Is Home Ownership Really Worth It?

[lazygood4nothinbum]

for the last 13 or so years i've enjoyed the stability of owning a house. it gave me something to do. i bought a fixerupper in crack town and it is now a lovely home surrounded by amazing & extensive gardens which i enjoyed planting, all smack in the middle of what has become one of the more desireable areas of town, minutes to great beaches and a vibrant downtown.

but what once gave me stability now holds me back. the garden i used to love to work in with my wolfpuppy by my side is just a cemetery for his bones. the area has become so successful that it has lost the low-key appeal which originally attracted me here. while i enjoyed modernizing the house, i am not enjoying the upkeep. where the house used to give me things to do, it is now keeping me from doing other things i'd rather be doing.

unless my thinking changes between now and then, when the market turns i'll be turning over the keys to the next homeowner. it's a vagabond life of rent for me.

 

[Moemg]

I've always loved owning a house but now I have to say the flexibility of renting does appeal to me .

 

[W2R]

I can only speak for myself. I don't think that renting is a smart financial move for me in ER. I plan to live in a paid off house and so housing will not be a worry for me on a limited retirement budget, no matter what happens with the market or inflation.

Non-financial aspects matter too. It could be freeing to be able to move on a whim, and if I were extremely wealthy I might consider renting.

 

[chinaco]

The reason I asked was that I saw a few posts where people had mentioned renting being a better approach.

My preference is home ownership. Conventional wisdom seems to be that home ownership is the best approach financially.

Thanks.

 

[Billy]

tightasadrum

I could call the landlord whenever anything doesn't suit and act really stupid and helpless.

bosco

how much is it worth to you to not have to deal with a landlord? To not have to ask to paint a room? To be told that next month the rent goes up? Or that they want to lay new carpet so please have all you stuff moved to a different room by thus and such a date?

If I remember right, Trombone Al gave some very good pointers on what to do if one is going to rent rather than purchase a home. He mentioned something to the effect that he paid for his rent in 6 month blocks or a year at a time, made small repairs himself, etc. and made an agreement with the landlord to stay for a long period of time like 1-3 years. This worked out well for both him and the landlord. I liked his ideas quite a bit. Made sense to me...

I have not ever had problems with landlords... I think it may have to do with building a relationship with them that is trustworthy on both sides. They want uninterrupted cash flow, and I wanted a stable place to live.

semtex

In fact, the property tax is the killer. About half block away, they just finished a huge house. Guess what's the property tax, 31k!!!

That's a lotta money to be paying -- plus the mortgage itself, repairs and all... whew. We live for a whole year on less than that. (see Priceless Retirement http://www.retireearlylifestyle.com/motley_fool_article_6.htm )
lg4n

but what once gave me stability now holds me back. the garden i used to love to work in with my wolfpuppy by my side is just a cemetery for his bones. the area has become so successful that it has lost the low-key appeal which originally attracted me here. while i enjoyed modernizing the house, i am not enjoying the upkeep. where the house used to give me things to do, it is now keeping me from doing other things i'd rather be doing.

I hear you there, LG4N. I think times change and depending on one's needs.... Maybe your needs have changed now.

Be well,

Akaisha
Author, The Adventurer's Guide to Early Retirement

 

[me_no_boss]

I would rent in my area starting 2005/2006.
But as someone said, I don't want to deal with the hassle the family would have to put up by renting.

I may also add, if you rent, choose your landlord wisely.

Landlord would be happy to have a tenant that behaves well, pay on time, stay for 2-3 years.
That way, both landlord and tenant can ride out this down turn and provide benefit to each other. Tenant gets a reasonable rent and can save money. Landlord gets posit cash flow and stability.
When the market works off the inventory and start to recover in a few, tenant buys a home and landlord can sell the property to capture the gains.

That works for me.

 

[bosco]

I have not ever had problems with landlords... I think it may have to do with building a relationship with them that is trustworthy on both sides. They want uninterrupted cash flow, and I wanted a stable place to live.

Yes, this has been my experience as well. However, it becomes another set of variables to deal with--I have to find a "compatible" landlord. In other words, I have to enter into a "relationship" and relationships take energy.

I'm not saying renting is good or bad, merely that I've noticed that I derive a measure of comfort in not having to nurture a relationship with my landlord. If he/she comes over, even if only to be a nice guy and bring me a 6-pack of beer, I don't have to fret that I don't have the house picked up at the moment.

On the other hand, it can be a source of comfort to make a phone call when the water heater leaks rather than going to the hardware store.

