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Rent Forever, Don’t Buy A Home
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With the new year comes the inaugural post for my new series, the Devil’s Advocate posts, where I try to argue the other side of common sense personal finance advice (read the Devil’s Advocate series introduction post). This post will tackle one of the cornerstones of well-accepted advice: rent as little as possible and buy a home as soon as you can, renting is just like throwing your money away. I think that, like all one-size fits all advice, is completely wrong and here’s why.
Renting Keeps You Flexible
When you rent, you can pick up and move almost whenever you want, with very little penalty (perhaps an early termination fee of some kind); when you own, selling a home can take a very very long time. You lose a lot of flexibility when you “put down your roots” and this is one the biggest reasons why you shouldn’t buy. When you want to look for a new job, you’re restricted to looking in the geographic area around your home. If you ever get a job offer in another area, you have to go through the headache of selling your home before you can take advantage of it. If you rented, you could just end your lease, rent a moving truck (avoid U-Hauls!), and just go.
Someone Else Does The Repairs
When you own your own home, every time something breaks, you have to fix it. Every time something breaks and can’t be repaired, you have to fork over the cash to buy a new one. A new refridgerator costs thousands, a new washer and dryer is on the hot side of a thousand bucks, a new dishwasher can set you back a couple hundred bucks, and that’s just the cheap stuff. When you rent, hopefully your landlord will take care of all of your problems, fixing things that need fixing, replacing things that need replacing, and if you pick your landlord correctly, it’ll be a corporation with deep pockets.
Owning A Home Is More Expensive Than It Looks
With renting, you do throw your money on rent because you never gain ownership of the place you’re renting. However, when you own a home, you also throw your money away on other fees and taxes that never go towards your home ownership. For example, you’ll pay property taxes, homeowners association dues, condominium fees, and any number of other fees associated to the area your home is in – none of which go towards the equity in your home. For example, on my home, I pay about $3,000 in property taxes each year plus $30/month for HOA fees, and $500/yr for a parks and recreation fee.
Renters Insurance Is Much Cheaper
When it comes to home related insurances, renter’s insurance is ridiculously cheaper than homeowners insurance – oftentimes ten times cheaper. I was able to get renter’s insurance when I was renting for as little as $7 each month but now I’m paying for homeowners insurance at $55 each month – a difference of $576 each year.
Home Prices Can Go Down Short-Term
One of the cornerstones of the argument to buy a home is that home prices always go up. I’m not one of those haters who sees the current housing market and is ready to throw falling prices into the faces of all those people who bought a home (I bought one last May, arguable near the peak of the housing prices nationally), but if you treat the housing market like any other market, you’ll recognize that in the long run every market will go up (yay inflation). The problem with that theory is the fact that while you can invest in the long term, reality forces you to live in the short term and in the short term the market can go down. Is this a strong enough argument to rent? Likely not, hence being placed last in the set, but it is a consideration.
Summary
Owning a home is something seriously significant, it’s a life changing decision, unlike investing in a 401K, which would likely not change much in your life right now; and so it’s not one that should be entered into lightly. My honest opinion is that the general rule of “buy a house, stop renting” is probably the most strongly believed but most weakly defensible of the common sense personal finance advice concepts out there.
Please weigh in! If you have an opinion, one way or another, I hope you will share it!
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I forgot to mention there is an income limitation to this loan- but fortunately I was able to by pass that due to the application process which was started before I started my new job…
What goes up must come down- And what’s down will eventually go up. It’s like the Stock Market, Real Estate will eventually rebound.
Your arguement that the renter doesn’t pay area taxes or property taxes is wrong. Your landlord wraps those fees and taxes into your rent. Someone has to pay property taxes, and your land lord isn’t paying that out of his own pocket.
The benefits of buying are the tax deductions, flexibility in your personal space, the long amount of time it takes for your bank to evict you vs the possibility nearly instant eviction by a landord, and the long term equity earned. No less important is the ability to put your house down as collateral for more adventursome financial adventures.
Renters are and always will be tossing their money down a deep, dark hole. N_G
Rents are based on what the market will bear, not on the landlord’s expenses. Like other prices of goods and services, the seller doesn’t just set the price unilaterally at whatever he/she feels like. The owner pays property taxes. If you don’t own the property, you don’t pay them. You pay a monthly fee to occupy space, and nothing more.
That fee is gone. Disappears. Kaput. Take the annual cost of rent at $1000.00/month ($12,000/year). Now subtract your property taxes (location is key) and your insurance, and see if you come out with a positive number. Likely you will, and likely that this number invested over a long term will grow enough to pay for your annual costs a few hundred times over.
Tax deductions are not a benefit of buying. They are a benefit of borrowing against a house. Borrowing equals risk, and risk is…well, risky. Buy a house with cash and you’re in the money. Rent the house out and you will recapitalize your investment over time. The house buys itself.
i am agree with you!
UGH! Just when we were getting somewhere, a Neanderthal comes in and takes us back to square one. Time to get schooled, N_G!
N_G
well Said!!
Sorry but I totally disagree with you! Prime example: My father bought a home in 1967 for $11,000. He paid it off by 1980 and with interest, taxes, repairs, appliances and maintaining it, it cost him as of 2009: $75,000! The home is now worth $220,000. The only problem he would of had if he had choosen to sell it would be the length of time to sell it. Small price to pay for the gain in Value. If you need to sell in the short term you might lose money, but long term… you are totally WRONG!!!!
Housing market issues aside, you are not accounting for the time value of money
with the money you would have invested into the house you can invest in the stock market instead and get greater gains on average
Bought a house almost 5 years ago for 107k. Now, the same type of house in my neighborhood can go for 150-200k depending on the condition. Most of the appreciation is from demand. Don’t think that the stock market would have returned 50% in the last 5 years.
That’s a very localized example, but if you invest in growth stock mutual funds for the long term that have averaged 8 – 12% over the past 30 years, you would certainly realize the same if not better gains. It’s all a function of time, and 5 years is too short to compare real estate and stocks.
If your house sold for $200K today, your return, not including selling costs, would be about 10-12% annual appreciation. This is achievable long term in the stock market, but not over the past 5 years…
Hi Tony,
Please factor inflation into your calculations and then resubmit your post.
Thanks!
I have to say, I bought a condo about 7 months ago and it’s the worst decision I’ve ever made. I WISH I could go back to the simplicity of an apartment. I thought buying a house would be liberating, but it was the most suffocating, stressful thing ever!
As soon as I bought, there was an onslaught of BS from my HOA about stuff I didn’t even do! Then, they assessed me (and the rest of the homeowners) thousands of dollars in “special assessments.” I live in Dallas, so buying even a brick and mortar house without an HOA is next to impossible. That’s why I went ahead and got a condo…I figured that if I had to pay some HOA dues, I might as well have it where stuff is fixed for me. It sounded good…have my stuff fixed AND build equity. Hah…laughable. After this terrible experience, I doubt I’ll ever be silly enough to buy again. Property taxes suck, repairing and upgrading things suck, fighting with (and paying) contractors over things you can’t fix yourself sucks, handling expensive plumbing issues sucks, replacing a roof sucks, chasing sheet rock imperfections sucks…
If I could have bought a brand new home, I doubt I’d feel any better. New builds are made so cheaply and without regard for quality that you just watch your investment literally deteriorate over the years. You just end up chasing problems. At least with an older home, anything you do to it is an improvement…you just have to have the cash (and time) laying around to invest in it. That’s difficult when you are juggling work, HOA dues, property taxes and routine maintenance. Buy vs rent? I say RENT. If you want the freedom and space a house gets you, RENT ONE.
Every buyer has an opportunity to conduct his or her due diligence prior to purchasing. You must know what you’re getting into. Not every home purchase is a smart purchase, but buying the right home will always trump renting.
Hi Kaye,
Your sentiment are mine exactly. I and my fiancee are thinking of renting a home instead of buying. We just don’t feel comfortable with the market/economy right now. As we have seen, owning is not such a protection after all. And people are delusional to think that just because you “own” a house that its yours. Truth be told, we don’t “own” anything. Even when paying a mortgage, you are still “renting” the space from your mortgage lender and banks. Your house becomes collateral against debt, and there are no guarantees that you will even hold on to it, not to mention a lot of headaches that come with it. As a matter of fact, Peter Schiff in one of his reports said that renters are wealthier than owners, and i believe that. You just don’t get all the headaches as you do owning, especially now. And we’ve been doing a lot of research and most economist are dead set against buying a home right now, they are suggesting to rent instead of buying, which is reinforcing our idea of renting right now.
Interesting post. A number of flaws in your argument, though.
You’re flexible as a renter: Sorta. If you are a month2month, yes. Most require a lease commitment though and it’s less flexible (depending on state law, MUCH less flexible). Of course, if you need to be flexible, then you probably don’t need a home of your own anyway. One of the points of homeownership is planting ‘roots.’
No repairs as a renter. Again, state laws vary, but appliances are seldom included in landlord repair costs (or included in home at all). Often, repairs still have a maintenance fee to do and if the renter caused the problem, often it is their expense totally to repair. With a home, you can get a home warranty, which will cover everything under the roof for about $500 a year.
You don’t pay taxes, insurance, HOA dues, etc when you rent. Uh…yeah you do. It’s just included in your monthly rent. You don’t think landlords LOSE money by renting do you?
Renter’s insurance is cheaper. Yeah, you’re only paying for the contents in renter’s insurance. But that’s not the only insurance you’re paying. See above.
Home Values go down, short-term. Sometimes, but you don’t buy a home with short-term thinking. A lose, or a rise, in value is only important IF you’re trying to sell. The beauty of a home is that it is tangible and has a purpose besides just being an investment.
Sometimes landlords DO lose money by renting. It depends on market conditions. That’s one of the risks you take when you sell something, that you won’t be able to sell it for enough to cover your costs.
You can’t buy a HOME. You can buy a building or part of a building. A HOME is something you make by having family, friends, a safe haven from life’s difficulties. As for this building having a purpose other than being an investment, that’s true, it’s also a place to live and to keep your stuff, but that purpose can be duplicated by rental housing, so the only real reason to buy a house is because it’s cheaper than renting (rare) or because you think the value will go up, during the time you own it, faster than other investments with similar risk profiles.
“You don’t think landlords LOSE money by renting do you?”
All the time…especially in this over-hyped bubble market.
Home prices have long outpaced prevaling rents in many US markets, where speculative home owners buy high and rent for A LOT less than their mortgage and ownership costs. In many urban markets, owners actually subsidize much lower rental prices.
The old truisms no longer apply in post-Bubble America!
Are we all forgetting something???? Sure you have to pay some extra costs in buying a home, but the majority of the money you pay to your mortgage goes into your own asset, in which you can sell and get your money back. When you rent you are flushing the money down the toilet.
not forgetting anything. you’re adding an assumption that isn’t foolproof: that the property will appreciate beyond what it has cost you. This requires a “time element” that you cannot always control.
renting is not “flushing money down the toilet”.
You CAN control how long you hold the property.
Actually, over the life of the loan, the majority of money paid to the bank is for interest, not principal.
For high cost areas, where one might have to pay 500k for a starter home, it’s far better to rent and invest the downpayment/savings for a better return at the end of 30 years.
I ran this scenario here, and it proves my point:
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html
It’s all relative…and so many Americans are not logical around the subject of home ownership. If we’ve learned anything from the past year, it’s that we must avoid looking for a universal maxims like “renting is flushing money down the toilet.”
Addendum:
Unfortunately, the above link did not contain my sample calculations.
