Scot Burns and the rent versus buy

[whitestick]

http://assetbuilder.com:9669/blogs/...tirees-renting-can-be-better-than-owning.aspx
Not to open up old discussions but, seems like Scott is opening up to the investing side of the discussion.

 

[chinaco]

I have been thinking about it.

 

[W2R]

But what about increasing prices of houses and rent? Sure, we have hit a blip in the housing market but I don't expect that to last forever.

I could easily rent an apartment with the income I would get by selling my house and putting the money into CD's. What about 10 years from now, when rents and sales prices for homes might be twice as high? I would be stuck up the proverbial river without a paddle.

Otherwise, I would do it. I like the flexibility. If I started to dislike a location or my neighbors, I could just pick up and move with a lot of ease. I do plan to rent for a year or so in any new retirement location, before buying.

 

[unclemick]

made you do it.

I've always favored rent ala Bear Bryant's agile, mobile and hostile.

And always bought!

Chickenheartedness I guess.

Like buying the beater car thaat makes your numbers look pretty vs the hot rod your heart lusts after.

heh heh heh heh

 

[kcowan]

We sold in 1997 and put the equity into the market. Our rent has increased 1.95% per year since then. Needless to say, it has been an excellent financial choice. In fact, it enabled us to RE and eventually FI 2 years later.

You should not compare to returns from CDs because real estate is an equity market subject to ups and downs. Inflation helps a real estate holding but not a fixed CD or bond.

Ultimately home ownership is a lifestyle choice. It is also a good inflation hedge in the long term. It can be a forced savings plan and a handy source of financial leverage.

For me, my forced saving and leverage days are over.

 

[Nords]

You should not compare to returns from CDs because real estate is an equity market subject to ups and downs. Inflation helps a real estate holding but not a fixed CD or bond.

I'm not sure real estate would benefit from a comparison to TIPS or I bonds, either.

Maybe to something that's highly illiquid with wide spreads, 6% transaction costs, and variable-interest margin loans... oh, wait, nobody would want to invest in one of those either!

 

[cute fuzzy bunny]

The rent vs buy argument needs to be evaluated in terms of decades, not a 5 or 10 year snapshot.

My first apartment rented for $265. 28 years later its renting fo $1265.

Slightly outpacing inflation...

And is it just me or does scott burns seem to regularly publish an article advising one direction, then later publish an article completely inverting his conclusions?

 

[whitestick]

And is it just me or does scott burns seem to regularly publish an article advising one direction, then later publish an article completely inverting his conclusions?

Changing perspective? or wisdom with ages?

For me, my forced saving and leverage days are over.

That's sort of the position that I'm dealing with. Moving from accumulation phase to spending phase, seems to favor the renting, with subsequent reinvesting of equity from house into market, to let it pay the rent.

 

[cute fuzzy bunny]

Changing perspective? or wisdom with ages?

Sure, if theres more than a month or two between articles...it was just last month he was positive on homeownership. I think thats closer to ADD than a changing perspective...

 

[Alan]

We sold in 1997 and put the equity into the market. Our rent has increased 1.95% per year since then. Needless to say, it has been an excellent financial choice. In fact, it enabled us to RE and eventually FI 2 years later.

You should not compare to returns from CDs because real estate is an equity market subject to ups and downs. Inflation helps a real estate holding but not a fixed CD or bond.

Ultimately home ownership is a lifestyle choice. It is also a good inflation hedge in the long term. It can be a forced savings plan and a handy source of financial leverage.

For me, my forced saving and leverage days are over.

We are in the same position. We never regretted owning houses but as we close in on RE we want flexibility as we plan to spend months at time living in England and Australia. We decided to try renting when a company move came up 3 years ago. We sold the house and put the money in a Wellesley account. Personal ROI according to VG site as of May 31st is 9.1%. Rent has actaully gone down 0.7% since we moved 3 years ago due to lots of new apartments being built in the area. I expect this will change but so far we are very pleased and find that renting really suits our lifestyle these days.

 

[halcyon7886]

Our rent has increased 1.95% per year since then.

Long time reader, first time poster.

It looks like rental stability is very much a local phenom.

I live in the Seattle area and I would love to have increases of less then 2% a year in rent. This year it was more like 10%. They originally only offered a 5 month lease and when I said I wanted a year they increased the monthly and would not go any longer then an 11 month lease no matter what.

