Rent vs. Buy

[calmloki]

Aaaaand in the every thing that goes around comes around category, CNN sez that buying may be the way to go now:

Buying is cheaper than renting in most U.S. cities - Aug. 16, 2011

 

[nbw888]

Wow I wish that was the case in the Los Angeles area! People are still trying to double there money even when they bought at the peak of the market. Apparently their homes haven't gone down in value in their minds!

 

[arebelspy]

Sure, buying is cheaper than renting right now, but good luck trying to buy.

Some issues:
A bunch of people are underwater on the homes they own. They can't buy.
A bunch of people have black marks on their credit from recent economic troubles (foreclosure, short sale, or simply being late on bills due to job loss, etc). They can't buy.
A bunch of people are unemployed. They can't buy.
Larger down payments needed nowadays. Anyone with trouble saving up that much money (and everyone here has read stats on how most Americans can't even access 2k in a month) can't buy.
Appraised values of houses may come in too low when selling. If this happens, one can't buy. (For example, I had a deal fall through recently cause the appraisal came in about 10% below contract price and the seller wouldn't budge on price.)

And in general the credit markets are so tight even people with good credit scores and a good down payment may struggle to find a lender.

Not to mention the deflationary type problem going on in housing right now. House prices are still going down, so even if it's cheaper to buy than rent, it may still be better to rent and wait for house prices to fall even further.

EDIT: Just read the article. Vegas was their example of the cheapest place to buy instead of rent (Disclaimer: I live in, and invest in real estate in, Vegas). Yet Vegas home sales, in the past year, have been approximately 50% cash purchases by investors. There's a ton of places for sale, but too many people having trouble qualifying in this credit market, so less sales than there could be, leading to half of them being cash (that would be a much lower percentage if more could qualify for mortgages). I also forgot to mention in the above list that make buying difficult: many homes are cash only sales. Good luck raising that much cash, for the average person. And many homes won't meet appraisal because the inside is wrecked, or the AC is missing, etc. All of those homes can't be purchased by an average person, only someone with cash to fix it up.

 

[calmloki]

I see real estate buys all over the place - trying to resist buying but it feels like being in a a going out of business candy store right after getting my allowance. Trying to be sensible and let others find the smoking deals, loan them 80% or less of the deal they find, and content myself with the interest payments. To a great extent, we loan on the property, not the borrower.

 

[Nords]

Sure, buying is cheaper than renting right now, but good luck trying to buy.

It's interesting that the two of you agree that it's better to buy right now, but that one of you sees opportunities and the other sees obstacles.

Should it surprise anyone that:
1. Cash buyers are finding bargains, and
2. There are lots of bargains where people aren't flocking to live?

That article is practically a Trulia infomercial begging people to do something, anything, with real estate-- especially if they can pay someone else a commission!

 

[tryan]

yeah, the hud home I re-habbed and tried to flip would have cost a buyer less than a grand for the mortgage, taxes and insurance. With no buyers ... a renter is paying $1300/mo.

Go figure!

 

[gerntz]

Buying rental property now gives a good return in many areas. So I say buy.

 

[arebelspy]

It's interesting that the two of you agree that it's better to buy right now, but that one of you sees opportunities and the other sees obstacles.

Oh I'm seeing opportunities as well.

I'm in escrow on three properties and in counter offer stage on two more.

Doesn't mean I'm not realistic about the situation, especially as it applies to most people.

Often opportunities come because of obstacles.

 

[columbus]

3-5 properties all at once? What is your strategy/story?

 

[chinaco]

There are many buyers on the side-line right now... with great credit that are not upside down. That want to buy.... but the other side of a buy is often a sell.

But the uncertainty (much of which has been induced by political BS) has left many people wondering. They can easily justify (to themselves) to wait.... So many are doing nothing.

Most people are putting off Major purchase decisions... until they have confidence things have stabilized.


We intend to sell and buy... but who wants to go through the hassle if the only people putting up an offer are bottom fishing... Not us!

I can also understand that people who are working, that might want to buy a home, are going to delay.... because of the renewed fears of a recession.

 

[calmloki]

We would be ok with selling, but it doesn't make sense to sell when the risk/reward rental return is superior to the risk/reward of investing the after-tax proceeds of a sale. We don't need to sell to the low ballers who dominate the market right now. OTOH, thank heavens we don't need to sell, because there are massive numbers of people who DO need or want to sell - which makes this a prime time for someone with some spare money. Remember reading that in the depression in the 30's cash was king. Same thing today.

 

[Nords]

We would be ok with selling, but it doesn't make sense to sell when the risk/reward rental return is superior to the risk/reward of investing the after-tax proceeds of a sale.

Five years ago, as we were buying 6.25% CDs, we felt pretty frustrated at our rental property's 4% cash-on-cash return.

Today, of course, it's a different story...

 

[kcowan]

So if cash is king right now, should we be converting our CDs and GICs to real property when they come due? I am tempted but I am reluctant to become a landlord.