I guess to a certain extent it's about knowing oneself. It's a decision that has elements that go beyond mere finances.

 

[kcowan]

We have rented our penthouse for 10 years after an exhaustive search for a suitable purchase. During that time, the property has appreciated to $2.1 million but is only costing $40k/yr so renting is actually reducing our SWR by over $40k/yr (by freeing up that extra $1.1 million to generate income). YMMV

 

[Moemg]

I've always wanted to live on a beach for a year or two .The cost to do that would be riduculous after the inflated prices and the taxes and the insurance but now that there is a glut of beachfront properties renting looks good and much more affordable than buying . I would rent while the money from the sale of my old house gains interest and I'd still be ahead.

 

[lets-retire]

In my situations renting has always been the losing proposition and the longest I've stayed in one spot has been 4 years. With that said I was fortunately to have to sell only when the market was strong. I must add that my current house is the newest one I've purchased and it was 3.5 years old when I purchased it. Just about all of the other houses I've bought have been fixer uppers and I walked away with a good profit from all of them. The monthly costs for each of my other houses, including the cost to fix, was less than it would have cost me to rent a similar house. Currently if I were to rent my house instead of buying it I would be paying an extra $100.00 per month.

I fall on the buying is better side. Of course if I had the freedom to travel and not work so much I would definitely look at seriously renting, both my house and furniture.

 

[Alex]

For me it is not a financial decision but an emotional one. I prefer the security of ownership. That's just the way I am. I don't lease cars either, I buy them.

 

[calmloki]

I greatly favor people renting rather than buying. Even if that means, like today, i have to go out and replace a toilet flapper and two t-stats on an under-counter water heater. And field phone calls and emails and meet with 3 different potential renters. And have to meet a couple more tomorrow as well as get the window installers going on the 5-plex. As long as it means frequent trips to the teller window to make deposits i'm a strong proponent of renting rather than buying. Unless someone wants a 7-unit..... then i'll happily sing the praises of ownership.

Lazy dog. SSI says no earned income since 1991.

 

[aenlighten]

It can be

It is a matter of local growth (increasing demand), congestion (limited supply), leverage (multiplying return), initial price (vs rent, a matter of timing), taxes (higher deductibility), and inflation (working for owners and against renters), but transaction costs require extended stays and limit movement flexibility. Usually renting starts cheaper but ends up more expensive, but breakeven can be very long when initially much cheaper. Real returns can be expected to be zero in the country, bond like in cities (pop 1MM), and stock like in metros (pop 10MM), but stock like returns come with volatility. The price is an indication of the return you can expect, higher prices, higher returns, but currently very high prices suggest low returns most places. If you want to live in desirable area permanently, you will generally have to buy because rents rise faster than incomes (the definition of desirable) and it becomes difficult to stay. More than anything else it is a lifestyle decision though.

 

[CyclingInvestor]

I have owned for 26 years now, my current house for almost 20 years. Financially
I would have been far ahead by renting and investing, but owning was not a financial
decision for me. I have had dogs most of my life, and no rental in Los Angeles
would have allowed me to own 3-4 dogs of 50 - 100+ lbs each.

 

[haha]

You have owned in LA since 1981, and even with the great appreciation you have had you feel that renting would have left you with more money?

This seems like a very strong argument for renting!

Ha

 

[CourtneyC]

Good question. To expand on the previous poster's comments about home ownership being the better long-run option, I will explain why that is the case.

In the long run, real estate tends to appreciate in value. The amount of appreciation varies by area and timing, but over time, almost every home will appreciate in value. In good markets, appreciation can exceed 10% per year on an annualized basis over a long timespan. The return on your investment that you actually recognize as a homeowner is much greater because of a concept called leverage.

Here's how leverage works: say you purchase a home for $200,000. To buy this home you decide to put down 20% of the purchase price ($40,000) and take out a mortgage on the rest ($180,000). For simplicity purposes, let's just say your property appreciates 10% during the year following your purchase, which would be $20,000 (10% of your purchase price x $200,000). Expenses and interest payments aside, you just made $20,000 on your $40,000 down payment, or 50%. Better yet, the interest payments on a mortgage are tax deductible.

In the short-run, however, your gains would not be as substantial as they would appear because of the 5-6% real estate commission you would likely incur to sell the home. Six percent of $220,000 = $13,200. After your other expenses, you would be lucky to break even if you sold after the first year.

