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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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see above comment..Thanks…bamababy24
Great debate…
In any major city or hotspot, buying is far, far more expensive then renting. If you feel confident that you are going to see double digit appreciation on your home though buying is a good idea. If not, it is far, far better to rent. And after the recent market run up, it is hard to see double digit appreciation for at least another decade.
I have a few homes that I rent out. They have break even cash flow and will likely apreciate 3% or so/year over the long term. (Even that is questionable. In cities like Dallas, Cincinnati, and Pittsburg, your home might be worth less ten years from now than it is today. This is possible if you don’t buy in a quality neighborhood where people will flock to year after year.) Of course, they also require work and renting them out from a distance is problematic.
People are so excited about deducting their loan interest and property taxes. The funny thing is, many, if not most, of us don’t itemize, so we don’t get to deduct any interest from our income. Even if we do, often our itemization is only a little bit above the standard deduction, so we only get to deduct a small part of the interest from our income.
Awesome website….. good job.
I live in Houston where property prices barely edge the inflation rate yoy. As much as homes here are relatively inexpensive compared to the rest of the country, the cost of maintenance, property taxes (3% per year), home owners insurance, flood insurance, repairs, community dues, yard work and lawn maintenance, tree trimming, foundation repair issues, termite treatment, painting, updates etc…… list goes on forever. In addition, tied down to the location for a long time because selling it is another 6% drawdown.
At the end of the day, economically speaking it is not worth it if you calculate inflation adjusted. It is more of a lifestyle issue to get a feeling of permanence (which in reality it is not and is driven by jobs etc…).
Tax benefits are humbug…..
It is just not paying the mortgage for the house. It is everything else. The real estate folks do a very hard sell to people getting them to believe that it is “The American Dream”. I think it is the “American Debt”. It is a drain on one’s time, energy and money.
Interesting!..I owned and now I rent and am planning to own again. I think I like the idea of owning. It is mine. I see the point of not having worries from renting. My bug now is do I buy a new home or older/existing one and make repairs…Which is a better investment?
All I have to say about renting vs owing is that you go ahead and rent and I’ll be the landlord. I have owned several homes and rental properties and it has afforded my family more that they would have had if we were just renters. Each home I bough, including the first one we could not afford because the mortgage payment was higher then it should have been (because it took so long to closen on the house and interest rates were climbing so fast) has yeild us more money than most can imagine. My husband and I took off work for a whole year after selling our first home and buying our second home. We clear about $100,000. on our first home and paid cash for our second home. Later we started buying rental property and saved even more because the IRS lets you right off all your expenses and your depreciation. Due to this we rally paid income taxes even though we both worked and made good money, mater of fact one year we received an income tax refund of over $10,000. so we were able to have much less taken out of our paychecks for taaxes and therefore have more money in our wallets. After selling our 2nd home we again cleared over $100,000 and then sold our rental properties as we moved out of state and used the money to build our dream home without borrowing a dime. We also had money in the bank and purchased more rental property for cash. I say to the renters go ahead and throw your money away, pay it to landlords and we will reap the rewards. My husband and I have retired, live in our dream home that is worth five times the money we paid to build it if not 10 times. We own a few rental properties and we have our retirements to fall back on when we need them. We were poor when we started and now we live the good life of retirement at a very yourng age. Our children lived a good life growing up. They alwasy had more than there friends and we always shared our fortune with oters. We help where ever we can but we also relax when we want. We now own a sailing yacht and have a great time sailing. I’m always looking for realestate, but I buy low and sell high. In between we rent them which pays for the mortgage, repairs, taxes, insurance and still gives us income. So if you realy want to rent go ahead but my advice is to buy somethig, even a fixer upper, but never pay full price, then your too can reap the rewards. Just don’t forget that the mortgage always comes first and pay extra when you can so you pay lest interest over the years and learn to save for emergencies, vacations, and hoildays.
I’m glad that things seem to work out for the lady in the last post who buys properties and rents them out, but something doesn’t quite add up there for me.
To hear her tell it, she and her husband just scoop up properties like so many pieces of candy and rent them out profitably before selling them for a profit.
If they are that market savvy they should be teaching economics or real estate at an ivy league university because not everyone has those same insights.
Also, many people don’t want to be bothered cutting the grass on a Saturday afternoon, let alone maintaining other properties and handling requests from a lot of tenants.
For anyone who feels this way I would not recommend that they be a property owner, let alone a landlord and a renter of properties, and maybe take a look at the stock market as a place to invest their funds.
Hey Reader and renter…I smell a rat myself when I read Kathy’s post. She has several words that are misspelled. Misspelling is easily corrected by simply consulting dictionary.com. Every misspelled word subtracts credibility from a post.
Since my last post, real estate prices in all the hot spots have dropped several precentage points. My rent stayed the same.
And of course, I misspelled “percentage.” oops. Mea culpa.
I totally agree and love the comments made by Joe on 08.14 @3:04. I am totally like you – except I have a car unfortunately.
There is no easy answer to this. You have to consider some major variables. Do you itemize, and if you don’t itemize, how close are your current potential itemizations to the standard deduction? How long will you be in the area and what do you see as the housing market outlook in that time period? How much will you be paying in fees such as HOA that are not part of your mortgage payment? And finally, a big question: If you rent, what will you do with the money that would normally go into the monthly mortgage payments? Will you use it to buy more things you don’t need or invest it? If you take these questions seriously and plug them into Excel, you will get your answer. The answer will not be the same for everyone.
Sorry, but the guy who wrote the last post just doesn’t seem to get it, since all of his points deal only with financial considerations.
Some of are saying that there are other aspects to consider which you can’t just plug into Excel and expect to get an answer.
For example, if someone doesn’t care about sports cars, should he shell out $150,000 for one just because it might normally sell for $153,000?
Even if he planned to sell it for the $3,000 profit, he would have to spend some time on it, and homeownership doesn’t even guarantee a profit.
I bought a duplex in 1990 have lived in 1 side and rented the other side. The results have been good with the exception of a rocky last tenant which resulted in an eviction. The rental income has helped pay the mortgage and the amount of work involved in management has been ok. It is not the huge dream house that so many of us feel we must die with but has helped me thru some tough times with unemployment and has increased in value greatly recently refinanced took a bit of equity out and wiped out all debt. Still have lots of equity.
There are very many pros/cons expressed here which are very valid. As an ex-renter and multiple times home owner, I must say that owning always gave me a psychological happiness that was priceless. Also frugal renters will often enjoy their sense of saving by renting, but then turn around and spend hundreds/thousands of dollars a month/year in sports bars, ski slopes/trips and on other over-priced extravagances to feel “happy” and really have nothing to show for it later. I also noticed no mention of the fact that, if you principal residence goes up after two years and you sell, you get the profit with no capital gains tax. A very good deal making $100,000 with no tax. Most people would prefer to own and feel good (you sense that in these comments), but those who just can’t afford it have to rationalize and wait.
That’s fine if owning a home brings happiness to the person who wrote the last post.
But I don’t see how he can conclude that renters waste more money on frivolous expenses any more than home owners do.
Also, I will buy a house tomorrow if he will guarantee that I can sell it for a considerable profit whenever I am ready.
You make a point. I did not mean all renters waste money, but many chose to spend it elsewhere. I should have said many; I did not mean all.
As to guarantees, my friend, I nor anyone else ever got one regarding potential profits, yet the fact of no capital gains on RE profits, if you meet all the conditions, is a fact and law. I have made 100s K over the years and did not have to pay tax (how sweet is that?). I was able to jump up to the next level more rapidly and make even more. You could never save it that fast and will always be behind.
Also, that you “would buy a house tomorrow”, suggests you would really like to own more than rent, if conditions were right for you. Understandable, and exactly my point. It’s all about $$$ and economic strength which comes with time, patience, discipline, good decisions, luck and being in the right place at the right time. But you can’t have your cake and eat, and there are no guarantees or freebies. If I could guarantee a considerable profit, I would buy it myself. That’s the way the real world works.
After thoughts:
I hope I don’t sound pedantic; I don’t mean to. I’m just an older guy who has learned a few things. First, when you’re young, time is on your side; take advantage of it. The days, months, years begin to fly by before you notice it; if you’re out of the loop, you lose. It is so easy to lose track of your spending which the enforced savings (equity) of home ownership helps you with. While housing can go down, don’t expect houses to ever become free, even in these trying times. Also, a lawsuit can clean out your savings, but you will not lose your primary home in this country. Imagine saving like crazy and losing it all because of a DUI (one martini) judgement…back to square one and always a renter!!!