Start with 500k home price; compare to 1500/monthly rent; and include home maintenance into the calculation.
Then, Google a free compound interest calculator and calculate what happens when a renter invests the down payment, tax savings and maintenance costs over 30 years. Disciplined renters who invest end up millionaires in the end.
Real Estate Bubble Hater,
My fiancee and i was thinking exactly like that. We were deciding if it was a good idea to buy or rent and then use the extra money to invest in something…
The thought that most of your mortgage payment goes toward the equity of your property is not accurate. Mortgages are not an even interest and principal payment every month. In the beginning most of your payment goes towards interest and much less of the payment goes towards principal. As you reach the end of your mortgage term this has a reverse affect and most of your money goes towards principal and much less towards interest. See a few examples:
At 5% on your loan the first month 77.6% of your mortgage goes towards interest.
At 6% it is 83.4%
At 7% it is 87.7%
At 8% it is 90.1%
So with this large percentage you are not putting much equity into your home through your mortgage payment.
I will agree that land lords try to cover all their costs and make a profit when renting a property but often this can equate to a lower cost to the renter then purchasing.
First we need to consider how long the land lord has owned the property. He might have owned it for 10+ years. Meaning he bought it at a much lower price equaling a lower mortgage and he is putting so much money towards principal ever month that in a tough market he can rent for less then a new mortgage would cost and gain most of his profits via the equity he is putting into the property. Where as a new purchase would be bought at the inflated price and would have little benefit of putting much equity into a home.
Second is can the person living in the residence afford to put down 20%+. Most investors are required to put this much down or more now. Putting this much down eliminates PMI and lowers the monthly payment. So a land lord could cover the costs of insurance to him, taxes, and the mortgage while renting the unit at a lower total cost to the renter then if the renter was to buy. This is a situation where renters can pay less money then it would cost them to own.
I put $90,000 on my home in 2003 and they raised my payment from $1000 to 2300. I lost my big beautiful home at an auction last Nov (2008). Talk about flushing your money down a hole.Now I rent a big townhouse for $980.00 The only way I will ever buy another home is with CASH.Just because you have a mortgage does not mean you Own the home.
We are all renters unless your house is paid off.
And even then-the tax man can throw you out.
Home ownership is a scam…just like the marriage fairytale.
lol… Sorry about your loss Anna, glad you brought it out.. all are renters! I own a few homes straight out, so you can say I have achieved what a few are working towards, but in the end, you’re still renting; but you will never know this till you do it full circle.
Taking a loan that would adjust was stupid. Some people shouldn’t buy real estate.
Anna
You have said a mouth-full. I had mentioned something similar in an early comment. Even as an owner, you are still renting. We can convince ourselves that we are not, but you are renting from the mortgage lender and banks, we really dont own anything.
@ Anna:
AMEN, sister! I agree 100%! Last night, after Easter dinner with my wife’s family, my brother-in-law gave me a good talking-to. He told me that I “shouldn’t spend your money on just anything you want, but save your money, instead, so that you can buy a house of your own!” He told me about how low prices are and told me that “You’re missing the chance of a lifetime!” You know what? MAYBE I DON’T WANT TO BE A HOMEOWNER!!! I, personally, feel more comfortable renting, and have lived in apartments most of my life…I’M USED TO IT. For someone to tell ME I should own a home…there’s a screw loose in his/her head! Why should I take part in what could be one of the world’s BIGGEST scams?! It’s MY money, and NOBODY else’s! I CAN DO WHATEVER THE #&@* I WANT TO DO WITH IT! So THERE!
I agree it’s better to rent than buy for many people. If you have kids, want to belong to a community and plan to stay for at least 5 years than maybe buy. But don’t expect to make a fortune when you do sell.
FYI your bills for HOA, taxes, repairs and if you throw in your electric bill probably equal my rent. So it seems I am really not throwing money down the drain afterall. Plus I spend my weekends travelling not mowing a yard. hmmmm. Thanks for writing this.
I like this! Thanks everyone, because I learned alot! I’ll rather rent, too! The lord showed me more than 10 years ago, the economy crashing as well as other things. I thank him so much that I listened.
What’s going to happen next?
I think it was a good idea, IF you did it YEARS ago (I bought mine in 1977), but… the financial angles have gotten so overly complicated, it’s a pain in the a$$ and a scarier venture now.
But I’ve NEVER been sorry I bought my house, although it carries constant responsibility. Since I live in a semi-rural area, the taxes have never been terribly overwhelming. The payments were $158/mo. I paid it off in 1993, so no one can throw me out now. When I lost my job of 23 years, what a blessing it was not to have to worry about that.
Kathy, years ago happens every year. In 30 years, right now will be years ago. The risks are no more frightening now than they were then.
You are definitely not in the majority, and you’re better off for it. Owning your home free and clear is an amazing feeling.
After living in a house for 3 years and seeing how much interest one pays for having a mortgage, I think it is better to rent. Not to mention the property taxes. Why wouldn’t it be better to rent for about 700-900/month and save the difference of a mortage payment, in my case 350/month, for the same time as a life of a mortgage loan. 350*12 = 4200/year. Multipy that times 10 years and one would save about 42,000.
So, you’re saying it’s better that the ENTIRE rent payment be completely lost, rather than a portion of it?
$700-900/month in rent is $8400 – $10,800 per year down the drain. Multiply that by 10 years and you have burned $84,000 – $108,000.
Simple math shows that $108,000 – $42,000 is a savings of $66,000.
Try again.
Renters pay mortgage indirectly!!! Think people
In NJ renters can apply for a partial rebate for the portion of their rent that is considered to have been applied to property taxes by the landlord. It is assumed that about 18% of your rent is going to your landlord’s property taxes. As stated earlier, the goal of the property owner is to make money, or at least break even, and most do. So yes, renters ARE paying property taxes, they just can’t write off as much as a homeowner.
Semantics. That’s like saying renters should qualify for a percentage of frequent flyer miles because their landlords use the rental income to take vacations. Renters do NOT pay property tax. They pay RENT. Whatever the landlord then chooses to do or not do with the money is irrelevant as far as the renter is concerned.
Investors who purchase apartment complexes are concerned with the capitalization rate on the property. The cap rate is affected by property taxes. The rent is determined largely by supply and demand. Apartment owners wrap as much of the costs into their calculations as possible before they realize a profit.
Your rent is what pays their costs. If their costs are too high, they lose money. If they lose too much money, they get purchased by someone else. The mathematics of renting dictates that you lose in the long run.
NJ ??? Say no more! This must be flame bait.
Renters don’t pay property taxes. One can assume all they want about where the money goes but there’s no way to quantify it in real terms unless the tenant pays in marked bills, lol.
Well, I’m not originally from NJ, and not that big a fan, but I’ll leave the NJ jokes to those who find them interesting. I will say though, that it’s the only state of many that I’ve lived in that let’s me write off part of my rent that goes to property taxes, so I can’t complain about that.
“Eligible homeowners and tenants who pay property taxes, either directly or through rent, on their principal residence in New Jersey are eligible for either a deduction or a refundable credit on their New Jersey resident income tax return.”
Source: http://www.state.nj.us/treasury/taxation/njit35.shtml
The rebate you refer to is simply so the state can keep tabs on who is renting without declaring the income. Otherwise, renters always paid property taxes via their rent.
Sean- With all due respect, that’s a really bad analogy. Of course renters pay “rent”. No one is disputing that. The point was (*sigh*) that the landlord is passing on his costs of doing business (including property taxes) to his tenants. Therefore, tenants are indirectly paying property taxes; not directly, but giving the landlord money to pay the property taxes. The State of NJ recognizes this, and allows renters like me to claim a portion of their rent as a “Property Tax Rebate” on their state income taxes. I get a “Property Tax Rebate” every year. However, my boyfriend who owns a home, comes out farther ahead (in adjusted dollars) in property tax write-offs than I do. You’ll have to take any semantical arguments up with the State, I only rent here.
im actually tallying back and forth on homebuying vs rent and i must say you guys have pretty good opinions which actually make sense. i’ve been renting since i was 18 which is 10 yrs now (to calculate like Jes) i should have $42k saved up but i barely have $42! i basically need to come up with at least $5-10k to even purchase a home considering closing cost and dwnpymt for a home that costs $120k. needless to say im looking to RENT again for $900 a month and good part is the company i rent from (buzzuto) puts $350 a month aside to go towards a dwnpymt on their homes! not a bad deal ehh!
How do they put that money aside towards a downpayment? Is it $350/month for as long as you’ve rented from them or for a specific amount of time? That’s an interesting program. Would you be interested in one of their homes?
They require that you buy a home in one of their developments. It’s not really a deal as they will recoup the $350/month in other ways.
For years all I saw was how good it was to buy a home. Glad I didn’t fall for that in the last few years at least when prices were unreasonable. I almost bought a home for $290K which was $50K less than what Zillow said it was worth at the time. So glad I didn’t get it since now it is probably worth only $250K or less. That 40K will buy me 4.7 years of rent including my electric! Not too shabby. Plus I don’t have to fix anything or mow a yard. Granted I have some negatives like no washer/dryer or garage and dealing with lots of close neighbors and landlords. Still I live a busy life and renting is easier and cheaper at least from 2002 to the present.
i have a question….maybe you folks can help me.
i have never owned a house and when my dad passed away he left me about $150K.
i have been trying to decide if i want to buy a house or not. if i do…. it will be something REALLY SMALL and cheap…. AND i would pay cash for it.
my landlord has offered me the place i am living in for 30K. if i didnt buy that i would look for something else around the country at a similar price.
my question then is…. should i continue to rent? my rent is 475/month. or should i just
plunk down the cash for a small cheap home that i might pay up to 50K for. ( and YES they are out there)
i dont make alot of money so no big house buying for me.
i just cant decide what i should do.i am debt free and just need money to live.
so? what do you think? should i keep paying my cheap rent? or buy a place?
thanks for your 2 cents.
Ann
Ann,
You should simply put the 150K in money market funds, bonds, etc… and simply live off the interest. If you earn a modest 3% a year you would have $4,500/year or $375/month for rent.
You can either keep paying the full price for rent and let the $4500/year grow to more or apply it to the rent and pay just $100/month in rent.
Either way you should consider saving it because you never know when you will need that money Ex: health, legal, your kid’s problems legal or health, old age, etc..
When inheriting large sums of money you should continue to live as you were and enjoy the extra income from interest this way your money never disappears.
Smart investing involves re-investing your earnings. Renting with your earned income is not a path to wealth and financial freedom.
If you buy, make sure your monthly payment (taxes/insurance/etc.) is no greater than 1/4 of your take home pay, and that you don’t finance for more than 15 years at a fixed rate.
For an income earner of about $40,000 annually, this translates to a home of no more than about $95,000.
Why let your investment earnings burn away on rent when you can own a home free and clear that will appreciate over time at about the same rate of return if not more. 3% cannot out pace inflation.
Have you ever heard of inflation? What’s 3% interest when we have 20% inflation. Get your money out of dollars or lose it.
Ann, How old are you? Are You going to have a retirement from work after a certain amount of years? Do you know how much upon retirement you will get from S.S.? If you have both of these options then consider doing something with the 150.. If not do not do anything but put the 150 into interest bearing fdic insured accounts and safe dividend stocks and reinvest the dividend . This will require a brokerage account such as Charles Schwab and they will reinvest the divs. for free— Avoid Mutual Funds with high fees. Learn everything you can about investing.. take a class ..Do you like the home you are living in for 30 thousand? Put 5% to 10% down and get a 20 year loan or 15 and just continue on like you are unless it is a money and utility pit??
