the last 5 years? Sure.
Across much of the US? Probably not. Don't forget the average cost of selling a house is 6%. Buy a place for $500K and if the value of the house doesn't go up by at least 6% you've lost money.
That doesn't include all the other costs associated with buying a new house (moving costs, etc).
Across much of the US? Probably not. Don't forget the average cost of selling a house is 6%. Buy a place for $500K and if the value of the house doesn't go up by at least 6% you've lost money.
That doesn't include all the other costs associated with buying a new house (moving costs, etc).
Not to mention loan origination fees, appraisals, and inspections costs.
Forgive me, I was very biased toward Bay Area.
The idea is that you are contractually constrained to invest into a long-term asset (the house) on a monthly basis. In principle people who rent are paying less each month and should on average do just as well if they invest that money elsewhere, but in practice they tend to spent the extra money. Once they reach retirement, they have fewer assets.
That's probably true for most periods in history, but we're still within a much-receded housing economy. When I bought my house, my rent was a couple hundred bucks more and with insurance + taxes I ended up paying ~ $30 more a month for more than double the space and, of course, actual assets.
There are places where this doesn't make sense, and there are times where it absolutely doesn't make sense, but present day is a lot different. My anecdote of paying less (or slightly more) in mortgage + associated versus rent is not all that uncommon these days.
The real hidden cost, if you ask me, is the way it changes your sense of mobility.
There are places where this doesn't make sense, and there are times where it absolutely doesn't make sense, but present day is a lot different. My anecdote of paying less (or slightly more) in mortgage + associated versus rent is not all that uncommon these days.
The real hidden cost, if you ask me, is the way it changes your sense of mobility.
Yes, but there is also the opportunity cost of your downpayment, the transaction costs of getting into and out of a house, and maintenance. Oh man, maintenance.
Ref - transaction costs. You have to figure it will cost you around ~8% of the value of a property to both get into and out of it. This does not include the cost of movers. With a rental your transaction costs might be $50 for the apartment application fee.
Ref - transaction costs. You have to figure it will cost you around ~8% of the value of a property to both get into and out of it. This does not include the cost of movers. With a rental your transaction costs might be $50 for the apartment application fee.
I wish - I'm currently renting a house for 1200 pounds/month(so...1900 USD per month) and the agency took $1000 just to take the property off the market("admin fee" - non-returnable, doesn't go towards the deposit, it's just money down the drain really), then 1 month rent as deposit, and 1 month rent in advance. So really, I spent nearly $6k just to start renting a place.
I'm really considering a mortgage, but don't have money for the downpayment. Our mortgage payments would be actually less than what we pay for rent now.
I'm really considering a mortgage, but don't have money for the downpayment. Our mortgage payments would be actually less than what we pay for rent now.
Rent pays maintenance costs, too it's just forcibly amortized and externalized. Higher-density housing like apartments and condos do have scale efficiencies reduce per-unit/occupant maintenance costs. But the difference between renting and buying is somewhat apples to oranges if you're comparing renting an apartment to buying a house.
Maybe in US it is cheap to rent, but at least in Poland, if you can get a mortgage, your mortgage monthly payment is often much lower than the rent payment for the same property. Renting here is only good if you don't plan to stay for long or if you actually can't get a good mortgage, because your income is low. The more you earn, typically the better interest rate you can get with mortgage (mine is currently 1.8% total), and with decreasing rate you're paying less and less with every year, contrary to more and more when renting.
It depends a lot on where you live in the US. In big cities, I'm sure it's definitely cheaper to rent. In more rural areas it's often less obvious which is the cheaper option and it really comes down to preference. And sometimes in rural areas it's cheaper to just own, depending on the cost of the houe.
In Berlin, Germany it's (at least at first) a lot cheaper to rent. The place we're renting for 500 euro/m would be about 200k euro if we wanted to buy it, which would mean something like 600-650 euro/m for 30 years (with maybe 40-50k euro down-payment).
Well, but after 30 years, when you retire the place is yours own and your monthly payment goes down. Even if you saved that 100-150 euro every month, you'd not afford buying it after 30 years, assuming it stayed at the same price-point.
On the other hand, it is hard to believe you can rent a 200k€ place for 500€/m. In Warsaw, a 2-room 40-50 m² apartment in the city center costs about 400-500€/m to rent, but if you wanted to buy it, offer prices start below 100k€.
On the other hand, it is hard to believe you can rent a 200k€ place for 500€/m. In Warsaw, a 2-room 40-50 m² apartment in the city center costs about 400-500€/m to rent, but if you wanted to buy it, offer prices start below 100k€.
On the other hand, it is hard to believe you can rent a
200k€ place for 500€/m. In Warsaw, a 2-room 40-50 m²
apartment in the city center costs about 400-500€/m to
rent, but if you wanted to buy it, offer prices start
below 100k€.
There are places that are unusual (like Mitte - the center of the city), but for ~90%+ of Berlin the pattern I described above more or less holds.
Even if you saved that 100-150 euro every month,
you'd not afford buying it after 30 years, assuming
it stayed at the same price-point.
If you're in a position where you have extra money and you can choose whether to invest it in the stock-market, buy a nice car, or put a down-payment+mortgage on a place to live it's a different consideration.
This is the point I was making: renting is the only choice if you can't get a safe mortgage with good terms. And getting a mortgage with monthly payment X, when you could hardly pay more than X would be a very risky option and even if some (crazy) bank agreed to it, they would set a very high interest rate for covering the risk. But getting a mortgage with a monthly payment X when you can really afford 4X is a totally different story.
While Berlin is a bit special case with its housing supply, renting is actually crazy expensive in Poland. You should compare the prices to e.g. Lithuania or Estonia, the difference in affordability is mindblowing.
>> in practice they tend to spent the extra money. Once they reach retirement, they have fewer assets.
They presumably spend the money on things they want. Forced savings means forced forgone consumption.