Also, lazy can be expensive. Calling the landlord for everything is nice, but he is not working for free (sorry). Homeownership is not rocket science; look at every house around you; some body owns it and is doing fine and making a profit, if they avoided the “bubble”. YOU CAN DO IT!!! And when you do, the losers will tell you that you were just lucky. Bull!!! (I have no interest in the R.E. industry. I’m just a Dad showing his daughter the ropes).
By the way, the only ones who got their fingers caught in the window during this “bubble” were those that didn’t know what I know and thought they had it all figured out. Everyone understands “common sense”, but not everyone has it. Later, if you want more…I take questions!
I have rented ever since i was divored 22 yrs ago. I love renting. I don’t have to worrry about repairs. and when neighborhoods start to change to my disatisfaction, I just pack up and move. I have watched my friends buy house then lose their jobs. homes get forclosed on after all of the money they have put in upgrading the home. I watch other friends who can’t afford to get repairs done, or have to really bite the bullet to pay ever increasing taxes. Right now I am preparing for a month long vacation to africa this summer, and all of my friends with whom i used to travel are worried about loosing their homes or have lost them. I don’t want to snicker but for so many years they insisted that i was wasting my money renting. of course you are, you get no tax breaks. That is why i am totally against the government bailing out these subprime home owners. they bit off more than they could chew trying to keep up with the jones. yes some were duped, but i have several friends who had more house than they could afford and when i questioned them they kept talking about the values of houses going nowhere but up and that they were going to get a promotion or a raise. Now two friends had 600,000 homes forclosed on and they are living in rental property, by the way both were laid off. I will rent until i am dragged away to the senior citizen building or i find a man who owns his own home
Quick Note:
Equity is worthless (until you sell)… 30K equity in a house that is worth $300,000 doesn’t mean anything. If you tried to sell your home today, with a $270K mortgage, you would have to bring money to closing. Everyone always talks about equity like it’s real. You can borrow against it, but then you’re hurting your overall net value (and cash flow) when you consider the interest. After you perform your rent vs. own analysis, be sure to include this test…
Quick test… Take the amount that your house will sale for (not what it appraises for) and multiply it by 88%, then subtract what you owe on the home… this is your real equity. This is the amount that you will walk away with if you decide to sell your home. So when you evaluate how long you have to keep your home before it becomes a good investment remember to include the “cost to sell”.
One thing that homeowners deal with that is now becoming seen as wasteful is the excess of space that comes with the deal.
It is not unusual for a family of four people to have a house with three or four bedrooms on the second floor and a good sized living room, dining room and den on the main floor.
In addition there is a vast basement with a garage and game room to heat and maintain, as well as an expansive (and expensive) lawn to maintain for appearances sake.
These are the kinds of priorities that have lead to the current housing crisis and hopefully, will give way to more modest, practical and affordable living arrangements in the future.
Something smaller and simpler would free up a lot of resources, leave a smaller carbon footprint and probably make for a much less stressful life for many people.
I have a 300 sf apt in Tokyo that you might be interested in. Just kidding!!!
Seriouly, remember that when you buy, someday you will sell.You have to get something that will appeal to and meet the needs of the average person (family). If a place is too eclectic or unusually spartan, you’ll be very limited in terms of potential buyers. Most people have no desire to live like a Bedouin.
Carbon footprints??? Please!!! Look at what the princes in the United Arab Republic are doing and building with your gas $$$. Indoor ski slopes and ice skating rinks in the desert…You only go around once and I, for one, have no intention of moving into a tent with no electricity and sleeping with my dog in the name of, in the name of, in the name of ??? I don’t know what!!!
By all means, live within your means, but don’t get carried away. I had a friend who religiously saved every penny he made for years for when he got married. He married a party girl who never saved a penny, just partied; it did not work out well for him. He did have plenty of money for his alimony payments, though.
Another poster here stated that she’d continue to rent until they carted her off to a senior citizen place (taxpayer subsidized?), or she met a man who owned a house. Hmmm… scares me!!! And you’re worried about carbon footprints?
I can see it now. “attractive female wishes to meet financially secure man who owns his own house. Please send picture of the house.” Ouch!!!!!!!
Before I bought I was financially sound, we moved to Georgia and bought into a dream- ended up out of work and used every penny to try and keep up with mortgage payments. Owning – It costs more and that whole making some body else rich – bah! We do that everyday with consumerism. I think buying works if you have the money to own – real money. Where I live I can get an apartment for 500 less than what we pay and there are so many houses that the market’s flooded. It all depends on where you buy – to me that determines the value. Of course conventional wisdom says to buy but as I age I see “conventional” aint’s for everyone.
Hey Rosie,
I see your point and you might be right.
Buying a house is like marriage… No guarantees regarding anything…but nice to think and feel that it (she or the house) is yours…unless you don’t mind sharing or possibly getting sloppy seconds! It’s all about $$$, either you’ve got it or you don’t. Winners talk and losers say “deal!!!”
I would like to respond to a few of Augie’s 3/16/08 comments.
He says that it would be hard to re-sell a Spartan home to a potential buyer, but I think a smart and responsible buyer would see the value of modest accommodations.
If he believes that “You only go around once” then why would he want to be burdened with the endless hassles and loss of mobility and freedom that come with owning a house?
And he might not like the idea of carbon footprints, but when a minority of the world’s population consumes a majority of the world’s goods, it makes the basic necessities unaffordable for countless people.
And that kind of global inequity is not offset by knowing that you have a sprawling, green, manicured front yard.
First, I would like to commend Decider on his social consciousness and state tht I sincerely respect that. I think he is a clear and level-header thinker and I would like to make some observations regarding areas where we might disagree.
While a smart and responsible buyer would see the value of modest accommodations, my experience is that most folks look for the nicest home, with the amerities and “all the bells and whistles” that they can afford, within reason. Trying to sell your “socially relevant” statement could be tough!
I do believe “you only go around once” and should try to enjoy life. I think you grossly overstate the burdens of home ownership. Endless hassles and loss of freedom? Janis Joplin said “freedon is just another word for nothing else to lose…” What about stabitity, security, peace of mind, pride of ownership, privacy, and economic upward mobility? What about the hassles of becoming a parent and the loss of freedom? I won’t even begin to comment on the joys my daughter has given me since the day she was born, and up to the present. I wonder, are you speaking as an ex-homeowner or just as someone who imagines how it must be to own a house?
Carbon footprints? A relatively new cliche. Our country produces 75% of the world’s most desired products and new technology, while utilizing 25% of the energy resounces. Not a bad trade-off, considering that we are also one of the most generous countries on the planet. When we have a catastrophe, we fix it ourselves. When there is a tsunami, somewhere we never heard of, we send massive aid. We have fences to keep people out; not to keep them in!!! Why do you think that they want in??? Prosperity, freedom, rule of law, and an opportunity to live in the manner you so willingly wish to forgo.If you must worry, worry about the 3,000,000,000,000 Chinese who live in squalor and pollution because of their oligarchy: not because you own a house!!!
One point we totally agree on, a sprawling manicured lawn is a pain in the butt. I’ve been there and done that!!! Avoid a house with a lawn, if you wish, but don’t preach to those who want one. Patterson Park is there for you, at taxpayer expense, if necessary, and you don’t have to cut it.
Keep the faith and don’t get too uptight. You only go around once!
Regards.
My father worked hard all of his life and raised our family in a beautiful four bedroom house.
After college I moved into a one bedroom apartment about one mile away.
When he would take extended trips overseas, I would go to the house to check on things and cut the grass.
He would have preferred that I just move in during those periods, and use his grand piano, fully equipped kitchen and deck overlooking a stream in the back yard.
I hardly ever did, though, preferring to return to my own little place which was more simple and snug.
I agree WHOLEHEARTEDLY with renting vs. buying. At least in this day and age. I’m an Air Force retiree and have never really put roots down…I always knew I’d be leaving where I lived (did buy a couple of houses when I was married, but again knew I wouldn’t be staying).
I have ‘come back home’ in retirement, and will most likely stay in my home state (Maine). In the past, I figured I would buy when I settled down…but when it gets right down to it, I don’t want the responsibility. I’m no longer married, and don’t see myself shoveling feet of snow off roofs, plowing/shoveling the driveway, fixing even little odds and ends that can go wrong that add up if you don’t know how to fix it yourself. And the big stuff? Forget it!! The heat has gone out in my apartment a couple of times this past winter! I just called the landlord and he came and fixed it!!! Problem over!! I don’t have to sweat over how much fixing it would cost, would I need a new one? Will I have enough money? What if I can’t get it fixed? etc…I don’t want to live like that. Not to mention taxes and all the other things the city/state/government can come up with to nickel and dime us.