Ann,
You’re commenting on a post who’s title is “Rent Forever, Don’t Buy a Home,” so I’m pretty sure what they’re advice is going to be to you.
The truth is, without knowing your full situation, it would be hard to give you an accurate assessment on what you should be doing, but in general, here’s some food for thought for you.
If you pay $50K for a property, it will take you approximately 9 years to recoup that money figuring a $475/month rent payment. Of course, that’s assuming that your rent NEVER increases (yeah, right!). Using a VERY conservative appreciation factor, that same property in 9 years would be valued at about $75-85K.
I won’t even go into the whole ‘pride of ownership’ or the tax breaks or anything else that most here because is crap anyway (it’s not, btw). I’ll stick to their theories, and simply ask you, can you (or will you) invest the money in something that could possibly make a better return than that over the same time frame?
Again, simply looking at a home as an investment vehicle is poor planning, in my opinion, but that’s the major reason given here for NOT buying in the first place.
Whatever your decision, make sure that the people giving you advice know ALL the details (not something for a public post). Good luck to you.
Roger
Roger thanks for your comment to me.
i have NO idea who to ask about this.
all i want is a place to live i dont care about it as an investment. if it goes up in value thats ok too but i am near the poverty line in the money i make and i am just getting by.
i dont even pay taxes because i make so little money.
i want to pay cash for a place to live and the pride of ownership thing doesnt figure with me.
its just a place to live…. as long as it neat and clean thats all i care about.
i dont dont care about houses but i dont know if its better to rent than to buy.
from what you said… i can see maybe buying is a better idea than renting.
but i did find a really cheap apartment for $200 in a small town.
maybe THAT would be better to rent than to buy something. i dont know.
all i know is … i am pretty well broke and i happen to have some money that i can buy a SMALL place with… or i can rent and try to find a safe investment for that money.
i dont think CD’s are gonna do it. if it not 100% safe i am not risking it.
i guess this was the wrong place to ask advice.
i just thought i would see what people had to say thats all.
Ann
I’m not a tax advisor, but it’s likely you’ll need to work with a CPA to handle inheritance taxes on that money.
Wow. $200 for rent.
With the market down. Take a risk in a mutual fund and let time make you $$$… It would be ridiculous to ignore that opportunity.
Renting and buying… So many factors…
Renting is many many times a great oppotunity if you can keep it cheap. Roommates make it even better.
Remember home prices average 4% historically… Barely over inflation…
And that doesnt cover all of the taxes/upkeep …
Plus when you buy and sell there are plenty of fees…
Its all about intelligently taking all of the factors into consideration.
Hi Tim… i dont think i would want to deal with roomates. LOL got use to living on my own but yes i did find a real cheap place to live.
there are alot of cheap places in the country if you dont mind living in a small town.
since i work online…. i can do that.
i dont want to take any chances with my money.
if i lost a single dime i would be heartbroken.
so it looks like CD’s are all i have to choose from.
its GOT to be 100% safe or i wont sleep at night. LOL
anyway…. thanks for your thoughts.
Ann,
I’d recommend talking with a financial advisor about your situation. It’s pretty much impossible for anyone on here to give you the best advice, as we simply don’t have all the information about your personal finances.
Look for an advisor with credentials – CFP (Certified Financial Planner) and/or CPA. I would recommend CFP who works on an hourly basis, as he will be less likely to try and sell you something. Search google to find a professional in your area with good ratings.
That being said, simply investing the $150K in a federally insured money market fund at a 2-3% interest rate will earn you $3,000 – 4,500 per year ($250 – 375 per month) in interest. FYI, you will likely have to pay capital gains tax on this interest at only 5%, considering your low tax bracket. This money would be federally insured, meaning virtually no risk. Even if the bank that is holding your money goes bankrupt, the government will pay you back.
Good luck
Wow so glad I found this forum! I am an EX-Realtor & Loan Officer and for years I have been told and brainwashed that buying (homeownership) is the American Way and the way to go. (Lies cause if you need a loan you aint buying you are asking for a loan to be a renter)
The funny thing is…that it’s not Homeownerhip at all it’s Rentership you are still forking over money to the banks (your landlord) to occupy your home.
It is a scam if you ask me…I never could wrap my mind on how for the first 5 years of your loan for a 30 year fixed most of your mortage payments go to paying down the interest first before paying down the principal (the important part to you).
Yes there is the tax break but it aint really that much of a break at all…what is breaking is pouring money into your home via. taxes, HOA, HOI, & Maintanace. After all that you have to pay water, gas & electric, not including add on’s such as telephone, cable and internet.
So after you have lived in your home for 7 to 10 years and then all of sudden your income is reduced or gone and you can’t afford to pay all of your bills and you fall behind and then are foreclosed on you have lost it ALL!!!
Not your bank (landlord) they just recoup what you owe from the sale of your house & you if they could not meet all the costs through the sale.
So really they are able to make out big any which way you cut it! & you the proud Homeowner (ha) is broke with bad credit no house, no money, all of your equity gone..down payment gone, hardwork in the house gone!…..cause it was never yours from the get go!
I thank God for the great opportuinty that he afforded us and the learning and wisdom that we have gained from owning a home…but God did warn us to not owe a man nothing but love!
Having a Mortgage is what it’s name means “The Death Pledge”
Mort – Latin meaning Death
Gage – Meaning Pledge
Moni, the argument for owning versus renting could go on forever if the one component that everyone believes were in fact true.
Owning does not mean you have to borrow money. Most will argue that it’s impossible to pay cash for a home.
It’s not. It happens every day. People save money, they pay cash, and they live in a blessing that goes up in value. The bank does not have to be involved at all.
So, I guess we should then rent while we save. In this case, renting is not necessarily always throwing money “down the drain” …. its purpose is to bide time until a larger, more sound, purchase can made (with actual cash). Therefore, no – renting is not always a waste.
As a renter, I think of home ownership more as a nice shelter for generations of my family to come, hopefully; and not so much as an investment. Well, actually, that’s considering they can always keep up property taxes, and nothing like ‘municipal eminent domain’ ever happens (like what happened to my grandfather’s house which was paid off decades before the city took over and bulldozed the entire neighborhood to build a federal complex).
I guess, land – at least in much of the USA – will never be fully owned and untouchable. You can possibly lose your home regardless (owned or “death-pledged”)through unpaid property tax, or eminent domain (less likely)…. but you could also lose your rental apartment at any time too. Neither is guaranteed.
I also like to add that there are some wonderful arguments about Renting vs. Buying
Maybe I’m being naive but I find that most people I know who have a mortage are STRESSED!!!!! I was thinking that alot of homeowners like myself are “house poor” when we went into this we were not but after soaring property taxes and increases in Homeowners Insurance and HOA and reductions in wages our homeownership has turned into a nightmare at best!
After doing research it would seem to prove us better if we were to let homeownership go and become renters for a few years and save and invest the difference so that we may once again get into homeownership but in a different way.
I mean the way of OWNING our home outright without a mortage. We may not be able to purchase anything grand but the thought of it being ours free and clear from a mortgage would be worth it to me!!!!
Oooops a lot of mis-spelled words…sorry, I know how some folks just cringe at that!
This varies from person to person. My husband and I have owned 2 homes in the past. The first we bought in 2002 and the second in 2004. We had mortgages on both. We have been renting since we relocated in 2007. We honestly wished that we had been renting all along. We would have saved SO much money. My FIL convinced us that renting was “throwing our money away” and actually buying those houses was exactly that. We weren’t able to put down 20% on either and with the second we had MAJOR repairs that we had to make. Until we have at least 20% and plan on staying in one area for 10 years or more (so our value might actually appreciate), we will rent. Yeah there is a sense of pride owning a home, but there is also a lot of stress that comes with it.
My wife and I have been renters our entire lives and I have to admit that buying is looking pretty good about now. I live in the Las Vegas area and I am seeing houses that were intended to be selling for over 300K going for right under 100K. These are houses that were built in like 2004-2007! The payments with fixed interest and the 10-15 year plan would STILL be cheaper than the rent that we are paying for or crummy apt. in the middle of the ghetto where we live now.
It would make sense that a brand new house in the middle of a brand new neighborhood wouldn’t have the maintenance issues that older houses would. It sure would be nice to get all of our “rent” money back the day we sell it.
Real estate is a complicated thing and to make out, you have to be on top of your game. There are some serious “numbers games” going on right now. It seems clear though, that a person could make TONS of money if they played their cards right. People can’t give their houses away right now, but everyone has to live somewhere. “One man’s loss is another man’s gain”… and there’s tons of loss going around… so therefore…
The old “buy low and sell high” concept has been around for a while now and I don’t see how the prices are going to be getting any lower.
Well, “Interested” if you wanna take the plunge go right ahead. It’s affordable to upgrade your living situation right now, no doubt about it. But buy to live, not to flip. 80% of the flippers of yore are now either holding worthless properties or had their credit destroyed by following the mindless herd to money without actually working for it. There is a reason it’s called a Housing Bubble – bubbles burst and don’t come back. Most people who can legitimately afford a home right now are living in one. True, everyone has to live somewhere – that’s what apartments are for, and at the lower end, cardboard boxes. You have to be able to actually afford to own a home now, what a remarkable concept.
BTW, that $300k tract house in Vegas? It’ll never sell for close to half that price again in our lifetimes.
1. It may be cheaper to rent than to buy. If you take out a mortgage on property, calculate the total interest on that property. (this is the money you are throwing away), if the property value passes an certain threshold, the interest you pay will be above your monthly rental.
2. Assuming that you invest the excess money that you were to pay towards a mortgage(principle) and assume that the interest on a mortgage is equal to rent, then your cash investment will compete with capital gains on the property and guess who will have higher returns
If it was cheaper to rent than to buy no one would ever buy property to rent out. And if that was the case rental rates would go through the roof. Which would then incentivize people to provide rental accomodations.
At certain times renting is cheaper than buying (see housing bubble). Sometimes buying is cheaper than renting. It really depends on housing prices, interest rates and the location.
Owning a home is expensive and takes more work than renting. It requires a lot of extra costs and effort that are not explicit in rental fees. Eventually though, when your mortgage is paid off, housing costs are minimal, leaving you with a fully owned asset.
In this post, everyone’s talking about the financial pros/cons, but I think one of the biggest benefits of renting is the time saved. At one point, I had 3 properties I was juggling due to relocating my mother, and ALL my spare time was sucked up tending the homes.
If you’re single and are on the fence of rent vs buy, you have to ask yourself..do I really want to burn all my weekends mowing lawns, weeding gardens, painting, powerwashing that deck, fixing things that are broken? Almost all homes need something done to them on a regular basis to keep them from turning into dumps over time.
Also, if you’re a first time buyer, you will feel broke for the first couple of years because there are lots of starter things that you need to buy each season..garbage cans, lawnmowers, rakes, tools, snowshovels..you get the point.
I consider myself very frugal and I also think that with a home, it is SO MUCH Harder to stick to a budget because of home improvement expenses because you can justify it is an ‘investment’. We pay for everything in cash and I save every receipt from home depot. I tally them once a year, just to see how bad it really is. It’s a frightening number…when you add in every trip to the hardware store and those bags of mulch in the spring.
Having said all that, I grew up in a rental property sharing our home with 2 sets of neighbors and nothing beats coming home to your own place..being able to have parties, paint your room orange (i did) if you want to and play by your own rules.