Every marginal dollar into savings isn't always a net positive. It depends on a lot of different factors including: life expectancy, whether or not you have dependents, how much you already have saved, your income, your alternatives, and not least of all your intertemporal discount rate.
There seems to be some sort of savings fundamentalism backlash against a culturally low savings rate. In a sound bite situation there may be no choice but to pick a simple message and go with it, but in a longer form discussion there's room for more nuance.
They presumably spend the money on things they want. Forced savings means forced forgone consumption.
Every marginal dollar into savings isn't always a net positive. It depends on a lot of different factors including: life expectancy, whether or not you have dependents, how much you already have saved, your income, your alternatives, and not least of all your intertemporal discount rate.
There seems to be some sort of savings fundamentalism backlash against a culturally low savings rate. In a sound bite situation there may be no choice but to pick a simple message and go with it, but in a longer form discussion there's room for more nuance.
I was no more frugal having bought a house, than when I was putting all my money away towards a deposit on a house, probably even less so.
I would have thought that the biggest reasons were (roughly) freezing your shelter expense against inflation, and putting an upper limit on how long you pay for shelter.
i.e. If I rent a £1000PCM flat for the rest of my life, my bill for shelter will continue to be roughly £1000PCM in today's money for the rest of my life.
If I buy a house with a £1000PCM mortgage payment, it will remain roughly £1000PCM for the rest the mortgage (though current low interest rates mean that it probably won't), which, in 25 years time could be worth just over half as much as it is now. And in 25 years time, I won't have to spend on shelter any more. I will have maintenance costs to pay for, but they are unlikely to equate more than £1000PCM in today's money over my lifetime.
So, where M is homeowner maintenance costs, someone with N+M living expenses is more likely to be better off than someone with £1000+N living expenses.
I would have thought that the biggest reasons were (roughly) freezing your shelter expense against inflation, and putting an upper limit on how long you pay for shelter.
i.e. If I rent a £1000PCM flat for the rest of my life, my bill for shelter will continue to be roughly £1000PCM in today's money for the rest of my life.
If I buy a house with a £1000PCM mortgage payment, it will remain roughly £1000PCM for the rest the mortgage (though current low interest rates mean that it probably won't), which, in 25 years time could be worth just over half as much as it is now. And in 25 years time, I won't have to spend on shelter any more. I will have maintenance costs to pay for, but they are unlikely to equate more than £1000PCM in today's money over my lifetime.
So, where M is homeowner maintenance costs, someone with N+M living expenses is more likely to be better off than someone with £1000+N living expenses.
There is an important oversimplification that these formulas/programs/spreadsheets often make, and I see it happening here. Consider two alternatives where everything is the same except the amount of money used for the mortgage down payment. The formula assume that money not used for the down payment is invested at a certain rate of return. If the mortgage interest rate is greater than the investment return, then the formula always indicate that the largest down payment possible should be made and if the rate of return for investments is assumed to be greater than the mortgage interest rate then the smallest possible down payment should be made.
Its easiest to understand the problem with specific numbers. Assume a home buyer has $120,000 that could be put into a down payment, but that the minimum required is only $20,000. What should the buyer do? Assume that the investment rate of return is 5% and the mortgage rate is 4%. Investing the $100,000 instead of using it for the down payment is essentially borrowing $100,000 at 4% and investing it at 5%. All the formulas/worksheets/programs like this one and even professional investment advisors will end up showing that is better to put down the minimum down payment and investing the $100,000. This ignores the risk between alternatives. Putting the $100,000 into the down payment produces a guaranteed, riskless, return the buyer of 4% per year (by saving him or her the mortgage interest payments on the $100,000). The 5% potential return from investing the money isn't a fair comparison. The comparison needs to be made to a riskless investment (e.g. US Treasury Bills). Currently the riskless rate of return available to investors is approximately 0%. This means that in the current environment the correct alternative is to put the $100,000 extra into the down payment (absent any liquidity concerns).
One may say that they are willing to take some risks to obtain a higher rate of return. Modern Portfolio Theory has its detractors, but as far as home buyers are concerned, its implications are still apropos. Having one component of your overall portfolio earning the equivalent of a riskless 4% (by making the larger mortgage down payment) is likely to produce better aggregate returns (on the home and additional equities etc.) at whatever risk tolerance one designs for their overall finances.
I have no formal training in finance or investing so none of what I've described here should be interpreted as advice, instead it is intended to spur discussion.
Its easiest to understand the problem with specific numbers. Assume a home buyer has $120,000 that could be put into a down payment, but that the minimum required is only $20,000. What should the buyer do? Assume that the investment rate of return is 5% and the mortgage rate is 4%. Investing the $100,000 instead of using it for the down payment is essentially borrowing $100,000 at 4% and investing it at 5%. All the formulas/worksheets/programs like this one and even professional investment advisors will end up showing that is better to put down the minimum down payment and investing the $100,000. This ignores the risk between alternatives. Putting the $100,000 into the down payment produces a guaranteed, riskless, return the buyer of 4% per year (by saving him or her the mortgage interest payments on the $100,000). The 5% potential return from investing the money isn't a fair comparison. The comparison needs to be made to a riskless investment (e.g. US Treasury Bills). Currently the riskless rate of return available to investors is approximately 0%. This means that in the current environment the correct alternative is to put the $100,000 extra into the down payment (absent any liquidity concerns).
One may say that they are willing to take some risks to obtain a higher rate of return. Modern Portfolio Theory has its detractors, but as far as home buyers are concerned, its implications are still apropos. Having one component of your overall portfolio earning the equivalent of a riskless 4% (by making the larger mortgage down payment) is likely to produce better aggregate returns (on the home and additional equities etc.) at whatever risk tolerance one designs for their overall finances.
I have no formal training in finance or investing so none of what I've described here should be interpreted as advice, instead it is intended to spur discussion.
Another point is that the idiom "a penny saved is a penny earned" is incorrect when it comes to loans and investments, because you pay tax on income. A penny saved is worth more than a penny earned.