Yeah, we may be giving money away to live in an apartment with nothing to show for it…but as far as I’m concerned, I’m saving all that money I’d be shelling out for so many ‘possible’ emergencies. Let’s see, what will I do with my money? Maybe I’ll take a trip to Boston in the Spring, or New York City, I’ve never been there. Maybe I’ll fly to Europe for a couple of weeks…I was there for nine years with the Air Force, I still have friends there. How about Arizona in the winter?
I’m not being arrogant talking about what I can do…I’m proving a point. And as God states in the Bible…’do not be slave to the creditor’…(not His exact Words, but you get the point).
As for me, I’m staying footloose and fancy free. As the old saying goes, ‘ya can’t take it with ya’. Ever seen a ‘U-Haul’ behind a hearse?
And don’t forget the Bible…ALL the answers are there!!
Debbie really makes a strong case for renting, and I love the way she tries to keep a Godly perspective in her decisions.
It makes you wonder about the appeal that owning property has for some people, even when they don’t need it and can’t afford it.
As Debbie seemed to indicate, I think it could be a desire to remain attached to this world, instead of fully preparing for the next one.
Wow! Just finished reading all of these comments. Interesting how easy it is for some to get off of the subject or not even get close. Too bad spell check does not work here for some, then who ever the ass was, would not have had to cut down the lady for no good reason about her spelling/poor typing skills.
Anyway… My wife and I have lived in a vacation destination town for 18 years. Our home has increased in value from $89,000 to $375,000 in that time. I am not going to do the math but I do believe that is not bad. We have been self employed in one way or another and itemized at tax time also. There are a lot of breaks when you are writing off as much as you can legally. We have put a lot of sweat equity into our home too.
Renting here would have been higher than owning per month for the same square footage. Our little town next to Rocky Mountain National Park has been somewhat insulated from recessions and declines in construction nation wide too. So…We believe in owning as long as you can be/stay in the right place, take all the tax breaks, and put some quality time into doing the work on the right improvements to your home yourself. But I can definitely agree that renting is the way to go for the mechanically inept, lazy coach potato types, or those that simply can’t for whatever reason.
We can only imagine how much money would have been spent(waisted) if we were not blessed with the initiative and sense to do most all of the work and improvements over the years ourselves.
If someone chooses not to become a homeowner because of the work involved, so be it. But, here is how it works:
In my posts, I have tried to convey the idea that homeownership is not really that much work. Why do you think the landlord does it for you? He makes a good buck doing something that is no big deal! And usually they just make a phone call, to BGE or another tradesman to fix it, and cuts himself (from your rent) a commission for making the phone call for you, that you could make yourself. OK, he also pays the bill now, but you give it back to him quickly, in spades, in your rent. As any experienced landlord will tell you, the only major downside to the business are lousy tenants. All the rest is cake!!!
There’s nothing wrong with getting others to do your stuff for you…like eating in a restaurant as opposed to eating at home. Just expect to pay for it, and don’t whine or complain about your rent or your restaurant bill. You’re the one who chooses not to cook. Bottom line!
And for the new people who are trying to decide to buy or not, just determine how helpless, lazy, or elitist you are, and then you’ll know the right decision for yourself.
You can do it if you’re not a “prince (princess)” who is afraid to get his/her hands dirty. Please understand I mean no offense to those who simply can’t afford to buy; that is a different story. On the other hand, my first house was a two-family dump (but all I could afford as I was not “blessed” with $$$ and had no great sense of entitlement), but I learned how to do things, and moved up the ladder with a little work, effort and reading to understand how it all works.
This whole conversation involves many complex issues which whole books have been written about. Nevertheless, if you want something you have to work for it. Don’t expect it for free, unless you’re on welfare! But that’s another story for a different post…
I live in an apartment complex that’s going condo. Forty two-bedroom units, and the owner is trying to get app. 190K apiece. Rent is currently $1100/mo. Proposed taxes and condo fee total app. $400/mo. If I can get the unit for 160K, put 40K down (including closing costs), my monthly payment should be around $1200, making the purchase a no-brainer. Except….
Investors have already bought six of the units, and I’m worried that renters will screw up the property; I’ve heard horror stories of how hard it can be to get absent owners to do anything. I’m concerned that the economy may tank, and housing values may drop for years. What if I have to move, or lose my job? The flexibility that comes with renting will be unavailable. What if the HOA has insoluble arguments, or if special assessments crop up unexpectedly? What if my new neighbor makes noise? — I can’t complain to the management anymore, just a potentially squabbing HOA. (Even worse, since I have a financial bankground and will want to know what’s going on, I’d probably have to serve on the HOA board!)
There’s plenty of risk in condo (or home) ownership. I’m not sure it makes sense unless there’s a high probability of staying in it for at least ten years. I’d have to invest my entire 40K savings account into the down payment. Right now I feel flush with cash, and since I’m frugal, I think I’m in good financial shape. Take away that 40K in the bank, however, and I’d feel a bit “naked.” If a $3000 assessment cropped up, I’m sure I’d feel anxious.
Home prices are still much too high since the recent insane spike, and should drop another 20% to return to historical values. Buying now, on the verge of a recession or worse, seems like an extremely bad idea. When all is said and done, my feeling is that the only real upside of owning is that you don’t pay federal tax on your gain when selling.
How are the future renters of the proposed condo units different or potentially more problematic then the renters of the present apartments? And yes, HOA’s are notoriously political and can be very arbitrary and intrusive, if they’re not balanced and reasonable. The “HOA police” can be a real pain, but lifesavers when a really “bad apple’ joins up!!!
Most of your concerns are valid, yet often we worry very much about things that never happen to us. Maybe you’ll get lucky, not have lousy neighbors or get hit with high assessments for unforeseen repairs and maintenance (if the building is an older one)…
The troubled times we are in make it sensible to not rush in. Another thing I’ll mention that you might worry about is who says you’ll have a gain, and not a loss, when you sell? Cookie-cutter condos do not seem to appreciate as much as other types of homes. Their selling prices are more locked in to or linked to comparable units in the same building. You can only individualize your unit just so much.
On the plus side, condos can be cheaper to get into while avoiding some of the hassles of traditional home ownership, although you will pay fees for this.
I would suggest that if you have been happy there as a renter of an apartment, you may be just as happy there as an owner. I don’t know what the right answer is, but i wish you the best of luck.
Another way to look at this is to think of all of all of the things that you “rent” anyway.
And by “rent” I mean use without owning, such as going to the super market without buying the store.
You let the owner of the store deal with the utilities, taxes and maintenance while you pay for your food.
This is probably the most convenient and economical arrangement for everyone.
It also applies to many other things such as public transportation, telephone service and the like.
We might have reached a point in civilization where housing should be thought of in the same way.
“How are the future renters of the proposed condo units different or potentially more problematic then the renters of the present apartments?”
The current tenants probably average 50 years old. Older equals quieter. Investors will rent to anyone — including 4 students who like to make noise in a single unit.
It all comes down to what is important to you. Property ownership vs Freedom. An example:I like freedom and being out and about therefore I rent. My girlfriend likes home ownership and is a homebody she owns a house. (We both make the same income). I live in a very nice active part of town, save 30% of my income so I can retire well off before Im 60, I have no debt, I get out of the USA for several weeks each year, and can go out on the town when I like. My girlfriend has to work a second job, lives in a dreary boring suburb, never travels, rarely goes out on the town, has virtually no savings and does not have alot of equity built up in her house because she has to take equity loans out to repair and fix up her home. My total housing expenses including utilities are 25% of my income, my girlfriend very simple house takes up over 60%. It goes back to how you want to live your life.
There are pros and cons to everything – but thanks for highlighting the alternative to the ‘American Dream’
I think some of these comments that favor renting show a wise philosophy that can apply to other areas of life besides housing.
The important idea is to take only what you need in life, and remember that your possessions are more likely to own you than vice versa.
As people come around to the beauty of this philosophy, they will see the big mansion, big car, big yacht lifestyle as pretentious and gaudy.
I am single and when I buy a house (probably in a year or 2) I plan on having a room mate to help with the expenses. When you’re renting you can’t get someone else in there to help with the rent (legally), but if you own you can rent out space in your house and live there at the same time. This would be harder to do if you had a family with kids of course, but for someone who’s single it’s a great option that I believe makes owning better than renting.
