Primary Residence: Rent vs Own

[kcowan]

What I always look for in a tool is a provision for the weekly trip to Lowes to buy something that will help to improve the value of the property.

 

[clobber]

Those who look at buying a home strictly as a financial decision are making a mistake. It has to be looked at as a lifestyle choice first, and then the numbers have to work to make it feasible.

This for sure.

And your story makes that point. For you, it sounds awesome to have the family getting together, doing projects, helping each other, having a BBQ, etc. For me, this sounds completely horrific. I'd rather the family be hanging out at the beach, or biking in the mountains, or canoeing - or, just having the BBQ. To each his own.

Even though you only bought for $80k, I'm betting that was at a time of much higher interest rates? Even a 15 year loan at 7% (which was really low for a long time), would cost you something like $50k over 15 years. On a 30 year loan it is more like $120k bringing the total up to around $200k. That's all I'm really saying.

 

[Music Lover]

This for sure.

And your story makes that point. For you, it sounds awesome to have the family getting together, doing projects, helping each other, having a BBQ, etc. For me, this sounds completely horrific. I'd rather the family be hanging out at the beach, or biking in the mountains, or canoeing - or, just having the BBQ. To each his own.

Even though you only bought for $80k, I'm betting that was at a time of much higher interest rates? Even a 15 year loan at 7% (which was really low for a long time), would cost you something like $50k over 15 years. On a 30 year loan it is more like $120k bringing the total up to around $200k. That's all I'm really saying.

I paid it off in less than 10 years, so total interest was not really that much.

Well, I suppose we all could have went to the beach, but then that beach trip costs $3,800 because you have to pay someone $5,000 to shingle the house. Instead, we shingle the house for $1,200 and still have a get together on the deck with good food. And, it only takes one day, actually, just part of a day. We all can still go to the beach the next day if we choose.

Would you give up a single day on the beach or a hike for $3,800? Multiply a few dozen single days over a couple decades for all the people involved and now you're talking $100,000 in saved money.

 

[rodi]

I had my eyes opened wide when a former coworker was selling his house in a western suburb of Philly (the job was in a close in northern suburb - Montgomery county)... the market had been flat - dead flat - for the 8 years he'd owned the house. But realtor fees and closing costs meant to SELL he had to bring a large check to closing.

He later bought a condo in center city - he made money on that - but then his job moved further out in the suburbs so the commute was bad again so he sold... so he's back to renting in Bucks county...

He's probably the poster child for why home ownership doesn't always pay.

In my area - the real estate is so high that renting often makes sense unless you have a large chunk of cash for a hefty down payment - the rent will be cheaper each month. But the landlords often purchased for a small fraction of current market value.

 

[ncbill]

iirc, average 30-year mortgage rate over the last 50 years is in the double-digits.

not until ZIRP did we see record low rates, which has resulted in enormous price appreciation in many urban areas.

homeowners in "hot" areas are essentially betting the above continues until it's their time to cash out, often relying on dual-incomes to afford the home.

 

[RunningBum]

iirc, average 30-year mortgage rate over the last 50 years is in the double-digits.

not until ZIRP did we see record low rates, which has resulted in enormous price appreciation in many urban areas.

homeowners in "hot" areas are essentially betting the above continues until it's their time to cash out, often relying on dual-incomes to afford the home.

You recall wrong. Double digit mortgage rates were only from the late 70s to about 1990.

 

[Badger]

And if you two sell your properties, you know what you can afford to buy? Exactly your house. Actually less because of the cost of selling. These scenarios you describe only work well if you plan to move to a less expensive area. Great if you do. Otherwise, you are basically just on the property ladder.

Your just comparing the price you paid to the current estimated price. Did you count all the interest you paid to purchase the house over the years? Did you count all the money you sunk into the house over the years? Did you count the money you spent on upgrades (that contributes to the current value). Did you count all the property tax, insurance, etc? New roof?

I subscribe to the theory that if you own your primary residence, it is your biggest liability and not your biggest asset/investment. See Rich Dad Scam #6 here

I'm not saying I do not own a home

I think you have assumed way too much. I have included all those things you mentioned except property tax and insurance which if you rent you are also paying those in your monthly rent.

I made a point of researching before buying. Location, location, location. For what my home is worth I could sell, stay in the same town in a very desirable neighborhood, buy another home 2X as large with upgrades, pay cash and still pocket a sizable amount of money at least 200k. If I was to move away from my beach location to a major city suburb in a desirable neighborhood I could buy a much larger home for half of what I can sell this one. I remain objective and do my homework.

Cheers!

 

[clobber]

I paid it off in less than 10 years, so total interest was not really that much.

Well, I suppose we all could have went to the beach, but then that beach trip costs $3,800 because you have to pay someone $5,000 to shingle the house. Instead, we shingle the house for $1,200 and still have a get together on the deck with good food. And, it only takes one day, actually, just part of a day. We all can still go to the beach the next day if we choose.