If I borrow at 4% and invest the same sum at 4%, then I'm guaranteed to lose money on the deal. How much more your investments have to yield, in order to break even on a loan-to-invest strategy depends on the degree of tax liability that your investments are subject to.
If I borrow at 4% and invest the same sum at 4%, then I'm guaranteed to lose money on the deal. How much more your investments have to yield, in order to break even on a loan-to-invest strategy depends on the degree of tax liability that your investments are subject to.
There is risk in the mortgage as well though. The value of the house could drop.
Isn't that only a risk if you need to sell the house at a time when the value is below what you paid?
Buying houses for shorter terms is just more risky, period. The housing market can crap out in catastrophic ways. Just like the stock market. The risk aversi
It would be an unrealized loss if you were living in a house with a mortgage bigger than the value of the house, so long as you pay though, you've still got a house to live your life in.
Buying houses for shorter terms is just more risky, period. The housing market can crap out in catastrophic ways. Just like the stock market. The risk aversi
It would be an unrealized loss if you were living in a house with a mortgage bigger than the value of the house, so long as you pay though, you've still got a house to live your life in.
There isn't though, this calculation doesn't consider valuation of the home at sale time. What this considers is, how much could that money earn you in investments vs how much will you save in interest payments over the life of the loan.
What this does assume is that you'll live in the house long enough for the interest savings to catch up with investment gains.
What this does assume is that you'll live in the house long enough for the interest savings to catch up with investment gains.
that's not really part of the equation.
If you make the minimum down payment, and the value of the house drops, you're still on the hook for the full value at the time you took out the loan.
Once you've secured your mortgage, your payment plan (and therefore debt) has nothing to do with the value of the house.
If you make the minimum down payment, and the value of the house drops, you're still on the hook for the full value at the time you took out the loan.
Once you've secured your mortgage, your payment plan (and therefore debt) has nothing to do with the value of the house.
We rented for the first ten years of our married life, and then purchased. All of the financial arguments aside, don't discount the value of having a place with your name on the deed. We had been forced to move out of two previous townhouses when the leases expired and the owners decided to sell. Knowing that your place is your place (yes, the bank's really, but they can't easily take it from you) is maybe an undervalued benefit.
Does this take into account the risk of a housing market crash? For me, the biggest reason for renting rather than buying is to avoid putting all my bags in one basket; I wouldn't buy $500k worth of shares of one company, so spending $500k on a single house seems similarly risky.
It's not clear to me that, say, $500k of assorted shares + $500k of house is worse than $1M of assorted shares. You've got more in a single asset, which is bad, but you're diversified into more asset classes, which is good.
The picture is a bit different if that $500k is all your assets or even substantially more than all your assets (a common situation for a first-time buyer with a big mortgage). Which suggests you should rent until you've built up substantial investments of other sorts, and then consider buying.
Historically, I think the variability in price of a single house hasn't been any worse than that of, say, a typical index fund. (Disclaimer: I haven't actually checked the figures.)
Of course, all the above treats houses as just another investment. This is a useful perspective, but you're going to be living in your house too, and questions like "can I redesign the bathroom?" and "if there's a flood or an earthquake, am I liable for fixing/replacing everything?" and "am I bothered by the possibility that my landlord might just throw me out one day?" and "can I get up and move somewhere else with minimal hassle?" may be just as important to you as "what is likely to leave me with more valuable assets 20 years from now?".
The picture is a bit different if that $500k is all your assets or even substantially more than all your assets (a common situation for a first-time buyer with a big mortgage). Which suggests you should rent until you've built up substantial investments of other sorts, and then consider buying.
Historically, I think the variability in price of a single house hasn't been any worse than that of, say, a typical index fund. (Disclaimer: I haven't actually checked the figures.)
Of course, all the above treats houses as just another investment. This is a useful perspective, but you're going to be living in your house too, and questions like "can I redesign the bathroom?" and "if there's a flood or an earthquake, am I liable for fixing/replacing everything?" and "am I bothered by the possibility that my landlord might just throw me out one day?" and "can I get up and move somewhere else with minimal hassle?" may be just as important to you as "what is likely to leave me with more valuable assets 20 years from now?".
I think one crucial difference between buying a house and an index fund is people are usually highly leveraged when they buy a house.
Example.
Assume you
1. Buy house and put down 100k for 500k house.
2. Buy 100k of stock.
3. Both assets drop 20%
Your stock will have lost 20% of it's value and you'll have lost 20k and 20% of your investment in the index fund. Your house will have lost 20% of its value and now at 400k, you've lost 100k of net-worth and 100% of your investment in your house.
Your stock will have lost 20% of it's value and you'll have lost 20k and 20% of your investment in the index fund. Your house will have lost 20% of its value and now at 400k, you've lost 100k of net-worth and 100% of your investment in your house.
Yup, agreed; that was the point of my second paragraph.
You're looking at it the exact right way. Risk is a two sided-coin. If the local housing market does well, you can make out like a bandit. If it doesn't, you can lose a lot of money.
No different than owning $500K worth of share in a public company.
Nothing wrong with buying a house, but people should be careful not to have their net worth all tied up in a single asset (house or not). The one rule I've heard is 90 minus your age. When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement. Too risky.
No different than owning $500K worth of share in a public company.
Nothing wrong with buying a house, but people should be careful not to have their net worth all tied up in a single asset (house or not). The one rule I've heard is 90 minus your age. When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement. Too risky.
I disagree, this view is too simplistic.
It's very different to owning shares in a company. You have to either buy a house or rent. You cant opt out entirely, whereas you can with shares.
By choosing to rent, you are betting on the housing market being stagnant or falling, if house prices shoot up and you opted to rent, you will need to now pay higher rents or a bigger mortgage.
So there is risk in renting too
If you decided to rent in london instead of buying 3 years ago, you'd be tens of thousands down
It's very different to owning shares in a company. You have to either buy a house or rent. You cant opt out entirely, whereas you can with shares.