In the long-run, however, your leveraged gains should far exceed realtors' commissions and other expenses, so buying makes sense.

 

[teejayevans]

For simplicity purposes, let's just say your property appreciates 10% during the year following your purchase,

Understand that since 1900 (2000-present excluded), real estate has
appreciated at the same rate as inflation. Hence the reason why we
have the current real estate bubble.
TJ

 

[CyclingInvestor]

You have owned in LA since 1981, and even with the great appreciation you have had you feel that renting would have left you with more money?

This seems like a very strong argument for renting!

Ha

My first house rose about 26% in 6 years, my current house has slightly more than
tripled in almost 20 years.- total appreciation of 5-6%/year. A few years ago I
analyzed my total estimated ownership costs vs renting - ownership had a decent
positive return, but I have kept my $$ in tax-free bonds (to 93) and stocks since.
The returns on these were considerably higher (I wish I had kept the ownership #s).

 

[al_bundy]

Good question. To expand on the previous poster's comments about home ownership being the better long-run option, I will explain why that is the case.

In the long run, real estate tends to appreciate in value. The amount of appreciation varies by area and timing, but over time, almost every home will appreciate in value. In good markets, appreciation can exceed 10% per year on an annualized basis over a long timespan. The return on your investment that you actually recognize as a homeowner is much greater because of a concept called leverage.

Here's how leverage works: say you purchase a home for $200,000. To buy this home you decide to put down 20% of the purchase price ($40,000) and take out a mortgage on the rest ($180,000). For simplicity purposes, let's just say your property appreciates 10% during the year following your purchase, which would be $20,000 (10% of your purchase price x $200,000). Expenses and interest payments aside, you just made $20,000 on your $40,000 down payment, or 50%. Better yet, the interest payments on a mortgage are tax deductible.

In the short-run, however, your gains would not be as substantial as they would appear because of the 5-6% real estate commission you would likely incur to sell the home. Six percent of $220,000 = $13,200. After your other expenses, you would be lucky to break even if you sold after the first year.

In the long-run, however, your leveraged gains should far exceed realtors' commissions and other expenses, so buying makes sense.

you have to run the numbers for 15 years. there are people living in the NYC burbs in good neighborhoods who bought 1987 - 1990 and it took 10 years for their home price to come back to the level of what they paid for their homes. add up the interest, taxes, maintenance and they probably lost money. of course once they pay off their home a big expense goes away unlike with renting

using the last 10 years of data for home price growth is not very scientific

 

[OAG]

My first home was $37K, sold it for $50K two years later; rolled profit into next $70K home; lived there 7 years sold it for $125K, next home purchased for $87K lived there 7 month (mistake) and sold it for $84K; next home purchased for $75K lived there for 9 years and sold it for $95K; next home $202K lived there for 9 years and sold it for $300K; next home purchased for $345K. Total "gain" $183K (assuming I sold current home for $345K today). The way I see it if you add the assumed "rent" I would have paid about $12K to $20K per year, so if we assume the midpoint of $16K per year over the past 30 years that would have been an additional $480K of "imputed" gain of a total of $663K ($183K + 480K = $663K). Of course the expense of ownership (RE Taxes, Insurance, Improvements, Maintenance, Repairs, etc.,) have to be subtracted. A reasonable guess, over the same 30 years, would be about $10K per year or $300K for the period. Could I have invested the excess and have had far more than the estimated net of $363K in this example; maybe, maybe not. BTW I never paid a commission to buy or sell these places and after the 3d one all were cash deals. I surmise that it all would have been very close to a net wash, especially when you consider the income loss of the cash sitting in the properties. So IMHO to answer the OP it probably is a wash. Just depends on what you feel is best for you.

 

[honobob]

Understand that since 1900 (2000-present excluded), real estate has
appreciated at the same rate as inflation. Hence the reason why we
have the current real estate bubble.
TJ

Understand that you are using a nationwide figure for home appreciation. Unless I'm trying to buy a home in every market my 9-11% (HI/CA/NV) per year appreciation is the figure I'm looking at.

And even if you count long term inflation as 3%, that's $9,000 per year on a $300K house. That's a 15% return on your 20% down. So you're saying anyone that buys a home is getting an automatic 15% return on their money? Make that the headline in tomorrows paper and we'll solve any current housing bubble you perceive.