Lastly, I bought a modestly priced home (1/2 of what the bank said I could afford and that allowed my family to pay extra on the mortgage, still do renovations, and not have to sacrifice vacations or retirement savings. We have had our home for 9 years and the time has flew, but now we are within striking distance of paying it off and it’s been completely remodeled. Owning a roof over your head is a much more tangible thing than a paper or electronic statement with numbers on it.
So, my last 2 cents is to buy as little house as you need or think you will grow into as your family grows. I hate McMansions. A smaller home means less house to heat/cool, lower taxes, less to clean/maintain, less house to furnish, fewer places for clutter to accumulate. When you’re space limited 1. you buy less stuff and 2 you purge more regularly.
I am wanting to buy a house due to not having someone so close to you and also having more say in things and more control. I have never rented a house and would not want to. It would not work for me.
I realize there are drawbacks but the best thing is you have control over who comes and goes and noone can as easily throw you out.
We have been stuck in a home we own, but do not love, waiting for the market to come back so we can sell and go somewhere else. However, we’ve recently decided to stop wasting time and rent our house out to someone else so we can go rent in a new area and try it on for size! I wish we would have thought of it two years ago.
P.S. Our renting plan should also allow us to live in a much nicer house than we would ever buy!
It’s funny that many of the comments here on the hardship of owning a home don’t take into consideration that you have more choices when purchasing a home, and whether the choice is good or bad is up to you.
All of these people you know complaining and whining about their mortgage, and others here who have had bad experiences owning homes (a few that have admitted that they made not so smart choices such as the poster who bought a mortgage with an adjustable rate and another who bought two homes, neither one bought with 20% down which is the CONVENTIONAL and highly recommended amount to put down.
Of course if you plop your money around willy-nilly w/out thought of the future you will run yourself down. I am a single 25 year old woman, I just bought my first home, and my monthly mortgage (interest+taxes+principle+insurance) amounts to about $550/month. The average rent for a place half the size of my house and with no land (I have abut 8000sqft of land) is about $650/month rent (on the LOW end)not including utilities, cable, etc.
I put 20% down on a home 50k below what the bank approved me for. I didn’t buy the most house I could afford because I took into account that there will be monthly costs outside of the house payments. I also am expecting a pretty fat tax return.
Unless you have $25-30k MINIMUM in an interest-yielding account WHILE you rent then yes…you are most definitely throwing your money away.
Now, if you don’t mind paying for convenience of maintenance and having little/no yard to maintain and the little “ownership chores” (which I personally find enjoyable)are not for you, then you mind not find that you are throwing your money away as you are willing to pay for a service in return.
Also, a home is a tangible thing. It’s useful and serves a purpose. So even if it’s monetarily worthless (which no home is, really) it is serving it’s purpose with shelter. I’d rather have a house that’s worth nothing than stock that’s worth nothing.
And if I ever wanted to move I could just get one of you guys to pay me rent to live in my house :p J/k about that…kinda.
As I tell anyone who argues adamantly for renting, I’ll be happy to have you as a tenant.
Nice going Ladeeda! Sounds like you’re on your way to financial freedom.
………….(yawn)……………
I agree, however my parents own their home. A wonderful 3 bedroom home on 2 acres in a great neighborhood. They are on a fixed income of 2000 dollars a month plus have money in savings. If they were renters they would spend 1200 dollars just to rent a simliar home in that neighborhood and would be down to only 800 a month to live or downsize into an apartment which would still be 700 dollars a month for a 2 bedroom in a decent area. WHo wants to do that? I think you buy a house so when you are on a fixed income in your 60’s you are not having to live in crappy apartment but then home prices are so high I don’t see my generation being able to pay off a home. Divorce rates are high, etc etc. UGH. lol
I’ve been reading a lot of these comments and there are some good points from both sides. But there is one thing that most people do not seem to grasp when they buy a house with a mortgage:
$120,000 sell price/30-year loan @ 6% /20% down = $231,204
So, let’s call it like it is. The price of this house listed at 120,000 is actually 231,204.
Your partially right, Palmetto. If you add in total interest on a home purchase, the total price of the home will usually double/triple.
Of course, you’re also NOT figuring in the tax breaks, which would make that number quite a bit less. Still, it’s something to consider.
That said, put your theory to the test with renting. Let’s say a $1000/month rent for 30 years. That’s $360K over the life AND that does NOT include the average 5% annual rent increases.
By contrast, your $120K purchased home in 30 years would likely be worth about $300K (using 5% simple appreciation, no compounding) to $400K+
So, at the end of 30 years, a renter will have paid an absolute minimum of $360K out of pocket with no return. The homeowner will own something with a minimum cash value of $300K to $400K.
Homeownership is not for everyone, but if it’s an option for you, then you need to fully consider all the options.
In the case of someone paying $1,000 per month in rent then absolutely, home ownership is something to strongly consider! Where I live, very few people pay that much in rent.
In my personal case I am able to save enough renting and put that money to work right now. At the end of the 30-year loan, a home may be worth a lot more but isn’t that more of a benefit for my children/grandchildren as inheritance than for me?
Anyway, Roger, you state that you are in the Real Estate business and I wonder how many of the home-buyers you work with actually consider the cost of a mortgage long-term? In other words, do they realize that they will be paying double or triple the advertised price?
I also think I should point out that my original argument was really to point out how much one spends over the life of a 30-year mortgage. If someone were able to put down 40% or 50% at signing and get a low-interest 15-year loan, homeownership looks much better!
Tax benefits for homeowners are overrated. Plus, your home is only worth something on paper. Once you convert it to cash, guess what? You’re homeless!
That sounds hopeless. Where’s that money gonna go?
Into another home. Lather, rinse, repeat!
Thanks Stan, this is the very truth.
Wow Stan,
That’s the best you can come up with; tax benefits are over-rated. Over-rated or not, better than not having any tax benefits. But, the tax benefits shouldn’t be a reason to buy in the first place. They are simply the icing on the cake.
“once you convert to cash…your homeless!”
No offense, but that’s simply the dumbest comment I’ve seen in quite awhile. There are a number of ways to get cash out of your home wthout selling, but assuming that you do sell, you’ll have the option of buying something else, or if you prefer, to become a renter. Hardly homeless by any stretch.
Since most that keep a home for 30 years will likely downsize their space, they will usually be able to sell their existing residence and purchase for cash a new smaller home, thus ending up with no monthly payment AND a sizeable chunk of cash in their pocket.
Roger,
In addition to taking some Real Estate 101 classes, I’d look up the proper use of contractions in grammar.
Tax breaks for homeowners are only for the interest portion of their mortgage payments. Depending on where you live, that is more than offset by property taxes, water bills, and other municipal obligations that a renter sees no part of.
Besides, I feel we both are defending old arguments that will be obsolete as this new economy takes shape. I see renting and buying being essentially equal in terms of cost / benefit in the future. People will choose to buy if they intend to stay, and rent if they prefer mobility. Gone are the days of the home as investment vehicle or ATM.
IMHO,
Stan Smyl
Stan,
I personally love when the best someone can respond to defend their position is to badmouth the other person about their grammar or education. Feel free to point out my grammar issues as I am sure that really affects my logic. As to real estate classes, since I have had over 10 years of real world experience in the real estate industry and literally 100’s of 100’s of hours of classroom time, I think I have got it covered, but thanks for the concern.
You are right, tax breaks are only for the interest portion of the mortgage. And if you honestly think that a renter does not pay for the “property taxes, water bills, and other municipal obligations” on a rental property, then my friend, maybe YOU should consider some real estate 101 courses. Do you really think a renter’s monthly payment does not include these things? Landlords are in the business to make money after all.
I think that you are correct that the “new economy” will be vastly different than anything we have seen. I do not agree that the costs of owning vs. renting are the same in terms of future appreciation. If you can show me the numbers, we can look at it.
I agree that owning a home is not for everyone. If you like the option to simply pick up and move, then having a house is simply a bad idea. No argument there.
Personally, I do not feel that you should view your personal home as an investment vehicle. Still, that said, the personal home is usually the largest single investment that a person will make, and is usually the largest factor of an individual’s net worth, especially in the later years.
You’re right. It makes so much more sense to rent “your” home from a bank and be on the hook for every single penny of maintenance, repair and tax, not to mention whatever other fees local government can dream up. Yes, sign me up for that. I’ll take 30 years, and while you’re at it, let me pay 3X the actual selling price by the time I’m done. I’ll tell everyone that I’m a “homeowner” the whole time.
The days of home as an investment vehicle are coming to an end.
Palmetto, as long as your comparing apples to apples when determining if it’s cheaper to rent, then in your market it may be better to rent than buy. By apples to apples, I mean are you living a house that would cost you more to buy than rent?
It’s true that there are some markets out there that it simply doesn’t make much financial sense to purchase compared to renting. But they are few and far between. What people usually mean is that they can rent a small apartment much cheaper than they can buy a house that may be double/triple the space.
Nothing wrong with a small apartment if that’s what you want, but you’re not comparing renting vs. buying equally.
And if you are saving money AND actually making sound investments with it, then great. BUT, most don’t do that either. If “putting it to use” means buying a big screen…well.
Back to your original point, Palmetto. You said that you don’t like a home loan because you end up paying 2-3x what you actually paid for the house with principle/interest payments. I think I answered that above. At the end of 30 years, you end up with something that has value (usually 5 times the original vlaue, on average). At the end of 30 years renting, what do you have?
And yes, buyers are fully aware of the total price of the home. It must be disclosed to them upfront by their lender in a good faith estimate. It is fully disclosed when they formally apply for the loan and it is fully disclosed when they sign for the loan.
As to it being a benefit for your kids/grandkids. I guess that all depends. If you’re 25, that only makes you 55 when the note’s paid off. Hardly “old.” Over 65, and you can tap in to your home’s equity with things like a reverse mortgage where your home will pay YOU.
And it doesn’t have to be a 30 year note, either. As you said, a 15 year is possible. But why stop there? Why not get the best of both? Get a 30 year and pay it off in 18, 15, 10, or 7 years. It very doable, and without paying more than you usually do in the first place.
My point is that there are tons of possibilities with home ownership. It may not be right for you and that’s cool. But the argument that it costs more to buy than rent, in most of the country, simply isn’t true, again, if you compare properties equally.
Likewise with the argument that you don’t pay property taxes, fees, (or for that matter the principle/interest payments on the loan), etc on a home if you’re a renter. Landlords are in the business to make money, folks. They do.
If people prefer to rent, then rent. I’m beginning to think that this whole “it’s cheaper to rent than buy” is a massive plot by landlords to keep people renting. For people that fall into that belief where owning a home is possible and would be better in their situation, I feel for them. However, as a landlord, I make good money off of renters, so maybe I should just stop arguing and simply collect my $$$.
Yikes!!! Rent vs Buy seems to be the hardest choice for everyone including me. Was at the bank today trying to get all the facts down and yes, the monthly repayments will not be the only thing you need to worry about, home improvements, repairs, closing costs, taxes, etc
1. Rent: increased mobility, no fuss, new house, no risk of foreclosure as you can scale down in rent when or if you lose your job, lower commuting charges as you can live closer to where you earn, more money available for other things e.g. kids, education, investing in the other intangible benefits of life
2. Buy: mortgage worry (may lead stress and health related costs), opportunity cost of other more riskier invesments with higher return, larger house further away from work or smaller flat closer to work, benefit from the property bubble (FYI:In Kenya right now, property prices are going up 15-20% annually due to foreclosures in the US, pirate money in Somalia and the downturn in the global economy making Kenyans run back home and purchase property anywhere at any price).