By choosing to rent, you are betting on the housing market being stagnant or falling, if house prices shoot up and you opted to rent, you will need to now pay higher rents or a bigger mortgage.
So there is risk in renting too
If you decided to rent in london instead of buying 3 years ago, you'd be tens of thousands down
Why will rents go up, when they could have gone up already?
If house prices cross a threshold where first time buyers can't afford to get onto the property ladder, they're forced to rent - driving up competition for stock & thus rental prices. (This appears to be affecting more & more people in the UK).
These people pulling the ladder up behind them might be in for a rude surprise.
A sketch of my argument: as we are sometimes reminded to bear in mind, prices are driven by market conditions and affordability, not costs. If prices shoot up, why will the rent increase? Is it not already set to the highest value the market can bear, or something very close to that? We'll assume it must be, because it would be silly to do anything else (and the tenancy market is liquid enough). But then, if prices are at the right level already, how will people pay for increased rent?
If salaries increase as well, then this is just ordinary inflation. House prices go up, rents have go up, salaries go up - well, people have been warning about this for years! On the other hand, if prices increase, and rents go up, and salaries don't, how are people going to be able to afford to pay for any of this? The obvious answer, of course, is that they won't.
A sketch of my argument: as we are sometimes reminded to bear in mind, prices are driven by market conditions and affordability, not costs. If prices shoot up, why will the rent increase? Is it not already set to the highest value the market can bear, or something very close to that? We'll assume it must be, because it would be silly to do anything else (and the tenancy market is liquid enough). But then, if prices are at the right level already, how will people pay for increased rent?
If salaries increase as well, then this is just ordinary inflation. House prices go up, rents have go up, salaries go up - well, people have been warning about this for years! On the other hand, if prices increase, and rents go up, and salaries don't, how are people going to be able to afford to pay for any of this? The obvious answer, of course, is that they won't.
Prices are what the market will bear. If everybody's costs go up, or supply is limited, then rent can sure go up. Renting is an inflexible demand - unless you want to go homeless.
Because every day there are more people and more jobs but not more land.
> When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement.
That said, if you actually own your home in retirement you've significantly mitigated against the risk of getting priced out by rising rents if the regional economy heats up. That could be a problem on a fixed income.
That said, if you actually own your home in retirement you've significantly mitigated against the risk of getting priced out by rising rents if the regional economy heats up. That could be a problem on a fixed income.
That's true.
However, the risk is that you have a 60 year old, nearing retirement with 90% of his/her net worth locked up in an asset. They are counting on being able to sell and use the equity for retirement.
If you own your home outright and have a nice chunk of cash in retirement funds, then you're fine. Of course that also means you're very diversified (some cash in real estate, some cash in the market).
However, the risk is that you have a 60 year old, nearing retirement with 90% of his/her net worth locked up in an asset. They are counting on being able to sell and use the equity for retirement.
If you own your home outright and have a nice chunk of cash in retirement funds, then you're fine. Of course that also means you're very diversified (some cash in real estate, some cash in the market).
Most of the houses that are really high-risk are at the top end of the market. Don't buy those. Buy mid-market houses, those values are much more stable. And never pay much more than the average house in that neighborhood is selling for, and don't over-improve. The last thing you want to own is the most expensive house on the block, as you'll never be able to sell it.
I know this isn't true everywhere, but the last time I did a similar calculation, based on the historic rate of rents increase in my area, buying the house, then just walking away at the end of 30 years was cheaper than rent.
This is actually sometimes the case, though please double-check your analyses before committing to outliers or "betting the farm". Since it does happen and can work for some people / some places it certainly complicates the simplified dichotomy presented in the OP and this topic.
But if buying is like putting $500k of shares in a company (this is a really expensive house, man), renting is throwing your cash out the window.
I mean, your mileage is going to vary on location, and a generic thread like this isn't necessarily all that useful, but in my area, a mortgage payment is actually less than a rental payment for a similar place.
So even if it's a "bad investment", I can reclaim at least some of the money I put into a purchase when I sell the place (or make a profit, but no guarantees). But I get nothing when I stop renting.
I mean, your mileage is going to vary on location, and a generic thread like this isn't necessarily all that useful, but in my area, a mortgage payment is actually less than a rental payment for a similar place.
So even if it's a "bad investment", I can reclaim at least some of the money I put into a purchase when I sell the place (or make a profit, but no guarantees). But I get nothing when I stop renting.
This is a very common fallacy and I am surprised people still think 'renting is throwing your cash out the window'. It isn't.
With a mortgage, you're essentially leveraging around 1:5, which means you put down your 20%ish and get 100% of an asset. If the asset moves down 20%, your net equity is worth exactly 0. If the asset moves up 20%, you've made a profit of 100% (simplified, not considering the fees and other costs).
The trick to understand this is, if you put your down-payment money somewhere else, like a long-term index fund, what kinds of profits would you have expected? What about the risk, considering you're highly leveraged in a mortgage?
Thus the calculator to do the math for you.
With a mortgage, you're essentially leveraging around 1:5, which means you put down your 20%ish and get 100% of an asset. If the asset moves down 20%, your net equity is worth exactly 0. If the asset moves up 20%, you've made a profit of 100% (simplified, not considering the fees and other costs).
The trick to understand this is, if you put your down-payment money somewhere else, like a long-term index fund, what kinds of profits would you have expected? What about the risk, considering you're highly leveraged in a mortgage?
Thus the calculator to do the math for you.
What money do you get back out of renting?
You don't get money back from renting. It's an expense, just like any other. However, you don't have to tie in 20% of say $500,000 into a home at 0% return. Over a long period of time, your return on this would be expected to be a little over 8% annual returns, based on S&Ps historic return rates.
So, let me give you a practical example. Three years ago I bought a condo for $55,000. Six months ago, I sold it for $70,000. Factoring in various transaction fees, and interest, I made about ten grand.