From todays Seattle Times, a few in the city are seeing much larger increases.

Local News | Rents soar through the roofs | Seattle Times Newspaper

 

[Alan]

Long time reader, first time poster.
It looks like rental stability is very much a local phenom.

Absolutely, just like house prices. You can't generalize about this. Just came back from a long walk in an area of town we haven't been in some months. Very surprised to see another big and fancy apartment complex going up. A few months ago one right next to us received planning permission and construction has started. (all good news for us of course).

I was reading an article on the take-up of new apartments and town homes in the town and the demographics have surprised the developers. They are building lots of these with a target audience of young families and so far their actal sales are exceeeding their projections in numbers of units sold but the typical buyer is an empty nester very close to or already retired looking for a place that is nuch smaller, low maintenance, that they can "lock and leave" as they go on extended vacations.

 

[cute fuzzy bunny]

So the big secret is to buy homes in nice appreciating areas, and rent in not quite as nice areas where theres not a lot of real estate appreciation driving the rents?

 

[Texas Proud]

To me it is just like any other purchase.... but I know that is now what Scott said earlier....

Here in Houston, housing prices are up a lot IMO, but STILL way below what I read about from many of you on this board... I can say it is cheaper to buy a house (and nice house) in an established neighborhood for $125K to $150K than to rent that same property...

There is a relationship between the prices of each and both will help drive the other (usually)...

 

[kcowan]

So the big secret is to buy homes in nice appreciating areas, and rent in not quite as nice areas where theres not a lot of real estate appreciation driving the rents?

That might be a good general rule, but in our neighborhood, it is rent in an older building where the rents were set on a much lower cost base because real estate prices are still bubbling here after 10 years. There is also a good rental inventory as well so increases are limited by vacancy rates. The emotional fervor of the mania to purchase regardless of economics has also helped keep vacancy rates up.

Just like any other purchase, each of the choices requires due diligence. YMMV

(...but going against the herd often pays off.)

 

[Alan]

So the big secret is to buy homes in nice appreciating areas, and rent in not quite as nice areas where theres not a lot of real estate appreciation driving the rents?

Not necessarily. The place we live is The Woodlands just north of Houston where house prices are appreciating very nicely I'm sure like the rest of Houston. Texas Proud will know it I'm sure, a very desirable place with very high property taxes to match and a great many McMansions. I never said I was renting because it is better value than buying, I said was renting because I want flexibility and that because that a lot of people want to rent here there is an increasing supply of luxury apartments and town houeses for rent so the rents have not increased in the last 3 years. New houses also continue to built at a great pace as well.

 

[cute fuzzy bunny]

Sorry about the confusion Alan, I wasnt directly addressing your post . I probably should have used a little more selective quoting.


I guess I can do a little backflip here and restate my point. If you want to make money, buy a residence in an area with appreciation potential. If you want to save money, rent in an area that isnt likely to see much appreciation (with the attendant rent increases), which usually means a less desirable locale.

 

[kcowan]

If you want to make money, buy a residence in an area with appreciation potential. If you want to save money, rent in an area that isnt likely to see much appreciation (with the attendant rent increases), which usually means a less desirable locale.

To quote the CFB strategy, buy an underpriced house that needs some TLC (possibly to be DIY'd)...

To quote KC, rent where vacancy rates are likely to remain high. Vacancy rates can be high because:
1) People keep moving out to buy homes
2) People are leaving the area
3) New rentals are coming into the market.
Both 1 & 3 can be in very desirable areas. 3 can also be caused by real estate speculators buying homes/condos and renting them out.

 

[free4now]

Another advantage of renting for those who have time on their hands is the ability to seek out and take advantage of great rental deals.

I just moved into the The Heritage on Fillmore which is way more luxurious and upscale than I would have ever imagined for myself. I got a great deal on the rent from a condo owner whose plans had changed and needed to rent the place out on short notice. I was chosen out of many applicants because as a former homeowner I had shown myself to be able to keep a place neat, because my financial statements showed I wouldn't have trouble coming up with the rent, and because I could sign the lease and move in immediately.

I had spent approx 100 hours combing craigslist and visiting rentals before finding this deal, something that most working stiffs couldn't afford to do.

