Primary Residence: Rent vs Own

[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]

Quote:

Originally Posted by Meadbh 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.

Quote:

Originally Posted by RunningBum 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]

Quote:

Originally Posted by clobber 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]

Quote:

Originally Posted by clobber 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]

Quote:

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

Quote:

Originally Posted by RunningBum 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]

Quote:

Originally Posted by 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

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]

Quote:

Originally Posted by Meadbh 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]

Quote:

Originally Posted by Meadbh 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]

Quote:

Originally Posted by Meadbh 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]

Quote:

Originally Posted by Totoro 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]

Quote:

Originally Posted by brucethebroker 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.

Quote:

Originally Posted by brucethebroker 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.

[jriemerm]

Quote:

Originally Posted by Cobra9777 You can play around with the variables, but the only way you can swing the conclusion in favor of renting is if you sell the house after only 1 year of ownership or assume some astronomical level of maintenance costs, HOA fees, etc. Based on my experience using this tool and others to analyze dozens of downsize options in Texas, any reasonable set of assumptions will generally favor owning.

There it is. I think of buying a home not so much as an investment--a way to increase my wealth--as an inflation hedge. In the vast majority of historical circumstances, by the time 10 years have passed a home buyer will be paying far less for living expenses than a renter living in an equivalent home. And once it's paid off you pay nothing but taxes and insurance. This is a huge boon for those who, like most retirees, are getting by on less income than they had when working.

Of course there are good reasons to rent. But buying pays off handsomely over time.

[Crewer]

I'm with Totoro on the fact that the markets are very different. There is very little selection of rental homes in our area. We rented nearly 2 years between the home we sold in 2011 and our present place. The place we rented was in a great area and we were lucky to get it since there are almost no homes for rent around there. It was also lower cost than where we finally bought (or had sold). But it needed work to get it up to snuff for me. For example, I took to always showering at the gym (water pressure very low at home - pipes probably needed replacing - and shower stall was tiny), etc.

If I couldn't afford to live where I do, I'd try to still own but at lower price point. If I had to move every few years I wouldn't own. If I wanted an apartment, I wouldn't own, etc.

I have a recently-divorced friend who is having difficulty renting a suitable home and has taken to renting from people who can't sell at the price they want but she's ok with moving every year or two in order to get they type of place she wants. Not me or DH for that!

And I know Adam! Glad to hear you love the show.

[Danmar]

Quote:

Originally Posted by jriemerm Of course there are good reasons to rent. But buying pays off handsomely over time.

This statement is not universally true. It depends on the location. I own because I want control not because of any financial reason. I am able to own because I have the resources to do so. I understand that many people do not so don't really get to participate in these kinds of discussions. I did rent for a while years ago and didn't like having to deal with the landlord. Don't rent out any of our places for the same reason, don't want to deal with tenants.

One property is worth about 25% less than I paid after 10 years. The others have appreciated but maintenance and repairs are at least equal to this appreciation. Granted I get to use them rent free. I think it's more a lifestyle decision than a financial decision at least for those with sufficient means.

[exnavynuke]

Quote:

Originally Posted by Rianne One of my favorite shows, "Adam Ruins Everything" has been "on target" for many topics that most people view the wrong way. The factual information on this show always surprises me. Recently, his topic was Rent vs Own for private residence. Financially, everything he said favors renting. Cost buying a house Cost upkeep Cost property taxes Cost selling Cost remodeling Appreciation historically is flat, unless you luck out. Yard and garden can be a joyous hobby if you like that sort of thing in retirement. His argument is renting has none of these expenses and you can move when you're unhappy with the situation. People richer than me, over the years, have mentioned they rent and would never buy. Any thoughts on the subject?

To say that "renting has none of these expenses" is also false, they're just not paid directly. The "rent" itself factors in most of these things (else landlords would never have a positive income stream, and most landlords that know what they're doing are making money despite paying for the necessary stuff).

Cost long-term favors owning if you're going to stay in the same place generally. During the "mortgage phase" of ownership, the costs will be slightly higher to own than rent in some cases while in others the rental market is hot and it will cost more to rent than own (even taking into account the "additional" ownership costs, because they're passed on to the tenant in the rent). When the mortgage phase goes away, cost to own becomes dramatically less expensive than renting from everything I can see. Sure, I'll pay ~$2k in insurance and taxes and I'll budget for another $3k or so in home maintenance/repair/upkeep, but that's still only a bit over $415/month on average for a 3/2 on 1/2 an acre. Which would cost me about 3x that in rent each month...

The primary advantage to renting is flexibility of location (i.e. you can move whenever with little or no financial penalty for doing so).

[jriemerm]

Quote:

Originally Posted by jriemerm Of course there are good reasons to rent. But buying pays off handsomely over time. Quote: Originally Posted by Danmar This statement is not universally true. It depends on the location. I own because I want control not because of any financial reason. I am able to own because I have the resources to do so. I understand that many people do not so don't really get to participate in these kinds of discussions. I did rent for a while years ago and didn't like having to deal with the landlord. Don't rent out any of our places for the same reason, don't want to deal with tenants. One property is about 25% underwater after 10 years. The others have appreciated but maintenance and repairs are at least equal to this appreciation. Granted I get to use them rent free. I think it's more a lifestyle decision than a financial decision at least for those with sufficient means.

Agreed, not universally true. But as I wrote, "in the vast majority of historical circumstances." There have been (rare) periods where home prices have been extremely inflated, and if you buy during one of those periods you may spend some time with an underwater mortgage. And certain areas see historically anomalous drops in home values.

But the strong historical trend shows that homes and property in general have been increasing in value consistently for centuries, for far longer than the existence of such things as stock markets. There are few economic trends more dependable than this one. And again, my point is not that buying a home is a good way to make money, but that it is a good way--one of the best ways--to stabilize living expenses.

Of course, the wealthier one is, the smaller the percentage of income that goes toward living expenses. The economic boon of home ownership is far less important to multi-millionaires or greater.