” On the subject ” …..I live in New York , of course it is very overpriced to live here …and a lot of people do anyway ! I love living here and my family lived here for years but it is soo expensive to live here !!! My father is a retired City Police Officer and owns a liquor store here in Long Island that is doing very well …But unless you own a business that is doing well here or you have a job making over $100,000 a yr New York will suck you dry and you will go broke ! Simply making it IMPOSSIBLE to live here and buy a home for newly married couples or anyone just starting out and looking for a home with the high property taxes and such ! But I can tell you renting is not fun either … I’ ve rented in people ’s homes and in gated communities ! You have no privacy and most gated communities have over priced the apartments to where you can almost buy a house !!! I paid $2,300 a mo. to live in a gated community and I was ripped off …The windows were drafty and I heard everyones every move !!!! In the end of a yr I paid almost $28,000 to live in a gated community that I could have put towards a house ! So in the end … Here ’s my advice DON’T rent BUY a home where it ’s affordable for you , nothing lavish just a starter home , a fixer upper and in a few yrs sell ! You will get your money back if you select the right area and then you can buy your DREAM home !!!
I’m afraid I don’t follow.
The debate here is whether it is better to buy a house or rent.
You are saying to buy a house and then sell it in a few years so that you can buy another house.
I thought buying was only a good investment if you planned to keep it for a while.
And even then, there are other considerations besides the money.
And there is no guarantee that keeping a house will pay off financially.
The best solution, if you are capable of doing this rigorously, is to determine what you’d be paying if you bought, then find something you like, to rent, for less, and invest the differential. I have run tables on this several different ways, and it always yields more.
HOWEVER, it is not foolproof. People have a tendency to NOT put away that differential rigorously, and live up to their income. As a result, the payoff is lost.
The ABSOLUTE BEST solution is to buy a house, and invest, simultaneously. Find a price point that works, go for something slightly less than you would like to spend (be SMART…LOCATION is key), and invest that differential at the same time. Then you actually outperform those who just buy a house or those who just invest.
By the way, I’ve lived in the NYC area for years, and the concept that you have to make $100,000 a year to buy a home is crazy. While prices are nowhere near what they were in 1989, I purchased a condo for over 120k which I now rent out. I was making less than $40k, and I’d saved the down payment by always sharing a rental apartment with other people and paying less per month.
People today are not inclined to do this…they want their “privacy”. Get over it folks. If you want a house, you have to make sacrifices BEFORE AND AFTER you purchase.
Once I had my condo, I rented out 1 room, it covered most of my mortgage. I was able to save even more and was able to buy a house 5 years later, KEEPING the condo which I now rent.
I suggest using your head if you want to buy, and realize that having roommates is not a bad thing in the short term, particularly from the ages of 22-30. These are the years you need to be making sacrifices to live well at a later age.
What I did is still possible to do….I saw condos in Jersey City, in good areas, that go for $250,000. You can definitely finance that on $60k a year, once you get the down payment.
I forgot the most important argument against renting:
You are paying the landlord so he can own the apartment. Your RENT is MORE than his:
Mortgage
Repairs
Taxes
Fees
COMBINED!
So, people who say you “don’t have to pay fees/taxes/repairs on rental properties” are “right”. But they’re also wrong. You’re just paying it all for someone else. And if they can afford to do it, why can’t you?
“What I did is still possible to do….I saw condos in Jersey City, in good areas, that go for $250,000. You can definitely finance that on $60k a year, once you get the down payment.”
This is NOT the time to try something like this. A 200K mortgage on a 60K gross salary is nuts. Going into that kind of debt as we enter a major recession is an extremely BAD idea. (Besides, there ARE no good areas in Jersey City.)
“I forgot the most important argument against renting:
You are paying the landlord so he can own the apartment. Your RENT is MORE than his:
Mortgage
Repairs
Taxes
Fees
COMBINED!”
Note, however, that his TAXES are nowhere near as high as yours if you bought your apartment. Once converted to condos, the sum of those individual taxes is much greater. Plus, the landlord is more likely to be able to absorb a big hit on one unit or two than you are on yours alone, e.g., $5,000 of new plumbing. He, not you, owns all the RISK inherent in ownership.
I have been happily renting a one bedroom apartment in a nice part of a large city for the past five and a half years.
However, lately I have felt the urge to move to the part of town where several universities including my alma mater are located.
In a few months, I will probably notify my landlord and make the move about ten miles away.
It will be fun to be in a place that is loaded with interesting shops, restaurants, cultural activities and higher learning programs.
In terms of money, nobody knows if this is a good move, but in terms of experiencing new opportunities it is – like the commercial says – priceless.
Once again (as ALWAYS), it comes down to value. And there is NO value in a house; whether it is rented, or purchased. The value is found with the persons involved in an exchange (Principle: People Are Assets, Things are Things). If a house or apartment was wanted by nobody, it is worthless. If it is wanted by many people, it shows that value of those people. If only one person wants it, it depends upon how much that person wants it (there’s some stewardship involved in all of this, of course).
So the Answer, when asked, which is worth more: Renting or Buying? Is simply, worth more to ‘whom’?
–Dave Charbonneau, C.E.R.
My way of figuring own vs rent. This assumes that cash flow will not be a problem (never stretch yourself too thin, it’s a recipe for disaster).
Cost of renting
Rent + renter’s insurance – after tax interest earned on invested “downpayment” not used: this total is being “thrown away”
Cost of owning
Interest – interest deduction + insurance + taxes + maintenance + other fees (condo, hoa, water & sewer…): this total is also being “thrown away”
Benefit of owning
Principal. The principal is effectively being put in a savings account. Assuming a rational market (a very false assumption most of the time) you should be getting a rate of return on this savings account equal to inflation.
Decision
From a purely financial perspective, if the cost of renting is lower than owning, you should rent and save the difference for a down payment. Eventually your downpayment will get large enough to reduce the big variable in the cost of ownership – interest. If you have a large mortgage with a long amortization, interest is going to be costly.
As mentioned by so many, there are other important factors (mobility, nesting, ability&interest to make repairs, etc) that I haven’t discussed because they are all personal. Hopefully this should be helpful with the financial side at least.
Augie : “I also noticed no mention of the fact that, if you principal residence goes up after two years and you sell, you get the profit with no capital gains tax. A very good deal making $100,000 with no tax.”
so augie….your property gone up in the past two years ? it did? have you tried to realised you so called gains? checked zillow recently?? get ready for DOWN all the way…baby!
keep in mind…prices still have another 30-50%% downside compared to historical averages…and they ALWAYS overcorrect….
where are you now augie????? ANYONE else want to catch a falling knife?
RULE no1: earn $1, spend $0.9, man is happy
RULE no2: earn $1, spend $1.1, man is screwed
I was in a one bedroom apt in a gated complex for a while at about $700/month. Did all the excel spreadsheets everyone talks about and the math said rent was the way to go. Ignored the math and went with emotion and decided to buy a 3/2 house and so glad I did. Payment for mortgage is $1200, add everything else and it is $1600 month. I have one roommate and factor my actual tax refund (only counting the portion related to the house) and I’m paying the equivalent of $800/month. Pretty good deal already, but that’s just the start! I have 2000 sq ft now versus 750 sq ft. I get to park in my garage and don’t have to look for parking and hope I get a spot kind of close to the apt. I have plenty of space and storage. I can actually fit all the basic kitchen items in the kitchen cabinets and don’t have to decide whether to put the toaster OR the microwave on the tiny counter next to the outlet. No more neighbors walking loudly above me. I have met my neighbors and we know each others’ names and wave hi when we see each other. Sounds cheesy but I think it’s cool. Never knew my neighbors in the apt. I can hang out in my back yard and have bar-b-ques…my backyard fits a lot more people and much more private than my little balcony in the apt. I can have people over and everyone can be inside my home at the same time (not the case with the apt). Friends and family can visit and stay in the guest room and they can use the guest bathroom. Really my roommate’s bathroom but they still get to use it.
Add to that inflation protection (mortgage will never change), guaranteed equity growth each time I make a payment, and an excellent chance of appreciation (based on historical data). No guarantee of appreciation of course.
And finally…I smile every time I drive up to my house and up the driveway because I’m happy to be “home”!
Dear SD,
I never said or implied in any post that being a flipper was a good plan. If you buy, hopefully it is for an extended stay which usually works in your favor.
