Housing: Own versus Rent

[Sam]

Has anyone done detailed analysis on Own vs Rent? Assuming of course that you'd be renting the exact same house you would buy, and vice versa.

In Houston, house appreciation is about 3% (no appreciation after inflation). Annual house rental is about 8% of house price (16K/year for a 200K house). Property tax is about 2.5% after homestead exemption. ROI is 9%. Maintenance, insurance, HOA also add to the cost of owning.

Using those numbers, my analysis tells me it's a bad, bad, bad idea to own. Renting the above house for 15 years, and you would end up with an extra 30K compared to owing it.

To break even, the house must appreciate at 4.5%.

What's your take? For this discussion, let's only focus on the financial aspect. Let's ignore all the surrounding emotions of own vs rent.

 

[REWahoo]

Sam, do a search using "rent vs. own" (in quotations) and you should bring up several threads on the subject. I also recall references to a couple of online calculators.

 

[Cut-Throat]

The problem is that if you rent, you can't control your destiny that well. You might have to move, if the owner has to sell etc. - that costs money. - I was a long term renter in an appt. in the 80's and 90's when mortgages were high. Invested in the stock market and when interest rates dropped bought a place in 98.

So I am not against renting. - If you rent an appt. - you have more control, but less space. renting a house, you're at the mercy of the landlord.

I pay about $1000 a month to live in my paid off house. with taxes, assoc. fees and utilites. I could probably get a nice place to rent for that much, but I would not enjoy it that much.

Buying vs. Renting is more about what you want to live in vs. finances. Renting probably comes out cheaper, but you get what you pay for.

That said, I rather rent a place I like, than own a place I don't.

Like where you live - whether you buy or rent!

 

[Caroline]

I can remember reading some compelling articles on the benefits of renting over owning in years past.

Silly me, I went ahead and bought a rental property 8 years ago for roughly $129K anyway -- I was maxing out my 401(k), and plowing a lot of what was left over into various Vanguard funds, and it just seemed like I should add real estate for diversification.

Six years ago I bought my own home in order to establish a toehold in the Bay Area in case prices went up and my ability to buy disappeared forever. Paid a little over $200K.

Recent corrections notwithstanding, I'm happy with results. I imagine the question of "rent vs buy" depends on area of the country, demographic trends, your personal situation, and plain old luck. Your analysis of a house in Houston takes an economic "snapshot" in time, which is the best one can do, but the future is really anybody's guess. Leaving emotions out of it, would we still want to add economic and demographic trends, and diversification into the analysis?

If somone had told me my $129K rental would be worth over $400 today, I'd have L'dMAO.

 

[wabmester]

There's a good rent vs buy calculator here:

link

The biggest factor is the length of time you plan to live there. In the short term, rent wins. In the longer term, the upside of home appreciation and the downside of rental inflation tend to favor buying a home.

 

[Alex]

Rent is for suckers. Buy a house.

 

[astromeria]

Rent is for suckers.

Oh, good grief! Renting is for people who determine that it makes more sense for them than buying due to financial, temporary location, or other issues.

 

[AltaRed]

Oh, good grief! Renting is for people who determine that it makes more sense for them than buying due to financial, temporary location, or other issues.

I agree.

 

[Khan]

I own a paid for house, and am looking to rent in the future.

I liked what I had, but I'm getting too old for this %^&*.

 

[Alex]

Oh, good grief! Renting is for people who determine that it makes more sense for them than buying due to financial, temporary location, or other issues.

Obviously, it depends on your situation. If you are in a temporary situation and are moving in a year or two, you'd probably be better of renting. And I'm sure that there are a lots of other situations where it makes sense to rent. But for the most people are better off owning than renting and the data proves it. But since I am not emotionally attached to my original post, I am modifying it!!!
Renting is usually for suckers.

 

[Ponks]

Hey Sam,

In your original example did you factor in the tax deductions of paying off a mortgage? This is another argument for owning a home.

Ponks

 

[mathjak107]

mortgage interest is like spending a dollar to get back a quarter. actually it could be less than a quarter as everyone gets the standard 10 or 12,000 deduction ,i forgot already what it is. all calculations have to start above that mount.


if you trigger the amt say goodbye to it all

 

[Mr._johngalt]

I own a paid for house, and am looking to rent in the future.

I liked what I had, but I'm getting too old for this %^&*.

Me too......."too old". OTOH, it appears that I am stuck right here
indefinitely for the reasons I have pointed out previously.
I had about the perfect rental bachelor pad (for me) and gave it
up. Doubt I could duplicate it around here even if I was so
inclined which right now is idle speculation.

JG

 

[Sam]

There's a good rent vs buy calculator here:

link

The biggest factor is the length of time you plan to live there. In the short term, rent wins. In the longer term, the upside of home appreciation and the downside of rental inflation tend to favor buying a home.

Thanks. It confirms my analysis.

If somone had told me my $129K rental would be worth over $400 today, I'd have L'dMAO.

What's L'dMAO?

In your original example did you factor in the tax deductions of paying off a mortgage? This is another argument for owning a home.

Because of the low cost in Houston, tax deduction is zero or almost nothing.

 

[REWahoo]

What's L'dMAO?

Laughed My @ss Off

 

[mathjak107]

lets not forget that even with tax deductions depending on your interest rate and down payment you actually can pay up to 3x the purchase price after 30 years. dont forget to factor that in along with all the un-reimbursed property taxes and repairs and other costs you dont have when renting. . with appreciation here even in new york we barely squeeked out a bank account annual return over the last 30 years.

i sold my home after my divorce a few years ago and dont regret it. renting since then but am considering buying in a 55+ community but soley because i want to live there not because its a great financial investment.

our rent is 1600 amonth , to buy a 2 bedroom apartment in our area is 330,000 -360,000 plus about 1,000 a month maintaince. just the interest we get on the money pays our rent, not even figuring another 10-12,000 a year maintance.