FYI: for those grammitacally adept individuals, excuse this Kenyan boy who places 2bets on renting and 1.99bets on mortgage (note not buying as it takes as 15yrs at 15% p.a. for purchase of a small flat suspended in the air).
“Massive plot by landlords to keep people renting” Okayyyyyy. Might wanna adjust the tinfoil on your windows there, bud. (whispering) I think they can see you.
I just bought a condo for cash. I’m scared that I made the wrong decision after reading all this. Did I?
No, you didn’t. At the end of the day this is just peoples opinions. Alot of which go against financial prudence.
I go by a simple rule of thumb and just bought before the increase in property prices and just sold my last house for a $20K profit in less than 2 years.
Here is the rule. If you are going to be there 5 years, you can afford the repairs/up keep, it appraises for more than you paid (this includes all closing costs,) and you like the place. You are a winner. The fact you paid cash puts you miles ahead of the game.
There is a reason people make money in real estate and are land lords and do nothing else. They make huge profits!!!
Congrats on your new condo that is PAID FOR!
Enjoy not having that monthly payment
It’s a crapshoot even during the best of times, and even more so during this administration. There are too many variables that are just out of your control. I think you did the right thing, paying cash and owning the thing outright instead of paying the bank for the privilege of controlling an asset that makes the roulette wheels in Vegas look like a sure thing. But you have no payment and need only put out for maintenance, insurance and property taxes. Not bad in these times.
Likening purchasing a home to the game of craps is so off base I don’t know where to begin, but the decision to purchase outright without getting the bank involved is the right choice.
Your house, when rented, will generate positive income for you, from one of these other rental advocates. Over time, you’ll be paid back, and then you can do it again.
You should have gone with your first instinct and not attempted your reply.
I totally agree with you on this. Renting is way much cheaper and I could have saved a ton of money. Now that we bought our home in 2004. It wasn’t ridiculously expensive, but it was enough to take away all our financial freedoms, the freedom to spend money and the freedom to travel. We didn’t have any extra money to travel at all, in exchange for the future where one day, the home will be paid off. If I were to choose again, I would rather rent, even a luxury apartment than to buy. There is no maintenance and the freedom to choose where to live.
I agree. No maintenance, and more freedom. I have 3 kids and have been a single parent for 3 years. I think about how much money I could have saved versus paid to the banks in that time. There is NO guarantee that you will get what you paid for the home, especially in this environment. When we have to sell, we will rent.
The only problem is: you are at the mercy of the landlord, and if they turn out to be bad, you have to move again.
Most people do not factor inflation. Inflation has been 3-5% on average, while U.S. housing appreciation has only been 1-3%. This means you can break even, but in most cases, lose money on the long run if purchasing a home.
For instance, Tony posts about his father buying a house during 1967 for $11,000 and having a value of $220,000 today (2009). At first glance, this would look like he made a profit of $209,000. However, when inflation is factored in, we see a drastically different picture.
Since the appreciation of your father’s house has been from $11k-$220k over a long span of 42 years, it also means that your father’s property has appreciated roughly $5239 per year or only 2.4% on average. Compare that with the annual inflation rate of 3-5% and your father incurred yearly losses.
For simplicity, lets use 4% as the inflation rate. If it was 4% on average, this would mean that your father loss $3561 or a total of $149,562 on average for the span of 42 years.
There are investments that can give you double and even triple-digit rates in annual return, but unfortunately, buying, or in more appropriate terms, going into debt for a home, is not one of them.
Thank you A Recent College Graduate, I dont think alot of people are looking at homeownership as a huge debt which it is in fact. Our society makes it seem blissful to own a home when in fact is just a way for the lenders and banks to profit from the home owner and still own their home at the same time. If I get a home, it will be cash, other than this, I will rent.
Recent CG
You’re right. There are investments that can offer you a better return than a home purchase. Much better,in fact. BUT, I don’t think a person should look at a primary home purchase as an investment. If you believe, in renting, then you don’t either. So why is this always an argument for renting over buying?
If you compare apples to apples, in most areas, it’s usually cheaper to buy than to rent. Even assuming that your rent vs. buy monthly is exactly the same, that means that you are expending the same about of $$$ for either place, yet at some point you can sell a home you own and recoup some, all, or much more than all, of your money back.
Finally, most people don’t invest their money anywhere. So saying that you’re not buying because you can put the money to better use is great IF you actually do that. Most don’t. Home buying is something like a forced savings, in a way for some.
There are reasons to rent over buying. Freedom to move at a moment’s notice, limited maintenance (varies, and you can get that with a purchase as well), you happen to live in a market where it actually IS cheaper to rent than buy (certain parts of CA is still a good example). I just don’t buy into the “better investments” theory.
Of course you dont buy into the “better investments” theory – you are a realtor and selling homes and properties is your business.
Yes, there are investments that can give you double to triple digit yearly gains. Also, you do not need to go into massive debt like in real estate to get it started. A former classmate of mine has been renting, but dilgently saving and wisely investing her money. Do you know what her net-worth is today? $750,000. Not a millionaire, but certainly far richer than most so-called “home-owners” today. (While she is far older than me, I should add that she is only her mid-30s.) Month after month, she saved a nice chunk from her salary and invested in funds and assets that gave her a yearly yield average of 50-60%. (Compare that with the anemic home appreciation of only 1-3%!)
Of course, there is the common argument that when you buy a home, you are forced to save. But when you are putting money every month on a home that cannot compete solidly against inflation, isnt that called “throwing money away?” Remember, housing appreciation is roughly 1-3%, but inflation has been 3-5% a year.
I should also add that while those monthly payments can improve your credit standing, they do little to improve your balance sheet. When you buy a home, you are put into a mortgage, which is essentially a lien that states that you owe a bank or lender a set amount of money. So if you got a mortgage for a house that is $500,000, you essentially owe the bank/lender $500,000 and have nice, negative balance sheet.
@ RCG
There is no mutual fund or asset that has given your friend 50-60% yearly gains. Especially mutual funds. And if there was an asset that she invested in that provided that sort or return, I have an investment for her, some swamp land that would be perfect to put a home on, lol.
Owning a home doesn’t make you rich. It prevents you from being poor, provided you buy right.
RCG,
Yes, I’m a Realtor. I’m also a landlord, so having people rent is a good thing to me. In fact, I’m neither for nor against renting/buying. My only point is that the “reasons” given for it being better to rent than buy aren’t very good reasons to choose one over the other. Many of them are plain false.
If you choose to rent rather than buy, you should do so based on facts dealing with YOUR situation, not others.
And again, if you’re single and don’t mind living in small apartment, then it’s very likely that you can save money by renting over buying even the smallest place. BUT, if you compare apples to apples (like a rent house vs. a purchased house of the same square footage), it’s very likely that your monthly will be CHEAPER buying rather than renting. It’s simply a matter of looking at the details.
Still, buying does put some obligations on you that, for the most part, renting does not. Namely, the ability to pack up and move at the drop of a hat. If you’re not planning on staying in one location for at least 3-5 years, then it’s probably not a good idea to buy.
As I said, there are indeed investments that can pay big returns. But a) this is an off-tangent thought process, imo, because it assumes comparing buying a house vs. investing in something else. I don’t view a home purchase as an investment, per se, in the first place, and b) it assumes that if one saves money via renting vs. buying that they will invest the difference and make tons of money. While I applaud your friend, the truth is, most people don’t, or won’t, do that.
Joe – Investments with double-triple digit annual returns exist. Just as with anything, you need to do thorough research to find them.
Roger Johnson/Anonymous – Considering that most people in the country do not have a net-worth anywhere near $1,000,000, I firmly believe that it would be better for them to stick their money somewhere else other than going into debt for a home they cannot afford.
I do agree that we should look at the details and one aspect with this is whether or not the client can afford the home as a whole. I notice how realtors concentrate a lot on the monthly payments (My mother is a realtor too). But one problem with this is when the person loses his/her job when a recession comes. (Recessions, on average, occur every 8-10 years). The average salary in the country is $47,000 and when you “buy” a home that is worth $500k or more, that means that you need to go into debt. People have forgotten about saving and buying things as a whole thanks to the overabundance of credit/loans. A harsh reminder came with the current housing crisis. While I am not a fan of investment advisor, Suze Orman, I agree with her that,”when you buy something, make sure you can buy it as a whole.”
You are right that most people will not do what my classmate has achieved and that is, in part, due to the lack of financial literacy. In “Money” magazine, a study showed that 80% of Americans could not even calculate the various charges and interests on their credit card and thought paying the minimum, monthly amount was enough. Put that kind of “know-how” in other areas such as housing, investments, consumer goods, etc and you see why the country is now very rich in debt.
I used to own a house and then sold it due to job move. This was ten years ago and Im still renting and Im happy I am. I want to buy so bad, but I know its the wrong decision. Unless you know your staying there long term, dont buy. And when I say long term, I mean more than seven years. Three – five years wont get it today. I live in Florida near the water and trust me, the homeowners insurance will offset any real profit you would make if you buy vs rent. The insurance is out of control and your one hurricane away from having no insurance at all or it will cost you $300 a month.
Ok i am gonna chime in again here. if you can buy a small house to live in for 50K and pay cash for it. isnt that better than paying $400/month for rent for the rest of your life?
i have seen lots of small houses in small towns that i wouldnt mind living in…and IN that price range.
since I work online at home and dont owe ANYTHING to anyone….
if i can decide where i would like to be…. wouldnt that be better than renting?
i am so divided on renting vs buying.
it really is not so much about whether the house gains in value as much as it is…not throwing away money on rent. in the end… you have nothing.
if i buy… i dont plan to move.
and if for some reason i DO have to. its just 50K not 250K.
Ann, Those are my feelings also but then everyone says in the next breath.. What about all of the repair bills, the accidental fire, the emergency water overflow? If the savings are not also with you then you will be living in a unlivable, unsafe, unhealthy home. So to live in the 50K home you have to have a big bank account to occur with it seems to be the reality that I have come accross.
right now i am renting an apartment in a small town. and my rent is $400/month.
these homes that i speak of are not dumps… they are just small homes… like 600 sq ft… in small towns. thats why the cost what they do.
some of them are 2 bedroom homes with some land around them. it just depends what towns you look at. but…. they ARE small towns.
theres no starbucks on the corner….and in some… no traffic lights. LOL
i am 58 and i have more than $150K invested with no debts. my job doesnt pay me that much unfortunately though.
i am just trying to find the best way to live and not throw money away.
i wouldnt buy a house that was a tumble down wreck. why do all houses have be $150K or more? why is it so had to believe that a decent little house…even today can be had for 50K? and not be a pile of crap?
its all about small towns…. thats where they are and if you have an online job like i do…. it doesnt matter where you live.
still i am undecided about renting vs buying.
i understand that you have to maintain your house. i am spending $400/ month on rent. times 12 months that $4800 a year.
is that what i would likely spend to maintain a small home in good shape on a yearly basis?
i dont know.
i am still thinking about all this.
thanks for your answers.
Hi Ann,
you will have to also consider property tax and other fees in your calculations. Depending on where you live, the tax % varies. If you pay cash for the home, you don’t have to pay double the home’s cost for the interest charges.
If you buy an older home, maintenance fee is unavoidable. The home need to be inspected for any major cost for repair before purchasing. Sometimes, water heater, and pipes and other things can go wrong. You need out of pocket for repairs like this.