To answer your question, I bought my latest house in Florida for $380,000 (tax-free cash earnings from previous home sales) in 2002. By 2005, identical houses were selling for $700,000 on my street. With this horrendous market, to sell now they are asking for $450-475,000 and they get sold. Not being a flipper, all this means nothing to me. However, in my case, if I were to sell, I would still get a $100,000+/- tax free gain. Not too shoddy…Assuming you are a renter, what have you got to look forward to? When things turn around, and they will, the gain will improve again. A funny story, a neighbor told me that when I bought my house for $380,000 everybody in the neighborhood was snickering at the amount I was paying. The smirks, by her admission, were wiped off their faces by 2005-6 and the previous owner was then crying that he sold too cheaply!!!
The tone of SD’s post is sarcastic and he/she gloats at the downturn in real estate prices. What SD fails to see is that longer term owners are probably still many miles ahead of him financially. The only ones sweating are the poor folks who bought at the top of the market with ridiculous exotic loans. However, there is still hope for SD. Get over your gloating and buy now, at or near this next bottom. You won’t regret it and someday you’ll wish you could personally thank Augie for this advice. And your friends will just call you “lucky”, not smart!!!
In this week’s Parade Magazine there is an article titled “Great Reasons to Rent.”
One point that they should have included in the article is that many home buyers have no business even thinking about purchasing a house, let alone buying the type that they often choose.
I haven’t read all the comments but i didn’t see this in the first few posts. I had a professor in college who largely advocated renting until you find somewhere you want to live forever. buying a house was not a good investment in his eyes. the historical return of something like an S&P 500 index fund has been around 9% annually. appreciation on real estate has historically been much lower than that. the tax benefits are great, but not all that significant once you take into account HOA fees, property taxes, etc. they’re even less significant if your annual income is less than $100K/year. plus with a house, your investment is not at all diversified.
Came here from the Simple Dollar. Good article!
But, except for the first one, the reasons are incorrect. Think of the homeowner as a middleman between you and your residence. Yes, you don’t care about repairs. Yes, repairs are expensive. Yes, owner’s insurance is more expensive than renter’s. Yes, the price may go down. All of these costs fall on the owner’s lap.
But guess what? The homeowner will pass those costs along to the you, and will keep a percent as a profit for her trouble. If she couldn’t make a profit, she would sell her house and invest elsewhere.
Bernardo.
Another plus of renting. If your income seriously decreases, you lose your job or get ill or something, you can easily move into a smaller cheaper place. You sometimes can even downsize in the same apartment complex and avoid the early lease termination fees.
My coworker just recently did this, her and her partner downsized from a three bedroom to a one bedroom or studio. Saving her a lot of money when she needed it.
One of the best ways to free up more money when you have to, is to downsize spending, and housing that you don’t need can eat a lot of money, probably in most cities at least a dollar per square foot per month.
Now if you could realistically say that people bought a house and stayed in it, locked the mortgage price in, then their monthly bills would stay the same as inflation went up, as their income increased. However, this just isn’t realistic, people usually buy better and better houses, they refinance when they have a decent amount of equity, etc.
Some people say that mortgages are better deals because of interest credits, I am pretty sure in a year or so, our refund will not benefit by the interest, it will not be enough interest to qualify for the credit. Maybe a disadvantage of low rates? Who knows.
My mortgage for a three bedroom attached home is about 1100 a month, I pay all my utilities which come to 300+ a month, and my homeowners insurance is $40 a month. The apartment town homes around here of comparable size around here rent for about $900 – $1000 a month, pay some utilities, insurance is $12. My tax credit just about covers my homeowners taxes, and I am lucky, I live in a state where they are incredibly low. So the homeowner tax and the income tax refund for mortgage interest cancel each other out. The partially paid utilities, lower insurance, and free repairs opens up a lot of cash versus home ownership. I am sure a well planned careful homeownership is a better deal, however, for the average person, I think renting is a better financial choice.
On a purely financial and realistic basis, home owning is not the hottest deal.
On a personal level owning a home is better, no landlord bossing you around, controlling what color you paint your house, limiting how many guests you can have over for how long, limiting what pets you can own etc.
why not figure out where you want to retire. 16 years before your retirement date- buy a house and rent it out- and retire in a paid for home.
or buy a two family and rent one unit at a cost that effectively pays the mortgage.
home ownership is cheaper in the long run- rents go up, mortgages stay the same effectively becoming a smaller percentage of your income.
the key with mortgages is knowing for sure you a planting roots- putting a big chunk down and the shortest possible term you can comfortably afford.
Today’s front page of USA Today reads, “Foreclosures take toll on mental health”
Owning a house is not something you have to do – even if they were giving them away for free.
They extract a lot of time and energy out of you that could better be applied to other areas such as helping others and enjoying the free and simple things in life.
I have often marveled at advertisements for some type of fancy scotch or whatever, that show people standing around at an outdoor party in front of a huge mansion.
The owner couldn’t possibly use all of that space, be in all those rooms, need all of that grass and require all of those chandeliers inside.
If the owner REALLY had a lot of class, he would sell it all, scale down and give those resources to people who need them to survive.
As for his own pleasure, he could delight in being led along still waters, lying down in green pastures and never wanting anything except the guidance of God
I think this really depends on the market you live in. I lived in Texas and Kansas and in both cases mortgage payments are actually LOWER than renting.
The last place I rented was a 3 bedroom 1900 sq ft house and rent was 900.00 a month, good for the location. I now own a 3000 sq ft 4 bedroom, 2 bath house and my total mortgage is just under 1000.00. I am getting nearly twice the house for only 100.00 more a month. BTW, if I was renting the same property, it would cost me anywhere between 1500.00 to 2000.00 a month. Why? Because the owner folds in all of his costs and estimated upkeep and a little extra into the rent payment, so he MAKES money each month. I would rent an apartment, but there is no such thing as a 3000 sq ft apartment in my area, and I use all of the space with 2 kids, a dog and 2 cats.
As a note I do pay about 800.00 a year extra for home owners insurance vs renters. I also do have to pay for upkeep (avg about 2000.00 a year) and property taxes (around 5500.00/year). I have done the math though and in my area I know that I am at least getting equal dollar for to own vs. rent.
I think if I lived in Cali or where the cost to own is absolutely crazy, then I would probably rent there as well. It really depends on the local economy. In some places renting is more cost effective than owning and in other places it is reversed.
One of the negative aspects of home ownership is the opportunity cost which is always at the expense of the person who has to call out the plumber, the electrician, the solar water heating installation technician, the tiler, the paver, the tiler, the glazier. For example: I work from home, and had set myself a specific task of doing some accounting work as well as a compliance report tomorrow morning. But that plan is now is out of the question, because we have a leak from the kitchen drain so we will need a plumber out first thing tomorrow morning. While I am at it anyway, my husband thinks it would be a great idea to have all the taps adjusted as well. So I can have a nice full plumbing day, and to heck with the work I needed to do. The trouble with plumbers and electricicans is that they never take you as anything other than as a housewife if you work from home, no matter what the nature of your work is. This has the result that they forever butt their head into your office. I would prefer these guys to do the job, leave me alone, and give me an invoice to pay once the job’s done.
The opportunity cost with the usual plumber or electrician is that my days’s work is either almost or totally lost. If I had been working at an office, I would most likely have had to take the day off to let the plumber in, but the opportunity cost to me could have been even higher.
So when you own your own home, somebody has to be there for that home, 24/7, because something needs to be fixed all the time. The opportunity cost for the housewife is very often the loss of her career, and the income streams that would have come from that career.
That’s a huge amount of money and, to my mind, it’s not worth it for a highly paid career woman to become an unpaid domestic drudge.
In that case, rather rent a property with a good landlord who fixes thing, not the poor wife. If you invest your money wisely you will have at least an equivalent amout in savings comparable to the appreciation of the property, and you will probably be a lot happier as well.
Sounds like your issues are more with your husband than simply renting/buying. To quote you, “rent a property with a good landlord who fixes things, not the poor wife.” If you’re going to be an enabler, don’t complain about your “prince”.
I saw an article yesterday that said home prices are being affected by rising oil prices.
Homes that are near cities sell better than those in distant suburbs, so people can get to work more easily.
It appears that gas guzzling vehicles and suburban lawns are now looked upon the way that smoking cigarettes is.
Most the people arguing for buying instead of renting are so retarded in the way they think about it its amazing. Yeah lets compare the mortgage vs rent and ignore things like insurance, taxes, maintenance etc. Yeah that makes a lot of sense.