 

[calmloki]

So if cash is king right now, should we be converting our CDs and GICs to real property when they come due? I am tempted but I am reluctant to become a landlord.

Which is why we have been doing short term hard money loans to investors. There is a risk (among other risks) that one ends up owning a piece of property, but at a discounted price. No management/maintenance hassles if all goes right. If it goes wrong you get to feed a lawyer fist-fulls of money till the property is yours or the borrower comes up with the money to pay you off - normally by borrowing from someone else. Not for everyone, we only loan on places we look at.

 

[arebelspy]

3-5 properties all at once? What is your strategy/story?

I'm looking to purchase three total right now, but am willing to go into escrow on more than that because many are short sales that wont pan out, only gets serious when the bank approves it. They're all super cheap. Vegas happens to be that way right now.

 

[columbus]

Sounds good, I have sfh and 3 unit, looking to save more $ and find my next deal. Not cash flowing much on the sfh but the 3 unit is with higher expenses. That's all in Columbus.

 

[mathjak107]

whether you buy or rent doesnt matter when it comes to housing costs. both are expenses. the lifetime of costs owning a home will easily eclipse the residual value of any home. typically taxes and mortgage alone run 2 to 3x the cost of the house and thats with out any other costs,renovations ,repairs ,insurance and all the other hundreds of costs that go with a house over a lifetime.

even if you buy another house the clock keeps ticking and adding up those costs. sell a house at a profit and rent? now that money goes to rent.

its all an expense folks ,dont fool yourself.

its not about whether you buy or rent .its about what do you do with the money as a renter that you didnt spend on the home . there are very few areas you arent at least 10 years of rent increases at 3% a year from catching up to the costs of buying.

a renter who invests the money he would have put down,the closing costs and the differences each month they saved will easily surpass anything the homeowner will have if he invests it elsewhere in a diversified mix.

my own home cost me 169k in new york in 1987 and sold for 330k in the early 2000's. the same amount following my fidelity insight news letter was 1.8 million. enough to buy 2 homes today and subtract out all the rent i paid.

typically by retirement it shakes out like this.

the homeowner can have lower housing costs but a smaller nest egg because he tied up the money in the much slower appreciating house along with many many expenses long term..

the renter will have higher housing costs but if they planned right a higher income from their larger nest egg.

the wild card is whether a renter has the discipline not to spend that extra dough and the answer is most of the time no.

so the homeowner at least gets the consolation prize of some residual value in the house.

in any case a home represents your cost of housing and its only an expense. .

my example is this.

suppose you rented a house and bought the house next door instead and rented that out.

suppose you got even more money than your paying in rent. are you at a disadvantage because your renting ? of course not.

suppose that rent increased along with your rent increases as well.

now picture this. instead of buying that house,suppose you invested in other asset classes that did even better and produced even bigger gains. are you at a disadvantge to the home buyer? no way..

thats the point. its all about what the alternatives are a renter does with that money he didnt spend on a house.

in either case you will spend a ton of money towards your housing costs and all are expenses in both cases . its only at the end of a lifetime of housing that you can tell who came out ahead.

 

[GregLee]

its only at the end of a lifetime of housing that you can tell who came out ahead.

I'm close enough to the end to tell. I rented and build up a nest egg for 23 years. (Didn't much like paying that rent.) Then I used the nest egg as a down payment and bought, paid off the mortgage in 10 years. (Didn't much like those mortgage payments.) Now for the last 7 years, no rent, no mortgage, but of course some tax, insurance, and maintenance (not nearly as much as rent or mortgage were, though).

Rent never ends; mortgage does. The buyers win.

 

[unclemick]

We lived in the ole fish camp and owned a rental duplex and mfg home rental for 15 yrs in N.O. - luckily sold before Katrina.

Now in ER - do I want to become a landlord again as the numbers 'may' look attractive?

Heh heh heh - self knowledge of my personality and a look in the mirror says - ah er no. . Life cycle index fund and party on in ER. It did help in the working years tho.

And by the by - I haven't paid off my 30 yr mortage in MO yet either.

 

[mathjak107]

I'm close enough to the end to tell. I rented and build up a nest egg for 23 years. (Didn't much like paying that rent.) Then I used the nest egg as a down payment and bought, paid off the mortgage in 10 years. (Didn't much like those mortgage payments.) Now for the last 7 years, no rent, no mortgage, but of course some tax, insurance, and maintenance (not nearly as much as rent or mortgage were, though).

Rent never ends; mortgage does. The buyers win.

but ever increasing increasing taxes,repairs and expenses never end.

the truth is for us the income generated off the portfolio we grew by renting instead easily pays the rent forever. if we decide to buy again we can but to be honest i dont want the headaches of ownership anymore.

while we rent our primary place we live in nyc we own a home in the poconos of pa we were going to retire to.

at this point we put it up for sale and after 4 years of ownership we decided again its just to much of a hassle maintaing a house and prefer not to.