 

[W2R]

2002: bought my house for $160K
2005: Very similar house across the street sold for $203K (same sq ft and age, fewer upgrades, little hurricane damage to either)
2006: paid off my house for $176K total P&I; tax + insurance ~= $2400/yr over that
2007: total put into my house so far, including P&I, tax, insurance, multiple A/C repairs, new circuit box, plumbing repairs, tree removal after Katrina, etc., up to now has been $192K. Don't know if I would want to sell in the current market, but I would take $195K if it was offered this afternoon.

Living in peace and quiet, knowing that I never have to pay rent or P&I again, and knowing in greater detail that I can ER when the time comes, are some of the intangible advantages to home ownership for me.

 

[perinova]

Not 10% but 3%!

Good question. In the long run, real estate tends to appreciate in value. The amount of appreciation varies by area and timing, but over time, almost every home will appreciate in value. In good markets, appreciation can exceed 10% per year on an annualized basis over a long timespan. The return on your investment that you actually recognize as a homeowner is much greater because of a concept called leverage.

Here's how leverage works: say you purchase a home for $200,000. To buy this home you decide to put down 20% of the purchase price ($40,000) and take out a mortgage on the rest ($180,000). For simplicity purposes, let's just say your property appreciates 10% during the year following your purchase, which would be $20,000 (10% of your purchase price x $200,000). Expenses and interest payments aside, you just made $20,000 on your $40,000 down payment, or 50%. Better yet, the interest payments on a mortgage are tax deductible.

Don't forget though that there is a lost opportunity cost of about 7% a year on a balanced portfolio. (That's about $3K the first year). Housing cost increases not at 10% average but only at the rate of inflation of 3% (It has in the past 150 years and fortunately for our descendants that will purchase homes with the same lending rules in the future). 3%=$6K. Another thing is that this "investment" only retain this value if maintained at about 1%(?) per year or you will sell it as a "fixer upper". 1%=$2K

You also need to factor in interest cost which is about half of the loan repayment over Thirty years ~$5K. (Worse: The first years are almost all interest payments).

The tax deduction needs to be compared with the standard deduction allowable to everyone ($5000*# of people: Family of two: $10K or more than all interest payments. Family of three: $15K would be more than interest payments and property tax too!!!).

On average per year this house costs you
$3K(Opportunity cost)+$5K(interest)-$6K(value increase)
+$5K(prop tax)+$2K(maintenance) = $9K/year. This is the rent equivalent on average.

- If you are lucky and can pull 10% consistently over your lifetime (??) your value increase might be $18K but again your Opportunity cost might also be much higher in the stock market and be $6K.
- The leverage works both ways and you might take a 0% gain (not that uncommon): Rent equivalent becomes now $15K.
Remove the leverage by buying all cash and you Opportunity cost is now $15K, no interest cost: That's a rent equivalent of $13K/year!!!!. BECAUSE THE FINANCIAL MARKET GENERATES WEALTH ON AVERAGE AT 4% HIGHER THAN INFLATION BUT NOT REAL ESTATE!!!!!!

It is good to know the average case in order to beat the average.

 

[twaddle]

Understand that you are using a nationwide figure for home appreciation. Unless I'm trying to buy a home in every market my 9-11% (HI/CA/NV) per year appreciation is the figure I'm looking at.

Ah yes. The "past is prologue" argument. So, if the median house in CA sells for $600K today, and homes appreciate at 11%/year, in 10 years the *median* house in CA will sell for $1.7 million, right?

Riiiiiiight. Who will be buying those crappy 2000 sq ft homes for $1.7 million?

Trees don't grow to the sky. When an area has above-average appreciation, that's not a good sign for future appreciation. Beware regression to the mean.

 

[honobob]

Ah yes. The "past is prologue" argument. So, if the median house in CA sells for $600K today, and homes appreciate at 11%/year, in 10 years the *median* house in CA will sell for $1.7 million, right?

Riiiiiiight. Who will be buying those crappy 2000 sq ft homes for $1.7 million?

Trees don't grow to the sky. When an area has above-average appreciation, that's not a good sign for future appreciation. Beware regression to the mean.

Duh? Prolly the people who bought in 1985 for $80K's that now have houses worth 11% more each year, say slightly over $600K!!! Don't believe that and you prolly don't believe in the Holocost or the moon landing!

And, they're crappy 1,000 sq ft homes here in the bay area!
Crappy 2000 sq ft homes are in Stockton, foreclosure capital!

11% is the average appreciation rate in the Bay Area. Lately it's been 25-50%+!!! Won't argue that it won't regress/revert to the mean but strongly disagree that our mean is determined by home sales in Louisville KY.