The guy with his “napkin” math that paid $300,000 for a place that rents for $1,000 a month. You are a moron…plan and simple.
Anyhow, the whole buying is a “long term investment”. Yes it is and historical
houses appreciate at the rent of inflation so buying becomes a good hedge
against inflation. BUT, the current housing bubble is a very anomalous event.
People that bought during the peak of the bubble in some areas won’t see prices return to their peak prices for many many years (10+ years). Just as the Nasdaq 8 years later has yet to recover from its peak in 2000.
The fact of the matter is that ownership is a great thing, if you plan on living in that dwelling the rest of your life. Everyone knows that most people do not do that. I live in the Midwest and I pay around $650 a month for rent and utilities. Most of my friends that own homes pay twice that ($1,300) just for their mortgage.
Take that other $650 and invest it in a mutual fund for 15 or 30 years and it will blow any home equity out of the water. I admitt that everyone isn’t able to do this but that’s what I’m doing.
If you want to follow the herd like all the other cattle then buy your house; if you care to join me on the beach sipping ritas then invest now and buy when you retire.
okay, this situation is open to comments from all……………………..
We are currently renting a beautiful new apartment for 680 dollars a month. We also pay the taxes of $100 a month, and of course we pay for all utilities. We do not have to pay for any fixing, but we do have to paint before we move out.
We saved our money and can now buy a beautiful new apartment with a rental in it for 300,000. We have 250,000 cash and will need a mortgage for 50,000, but the rental in the apartment will cover the entire mortgage payment.
It will be paid off in fifteen years, at which time we plan that the last of the children will be out of the house, we can retire, and we can move to the small unit and rent out the larger unit for more money in order to supplement our admittedly very small pension and social security.
We feel like the apartment will give us the security of having a roof over our heads in a community we like, and it will eventually supplement our meager income.
We tried to invest in the market, but we did not do too well. We lost 125,000, earned 100,000, lost 5,000, etc. So, we did not do well with having the cash.
We ended up swallowing a hefty loss.
We only have the 250,000 because we bought a house for 58,000 eighteen years ago and sold it last year for 150,000.
So, do we continue to rent, since our landlord said he would give us a longterm rental where the price increase would just be the cost of inflation yearly, and no more, which is very reasonable, or should we buy?
Add to the cost of buying a home the opportunity cost of having your money tied up in real estate. If the cost to rent is $1500/month and the mortgage payment+expenses would be $2500 (fairly typical) you loose the chance to invest that $1000/month. On average over the 30 years it takes to buy the value of the house goes up at the rate of inflation plus 1% and that only recently. On average the money I put in a stock EFT goes up 10% . The house only seems to gain so much because it is compounded over many years. I could buy two houses (depending on the market of course) outright for the $1000/month invested in a good mutual fund over a 30 year period and I would still have had a place to live without being tied down.
If that last post by Kate is accurate, it is a fascinating way to look at the rent vs. buy question and a great argument for renting.
Imagine – someone who takes out a mortgage might own one house after making payments for 30 years.
But someone who rents for 30 years and invests his money wisely could own TWO houses.
And her point about not being tied down during that period allows the renter to pursue employment opportunities as they arise.
It all depends on where you live. Here in Seattle rent are all over the map, but I’m about to move into a house within walking distance of work, in the middle of the city, for 450 a month including utilities. The prices for homes in Queen Anne where my place is are all in the multiple millions of dollars. Besides whether I could afford a mortgage that size is the fact that the differential between the monthly mortgage payment and the rent is a large enough investment to be better spent anywhere else than the interest on a home where I may not want to live in 10 years. And my ability to find such a low rent in such a convenient location to a new job is purely a factor of not being tied down by a mortgage.
i think renting would be good for someone who hasn’t settled down yet. If you have a steady job and intend to keep it until you retire( like teaching), i would buy a home.
if you wanna be real clever own at an expensive location better yet own- 2-3 kouses or apartments and live on rent – renting for yourself in not so luxury area!!!
My wife and I rent a very very nice upscale condo for $750.00 per month. This includes High End Cable, Super Fast Wireless Internet, Water, and ALL Maintenance. We have very high end appliance and a Washer+Dryer in the unit.
We did dream of owning a house but now after a year of living in our condo, we’ve decided it’s just stupid to throw our money away on a house. We will be renting this or another similar unit for the rest of our lives and the extra money we would be wasting on a HOUSE will go into our retirement investments.
Soon, we’ll have enough to retire and travel all we want and NEVER work again.
If we owned a house, it would cost us a FORTUNE just to maintain it. Sorry, I would rather have my FREEDOM.
Im not sure were the last person bought his home but I would rather have rented. We live in Tamarac Florida in a beautiful older home. Homes new and old require lots of costly care, the new once due to poor construction. My property tax was about 6500, home insurance 3500, to mth care and utilities endless. My home has dropped about $100,000 in 2yrs I live on a cul te sac with 10 homes, and 4 of them went into forclosure. I Know that I should have rented longer. I could have had a better home in a great area for a lot less. The last person did not calculate all his taxes, payments, and extra crazy fees by the city.
Great article, mediocre posts. What I gather from having read 75% of what’s on here is that people’s English skills (spelling, grammar, etc.) run a very close second to their math skills. And most of the math I’ve seen here is highly suspect. Seems like we have three camps represented here: Renters basking in being able to watch the Housing Meltdown from the sidelines, New Home “Owners” lamenting their decision to buy at the peak of the bubble, and using the same smoke, mirrors and creative math to defend their choice as the agents, appraisers and brokers did in getting them to sign on the dotted line in the first place. Lastly, we have Home “Owners” that bought before the market peaked and did not go out and re-fi to buy boats or a third SUV or his and hers Harleys. They can sit comfortably knowing the difference between “on paper” appreciation and reality.
I have been doing some quick calulations of my own and need some in put. I dont belive buying is best. I think it used to when homes cost 50 grand and 30 years later they were worth 490000. Also when property taxes were 1000 bucks a year not the 12k a year that is the usual maybe not the norm in bergen county. Some rough back of the envelope calculations are-Buy an average (4 bed 2 bath 100 by 75 lot) home (in NJ)for 450000 at 6 percent your paying back 900000 plus 360k in property taxes over 30 years making that home cost 1.35 mil-not including tax increase, upkeep water bill and all the things you wouldnt pay for renting.
At this point i dont think my home will be worth 1.35 million in 30 years. Some projections at this point say ill sell my home for about 700k in 30 years. making a net LOSS of 565k. If i rented figuring a comprable home costs about 1800 a month x 360 months is a total payment loss of 648k. the difference between renting and buying is that buyings loss is smaller but only buy 83k. over 30 years that means im losing 230 bucks a month when im renting vs buying. If i put 25k in the bank at 4 percent over thirty years the result would be about 83 k. I think the benefit from buying (not profit) should be better than the benefit from an orange savings account dont you?.
There is a silver lining to all of this.
Hopefully, we have learned that if the American dream is to own a massive mansion on a sprawling lawn, then we have a shallow dream.
There is such a waste of resources, time and energy tied up into that kind of thinking that it was bound to show up in areas like the current housing crisis.
It probably contributes to global warming, hurricane damage, fuel shortages, high food costs and other problems as well.
If and when the economy stabilizes, maybe we will have learned that bigger is not always better, and that less can sometimes be more.
Bravo for that!
When you buy, your payment never increases. Rents will always increase over time. If my grandfather hadn’t bought his house back in 1964 and instead rented forever, my grandmother would find herself at age 76 shelling out over $2500 a month for a similar house. Instead, they paid about $240 a month and haven’t had a payment in 14 years. She owns it and pays not a cent beyond maintenance. (No property taxes for her either since my grandfather was 100% service disabled)
The reason I am buying a home is that in the long term, I won’t have to worry about how I am going to pay for where I am going to live. Some day, I will never have to worry about making another payment. If I rented forever I’d always have that next month’s payment looming and have to worry about where it is going to come from. I also expect that at age 24, I am not at the peak of my earning potential. I expect my income to increase over the years while my payment remains the same. Renting, I’d almost surely be paying far more per month 15 years down the road to rent my house than my payment would have been. That’s why renting is stupid.
With all due respects to Scott, it sounds like he hasn’t considered very many aspects of this situation.
I would suggest that he go back and read many of the posts on this site.
He may still choose to buy afterwards, but I think the case for renting is a lot stronger than he believes.
I really like this Devil’s Advocate post! I like to weigh in with my history and thoughts.