RGC,
I’m focusing on monthly payment because YOU’RE focusing on monthly payment. You will ALWAYS have a monthly rent payment. Will not ALWAYS have a monthly mortgage payment. Still, as long as you’re comparing apples to apples, in most areas, you can still buy cheaper than you can rent a comparable property. So from a strictly financial aspect, it can still be better to buy.
That shouldn’t be the only factor, though. Many others have already been mentioned; primary among them the length of time that you intend to stay put.
I’m not sure why a person should make sure that they can pay for a property “as a whole” vs. making a monthly, then say that renting is better, where there is always a monthly. What’s the difference?
Ann,
If you can pay cash for a home, you’re all the better. Again, if you’re comparing apples to apples, it’s simply a false statement to say that as a renter, you don’t have to worry about taxes, maintenance, repairs, etc. The only real difference is that these things are not figured into the monthly payment.
And maintenance will vary from year to year and will depend greatly on a number of other factors like age, upkeep and natural disasters, etc.
I’ll make an assumption that you’ll be getting insurance on a place (if you choose to buy). That will cover any major repairs, issues.
if you don’t want to sweat the small stuff, you can always choose to get a home warranty on your property. Costs will vary from state to state and also depending on coverage, but usually will be cost $350-1000/annually. These things can cover as much as you want, in most cases.
There are always options.
yes i would definitely get insurance on anything i bought. and as far as taxes… the places i have been looking at… the taxes are VERY low. LOL in some cases just plain rediculious.
small towns in out of the way places have their drawbacks but if you are looking for small cheaper homes. thats where they are.
i definitly dont want a mortage and i have 50K cash in my pocket to buy something if i decide to do it.
but… still i am not sure one way or another about buying vs renting.
so….more research is the only answer.
thanks for your comments.
Ann, you can research yourself to death. Not saying that you shouldn’t research, but you should know that most people are not going to give you unbiased information. If they lean to one side or the other, that’s the “best” way, period.
I’m making a few assumptions, but in your case, there’s a pretty easy way to determine which way is best, at least financially speaking.
If it’s going to cost you $50K to buy, and you can rent a comparable home for $400/month, can you find another investment for your $50K that will bring in a stable $400/month?
If not, it’s probably better to buy. Assuming no appreciation on your home, worst case is that you would recoup your $50K when you sell, so the only factor (again, financially) is the monthly. $50K = no monthly. Rent = $400/month.
It’s over simplified, but it works.
very interesting ! thanks for that.
i have not found anything that 50K will bring in $400/ month.
the most i have been able to get out of 50K in a SAFE investment is about $200/ month.
you make a very good point…and i do appreciate it.
its great to hear what others think and i have not heard THAT one before.
so thanks again Roger!
Roger Johnson a.k.a. Anonymous
The reason why you need to look at purchases, whether they are houses, cars, etc, as a whole vs on a monthly basis is because it encourages better planning by giving you a more accurate overview of your finances in the long-term. Its essentially like using a roadmap for a trip vs not using one. Which choice would you rather choose?
Because we now see that buying things as a whole encourages better long-term planning, lets do the same with buying vs renting a home.
I notice how you seem to avoid some key issues I have brought up repeatedly regarding buying a home, so I’ll post them again:
-Debt: For instance, if you bought a home for $500,000, you went into a mortgage, which is a lien stating that you owe the bank/lender $500k. This is debt. On your balance sheet, this would show up as a debt of -$500,000.
-Inflation: Okay, building from the example above, you are now in debt, but at least housing appreciation will get you out of the red right? Houses in the country have been appreciating by 1-3% on average. So if you bought a house today for $500,000, it would be approximately $551,907 in 4 years using a 2.5 appreciation rate. It looks like you have some profit if you sell the house. However, inflation has been 3-5 % on average, so if we applied a 4% inflation rate in this scenario, you would lose $7000-8000 a year on average. Of course, you can break even at times, but in most cases, you will lose money. (Wow, its just like Vegas!)
Add in the maintenance costs, taxes, etc and its obviously a losing game. It shows why most “homeowners” (better called as “home-debtors”), even after paying off their home, are at a worse position than when they started. Only logical people will see this trap.
Lastly, you are a realtor, so naturally, your views on buying (going into debt) for a home will be more positive and biased than what economic realities prove.
Why is it that everyone believes that buying a home means you MUST go into debt?
Buying a home is better than renting and borrowing money is a bad idea.
Buy that 500K home for cash, and you’re already ahead of the game. The ground rules for discussion regarding the “buy vs. rent” argument need to be clearly understood.
I’ll say it again. Buying a house does not mean you have to borrow money.
hmmm, seems my last post in response to RCG didn’t take for some reason. Well, no time to redo it now.
Jon, you make lot’s of excellent points. Just put a nice little house under contract today. A late 20’s couple just paid $50K cash. Will put in about $5K in work and will then have a value in today’s market for about $75-80K. Where’s the loss in homeownership there?
There is nothing wrong with buying a home with your OWN cash, however, I have a better question: In a country where only 5-10% have a net-worth of at least $1 million dollars and where the majority of households have a debt of $134,000, who actually has their own cash to buy a home for $500k or more?
Roger, you keep sidetracking inflation. Better yet, do you know what inflation is? Where is the gain in homeownership if inflation continually outpaces the appreciation rate of homes? Any investment that does not exceed the rate of inflation is a liability.
Thanks RCG im clearly in your corner on this. It makes perfect sense. And most of the folks on here thats talking about buying are not factoring in the economy right now, inflation or possibly hyperinflation in the near future. And interestingly enough the owners are the ones losing their homes right now, not the renters.
Recent College Graduate,
Roger just got home from school and is currently doing his homework. If he has time before dinner I will let him use my computer to chat with his friends. I hope some of you will be able to explain fractions to him this evening, as he is having such a hard time with them. Fourth grade is hard!
Love,
Roger’s Mom
Roger,
Switching your name from “Roger Johnson” to “Anonymous” and to finally “Roger’s Mom” is pretty pathetic.
At least the good news is that people will now know who you really are and will think twice before approaching you or any other realtors.
Recent Grad: Roger and Roger’s mom are two different people, I think you might want to re-read the comment by “Roger’s Mom” with a hint of sarcasm… as it was original intended by the author.
RCG,
1st, I had written a response to you that didn’t post for some reason. Not going to rehash the whole thing here, but I’m not sidetracking inflation at all. In fact, your data is wrong. It’s that simple. All data can be ‘tweaked’ to make it work for any argument, so I rarely post it myself. That said, if you compare reliable data on the subject, the absolute worst housing compares to inflation is equal, that is housing and inflation both go up on average 3-5%. So no, I’m not side-tracking, your data is wrong and it’s not worth the discussion.
2nd, you keep saying that it’s better to rent than buy because you lose money by buying a home. Still, I’ve yet to see anywhere in your post how you somehow MAKE money by renting. Now, I know I’m just a dumb Realtor, but unless you’re on welfare, it still requires a monthly payment to rent something, too. Payments that you don’t recoup, PERIOD! So, when you can honestly compare the 2 and then say you can rent a similar home to one you can buy AND still come out better in 5, 10, 15 or 30 yrs, we can have an adult conversation about it.
3rd, adults can provide intelligent arguments to their theories and have some real world data and knowledge to back it up as well. We don’t need to engage in put-downs or log on as others and try to lay the blame to someone else in order to get our point across. When/if you go up, please come back and we can have debate on the issue if you like.
4th, my “Anonymous” post was simply because the system didn’t auto-log has it normally does, and I didn’t check. Sorry if that offends you somehow, but hey computers to have errors. That said, I can’t see how you’re any less than anonymous. That’s MY name on the board. That’s MY website it links to, and that’s MY phone numbers that anyone can reach me at. I haven’t even seen you post your first name. So who’s anonymous, really?
I’ll let the kids play now. Apparently, it’s so much more fun for them to call people names than it is for them to actually provide anything of substance. Hiding behind a computer screen makes them feel so empowered!
So you are saying that the U.S. Bureau of Labor Statistics is posting wrong data? That is highly unlikely. I should also note that I have done data analysis from Stata and SPSS databases and they have posted similar results from the U.S. Bureau of Labor Statistics. My results have showed that much of what you have stated are myths and lies.
Money Magazine showed that while poor people, did indeed, rent, wealthy individuals also rented heavily as well due to the fact that inflation DOES exceed the rate of home appreciation. Sure, if I were to rent, I would not get that money back, but with going into debt for a home, I would add that plus the lost incurred from inflation. The funny thing is that most people that are going into debt to buy a home are the middle-class, or now appropiately known, the working-poor. They buy a home to come out ahead, but ironically, are in a worse financial situation than when they started. A large majority of them have debts of an average of $134,000. They are supposed to have reached the “American Dream”, but when you look at their balance sheets, it becomes the laughable and illusionary dream.
Anyways, enjoy your dreamy, but false propagandas regarding homeownership. I’ll laugh all the way to the bank with my ever-increasing net-worth.
Roger is just a flamebaiter. Don’t take his drivel seriously. If you look back far enough, you can see his arguments are circular.
No, renters don’t really pay property tax. Not directly, anyway. Granted, most landlords will have rent income cover most, if not all expenses involved in a rental property, there is no way to make a connection any other way than theoretically. For example, renters don’t pay upkeep on the landlord’s car, or do they?
If the inflation part did not scare you, the interest rates probably will
It is currently in the 5.34% area, an all-time historic low. This means that you will have to pay the interest for whatever term you have (eg: 30 year, 15 year, etc).
Let’s make an example of this. Let’s say you went into debt for a $500,000 home and get a loan for 6% for a 30 year term. The 6% means that you will pay roughly $30,000 a year in interest for the next (30) thirty years. Considering how I see many monthly payments going for $2k-3k on a home around this value, on average, you’ll be paying for that interest for the next thirty years.
Once you have payed all that interest, you still have, depending on your monthly, roughly 15-20 years to pay off your home. Thanks to the loan, the total amount you have due is actually $1.4 million. ($900,000 from 6%, 30 year interest and original amount of the house, $500,000) Remember, housing appreciation has been roughly 1-3% on average while inflation has been 3-5% on average. Add in the yearly interest rates and you are still on an obviously losing side. If we were using this example with an average inflation rate of 4.5% and an average housing appreciation rate of 2.5% , you would be losing 8% or $40,000 a year on average.
No matter which way you look at it, the bankers always win while the masses always lose in the housing business. It is simply Las Vegas with a more seductive, but elusive propaganda.
I cannot believe someone actually wrote an article claiming renting for the rest of your life is a better choice than home ownership. This is too funny.
First of all, if you are renting, you cannot modify the property in any way. If you do any type of damage, such as wear out some carpet, you may be forced to pay for it. If you get a little too loud, you can be evicted easily. You cannot have animals/pets.
Renting does nothing for your credit. You do not own any property. You have what exactly…a car? Two cars? Nothing is in your name, unless you own some property or a home. And if you did own a home…why would you pay rent someplace else??
You throw your money away by paying rent…that is hardly comparable to paying property taxes, maintenance, etc. By the way, so what if you need to fix the roof? The hot water heater? I mean, it’s a convenience to have someone else do it, but it’s still not your own place. You are basically a guest paying someone to live there short term.
And if you do leave when you wish…you may violate the terms of your lease. You may be forced to pay additional money if you violate the lease.
Let’s not even get into dealing with the manager of the property that you rent…I will leave that subject alone.
This is truly a ridiculous article. I will be happy to use this article as an example of a logical fallacy for my composition class.
*One more thing…note to the author…*
I really like how you admit you are a homeowner. Therefore, you feel like you have made an inferior choice by purchasing a home, right?