 

[jeff2006]

Buying vs. Renting is more about what you want to live in vs. finances. Renting probably comes out cheaper, but you get what you pay for.

That said, I rather rent a place I like, than own a place I don't.

Like where you live - whether you buy or rent!

In my experience, this is right on. Once I owned a house I really didn't like -- miserable experience.

Also . . . a good apartment could offer a lot of the advantages of asssited living (if that's the correct term (maybe should be "independent living" in a group setting), but without the high expense. Around here (Raleigh), for example, you can get a really nice apt for about 1200 per month, whereas "assisted living" with minimal services is about 2400.

Not of much interest to the younger posters, I guess

 

[perinova]

Few people do a true analysis of rent vs own since they have a personal bias toward renting or owning in the first place. When I talk to others about this I often notice that people are clueless on the subject (or maybe it's me ). I usually let people be wrong to avoid "breaking their house". Better be wrong unaware and happy that wrong aware and unhappy... Anyway...
A lot of calculators seem incorrect and missing pieces of the equation.

- A pure financial analysis at t=0 including property tax and maintenance tells me that the break even point for the rent vs own is: if home value is 15times yearly rent then it is a good buy. This number in itself varies in what state you are living since maintenance is different in snow or desert country and since property taxes can vary so much.
- Add on the wealth effect created by a possible increase of the home value over inflation is only valid if you one day will sell for profit and rent; or move to a much cheaper area. When considering this you need to take in account economic factors such as where are we in the economic cycle interest rate and valuation wise. Also where you are considering moving to makes a huge difference in outlook.
- Stability factors and other personal preferences: Do you like to move every 4 years or so? (that's the average length of time in the country). Renting may sometiomes end sooner that what you planned but it is also a lot easier to break a lease than finding a buyer and getting rid of a deathpledgemortgage.
Do you like gardening and home repairs? Do you like ultimate privacy or like to see a few neighbors every so often?

 

[Craig]

Sam, your TX appreciation rate is (at least was) atypically low for the country, and certainly biases the analysis. I lived in DFW, and was disappointed in our home investment in Plano ... small numbers, but only home I ever lost money on. TX taxes real estate much too heavily (yeah, I know there's no state income tax ... but we effectively "rented" our home in Plano, with real estate taxes at nearly $600 per month). The rents look quite high as well.

Those above have adequately answered your question. [perinova ... eventually, everyone, or their estate, sells at some point ... ]

My personal bias is ownership, generally ... has paid off for us big time, over our lives. But ... we might rent someday, if for no other reason than to be liquid and more fancy free.

 

[Sam]

Charles, I thought DFW appreciation rate is about the same as Houston. May be 1% more?

Not sure what you mean by "The rents look quite high as well"?

Anyway, as I mentioned before, to break even in this Houston example, the appreciation rate needs to go up to 4.5% (from 3%).

 

[Corporateburnout]

I agree with the people that stated it is mainly a personal preference. I am of the opinion that if you like the area you live in and you plan to stay there then owning is perferable to renting. As I get older I do not want to keep packing moving and unpacking every time my landlord sells the house or the property management decides to convert my apartment into condos. To me there are many restrictions imposed on a renter such as modifying and remodeling the apartment or house not to mention conflicts between landlord and tenants that I can live without.

 

[Delawaredave]

Housing appreciation has averaged 1-2% over inflation over the last century. Last 6 years have been way over average. Next 6 years will be way under average.

Probably need appreciation to match inflation to break even versus renting. 1-2% appreciation above that tilts scale towards buying - especially if you'll be in the house more than 5 years.

If I moved to another city and expected to move again in less than 5-7 years, I would rent now. If I expected to be there longer than 5-7 years, I'd buy.

 

[youbet]

Do you like gardening and home repairs? Do you like ultimate privacy or like to see a few neighbors every so often?

Do you enjoy outdoor activities and room for hobbies? Do you crave a bit of privacy or prefer your every move be done under the watchful eyes of your busybody neighbors?

Just an alternate point of view......

 

[youbet]

Our home has been a convenient part time job for me, much more convenient than anything working for someone else could have ever been.

When we had it built, we left certain items undone knowing I'd complete them over the years. You know, finishing the basement, cabinets in the garage, landscaping and on and on. When that was all done, doing maintenance myself became the part time job. By keeping construction and maintenance costs low and adding improvements ourselves, our current value is quite high vs. our costs.

Of course, if we could have afforded to pay for everything to be done, I would have gladly done that. I also would have never worked for MegaCorp for decades....... Having the house and adding lots of sweat equity was just another way to get to FIRE. And, for us, necessary because we started with a negative net worth.

 

[kcowan]

I have owned four homes and am renting my 3rd. Emotionally, owning is the best. My last house was a castle with a sweeping oak circular staircase from a 20x40 2-storey entrance, 350 ft driveway that snaked across the front of the house and around back to the 3-car garage by the pool.

First house $21500 in 9/67 bought
Last house $535000 in 9/97 sold
Annual gross gain 4.763% p.a.
Less selling costs, improvements, maintenance, taxes.

Since then I have been getting more than that after tax with the proceeds.

Plus I am living in a $1.8 million property (current value) for $3000/mo including electricity, heating, water, sewage, maintenance, taxes. Retired in 2002. Travel a lot.