Ultimately, I think this boils down to emotions, with geography an important second. And with the emotions driving the current market meltdown, that’s another clear, but off-topic example of why people make the financial decisions they do.
Emotionally, I don’t get the pleasure that a die hard home owner gets. I have no desire to paint my walls a particular color (as one poster mentioned), repair or maintain or remodel my dwelling. That’s just my emotional blueprint. It may change as I get older or if I make a lifestyle change (get remarried, have kids), but it’s where am I at right now.
Switching to the numbers, here are mine: I’ve never owned and my mother, who lives a few cities away, has never owned either. We’re two die-hard renters. This is not to say I never lived in a house growing up as a kid though. I’ve made over six figures for 14 years and have never missed a payment ever since I got my first credit card when I was 19 (my FICO is close to 800) – so my income and credit rating are not barriers. I have no special needs such as disabilities or exotic animals which could narrow my housing choices.
I do live in one of the worst cities for housing affordability – Los Angeles – where according to Redfin.com, there were over 11,000 houses for sale in Los Angeles county over the last 90 days. The median sold price (not the wish or list price) was 380K. That’s a $2, 217.58 monthly mortgage payment on a 5.750%, 30 year fixed loan. According to City-data.com, the estimated median household income in 2005 was $47,640. Hmm, a pretty big affordability gap at the macro level to own. I know this is a macro look, using statistics, and not an apples to apples comparison, but nothing really is super precise with real estate, is it? However, City-data.com also quotes the median contract rent was $852/month in 2005. So the financial justification for renting and never owning is pretty good. Again, these stats includes a bunch of areas that are probably aren’t a fit for everyone (not everyone wants to live in South Central LA or even Beverly Hills), but again, it’s probably never going to be exact.
So at a macro level, at least for Los Angeles, renting wins on the numbers. Again, this is putting the emotions aside and just looking at numbers. If you’re emotionally driven to own for one reason or another, then you’ll probably do whatever it takes to own (and argue with me on this board which I look forward to).
What about my situation? I think renting wins on the numbers again at my micro level. I rent part of a nice house for around $800 month on a six figure income with no debt outside of a modest car lease payment. I live in a nice area of the Valley.
What about timing? Well, I could owned when housing was appreciating like crazy in LA only to be crushed now that things have plummeted. Could I have bought and then sold? Probably, but timing can be very difficult to well, time. I haven’t run the numbers, but I think my renting through the boom and now bust, has probably been financially superior to those who have bought when I started earning enough to own a house and still own now. I’m not going to entertain stats of someone buying an original land tract when Percy H Clark Co started selling them officially in Beverly Hills on Oct 22, 1906 and how those owners are better off than me. Of course they are. Now, comparing my financial situation to those with savvy market timing (aka buying and selling using more reasonable and comparable dates), I don’t know if I’m financially better off than them.
Apologies for any spelling, grammatical, or minor math errors. Feel free to point them out if materially detracts from my post.
Let me know your thoughts.
WOW! That is probably the most salient post I’ve read on this site to date.
By the way, KJ, I have a screenplay I’d like you to read. Seriously.
Interesting views—
I speak for myself and those who can relate- I never rented (due to living with parents) I just turned 25 and recently (Oct. 2nd) bought a foreclosed Single family house in Mass. In the Suburbs to be exact- My mortgage is 1,148 but with the escrow for taxes it will come out to a monthly payment of 1,408 a month- this house comes with a pool, 4 bedrooms, 2 baths, sunroom- drive way etc- let’s just say I have the works. The surrounding houses last year sold for 380k some 400k- I bought the house for 220k since it’s a foreclosure and the market is so crappy- The surrounding houses to this day are worth about 300-340k-
Once the market picks back up- I know for sure I can make an easy 100k profit or more taking into consideration the interest of the loan within the years to come- either way- Owning is the best option– I may consider to (rent) the house out to a family, who can not afford ownership- charge them 1,800 for rent- that way I can use their rent money to pay on my mortgage and still have $400 left over…….In Mass. you can rent a whole house for 2k…. for all the renters you are just paying someone else’s mortgage-
Umm… If you paid $220K for your house then that’s what it’s worth. There are no “deals” out there, you simply pay what the market is willing to bear. If your new neighbors decide to sell now, and the homes are similar, then they won’t get that much more for their homes than you paid for yours. Don’t get fooled into thinking you bought a house for half it’s actual value. You won’t see 2005 prices for another 10 years at least, maybe more in most markets. And by the way, you aren’t a “homeowner” until the mortgage is paid off. Until then you’re paying rent to the bank.
actually—foreclosures are always cheaper— and any person would know that– I have over 2000sqft—and not one house that is up for sale with that much square footage is priced below- 320k-(in my area) 2 houses sold last month around 321k-327k
Other houses that are priced below 260k are all capes- with square footage around 890-1000—-
I know what I bought, I know the area, I know what the houses are selling for, and what they have sold for…….I did the math—
“Mortgage to the bank” backwards thinker- I can tell that you are a renter.
Smith
There is no use in arguing or trying to justify your point. Understand that some people will never have the ability to own any thing in their lives. It’s been proving over and over that real estate is the best vehicle for investing. There is not a surplus of land, once it is all built on that is it.
Look at N.Y, look at the prices for the worst piece of compact property, which is still unaffordable to most people. You will reap the benefits of that property in the years to come. All the renters would have nothing to show, no property, no profit after the sale of a home, all they will have to show is receipts for the amount of rent they have paid over the years.
There are never any investment “absolutes” in life. Renting can be the superior option for many depending on their circumstances and priorities in life.
At this point in my life, I love the flexibility and liquidity renting offers me. I’ll gladly take less money to avoid the hassles that come along with home ownership. I currently have less “unrealized” profit than my home buying friends but I believe my quality of life is superior to theirs. I have the freedom to make choices in my career and life without the burden of a home mortgage hanging over my head.
http://www.getrichslowly.org/blog/2007/07/16/renting-vs-buying-the-realities-of-home-buying/
I choose to rent, though I could easily buy, especially now in the area of California I am in. But with prices expected to slide well into 2010, I’ll hold off on that decision. As far as the lady with the 220k foreclosure, I don’t doubt that foreclosures aren’t cheaper than most homes sold through normal channels, it’s just you can’t buy a home basing its actual value being any different than what you paid for it, more or less. Just because gas was $4.45 a gallon two weeks ago, but today it sells for $3.95 does not mean I am getting the gas at a discount. I’m simply buying it for what it is worth today.
As far as the Moronic refrain: “Land is the only thing they aren’t making more of” – Well, how about Beta Cassette Recorders? They aren’t making any more of those either.
I’ve been investing the extra $12,000 a year I’m saving by not (owning) renting a home from the bank and investing it in Gold. That’s one investment vehicle that has never been foreclosed upon or been worth ZERO.
When the market is right I am going to get into a 15 year fixed rate mortgage with 50% down. I’ll have it paid off within 10 years and then I will actually own my home.
I agree with some of the posts above, such as the one about the freedom that renting gives to a person.
As a single man, I love the idea of not being stuck in any one location, but I would think renting would be even better for people raising families.
They are free to follow any career opportunity without having to leave their children behind in another city – talk about family values!
And I agree with the post that said it is not that important to be able to paint the walls whatever color you want – big deal.
And if it is that important, I’ll bet a landlord would let a tenant do it if the request was reasonable.
Personally, the idea of owning things actually scares me, since I subscribe to the idea that you don’t really own your possessions as much as they own you.
I recently unloaded tons of stuff from my apartment and from my storage area like a laptop computer, CD and DVD decks, audio and video cassette decks, speakers and a four track porta-studio deck.
I gave it to a volunteer fireman who has a son in college, and it was a great feeling.
Just give me my quiet, cozy little apartment with today’s newspaper and I won’t miss all that hype and noise.
On page 40 of the latest edition of Newsweek (10/20/08) there is an article by a Professor of Economics at Yale University who writes,
“But what’s ironic, as any classical economist would tell you, is that homeownership is actually not a great idea from an investment standpoint. A better strategy would be to diversify as much as possible-put your money into stocks, bonds, many different geographies-and then use the income to rent whatever you like, which allows for greater flexibility and efficiencies. The popular argument that renting is equivalent to throwing money down the drain is really fallacious, since the money you save can be invested to produce dividends.”