Why ever would I consider renting? We're still at a relatively low point in the market, and there's a pretty good chance the value of your property is going to go up, not down.
Why ever would I consider renting? We're still at a relatively low point in the market, and there's a pretty good chance the value of your property is going to go up, not down.
It would be interesting to see your breakdown. I figure your purchase closing costs to have been around $2k. Your agents selling commission around $3.5k. Then you must have had condo association fee of some kind. Property tax as well. You might have fixed up something or other to sell?
No doubt you can make money on property though, plenty of shows about flipping houses are popular. I was just curious about your math.
I bought a condo in an area that has exploded with gentrification but still after we sell in s couple of months were not expecting a huge profit. We're going to rent and let somebody else deal with all the hassles for a while.
No doubt you can make money on property though, plenty of shows about flipping houses are popular. I was just curious about your math.
I bought a condo in an area that has exploded with gentrification but still after we sell in s couple of months were not expecting a huge profit. We're going to rent and let somebody else deal with all the hassles for a while.
Generally I consider taxes/association fees to be more cost of living than part of the property, in honesty (no way to really live anywhere for "free"). I spent a little to make the place nicer for sale, but it's a one bedroom, and we did a lot of stuff ourselves. (I learned to rescreen a screen door!)
I'd have to look at a lot of paperwork I can't bother myself with for an HN comment to get you an exact number, but after the sale of that place, and the purchase of a new place (I moved to get a larger place, wasn't really aiming to make money specifically.), I ended up with about the same amount of money put in towards the new place as I had paid into the old one, and an extra ten grand in my savings.
I'm not trying to say "buying is always better", and you have to do your research on the value of your property, properties in the area, where the housing market is at the time, how the rental market is going. There's no way anyone on this site can conclusively tell you that buying or renting is "better" nationwide.
But it's hard to understand why one would rent in a lot of cases, where you have no chance of getting that money back out.
I'd have to look at a lot of paperwork I can't bother myself with for an HN comment to get you an exact number, but after the sale of that place, and the purchase of a new place (I moved to get a larger place, wasn't really aiming to make money specifically.), I ended up with about the same amount of money put in towards the new place as I had paid into the old one, and an extra ten grand in my savings.
I'm not trying to say "buying is always better", and you have to do your research on the value of your property, properties in the area, where the housing market is at the time, how the rental market is going. There's no way anyone on this site can conclusively tell you that buying or renting is "better" nationwide.
But it's hard to understand why one would rent in a lot of cases, where you have no chance of getting that money back out.
Thanks. I guess I personally haven't really made much money on property, I've managed to break even probably if I figured it out. Although our upcoming sale will leave me with mid 6 figures in our bank account, it's not really profit, just equity that we've paid down.
I have enjoyed having our own place to do with as we pleased, but I'm looking forward to renting for a while!
I have enjoyed having our own place to do with as we pleased, but I'm looking forward to renting for a while!
The theory goes that you get a non-leveraged value of having a place to live...
rent is a 1:1 cost:value on living space. Mortgage is leveraged.
rent is a 1:1 cost:value on living space. Mortgage is leveraged.
It's good to get people thinking about all the things included in the calculator. Most people are totally clueless when it comes to the real cost/value of owning. They only see what someone bought a property for and what it sold for some time later.
A home you live in is almost always a net cost. It's not really an investment so much as its a cost avoidance (vs renting). Buying more house than you need "because this is an investment" is almost always a bad idea if you live in the home and thus are the one footing the bigger tax bill, interest, maintenance, utilities, improvements...
A home you live in is almost always a net cost. It's not really an investment so much as its a cost avoidance (vs renting). Buying more house than you need "because this is an investment" is almost always a bad idea if you live in the home and thus are the one footing the bigger tax bill, interest, maintenance, utilities, improvements...
> A home you live in is almost always a net cost.
Plus it "prevents" you from moving somewhere else. Or let's say, it increases the friction of moving somewhere else. Most home owners stay at the same place for the rest of their lives.
Plus it "prevents" you from moving somewhere else. Or let's say, it increases the friction of moving somewhere else. Most home owners stay at the same place for the rest of their lives.
There are a whole lot of other factors that increase friction more than owning your domicile, and those factors tend to be stronger with people who are motivated to buy:
- Deep networks of friends - Strong community ties - Strong local family ties - Children with their attendant social networks - General aversion to moving frequently
Also, the idea that "most" homeowners never leave is antiquated. Nearly everyone I know who has bought a property has bought more than one before 40.
- Deep networks of friends - Strong community ties - Strong local family ties - Children with their attendant social networks - General aversion to moving frequently
Also, the idea that "most" homeowners never leave is antiquated. Nearly everyone I know who has bought a property has bought more than one before 40.
> Also, the idea that "most" homeowners never leave is antiquated. Nearly everyone I know who has bought a property has bought more than one before 40.
I'm guessing you live in the US ? Outside people are way less mobile.
I'm guessing you live in the US ? Outside people are way less mobile.
On the plus side, once you've found somewhere you like you can stay there as long as you want. If you rent it's up to the owner how long you can live there
True, but there's always the risk that where you like living changes over time and becomes HELL 20-30 years down the road. And I have seen this happen among several of my family members.
When you rent, sure, you can't stay forever, but you have visibility at 2 years down the road (depends on the country where you live, but where I do the owner cannot get you out for the duration of your lease, and that's usually 2 years).
When you rent, sure, you can't stay forever, but you have visibility at 2 years down the road (depends on the country where you live, but where I do the owner cannot get you out for the duration of your lease, and that's usually 2 years).
The money is certainly important.
But buying is better than renting in many ways.
Want to rip out your kitchen and have a new one?
Want to pave part of the garden?
Want to move a wall?
Want to paint it all, or fit blinds?
If you own it you can do all that. If you rent you have to ask permission which you might not get. Plus why spend money on somewhere you don't own?