 

[haha]

Another advantage of renting for those who have time on their hands is the ability to seek out and take advantage of great rental deals.

I just moved into the The Heritage on Fillmore which is way more luxurious and upscale than I would have ever imagined for myself. I got a great deal on the rent from a condo owner whose plans had changed and needed to rent the place out on short notice. I was chosen out of many applicants because as a former homeowner I had shown myself to be able to keep a place neat, because my financial statements showed I wouldn't have trouble coming up with the rent, and because I could sign the lease and move in immediately.

I had spent approx 100 hours combing craigslist and visiting rentals before finding this deal, something that most working stiffs couldn't afford to do.

Free4Now, how did you time this with your need to vacate either your home because it is sold, or your current apartment because the lease is expiring?

In my area there are many people looking to rent, perhaps mostly because no one would pay the rent for a unit that would be required to even come close to covering the mortgage and assoc fee on the unit being rented, if these are figured at market price for a sale. There seem to be more people looking than offering units.

So there is competition for a unit in desirable in city areas. This may not be the case in large suburban complexes.

So if you need a place, you had better grab the first thing that looks OK, or you are going to be looking for a very long time which might entail sleeping on someone's floor or moving into a motel for a spell.

I have been experiencing just this frustration and it gets stressful.

Ha

 

[Danny]

For someone retired, with the house paid for - cashing out, putting the proceeds in Cds at 5% and renting is where my head is at. I like freeing up the equity and paying the rent with interest income.

If I was starting out again - I would be saving for a big down payment on a home purchase in about a year or two..when I think the prices will be lower. If you can manage to stay put for a long time I still think owning a house when you are young is a good strategy.

If you do sell, just don't do what Albert Brooks did and buy an RV and head for Vegas...

 

[haha]

For someone retired, with the house paid for - cashing out, putting the proceeds in Cds at 5% and renting is where my head is at. I like freeing up the equity and paying the rent with interest income.

This is definitely an emotionally appealing approach. But I'm not sure how well it works, unless housing is very overpriced relative to rents.

First, in most good areas rents increase a bit faster than CPI inflation, most of the time. So you really need to look at your real, after tax return on your CD. Which may be close to nil.

If you play the SWR game and assume a 4% real return, and purchase prices are high, then it should work out. But you have exchanged a near certainty- what your housing will cost if you own it- for a market speculation.

This speculation has certainly tended to work out well enough in many areas for a long time.

Of course if housing markets really do tank, it won't matter that you have gotten 0-1% real return on your sales price, because you can re-enter at a lower price. But in many places that fervently hoped for event has shown no sign of taking place.

Ha

 

[Danny]

Don't forget you'll never have to remodel again! and you can easily move if you don't like your neighbors!

Happy Dance!

 

[mickeyd]

Several years ago my next door neighbor sold his house and moved into an apartment. I thought that he was nuts at the time but the more that I thought about it, the more that I could appreciate his scheme of using the equity in the house to pay for rent. Another up side, after a few years he decided he could afford a nicer rent place and went upscale with much ease.

 

[free4now]

Free4Now, how did you time this with your need to vacate either your home because it is sold, or your current apartment because the lease is expiring?

Because I was moving less than an hour's drive away, I did the rental search in parallel with prepping and selling the home. Around the time I put the home on the market I had a good idea of what neighborhoods were good and what reasonable rents were, and I started actually touring rentals. A few weeks into the selling I had found my rental and signed a lease. A couple of days after that I accepted an offer on my home, so the timing worked out perfect.

Now I'm using the escrow period to do final packing and move things from the rental to the home.

In my area there are many people looking to rent, perhaps mostly because no one would pay the rent for a unit that would be required to even come close to covering the mortgage and assoc fee on the unit being rented, if these are figured at market price for a sale. There seem to be more people looking than offering units.

So there is competition for a unit in desirable in city areas. This may not be the case in large suburban complexes.

So if you need a place, you had better grab the first thing that looks OK, or you are going to be looking for a very long time which might entail sleeping on someone's floor or moving into a motel for a spell.
Ha

That was my thinking going into the process; I almost leased the first rental I saw! But I realized that I had at least a few weeks before I needed to commit so I stuck it out to explore more options, and that worked out great. The key is simply starting early so you aren't forced into an undesirable rental by time pressure.