Now in November 2008, we see how house prices can fall dramatically which makes home ownership seem less of a good deal for the recently arrived. On the other hand, a renter’s stock investments/dividends/principal can vaporize too, while he didn’t keep his money “tied up”. And how many renters are forced to move because the “owner” is in financial trouble or foreclosure? I hear a lot of people saying they are just going to hold on in undesireable situations until things get better. It must be heart-breaking to see your “paper investments” disappearing before your eyes while you sacrifice and live frugally. Maybe you should take comfort in your leaving a smaller carbon footprint? This painful flush is probably healthy in the long-run. Many people are getting an education and will be smarter the next time around instead of just being “smart”. By the way, did you see that despite the big $750 Billion Wall Street bailout, many companies are setting aside vast sums of $$$ for bonus payments for their incompetant CEOs? How’s that for balls and how does that make you feel as you see your stock investments going down the toilet ?
There is a saying in Spanish that “once everyone sees the cat’s testicles, they all know it is a male”. We say “Monday morning quarterback”.
Let us see what Obama comes up with as he spreads your wealth around!!!
I do not believe it is cheaper to rent than to buy. Not all fees (insurance etc) are cheaper when renting, plus a wise home buyer should be able to purchase a home cheaper than renting!!! I am a resourcfull individual and I have no problem fixing most things. If one approaches the prospect very level-headed, a home can be a huge capital generator. For HOA fees, don’t live in a sub-division, for parks and recreation fees, if you like the park, then don’t complain. I have children, $45 a month to listen to my sons’ laugh on the play ground is great return on investment. If you pay thousands for a fridge, well frankly, you are a sucker and need to rent to protect the rest of us.
The bottom line is if you want to move alot, rent, but for everyone else who isn’t afraid of working on their own stuff and don’t live in the Hamptons, buying is a smart way to go.
Just my 2 cents worth lol
Three points:
1. The rental situation matters. In this, I mean that how draconian your landlord is, how well maintained the apartments are, how much noise through a wall bothers you, how much it bothers you that someone might see through a window, and on and on all matter. Since moving out of my parents house, I have always rented, usually in fairly urban areas. When your neighbors walk by, they might accidentally see in your window. They might accidentally see you in your underwear through your window. I’m young and hot, and frankly, it just doesn’t bother me that much, so long as it’s an accident. When my mom comes to visit, she hangs blankets in the windows. For her to be seen in her underwear, even accidentally, would be terrible and she would pay a lot of money to avoid it. Likewise, she complains about noise from the street and through floors/walls. I literally do not even notice these things. Like everything else in life, it’s all about what you are comfortable with. Not having “issues” will save you a ton of $$ in the long run. I’ve been lucky to have good landlords, mainly by renting at small places with landlords that have been there a long time. I would NEVER rent at a corporate place where they nickel and dime you for pet rent and guest parking and all that mess. Like any other economic transaction in life, both the circumstances and the background that you bring are the most important factors in determining value. Getting a great bargain on Sushi matters little if you hate sushi.
2. Renting opens possibilities not available through buying. I’ve shared a 290 sq. foot apartment with my partner, I currently live in a 600 sq. ft two bedroom. Neither of these options are particularly easy to find on the “for sale” real estate market outside of really large cities. In America, it’s all single family detached homes.
3. Renting forces you to downsize. Just as having a mortgage forces you to save, renting forces you to reign in consumer spending. Less space to heat/cool, less furniture, no mower, no sporting goods that sit unused in the garage. I think that renting, and living in smaller places generally, forces Americans to be more wise about how they consume, simply because you don’t have the space for it all. That saves me surprising amounts of $ in the long run.
I sold my $200,000 house and put the cash in a save investment vehicle at 5% so my house that was worth 200k and never paid me any money is now converted into an investment that pays me $10,000 a year in interest. When you figure in the $3000 a year for taxes, the gas bill $1000 year and the maintaince aprox $2000 year. That is $16,000 per year or about $1333.33 per month. If I rent an apt for $1000 a month I how have $333.33 per month more than i would if i still owned. Apts in Des Moines have pool, fitness centers, free heat, free internet. The downfall is you neighbors. So i dont know if owning is better or less expensive than renting at all.
just something to think about
An article in today’s USA Today(1/9/09)about smaller homes being built talked to a lady from Weichert Realtors who told them that clients used to like the status of a big home, but “those days are gone.”
I bought a little renovated foreclosure online in 2000 for $67K, I sold it in 2008 (a bad market) for $164k…I agree with stocks, bonds, investments and the like, but as you can plainly see…well, you do the math (no, I’ll do it for you, $97k in exactly 8 years….oh, and ps, I sold it my self through an online MLS company for $245.00 no realtor fees…Id never get that from renting.)
Maybe it should be more of a relationship, to take what we make from selling a home (since you only take a deposit back from an apartment) and invest that into the stock market or ira..now thats a good idea!
As a renter, 23, I find to other choice. In Bergen County, NJ, all I hear on the news is the prices of housing going down down down. All I see around me however, is expensive houses. I make close to double the salary of most people my own age (I make around 55k), only live in a 1br, and still can’t manage to save up that 20%. A 500k 2br starter home? Give me a f-ing break. I pay 1200/month for a 1br, which is actually quite modest. At least I can put away a couple hundred a month. With a house, I’d be paying my more than my rent amount in interest alone! Does that sound like a smart investment to you?
Kyle-
I am 25- and I bought my first house in Oct. 08- in Mass. I went with a Single Family for 200k- I put about 4% down- my monthly payments including taxes are a little less than $1,400 a month- I have 4 bedrooms- a room mate who pays me $800– utilities may run about $300 (winter months with gas on)So about $900 a month comes out of my pockets- could be less if I wanted another roommate- I make 67K a year- Every month about 3k goes into savings- after Uncle Sam finish rape me—- And I play the stock market (swing/day trade)that’s another Salary alone- Now that is the idea of an investment—
My next move is to buy a multifamily- 3 units- for no more than 260k- (currently looking)Mortgage should be about $1,700 with taxes- I will make sure each unit has at least 3 bed rooms- In boston- Section 8 gives you $1,600 for a 3 bed room (got to love the Govt. programs) All my units will be rented out to Section 8— Do the Math- That’s a $3,100 rental income in my pocket after the mortgage is paid–every month- to the point where I can pay the mortgage on my first house— and still have about 2k left over
It does not matter the amount of interest the bank will make on the mortgage– pay off sooner if that’s a concern- At the end- It’s really the renters who pay for all the cost over the years—— As long as the (investor) does it right to begin with…. It’s all in the thought process. take advantage of these low prices- low interest rates—- nothing stays low forever–It’s the market trend.
As a single woman, no children and a hater of yard work and snow removal it makes a lot of since to me to rent. The landlord takes care of most things, even changes the light bulbs for me since I can’t reach them. Maybe if I had children or a husband I would think differently. Another point is, I could not afford to buy a home in the area I’d like to live but I can rent. I’m very happy.
Smith – Thanks for your post. Unfortunately, where I live, single families start around 350, but I see where you’re going with this. You didn’t have any issues getting a loan with only 4% down? My credit is around 780 (Experian), was there any special condition for you to get that loan, or is good credit still good credit these days?
Thanks again,
Kyle
I think it just depends on your goals whether you should buy a house or not. I don’t want to buy property to be a landlord. I don’t want a big home to take care of. I’m not sure if I want to stay where I am now.
Everyone says I’m wasting my money renting, but I did the math. If I bought now, a reasonable house ($200,000) with 5% down I’d be paying about $550 into property taxes, insurance and PMI. My rent is only $770. Right now I’m only wasting $220 a month which would go to home expenses anyway.
I’ll just wait as long as possible to buy a home. I’d like to pay with a lot of cash so I have a small mortgage. Right now I rent because I’ve been laid off twice. I have the money to support myself if I get laid off again and I have very few expenses. I feel responsible and I like that.
Great article. Thank you.
Kyle—
I am not sure what other states offer for first time home buyers- but A Soft Second Mortgage is one of the benefits that Mass offers for first time home buyers- a 3% down payment- they will even assist on your closings cost if needed- Also they take 1/2 to as much as 2-1/4 off of the Market interest rate— There is no PMI– the second part of the mortgage helps you establish equity rather than throwing it away on PMI— The criteria for the loan- 1.) You have to be a first time home buyer 2.) have to have money for the down payment and closing cost 3.) Have to have excellent Credit- 4.) your debt to income ratio have to make sense— I had no outstanding debt….
I am not sure what they offer in your state- but I am sure they have some great loans out there- research is important.
http://www.cityofboston.gov/Dnd/bhc/Soft_Second.asp