If you own it you can do all that. If you rent you have to ask permission which you might not get. Plus why spend money on somewhere you don't own?
Want to live somewhere else without making a life-altering financial transaction that could lower your net worth tens of thousands of dollars?
Property will always increase over the long term. Unless you're moving every 6 months this isn't a good reason.
Of course selling your house and buying a new one will take a few months, so it does restrict your mobility in that way.
Of course selling your house and buying a new one will take a few months, so it does restrict your mobility in that way.
Property will always increase over the long term.
I'm not picking on you, but it's amazing how quickly Americans (not saying you're from the US) forget economic events that happened only a few years back.
There are many places in the US where housing prices haven't come close to the peak in 2007. I knew several folks who lost a ton of money ($100K+) on real estate back then. It seems like all of those concerns have evaporated in the last 8 years.
I'm not picking on you, but it's amazing how quickly Americans (not saying you're from the US) forget economic events that happened only a few years back.
There are many places in the US where housing prices haven't come close to the peak in 2007. I knew several folks who lost a ton of money ($100K+) on real estate back then. It seems like all of those concerns have evaporated in the last 8 years.
Maybe on the whole but your personal investment is highly centralized and is in no way guaranteed to go up over any period of time.
My parents bought a 2-family in Milwaukee in 1980 for around $30,000. They sold it in 1988 for around $30,000. It's still worth around $30,000, if it's still standing and maintained.
And Milwaukee is not, by a long shot, Detroit— it's still barely below its peak population. Wages have declined, however— an average young person when my parents were young would make the same amount of money as in San Francisco: http://www.theatlantic.com/business/archive/2015/02/for-grea...
(All of these numbers are nominal dollars— the house has significantly declined in real value.)
And Milwaukee is not, by a long shot, Detroit— it's still barely below its peak population. Wages have declined, however— an average young person when my parents were young would make the same amount of money as in San Francisco: http://www.theatlantic.com/business/archive/2015/02/for-grea...
(All of these numbers are nominal dollars— the house has significantly declined in real value.)
8 years isn't the long term. Sorry if this wasn't obvious.
"Property will always increase over the long term"
what makes you think this is the case?
for all the singularity and robot economy talk on here, if give those things have even a small chance of occurring, over 30 years that adds significant risk to real estate values across the United States
that's essentially like the factory in town going out of business across most of the country
----------------------------
what makes you think this is the case?
for all the singularity and robot economy talk on here, if give those things have even a small chance of occurring, over 30 years that adds significant risk to real estate values across the United States
that's essentially like the factory in town going out of business across most of the country
----------------------------
And when the factory employing most of the people in the town closes down, you're stuck with a virtually worthless property forever. Buying may have real downsides when you need to work for a living...
Renting is the best option for flexibility. Want to add a bedroom? Want to change neighborhoods? Just lost your job and want to downgrade? Want to move closer to your new job, or an entirely new state? These are all good, common use-cases for renting. BTW, a lot of landlords will let you modify your place - some will even chip in for the costs or pay it all.
>Plus why spend money on somewhere you don't own?
People have this mentality that renting is throwing out money. It's not - it turns your housing into another explicit cost like food and travel. I like this, I think too many people make the biggest investment decision of their lives (often by orders of magnitude) so lightly. And anyway, when you own, the costs that would go to renting are priced in, like: taxes, upkeep, opportunity costs, and interest payments. There is no free lunch - even the home ownership tax benefits get priced into housing costs.
>Plus why spend money on somewhere you don't own?
People have this mentality that renting is throwing out money. It's not - it turns your housing into another explicit cost like food and travel. I like this, I think too many people make the biggest investment decision of their lives (often by orders of magnitude) so lightly. And anyway, when you own, the costs that would go to renting are priced in, like: taxes, upkeep, opportunity costs, and interest payments. There is no free lunch - even the home ownership tax benefits get priced into housing costs.
There are locations, and I live on one of them, where finding an accomodation, even with stable long term 150k USD/year single pet-less guy is a few month effort of chasing 100s of appartments, until one will work out. You are nto in position to actually pick anything.
On this thread it's visible that people try to promote their own decisions in this topic (and we all have been into it deep down). Let me put mine - I took loan 8 years ago, in a different country, on a small appartment that when looking back, wasn't the best idea (but neither really bad). Mind you, it was in 2007 :) Surprisingly the price didn't drop below the one I paid, but the pressure to bring every month enough cash to make it through was... not nice. THe perspective to have similar setup for next 20 years was a bit sould-crushing though (it was 50m appartment, so nothing to raise your family in).
But, this pressure forced me off my lazy but, I temporarily moved to another country to earn more and pay it off asap, realized that this country is SO much better than previous one (which wasn't my home anyway), so I decided to stay. 5 years forward, probably the best decision of my life (and there were heaps of people saying I should settle where I am instead of move).
On this thread it's visible that people try to promote their own decisions in this topic (and we all have been into it deep down). Let me put mine - I took loan 8 years ago, in a different country, on a small appartment that when looking back, wasn't the best idea (but neither really bad). Mind you, it was in 2007 :) Surprisingly the price didn't drop below the one I paid, but the pressure to bring every month enough cash to make it through was... not nice. THe perspective to have similar setup for next 20 years was a bit sould-crushing though (it was 50m appartment, so nothing to raise your family in).
But, this pressure forced me off my lazy but, I temporarily moved to another country to earn more and pay it off asap, realized that this country is SO much better than previous one (which wasn't my home anyway), so I decided to stay. 5 years forward, probably the best decision of my life (and there were heaps of people saying I should settle where I am instead of move).
> BTW, a lot of landlords will let you modify your place - some will even chip in for the costs or pay it all.
Where are all these landlords, because the ones I have experience with in Florida, Texas, and Virginia get pissed if you so much as nail a picture to the wall.
Where are all these landlords, because the ones I have experience with in Florida, Texas, and Virginia get pissed if you so much as nail a picture to the wall.
Providence, RI: interior paint.