A truly rhetorical and humorous article. Thanks for the laugh.
Hey Professor Josh,
Thanks for one of the most humorous* posts I’ve seen here in quite some time. I do have one suggestion, though…try reading some of the other posts before posing questions of your own.
There’s no need to reinvent the wheel.
*not intentionally humorous.
Thanks Sean…I will keep your suggestion in mind.
A refrigerator costs thousands? Is it plated with gold?
Yes, as a homeowner you do have to pay for the repairs, but you also have the freedom to choose your options. If you don’t have thousands, but need a new refrigerator, that ‘on-sale’ option looks pretty good. And for some reason in my family, all the aunts and uncles have extra frigs, ‘just in case’.
My only comment are people who say “I paid this much and now its worth double 40 years later!” I have to call attention to inflation and the Fed’s propensity to churn out extra dollars that devalue your investments.
Its sad that the only way people have to afford things anymore is to strike a deal with a bank and pay 5% interest over 30 – 40 years.
A great way is to skip the banks and do seller financing. You basically pay THEIR mortgage, without renegotiating with the banks. Basically, you ‘rent’ for another year or two, and the seller agrees your money goes toward your down payment.
Even as a renter, you need to have an emergency fund for when things go wrong, and a plan to replace things that will require fixing/modification. Its the same process with home ownership. I’m 28, so by the time I’m 50, I’ll own a home. Renters however, will have to continue to pay rent… until they die. Depressing!!!!
KayBee, what’s a “frig”? Is that anything like a fridge?
I’ve been reading these posts off and on and I am amazed at the arguements. Rent vs. buy, both are excellent options for whatever fits your lifestyle. I just bought a townhome. I have rented in the past and granted it was stress free and so is my townhome. I pay a month charge for yard, roof, water, sewer and insurance (not including contents of course). Here’s what I did, I owned 3 homes and yes they were mortgaged. I lived in each of them for anywhere to 3 to 5 years and made enough profit on them to pay cash for what I now own free and clear. Without owning, I would have never been able to purchase my townhome for cash. Buying real estate can be profitable.
All this nonsense of home owning is just american myth time! ive lived around the world and people are doing just fine by renting until the end. Guess what? They usually have huge sums of saved up cash and spend time travelling the world and enjoying themselves without being rooted to one place like homeowners or be worrying about whose breaking into your house when your away. Another great plus with renting, its half the work to maintain it. Like i said its personal choice in the end but renting can def be a great option.
Andrew,
You are so correct. Peter Schiff had published a report that renters have more wealth than homeowners. And I know people myself who have been renting for years on top of years and are very well, healthy and happy. Homeownership has always been a myth and scam as we have found out with the housing bubble.
to kaybee. few things are more depressing than being in debt your whole life. Which is what most homeowners are, in debt trying to pay off their mortgage, when they could be using all that money, having fun, traveling, buying that big tv, or a new car. Yeah sure is depressing to be a homeowner.
@Jim: When I said it was depressing, I was referring to the costs of homes being so prohibitively expensive that people HAVE to finance a loan over the course of 30 years. The banks are making a tremendous amount of money in interest, and unless you are very wealthy, it is difficult to pay all cash for a house.
I really love our (rented) townhome and am looking into how renting might be better in the long term.
Ideally my dream is for my fiancee and I to own a ‘family’ home that the kids can always come back to, but observing how my aunts and uncles disregard that privilege from my grandparents, I think there may not be a point. My fiancee and I want to travel and I’d like to get a RV to see the country. Now THAT I could buy with cash one day. A home, however, always carries the penalties of taxes you never recoup, and interests that makes the bank rich.
Well let me see. I rent a 2000 sq ft house for $1400.
The owners bought the house for $378,000. And say their loan was 5% 30yr.
That makes there payment around $2000.00.
The total interest paid would be $352,513 at the end of the loan.
Now say I take the extra $600, and invest it for 10 years at 10% return. That would be about $123,931. Keep going for 30yrs and its up to $1,367,595.
MMMmmm. Math doesn’t lie. Seems renting is better. After 30yrs buy the house out right and save all that interest you pay in owning!
Ok when renting vs. buying you also have to take into account other factors such as time saved, amenities, etc.
For example I pay $930 dollars in rent. The average cost of a house in this area is 350-500K in an upscale neighborhood that surrounds my apartment. There mortgage payment is triple my rent.
Gym on site of complex for free use – Would be 40 dollars for a gym membership if i owned a home
A pool – the maintenance on a pool is a couple thousand a year
Daily commute is less than 5 miles roundtrip. (that saves me somewhere between 200-300 dollars a month on gas if I wanted to buy a house in my price range ). Remember you are just throwing gas money away, it doesn’t come back.
I get on average 1 to 2 hours extra a day than my co-workers who own homes. Time is valuable, and i don’t have to spent it in my car.
So financially i am only contributing 600 dollars towards rent after you minus amenities and money saved on gas. I think renting is just fine
On a $500K note, you’d definitely pay triple your current rent, but part of it would be principal payments, and you get a tax deduction on the other part. On a $350K note, you’d pay a lot less. And if you put down 10-20%, which most banks require you to do these days, you’d pay even less.
It depends on how old are you.Granted buying a house keeps you tied up but why people move in the first place.The answer is job insecurity ,funny term but it is so true.Therefore if you are near retirement age then buying a house makes more sense in today’s market however many banks don’t like to deal with older people unless they have tons of money.In fact being fifty yearsold or even more is a liability in this beloved country of ours.
Joey5– Math does not lie, but to bad the average joe is not smart enough to actually make those #s work—-
Buying is FARRRR better than renting—I bought two houses last year— A single family for $220K and a Multi for $250K all in Boston— I still own my Multi- mortgage is 1,673 a month including taxes– Rent from all 3 floors (3 bed rooms) 1,500 for each, and $900 for the basement— Capitalization at the finest!!!
The single Family- sold it 8/2/09 For $338K- after all my upgrades- that only cost me 20k— 98K was my total profit—in less than 1yr… you can never do that renting!!!!
So, John… where are YOU living now?
The details, I omitted— I live with my wife, who owned her house before we got married–
Hi John,
If you have a mortgage for those two properties, lets get it straight: they are NOT yours, they are the bank’s properties. The monthly rentals you are receiving are nice, but keep in mind that those are not profits until you fully pay the mortgage on those properties.
Also the common story of,”Wow, I made a profit of x on my house!” always amuses me, especially since the inflation and interest rates are not considered. They erase any potential profit and add additional losses on the home debtors behalf. You should read some of my previous posts regarding inflation and the interest rates to see how the “actual math” works.
Lastly, I should add a little secret that most realtors do not want to tell you (or may not know themselves). The housing appreciation rate mirrors the appreciation rate of income (1-3%). Why is this the case? If you have housing rising faster than the rate of income, then people simply cannot afford the debt and you get a market crash just like the one we just experienced (and may potentially further experience in the 2010 and 2011).
Also a little fun question to keep pro-homeowners enlightened: What is the average net-worth of homeowners in America? Hint: It’s in the negative territory!
A Recent College Graduate
What inflation occurred in a span of less than a year? I do not need to consider inflation when it comes to the sale of the single family house, I bought it during a “recessionary time” Oct.2nd 2008 to be exact- a foreclosure at that, put a little money into and flipped it,- My profit is substantional–for 10 months-
I understand that My 3 family is the “Bank’s house” until the mortgage is paid off, But what you do Not understand is that those PROFITS are mine, I realize the rental income Every Single month when I go to collect the rent, it only takes one rental income to cover the mortage–The rest-$3,727=My PROFIT– The bank does not get that. I can own this apartment for 30 yrs- That will not change the $1,341,720.00 that I will make over that time frame- Once again the bank does not get that. Nor will they ever make that off of me.
What the Bank will make is $211,088.95 in interest for the 30yr note based off a 4.80 fixed interest rate- If I choose not to make additional payments on the mortgage to cut their profit in half– But no need for me to make additional anything- when The “RENTER” is the one in essence who is actually paying “my” mortgage,
30 yrs-
1,341,720.00 my income profit
211,088.95 Bank’s profit
My total profit $1,130,631.05
You can factor inflation into those numbers, but keep one thing in mind- Nothing comes out of my pocket- so who really comes out on top- the Bank, maybe- The renter- NEVER, The owner (if it’s done right) Always!
Housing appreciation is not a factor in my situation, the appreciation of my rental property is not my concern, I have 0 intentions on selling it, I am in it for the consistent income, as long as all units remain occupied,
Rich Dad Poor Dad, is a great book to read- I read this 8 yrs ago when I was in highschool– paid off well. College doesn’t teach you the essentials of creating wealth–just the basics of attaining a “job”….
I should have never subtracted the Bank’s “expected” interest profit from my total “expected” income profit– I will realize the total gain, once again the Renter pays the mortage,hense the interest on the note
Say John, Who gets sued if a tenant falls down the stairs? The bank, or you? Just curious.
For such a hypothetical situation– I of course…….if negligence is involved, no negligence on my part , it will be a loosing argument
Thanks, RCG,
homeowners DO NOT OWN THEIR HOMES THE BANKS DO. IS THIS NOT CLEAR??? Unless you can pay cash outright and buy your home, you are basically a renter at the mercy of banks, even if you do so-called “own”.
The big problem are people in this country like to buy house more then they could afford.
Do it like me then you will be fine.
Bought 1st house 240k live there few months and rent it out. Got good rate from bank at 4.25% ARM for 7 years.
Bought 2nd house 190k live there for a few months and rent it out. Got 5.35% for 10 years ARM.
Bought a 2 Bedrooms Condo for 66k and got a ARM for 5% and pay off this in 5 years.
Now i dont have a mortgate, only pay association due, Pay cash for a 2007 Camry Toyota for my girlfriend. No credit card. Travel to Thailand, Honkong once a year.
Amazing that i make only 40k a year, and my girlfriend make $30k. i also got free company vehicle, laptop, phone since my job is service technician.
After 6 years owing a 240k home, i pay alot extra toward the principal, and now owning 117k on that house which leave me 123k equity, but plan to pay off in 2 years.
On the 190k home i still own 141k, but plan to refinance back to 30 years, and have a goal to pay off in 7 years.
Conclusion: To invest in Renter home, you must have good credit, no credit card, use cash if you can, no car payment, no mortgate on the home you currenty live or start out buying a cheap place and live there for a while. When buying a rental place, make sure to choose location, and long term invest, dont bother looking at how much your home worth today.
If you could get the best rate, and after the principal and pay it down, then you are the smart investor.
John,
You are simply over-leveraged thanks to the abundance of credit. (I am glad financial regulations will be stepped up to prevent more stupidity in the markets today.)
I have read “Rich Dad, Poor Dad” and while he does mention noteworthy facts about American debt, financial illiteracy, etc, I found much of his advice mediocre, and at best, very dangerous. He consistently undervalues risk and promotes a lot over-leveraging in real-estate (just like you have done). Yes, you can make a lot money with leverage, but you can also lose a lot money with leverage – Its a double-edged sword.
While receiving a yearly cashflow of $44,753 (actually more like roughly $22,000 a year after inflation and the interest rate are calculated) is nice, you are doing that against a total debt of $610,000 for your rental property. It is a very high risk to reward ratio, or in other words, really “inefficient.”
As for your statement that “college does not teach wealth”, with only $30-50k, I can actually make the same amount of cashflow or even more each year. Heck, even a person who consistently saves and invests every month can equalize or beat the amount you get every year. The added beauty of this is that this method does not have debt on our balance sheets for 50+ years.