Would you give up a single day on the beach or a hike for $3,800? Multiply a few dozen single days over a couple decades for all the people involved and now you're talking $100,000 in saved money.

Ohh don't get me wrong, I completely see your point.

In the context of this discussion, if I am renting (vs buying), then that new roof costs me $0. The beach, or mountain, or lake is a few miles away. I spend the day there and then come home (rental). A few dollars of gas and we have a great day not doing home maintenance. You are $1200 down to me on this deal. And I didn't spend anytime trying to roof a house.

Again - i see your point. And I'm not even saying my way is better.

 

[Meadbh]

In the context of this discussion, if I am renting (vs buying), then that new roof costs me $0.

Where do you think your landlord gets the money to pay for the new roof? That cost is built into your rent.

 

[Music Lover]

Ohh don't get me wrong, I completely see your point.

In the context of this discussion, if I am renting (vs buying), then that new roof costs me $0. The beach, or mountain, or lake is a few miles away. I spend the day there and then come home (rental). A few dollars of gas and we have a great day not doing home maintenance. You are $1200 down to me on this deal. And I didn't spend anytime trying to roof a house.

Again - i see your point. And I'm not even saying my way is better.

As Meadbh stated, the cost for the roof is built into your rent.

I'm "hands on" and actually enjoy doing my own repairs and renos, so it's not a hardship for me to take on a roof. The majority of my friends and family are in trades and are DIY capable, and we'll never call in a contractor if we can do it ourselves. It's a nice feeling to sit and enjoy a cold beer on a deck that you built with your own hands that wasn't there the previous day...and the young folk learn from the older ones and develop skills that will save them thousands over their lives.

It's not for everyone, but it works for us.

 

[RobbieB]

I chose to own because I want to do to the house whatever I want to do w/o permission from landlords or HOA's. Paint, landscaping, porches, roof color, antennas, pools, hot tubs, dogs and cats. That's the prime motive.

Now that it's paid for, I live for 25% of what I would pay in rent and that includes 1% of value annually for upkeep.

 

[clobber]

Where do you think your landlord gets the money to pay for the new roof? That cost is built into your rent.

That depends. I experienced first hand how home prices, interest rates, and rents don't necessarily move in lock step. It is also why the price-to-rent ratio varies so widely across the country. Many landlords rely on depreciation to turn the profit. It is one reason you can find rent to be less that the landlord's mortgage.

From a financial perspective, there is usually a number where renting or buying makes sense in a given market.

 

[ncbill]

you're right (over 8%), though it also popped over 10% around the time of the first oil embargo.

a reversion to the mean would still be a huge shock to the RE market.

You recall wrong. Double digit mortgage rates were only from the late 70s to about 1990.

 

[kcowan]

I have done both. Owned for 30 years and made a bunch but also spent a bunch. For 20 years, we have rented. In 2002, could not have retired if we had so much capital tied up. Would have had to downsize. Last year, we were faced with replacing wall-to-wall carpet with hardwood. Since we would be moving everything, we evaluated buying a place. The cost per sq.ft. was $6.2k per month. We pay $1.72k per month owing to rental controls.

So the answer is that it depends!

We own our southern property because the numbers worked.

 

[dunkelblau]

Lifelong renter here. Financially I would have come out ahead owning, assuming the equity buildup didn't reduce my net stock exposure, and if being a homeowner didn't trigger lifestyle creep. But if my home equity replaced stock allocation or got me to buy extra junk to fill the space, I think it would have turned out even at best.

I'm still ambivalent about owning, I'm willing to buy if I can get what I want-- the hardest part being the exact right location. Heck if my apartment complex converted to condos I'd buy my unit immediately because my annual gross rent is about 6% of what I think it would sell for, and I'd guess property tax, HOA, maintenance, and insurance all together would be just half what I now pay in rent. So my total living expenses would drop by more than a third.

 

[Senator]

Most of what you wrote is not comparing apples to apples. If what I want is to have any given house, is it better to rent or buy? If I rent a house in the burbs where it snows, then as a renter I still have to have my own mowers, snow blowers, rakes, etc. Likewise, you cant compare an apartment closer to work if that is not what you want.

You are correct. Pick a house in a place and comparing buying or renting that exact same house, it is better to buy.

If you just ask what is cheaper, renting or buying, renting is likely cheaper. You can be flexible and live in a place where is most advantageous, and move when it is not.

A 1BR apartment would generally be cheaper than a 3BR house.

 

[haha]

It is often said here that a new roof, or property tax ias built into the rent you -pay.

Well, it depends. You can have two buildings down the street from one another. RE tax on the apartment building will usually be considerably less-maybe 1/2-of the sum of RE taxes on all the homes in the condominium.