Fairfield, IA: all maintenance as well as on-going renovations at $25/hr plus materials.
San Francisco, CA: interior paint, garden, chicken coop, converted garage into bedroom.
Portland, OR: extensive tear out and renovation, removed walls, renovated kitchen, new wiring and lighting, converted attic into bedroom, finished basement and added bedroom -- all on the owner's dime. Also, we built a kiln and a giant skate ramp in the backyard.
So it is possible. Although admittedly, I do have a knack for finding laid back landlords.
Fairfield, IA: all maintenance as well as on-going renovations at $25/hr plus materials.
San Francisco, CA: interior paint, garden, chicken coop, converted garage into bedroom.
Portland, OR: extensive tear out and renovation, removed walls, renovated kitchen, new wiring and lighting, converted attic into bedroom, finished basement and added bedroom -- all on the owner's dime. Also, we built a kiln and a giant skate ramp in the backyard.
So it is possible. Although admittedly, I do have a knack for finding laid back landlords.
The Portland example is dangerous territory, because now they have a home they can rent for much more per month and might kick you out. Then you just lived in a construction zone doing free labor for a year for nothing.
Hanging paintings with nails is typically considered part of legally defined normal wear-and-tear. If your landlord is getting angry at you using the place you're renting in a reasonable manner, than perhaps you're renting from the wrong people.
So, that seems to be an open question in Texas. The Texas law leaves a lot up to interpretation, so reversing charges for nail holes would require suing your landlord. I'm not sure, but I think the situations in Florida and Virginia are similar.
It's a trade off.
I live in London, UK in a flat I rent for £950 pcm. This would cost me £379,000 to buy, at the very least as it's a relatively nice area.
I could scrape the deposit and get a £379,000 mortgage but the insurance, maintenance and other costs on top would result in zero disposable income.
Currently I have £1750 left over every month which is nothing but bags of freedom to do whatever I want.
If I was to drop dead on Monday, the last great event wouldn't be getting Magnet in to do my kitchen, painting the living room ceiling and sitting in all weekend eating Tesco Value food. It would be chilling next to Lake Geneva in Lausanne with my other half which is exactly what I'm doing.
Live life now before it's over.
Edit: This is based on the advice of my wife's grandparents who are just about hanging on at the age of 84 and 86 respectively. They had to cancel their cruise this year due to poor health and openly admit that they worked way too hard for a house. They have a nice £1m house in London and a pile of savings but it's worth nothing to them now because their health is gone. It's empty as the children have left and they realised the memories were more important than the bricks.
So, sod buying a house. I'll live an irresponsible yet fulfilling life now.
I live in London, UK in a flat I rent for £950 pcm. This would cost me £379,000 to buy, at the very least as it's a relatively nice area.
I could scrape the deposit and get a £379,000 mortgage but the insurance, maintenance and other costs on top would result in zero disposable income.
Currently I have £1750 left over every month which is nothing but bags of freedom to do whatever I want.
If I was to drop dead on Monday, the last great event wouldn't be getting Magnet in to do my kitchen, painting the living room ceiling and sitting in all weekend eating Tesco Value food. It would be chilling next to Lake Geneva in Lausanne with my other half which is exactly what I'm doing.
Live life now before it's over.
Edit: This is based on the advice of my wife's grandparents who are just about hanging on at the age of 84 and 86 respectively. They had to cancel their cruise this year due to poor health and openly admit that they worked way too hard for a house. They have a nice £1m house in London and a pile of savings but it's worth nothing to them now because their health is gone. It's empty as the children have left and they realised the memories were more important than the bricks.
So, sod buying a house. I'll live an irresponsible yet fulfilling life now.
Phenomenal comment. Hopefully people read this and contemplate it. I've gone through an intense period of my life with respect to life and death, and a couple of years ago I only thought about "doing the right thing", now I ensure I enjoy each day I have, because nothing is promised and possessions are ultimately useless.
you know, some of us DO hangout around lake geneva (or any other pretty place), have most of weekends done like there's no tomorrow (mountains, adventures, traveling etc. practically every weekend) and still manage to invest into whatever they prefer (right now selling flat in Prague, and considering one in Chamonix). That's my sweet spot in life right now. We'll see how long life will keep me in it, before throwing into something wild, as usual :)
It's not irresponsible to spend money on traveling and adventures. You get back much more than nice time there and couple of photos and souvenirs - you are exposed to new environment, people, culture etc. and you'll grow inside in a subtle, yet steady way. On the other hand, usual "buying stuff you don't need to impress people you don't care about" is useless, and won't even bring any long term happiness.
It's not irresponsible to spend money on traveling and adventures. You get back much more than nice time there and couple of photos and souvenirs - you are exposed to new environment, people, culture etc. and you'll grow inside in a subtle, yet steady way. On the other hand, usual "buying stuff you don't need to impress people you don't care about" is useless, and won't even bring any long term happiness.
Not sure if it's a difference in location but where I live it would cost me more per month to rent a similar property than what I own. If I wanted to save, I'd have to rent a smaller place instead.
You're probably right but will it in 5 years is the question you need to ask?
You always pay over the odds to rent initially but due to inflation and relative property prices it becomes good value rather quickly.
You always pay over the odds to rent initially but due to inflation and relative property prices it becomes good value rather quickly.
It wasn't before the market crashed but it's been much cheaper to buy than to rent where I live at least.
it's definitely a balancing act, where the balance point depends on your own personality and proclivities. However, I think we can all agree that a formula involving London home prices is not going to be very representative of the rest of the world! ;-)
Actually in the tech sector the price vs salary ratio is pretty consistent all over the UK. The prices are high in London but you earn a pile of cash. The inverse is also true elsewhere.
London is one of those crazy places where a job jump can actually get a salary boost larger than the national average salary in its entirety which is where the short term advantage is if you know how to play the market.
London is one of those crazy places where a job jump can actually get a salary boost larger than the national average salary in its entirety which is where the short term advantage is if you know how to play the market.
