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Rent or buy: run the numbers.
Old 09-26-2005, 10:48 AM   #1
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Rent or buy: run the numbers.

Thanks to Kramer at raddr's board for a couple of the best articles I've seen in recent years on this subject. BTW both authors conclude that renting is still way better despite raising families and being a bit concerned about stability.

NYT: "Is It Better to Buy or Rent?"

SF Chronicle: "Why own when you can rent?"
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 11:01 AM   #2
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Re: Rent or buy: run the numbers.

Interesting article. I think it assumes that the entire country is in a housing bubble, though. I think it also ignores the benefit of living in a house once the mortgage is paid off?
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 11:13 AM   #3
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Re: Rent or buy: run the numbers.

Quote:
Originally Posted by maddythebeagle
Interesting article. I think it assumes that the entire country is in a housing bubble, though. I think it also ignores the benefit of living in a house once the mortgage is paid off?
The NYT article does mention the difference between high-cost areas (the coasts) and lower-cost areas (Heartland). But you gotta run the numbers.

Considering that most people move within seven years, the vast majority never get to the "paid off mortgage" stage. Even then with property taxes & maintenance/overhauls in a low-appreciation area it's possible to do better by renting. A more complicated analysis is how much better that mortgage money would have performed in equities over 30 years instead of paying interest on (or being tied up in) what is largely an illiquid depreciating liability. The ability to spreadsheet these relatively straightforward numbers and check one's assumptions is way beyond most wannabe homeowners, and the RE industry gains nothing by educating anyone.

Security is more important to me than saving $$ by renting so it's an emotional decision. But friends of ours are moving from San Diego to Oahu and contemplating renting out their 2BR home for $2500/month (gross rent) instead of selling it for ~$800K. They'll be doing that with a property manager while landlording from two time zones and a five-hour flight away from the situation. Did I mention that they also have two mortgages and a HELOC on the place? And that the city is considering widening the nearby main road to the point where passing trucks would make the house shake? They claim that they're making an unemotional financial decision but they don't believe that they can earn more money per month by putting their equity in a CD, let alone into a more aggressive investment. I don't see much security in risking all that equity for no cashflow and a possible drop in their local RE market.
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 11:19 AM   #4
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Re: Rent or buy: run the numbers.

Amusing.

After a brief look here in NW MO - four people plus a dog and cat - ignored my own advice(from prior posts) and bought.

Never bothered to run the numbers. Handcapped equiped(Mom) house with a yard for the dog.

Will play with numbers in later posts.

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Re: Rent or buy: run the numbers.
Old 09-26-2005, 11:46 AM   #5
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Re: Rent or buy: run the numbers.

These, alas, are 'current state' financial evaluations. Of course renting looks financially beneficial right after a huge run up in home prices while rents still lag.

With homes selling at 400K+ in my area and the same homes renting for $1000-1200 a month, it seems like a no brainer to sell and rent, excluding the hassles of having a landlord. However, if home prices continue to pace inflation and so do rents, the former is a positive financial situation while the second obviously is not.

A scenario where you cash out and rent and over the next 10 years rents catch up with home prices and continue upward, is big death.

I guess on the other hand if you're in a 'bubble' area and expect a price decline, it might be a good idea. For a while.

Big diff between the coasts/high escalation/bubble areas and middle america where home prices dont move much.
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 11:54 AM   #6
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Re: Rent or buy: run the numbers.

Here is my real world information. I'm single and live in Atlanta, GA. I purchased a new house.

6 Years of ownership


237,000 House Basis - Purchase Price - No Mortgage
12,000 Real Estate Taxes - after tax affect
3,000 Home Ins
1,200 Lawn Care
1,800 Home Mtc
1,200 Misc items - Things I forgot

256,200 Subtoatl 1 - Cash Cost

80,603 Opportunity Cost money invested in House
Assume 5% after tax return & reinvest income

1,088 Opportunity Cost of other house costs
Assume 5% after tax return & reinvest income
81,691 Subtotal 2 Opportunity Cost

337,891 Cost of House
Subtotal 1 & Subtotal 2

283,700 Net Money to seller after all closing, commission, etc costs.

(54,191) Total Cost of owning a home

Renting Cost
79,569 Assume 1,200/mo increases 5%/year

25,378 Benefit of owning
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 12:18 PM   #7
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Re: Rent or buy: run the numbers.

I guess the bottom line remains "run the numbers" for your particular situation. However, like the article states, it seems only in "bubble" areas (NY, DC, some Florida, CA, HI, etc) is the choice to rent instead of buy a clear choice. Anyone in "the heartlands" (defined as 50+ miles inland?) should still buy instead of rent in general. Assuming you're going to live in the same house for a number of years.

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Re: Rent or buy: run the numbers.
Old 09-26-2005, 01:20 PM   #8
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Re: Rent or buy: run the numbers.

I read the Times article the day it was published. Contrary to what nords wrote in his opening post, it does not conclude that renting is better. Sometimes it is and sometimes it isn't. Indeed, it concludes that buying is better when you are going to stay in the home several years. Renting is better if you are going to move in a few years. That has always been the case, so what else is new (or old)?

Maybe I read a different article than what folks here commented on.
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 03:13 PM   #9
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Re: Rent or buy: run the numbers.

Read the article this morning and...
I conclude that I may never be able to move to Arizona.
Currently living in western PA. , where housing prices go up about 3 to 5 percent per year, even in this time of the BUBBLE.
So, in relation to much of the country, we're falling behind.
What I need to happen is for the bubble to burst and housing prices in the South and the West to come tumbling down. Not holding my breath.
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 03:22 PM   #10
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Re: Rent or buy: run the numbers.