And Repairs? Any good sized apartment owner has crews and relationships and he is doing various maintenance projects continually. A homeowner OTH faces each situation as a more or less a one off.

An apartment may have 20-100 units. A larger rood perhaps, but still only one roof, relative to the 20-100 roofs needed to cover the same number of SFH homeowners.

I think is very dynamic markets, if one can buy during temporary stress, it is a good idea.

Otherwise, as a money deal only, renting is likely much better.

Ha

 

[Cobra9777]

I really like this tool as well. One of the great features is grey shadow bars that show you how adjusting the variables will adjust the output - before you actually make the adjustment. You can see that length of mortgage and down payment amount dont make much of a difference (excluding PMI of course).

However, I think I disagree with your conclusion. All I have to do is change the property tax rate to the average 1.81% for Texas and make the home price growth rate 1.1%. Then the rent is $1210. I agree with everyone else it is situation dependent.

I would agree that $1200/mo might be a better representation of total cost of ownership for a $250K house in Texas. Although, one could also argue that the higher property tax in Texas is offset by no state income tax. So in reality, it's not an "extra" cost vs the default national value in the tool, just a shift from one line to another on one's budget.

Be that as it may, using your assumptions, in order to disagree with my conclusion, you have to find a $250K house in Texas that rents for $1200/mo or less. Highly unlikely. The landlord would get rent revenue of only 5.8% of value. Most landlords target net profit higher than that with revenue well into double digits. Rent on $250K houses around here averages $2000/mo and up. In order to get monthly ownership cost that high on the same house, you have to make a whole series of dubious assumptions about maintenance and other costs.

For example, I went back to the NYT tool and entered the two changes you suggested. Then, to get the ownership cost up to $2000/mo (the indifference point vs rent option), I had to raise the maintenance assumption by 5X from the default 1% of value ($2.5K first year) to 5% ($12.5K first year). To get a clear advantage from renting, I had to raise it to 7% ($17.6K first year). Maybe others have had a different experience, but based on my 32 years of home ownership, those are not reasonable ongoing maintenance cost assumptions for a $250K house, especially if it's newer or has been recently updated.

 

[pb4uski]

iirc, average 30-year mortgage rate over the last 50 years is in the double-digits....

You recall wrong. Double digit mortgage rates were only from the late 70s to about 1990.

+1 Mortgage rates have more often been in the single digits over the last 50 years.

30-Year Fixed-Rate Mortgages Since 1971 - Freddie Mac

 

[Meadbh]

It is often said here that a new roof, or property tax ias built into the rent you -pay.

Well, it depends. You can have two buildings down the street from one another. RE tax on the apartment building will usually be considerably less-maybe 1/2-of the sum of RE taxes on all the homes in the condominium.

And Repairs? Any good sized apartment owner has crews and relationships and he is doing various maintenance projects continually. A homeowner OTH faces each situation as a more or less a one off.

An apartment may have 20-100 units. A larger rood perhaps, but still only one roof, relative to the 20-100 roofs needed to cover the same number of SFH homeowners.

I think is very dynamic markets, if one can buy during temporary stress, it is a good idea.

Otherwise, as a money deal only, renting is likely much better.

Ha

I think we need to compare apples with apples. Of course the structure of an apartment building is different from that of a SFH. The valid comparison is between an owner occupied house and an identical rented house.

 

[Senator]

I think we need to compare apples with apples. Of course the structure of an apartment building is different from that of a SFH. The valid comparison is between an owner occupied house and an identical rented house.

The cost will be the same, except the rented house has to include a premium for owner profit, a risk premium, and the option for the renter to move out easily. Therefore, in your apples to apples comparison, the house ownership beats renting in normal markets.

Not much different than the lease vs. buy on an automobile.

 

[brucethebroker]

When I sold my first house after 20 years, I got about 3 times what I paid for it. I calculated it was about a 3% annual return. That's more in line with market expectations.

Did you pay cash when you bought your house, or did you finance? If you financed, you need to look at the return on your down payment, not what you paid for the house. Some may argue, but the reduction of principal over the years is offset by what you would have paid out renting somewhere else. This is how I have looked at it and others may argue the point.

Here is the argument from a landlord's point of view:
We purchased a $60k property in 1983. Similar rents would have been $500, and our payment was $650. Today, that home would be paid off, the value would be about $180k, and similar rents would be around $1500 a month. We put down 5% on an insured conventional mortgage. (Stupidly, we sold the house and moved 8 blocks away.)
1. Compare the rents. If we had stayed put, we would be only paying taxes, insurance and upkeep today. Contrast that with paying the $1500 a month rent.
2. Look at the tax deductions over 34 years for owning.
3. Look at the return. Our total investment would be the original $3,000 down, plus upkeep.