Its actually a good thing I did go to college, because otherwise, I would probably have accumulated decades of debt like you have!
A Recent College Graduate
We can go back and forth all day, Some see the glass as half full while others see the glass as half empty.
“over-leveraged” I don’t think so, there are some key factors that the bank have to take into consideration before allowing someone to purchase a property- Credit,Income, debt/equity ratio- This 3 family was never my main source of income, I have no prior debt. And what amazes me is your failure to understand that the RENTER is paying my mortgage, you are missing that key component, how can some one be “over-leveraged” in something that they do not pay for directly, how can a POSITIVE cash flow be “inefficient” even after you take your “inflation” into consideration-
It’s beyond me, that a Renter feels like they are saving some sort of money by investing “pay rent” in someone else’s property-
“We can use the extra money and invest it, and see a 10% yearly return” or “we have the choice to leave when we choose”
As an investor, I am able to do all those above, and much more, not to mention the tax right off is excellent.
p.s I did go to college- decades of debt- It may look like that on paper with this rental unit, however, I will be happy to rent you a place….so you can solely take on that debt (indirectly)
Hi John and Recent College Grad,
Let me start off by saying I consider myself a Real Estate Tycoon. I close my own deals, so the commission from my sales and buys go right into my bank account. I own a total of 7 properties, one beach house in Florida, which is my vacation home, a single family home in VA, where my wife and I reside, and the other 5 properties are all rentals. I own 4 out of the 7, 3 of the properties are mortgaged. I recently purchased 2 properties last year and this year.
I am 66 years old, I haven’t worked for anyone since I was 24 years old. I bought my first property when I was 21 years old. My first property is a rental, a total of six units, I occupied one, while the other 5 stayed rented. The income was more than enough money to pay the mortgage, the minor expenses and taxes, and I had plenty of cash left over, to save or invest. I saved the rental income for 4 years, and that money along with income I receive from my full time job as a plumber, I bought my second rental property 4 years later. The rent from both properties were more than enough to quit my job. I established my own plumbing company, and I also studied to obtain a real estate license. I focus more on the real estate aspect, and plump my own properties
I will keep this short and simple, I have many years of experience buying holding, and flipping properties. The properties I flipped were all single family, burnt out or just plain old run down. The properties that I end up keeping, are the rentals. The cash flow is just too significant to ignore, and yes you may have to deal with burdensome tenants every now and again, but the money far outweighs the little things. John, from reading what you wrote you appear to be some where around 27, you are on an excellent path, you bought at a great time, and the rental levels vastly exceed your mortgage payments, I understand your logic, and you are correct, it not necessary for you to pay off your mortgage, especially with they type of cash-flow that you have, if you do plan on acquiring more properties, it is a good idea to completely own at least one or more, depending on if you plan on going the real estate route. If you are not, then have a mortgage on that property is fine, as you stated numerous times, the renter is paying for your luxuries.
Recent College Grad, There are a few people that really understand the concept of a rental unit. If John were to have done this with a single family, then yes he would have been way over his head, however, his numbers work, especially plugged into a cash-flow excel chart, that I have for my clients to determine whether or not the property is worth investing in over the course of X amount of years. Despite the recent downfall, real estate over the long run is worth it, everything has cycles, but if you are in it for the long hall, the cash flow far exceeds declines in home prices because rental prices does not decline at the same rate- over a course of time, Rent just seems to have increased.
My mother is a realtor and I have seen a lot of people that have gone into debt for rental properties only to go into foreclosures. Much of their tenants lost their jobs and the home debtors could not afford the monthly payments anymore.
I personally prefer the use of equities and commodities as a tool for wealth-building, especially since you do not need to have that debt on your balance sheet for nearly a lifetime. (Your tenants may be paying for it, but it is still your debt.) A former boss of mine is a hedge fund manager and taught me a lot of excellent ways in using far less leverage than in real estate, but with a much better cashflow in a year. As mentioned, he can take money as small as $50,000 and give you a 90% rate return in a year.
If you like real estate, then that is your choice. Just keep in mind that equities and commodities can yield far more than what you can make in real estate without accumulating a massive amount of debt and risk.
I mostly agree. I own my own house but would probably have remained a renter if I had it to do over again. I would never consider buying real estate as an investment. Equities and commodities do entail a great deal of investment risk, but you can buy the with money you already have, not money you have to borrow. In fact, if you borrow money to buy equities, you’re probably being foolish.
Its all perspective,
I am doing great In my real estate venture. I know all about equities and commodities, (I am a trader) I trade currencies, and mainly stocks- day trader to be exact.. I live my life as freely as possible, not confined to a 9-5. I know the best of both trades, its just a matter of how you let your money, or the bank’s money work for you. That’s the purpose of the banking system, use it to your advantage
Methinks English isn’t Tom’s native language, either. That’s a wake up call to native born Americans who fail to take advantage of all this great country has to offer.
Sorry, I came to the US when i was 16 years old. My english wasn’t good, but enough to make lots of money. hehe
Hey Scott,
With the market today, would you be best to invest in home, condo, or muti unit? Since you are a plummer, i guess you save lot of money by repair the pluming yourself.
Give us more advice.
thanks,
Tom
Hello Tom,
It all depends on your location, prices, and the type of person you are. Do you mind doing house maintenance, such a mowing your yard, or snow removal- or would you rather pay a condo association that does all the maintenance work? Would you rather struggle to pay a mortgage by yourself (although you may make excellent money) and have that peace of mind, or would you rather live in the multi-unit property and have the renters pay the mortgage, while you can save your income, collect the additional income- but you may give up some peace of mind when dealing with tenants. It all depends on you, as well as the price, and the type of investment.
I never invested in Condos- too many of them were built, over flooded the markets, too many are left vacant, over priced then, may be cheap now- It’s a great alternative to own only, if payments are significantly lower than rent. If not, it’s better to own a single family. Easy turn over rate, depending on your area (do your research)
Home prices across the country are still relatively low, but not as low compared to last Oct.08 through March 09. I will advise, if it’s your first investment, go with a Multi-Family- Compare the prices with what they were priced at before the boom, at the peak of the boom, and when it hit the bottom, just to make sure your entry price is well positioned. Make sure the rental income is enough to cover the mortgage, and always make sure your cash-flow at the end of the process is positive.
This is pretty good advice… I’m currently closing on my own personal property, a single family – got it for same price as most townhomes in the area. Next step is multi-family or townhome place for an income/rental property. One of the guys I coach hockey with has numerous ones and they were thinking of cashing out of one, they did most of the hard work already and the tenants are there and have been for many years.
If you’re day trading, you’re not living life as you see fit. You’re spending market hours in front of a computer screen, without so much as a lunch break, chasing returns that rarely exceed the S&P 500 index fund. Good luck with that.
Wow, people have no clue- there are many failures out there that have tried to do this– and a very small percentage of those who have succeeded
I don’t need luck, I’ve done this successfully for 4 years,
How are you going to sit and tell me what I do on a day to day basis?
Yes, I live how I see fit, (Can you hop on a plane, and just decide that you want to relax in Miami, or in the Virgin Islands, last minute at any given moment?
No I don’t spend Market hours in front of a computer screen (It only takes 20-30 mins tops) for the things I trade–
No I don’t trade every day, no need to be greedy if I can make 6-10K a day.
I eat lunch when ever
And Yes I do exceed returns far beyond the S&P 500 index fund.. I exceed it in 1 given day-
You have no clue
Not only do I trade for my self, but I have an LLC. – Just reached my 218 investor- Min investment 5K– My management fee 20% off all gains–your good at math right?
When it comes to trading- that’s my passion-
check http://www.thelion.com I am one of the Guru’s there, the owner–He’s been doing this for years..we travel, choose to trade when we want, nothing confines us…… Top trades can make 30K+ a day on a trade if the opportunity exist…. (and yes the possibility to loose-generally for the newbies who do not know the in and outs of the market and do not know how to manage risk) but I make an excellent living doing what I do.. here is another trader http://timothysykes.com/ (but he makes more off his blog, which sells the concept of trading) but same trading concept…. Making money in the Market- it’s real!
Hi Scott,
Thanks for the advice.
i am currently own a 2 bedrooms condo, and it’s pay for. Also owning 2 townhomes and rent it out. I should look into muti-Family home, since the interest rate and the home price are super low.
Do you have a good link anywhere to help me out with muti-housing investment.
thanks,
tom
Hi John,
Its always nice hearing from and talking to traders, but I have a question: If you are one of the “true” professional traders, why did you go into debt for the rental property with the added interest? The traders I know have been very debt and credit adverse and usually bought virtually all their goods and services, whether it be a rental property, home, car, etc, with their own cash outright.
RCG,
To be honest, I have no desire to “Own” my rental property out right, The way I see things when it comes to my “first” rental is- why should I put such a large sum of money into something, that others are paying for? The rent covers the mortgage- which includes interest, taxes, insurance- and my personal expenses. With that logic, there is no need for me to do so. I can use my additional cash for other things.
Now on the taxes side of things, Let’s say if I paid off the property- What would I have to off set my income? nothing really- with this rental, I am able to write off the interest, “repairs” etc. so there has to be a balance- If not, Uncle Sam will rape me over and over again. (trust me I know, pre-rental ownership)
Everything else I own outright- My cars, The wife’s house (our house.)Every thing else I buy is paid for cash. And in the near future, when I buy another property, my logic will be the same- Have “them” pay for.
Why would you want to pay mortgage interest and take a tax deduction (worth perhaps 40%) to “offset” your income? Wouldn’t you rather _not pay_ mortgage interest and keep 100% of that money?
Andrew-
That money will be taxed at an even higher rate, My account did the math- showed me the #s- once again, I pay for nothing (why is that so hard to understand)
You should fire your accountant. Unless the marginal tax rate is 100%, it’s better to keep the money than to incur the deduction.
Would not most Americans be better off if real estate prices never returned to the bubble prices?
I’m not relying on any statistics or economics education – just intuition. I recall my parents selling a house in the 1960s and being grateful that they didn’t lose too much compared to their purchase price – kind of like when one sells their car. That always seemed to me to be better for people. A new house would cost more than a resale. A resale house might sell for more if it had been improved in some way. Most houses would depreciate to some extent. That seems like that would keep housing affordable and stop the unrealistic notion that one’s shelter is also one’s retirement plan.
For your house to also be a good investment, you have to either sell it and move to something less expensive to get the money, or take out a loan for some of the equity and pay interest on that loan. I don’t know why anyone thinks that’s good for most Americans.
Because people do believe that, a lot of people have become dependent on real estate as an industry. Of course, it is painful for them now with prices and employment related to real estate down, but wouldn’t we all better off if it stayed that way? Don’t all of these artificial attempts to reinvigorate that part of the economy just invite more of the same bad results? Let’s go back to manufacturing things we can export.
Houses do typically depreciate, since they’re getting older and more worn. It’s land that appreciates, since the population keeps growing and concentrating itself into the temperate, fun areas.
The smartest thing you can do is have patience. If you are, for example, able to live with a relative, share and apartment with a friend, or some other arrangement where you can really save a lot of your income, then buying a house with cash is the smartest thing you can do. If, for example, you buy a 165K home on a 30 year mortgage, 5.5% interest, the total interest will end up costing you $172,267. If you are able to refinance to a lower rate or shorter term, you will be able to reduce that amount, but it is difficult. Why not save and without stressing yourself in the long run buy with either a larger down payment or in full. Americans want everything now and disregard the smart approach. This is my opinion.
How exactly does one “share and apartment”? That makes no sense at all.