So, what's wrong with Western Pennsylvania?
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 04:14 PM   #11
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Re: Rent or buy: run the numbers.

I think it definately is a case by case basis. If I sold now I would have lived free since I bought and walk away with about 40000 in my pockent. A similar house two streets over was for rent the same time I bought this one. The rent was $40 more per month and I would not receive a refund of anything when I move. So in my case it definately is better to buy than rent.
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 05:14 PM   #12
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Re: Rent or buy: run the numbers.

Quote:
Originally Posted by razztazz
So, what's wrong with Western Pennsylvania?
Brrrrrrr. You mean the part in the 1970s where the Ohio River froze and the power companies kept a "death watch" on how many days of coal they had left? Surely the power grid is better fueled these days.

Or the snowy, icy winters with road salt accelerating road & vehicle corrosion, leading to legendary potholes and aggravated breakdowns? Maybe there's a better type of asphalt and maybe global warming is improving Jan/Feb.

Or the Aug/Sep heat & humidity, relieved only by the gentle breezes created by the hyperkinetic flapping of the mosquito's & deerfly's wings. But maybe there are better pest controls now.

Perhaps my memories are misted by the haze of two decades and things may be much better now. I haven't been back since the early '80s. Maybe our high school class will have a 30th or 35th reunion...
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 05:21 PM   #13
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Re: Rent or buy: run the numbers.

I'd gladly forgo unplugging toilets, killing fireants/termites, chopping crab/nut/dallisgrass...

But I'd hate to give up my garage/workshop...

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Re: Rent or buy: run the numbers.
Old 09-26-2005, 07:39 PM   #14
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Re: Rent or buy: run the numbers.

Quote:
Originally Posted by Nords
Brrrrrrr. You mean the part in the 1970s where the Ohio River froze and the power companies kept a "death watch" on how many days of coal they had left? Surely the power grid is better fueled these days.

Or the snowy, icy winters with road salt accelerating road & vehicle corrosion, leading to legendary potholes and aggravated breakdowns? Maybe there's a better type of asphalt and maybe global warming is improving Jan/Feb.

Or the Aug/Sep heat & humidity, relieved only by the gentle breezes created by the hyperkinetic flapping of the mosquito's & deerfly's wings. But maybe there are better pest controls now.

Perhaps my memories are misted by the haze of two decades and things may be much better now. I haven't been back since the early '80s. Maybe our high school class will have a 30th or 35th reunion...
I sort of like the mountains covered with old tires and dead cars you get to drive by. Maybe they caught fire by now.

Good football players though...
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 08:58 PM   #15
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Re: Rent or buy: run the numbers.

I saw the NYT article.* The only problem I had with the analysis is that they included an opportunity cost (or implied return) on the down payment but did not include any assumption about home price appreciation.* Unless you use a "risk free" rate of return on the down payment, which I don't think they did, you should probably include some assumption about housing price appreciation.* Even if you only assume housing prices appreciate at the rate of inflation, the levered return on your down payment is pretty high (and tax free).

Unless housing prices crash*
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 09:16 PM   #16
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Re: Rent or buy: run the numbers.

This brings up another question? How do people make money off of their rentals when the cost of buying is so much higher than renting in some of these areas? RE doenst sound very easy.
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 10:26 PM   #17
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Re: Rent or buy: run the numbers.

Quote:
Originally Posted by maddythebeagle
This brings up another question? How do people make money off of their rentals when the cost of buying is so much higher than renting in some of these areas? RE doenst sound very easy.
They might have bought years ago, and have the property carrying only a small note. Or it may be free and clear. So their cash flow is positive, as long as they don't refinace and take out a large mortgage.

Otherwise, they are speculating on continued rapid appreciation, in spite of negative cash* flow today.

Ha
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Re: Rent or buy: run the numbers.
Old 09-26-2005, 10:55 PM   #18
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Re: Rent or buy: run the numbers.

I have a friend who is convinced the bubble is bursting here in SD, he has sold his McMansion for an obscene profit and is renting a similar home for less than his mortgage was. So far he's coming out ahead every month. Even if the market only stays flat and then starts rising again, he could still win if he made enough of a profit investing the windfall (but taxes, always the taxes to figure). Still, he's got a daughter almost the same age as mine, that's some mental fortitude.
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Re: Rent or buy: run the numbers.
Old 09-27-2005, 07:47 AM   #19
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Re: Rent or buy: run the numbers.

My own scenario is a sell, go on vacation for a long time, then rent and wait the market out.

We Retired, then sold our home in South Orange County California for just under $1m

We went sailing for 3 years. House went up after we sold it about $100k, (No Housing Costs or headaches for 3 years, Priceless)

We returned and visited the family for a few months in Canada.

We rented a 3 bed 2.5 bath condo, on a river in North East Florida for 9 months, for $800 pm, including Electricity, (No gas on property), Cable TV, and High speed Internet. We pay phone and maintain the place well for the owners, and look after their car etc. (We are good Renters and they know it). I see no point in buying right now as long as we get this type of deal. I will try to get a years extension on the lease if possible.

SWR
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Re: Rent or buy: run the numbers.
Old 09-27-2005, 09:39 AM   #20
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Re: Rent or buy: run the numbers.

W. Pa is beautiful about 9 months of the year...it's the 3 months of winter that I hate.
Old tires and dead cars ? Don't see them around here, you must be thinking of somewhere else.
Pot holes, YES, big problem in the winter.
August humidity, yes, but most of the country has humidity... that's one reason I like AZ, no humidity.
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