One thing to consider -- avoid the 30-year fixed mortgage if you can. If you are buying, then buy a cheaper property that you can pay off in 5 years or so. Then in 5 years, you can sell that and take out another loan for the next property. Example: I bought my house for 180,000 on a 30-year mortgage, and 20% down payment (36,000). 15 years into it I've barely made a dent. I would have been better off buying a $100,000 smaller house or town house/condo, and I could have paid that off in 5 years with what I'm currently putting out per month (counting lower taxes and insurance on the smaller property). Then I could have sold it, and bought a $160,000 house, and 5 years or so later owned that one outright.
This is also a market proof strategy -- if the market goes down, the your current house may lose value (but you're not upside down on your mortgage, because you don't have one after 5 years). But the next house will also be proportionally cheaper too. And if the market goes up, the house you just paid off has gained in value, making for a bigger down payment on the next house.
This is also a market proof strategy -- if the market goes down, the your current house may lose value (but you're not upside down on your mortgage, because you don't have one after 5 years). But the next house will also be proportionally cheaper too. And if the market goes up, the house you just paid off has gained in value, making for a bigger down payment on the next house.
One factor that's never discussed is the availability of rental inventory. In some cities it's very hard to find a single family home (instead of an apartment) for rent - hence buying becomes the only path to getting the type of home you want.
I've always wanted a model like this to point people to. I don't have a dog in the buy/rent column, but I feel like most of these decisions are made without a regard for many pertinent considerations. The main one that bugs me is how long you will likely stay in a place. Completely disregarding market effects, if you're not going to hold onto it long then it's probably not going to work out.
Some people don't buy to, in their words, avoid being exposed to the property market or some variation thereof. This a fallacy. As long as you need somewhere to live you are exposed to the property market.
A good way of looking at this is: not owning is equivalent to having a large short position in the property market. If prices go down, you "win" by not losing money and/or your rent going down. If prices go up, you "lose" because your rent goes up and what you can buy now is less than what you could've before.
That's a fine position to take but my point is that it IS a position.
You don't necessarily need to own where you live but you should own _something_. It could be in the area you plan to retire to (to hedge against rising prices), an investment property to generate income or whatever.
IMHO REITs aren't the answer here. Residential and commercial real estate are different beasts. Commercial real estate is generally a means of generating income. Residential is far more speculative.
Some people compare long term returns on property vs equities. These compare reasonably favourably.
In all those cases borrowing to buy property is far more favourable. In the US at least you can get 30 year fixed mortgages that are currently hovering about 4% for 80%+ of the purchase price. You just can't get those terms on anything else.
Even on day 1 your mortgage payment is ~30% principal at these interest rates.
Property tends to be a great hedge against inflation too and higher interest rates and higher inflation seems to be a risk with the amount of quantitative easing occurring in the developed world.
Lastly, the ability to essentially fix your housing costs is (IMHO) huge, particularly in major urban centers.
A good way of looking at this is: not owning is equivalent to having a large short position in the property market. If prices go down, you "win" by not losing money and/or your rent going down. If prices go up, you "lose" because your rent goes up and what you can buy now is less than what you could've before.
That's a fine position to take but my point is that it IS a position.
You don't necessarily need to own where you live but you should own _something_. It could be in the area you plan to retire to (to hedge against rising prices), an investment property to generate income or whatever.
IMHO REITs aren't the answer here. Residential and commercial real estate are different beasts. Commercial real estate is generally a means of generating income. Residential is far more speculative.
Some people compare long term returns on property vs equities. These compare reasonably favourably.
In all those cases borrowing to buy property is far more favourable. In the US at least you can get 30 year fixed mortgages that are currently hovering about 4% for 80%+ of the purchase price. You just can't get those terms on anything else.
Even on day 1 your mortgage payment is ~30% principal at these interest rates.
Property tends to be a great hedge against inflation too and higher interest rates and higher inflation seems to be a risk with the amount of quantitative easing occurring in the developed world.
Lastly, the ability to essentially fix your housing costs is (IMHO) huge, particularly in major urban centers.
For me, it's better to buy. And that's not a financial decision either. I've just always wanted to restore an old house.
This model doesn't seem to consider risk. If you finance 75% of your home value, your equity is 4x as volatile as the market.
Very nice calculator. It is missing a PMI option for loans with a downpayment under 20%. That is a significant expense.
It totally depends on the area and timing. I've bought and sold a number of places for a decent profit (all in cities) AND I managed to hold onto my last one and rent it for a good deal more than the mortgage payment. Renting IS throwing money away, plus none of my friends who rent live in as nice of a place as I do for the same monthly payment. Sure they can move to another city faster than I can, but the longest I've taken to sell a place it 4 months, not a big deal.
It heavily depends on the area. In very urban areas, property is a lot more expensive, and renting is probably the way to go. In my area, it's almost the same cost to buy as to rent. The difference being, you can get some of the money back on your purchase by selling your property, whereas your rent just entered a black hole.
So I pretended that "$" meant "£", and entered some plausible UK figures, including recent house price growth of 8% and rental growth of 10%, and it told me I should buy unless I could rent for -£391 a month.
Taking out a mortgage is clearly the best investment I ever made.
Taking out a mortgage is clearly the best investment I ever made.
Any github link to the actual visualisation would be handy .. looks like crossfilter types http://square.github.io/crossfilter/
I think this has been mentioned a couple of times when it has come up, but it would be nice to be able to add / remove local taxes e.g stamp duty here in the UK.
I would buy, but Manhattan is expensive as hell and I don't want to live in the Bronx.
Yes.
(It was obligatory.)
(It was obligatory.)
20 hours ago: https://news.ycombinator.com/item?id=9739544
393 days ago: https://news.ycombinator.com/item?id=7783201
1775 days ago: https://news.ycombinator.com/item?id=1586757
1884 days ago: https://news.ycombinator.com/item?id=1283190