Most financial gurus that advocate renting live in high cost of living areas, or prefer renting themselves. In the Midwest, South and other lower cost of living areas, owning is usually a better choice.

Landlords are business people. They are not financially stupid (well, the successful are not). Successful business people do not buy property unless it makes since. Renters are the customers. All the arguments for renting except ease of moving and not having to come up with a downpayment are justifications to transfer the hassle/expense to the landlord. "I want to call the super when the dishwasher is broken" is really "I want to pay the landlord to have the plumber fix the dishwasher".

Afraid you might want to move in the future? Either sell your current home, or rent it out-you personally, or with a property manager.

Obviously, when you retire (after you are financially secure) renting will be less hassle, and perhaps a better option. But most of the "renting is better than owning" articles I read are aimed at young people. How many "gray beards" would recommend a lifetime of renting to a 25 year old? No one I personally know would. We have all done very nicely buying homes over the years, and we now have low costs of providing shelter, not $1500 a month rent-plus the equity.

 

[Totoro]

I think we need to compare apples with apples. Of course the structure of an apartment building is different from that of a SFH. The valid comparison is between an owner occupied house and an identical rented house.

And there's the rub. That doesn't fly where I live.

I'm with Senator on this one: renting is usually better, certainly financially. Been a renter all the way so far, and the benefits are obvious. Low switching costs, always exactly the amount of space, live where you spend your day as a principle saving me thousands of hours and transport costs, no concentration risk ..

The big downsides:

• Rent / own markets are very different. I can't rent in some places I'd prefer to live, and renting a house is a narrow market here compared to condos. If you rent somewhere, usually there is a buy option too.
• You can't control (rent) inflation. Increases portfolio uncertainty, and you can get priced out of a location.
• [Situational] low flexibility in tailoring the place. I don't do that anyway so no upside.

Other than, it's rental all the way. Yes, in theory there is the financial trade-off between buy/rent. In practice in most areas I'd want to live, the yields just aren't there: house prices are too high vs. rents.

 

[Senator]

And there's the rub. That doesn't fly where I live.

I'm with Senator on this one: renting is usually better, certainly financially. Been a renter all the way so far, and the benefits are obvious. Low switching costs, always exactly the amount of space, live where you spend your day as a principle saving me thousands of hours and transport costs, no concentration risk ..

The big downsides:

• Rent / own markets are very different. I can't rent in some places I'd prefer to live, and renting a house is a narrow market here compared to condos. If you rent somewhere, usually there is a buy option too.
• You can't control (rent) inflation. Increases portfolio uncertainty, and you can get priced out of a location.
• [Situational] low flexibility in tailoring the place. I don't do that anyway so no upside.

Other than, it's rental all the way. Yes, in theory there is the financial trade-off between buy/rent. In practice in most areas I'd want to live, the yields just aren't there: house prices are too high vs. rents.

Exactly. Renting is cheaper than owning, IF you maximize the rental experience. There are many intangibles that save money when you rent. Lower commute costs and time savings, buying only the space you need, when you need it, not needing to buy maintenance tools, etc. Living in a secure building may give a better peace of mind than in a house on a city street in a high-crime area.

Imagine if you took your commute savings and invested the money. Then took the time you saved and worked a side gig, or just worked longer at work. You may get further ahead in your career and have a higher paying job. Then, if a higher paying job opened up across town, you move closer to that job. Or if your street started to become a higher crime area, you move easily. The time you save by not mowing a lawn could be invested elsewhere too.

Or, maybe you workout when you could have been commuting, what are the health benefits?

If all you are comparing is whether to rent house A or buy house A, that is not a good rent vs. own comparison. There are far more intangibles in renting that are not considered, but only if you are able to maximize the rental experience.

I do own my own home, and have owned it for 22+ years. I would do the same, because I like to be more independent. But it does cost more than renting.

 

[Meadbh]

Did you pay cash when you bought your house, or did you finance? If you financed, you need to look at the return on your down payment, not what you paid for the house.

I paid $85K for my house in 1991 when interest rates were high but falling. I had $60K saved up for the down payment. I got a 6-month mortgage for $25K at 10.25%, followed by a 12-month mortgage at 8.5%. 18 months after moving in, I paid off the balance. While the year over year return on $60K would have been over 4%, I also put in some money at the 18 month mark. I forget how much.

I moved into my house from a high rise apartment where I was paying $1100 per month. My mortgage, property taxes, etc came to less than that. Once the mortgage was paid off, my cash flow improved tremendously and I had money to spend on home improvement. If you think about the ratio of rent to purchase price of the home, 77 months of rent would have paid for the home outsright. So for me it was a good financial decision o buy.

Landlords are business people. They are not financially stupid (well, the successful are not). Successful business people do not buy property unless it makes since. (Sic)

I know. I am one.