Primary Residence: Rent vs Own

[jriemerm]

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]

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]

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]

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 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.

 

[Danmar]

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.

I think you make valid points but generally tend to overstate the financial benefits of owning real estate. Studies have shown that over long periods of time residential real state has generally only kept pace with inflation. Not bad perhaps but not great. I think a better case can be made for commercial real estate though.

 

[savory]

I had my eyes opened wide when a former coworker was selling his house in a western suburb of Philly (the job was in a close in northern suburb - Montgomery county)... the market had been flat - dead flat - for the 8 years he'd owned the house. But realtor fees and closing costs meant to SELL he had to bring a large check to closing.

He later bought a condo in center city - he made money on that - but then his job moved further out in the suburbs so the commute was bad again so he sold... so he's back to renting in Bucks county...

He's probably the poster child for why home ownership doesn't always pay.

In my area - the real estate is so high that renting often makes sense unless you have a large chunk of cash for a hefty down payment - the rent will be cheaper each month. But the landlords often purchased for a small fraction of current market value.

This post made.me think that if you are on this forum you were likely successful with your real estate approach and just as an aside, health/employment issues did not get in the way of wealth accumulation.

Perhaps our real estate success was based upon our ability to survive difficult times and not needing to sell at market lows. Luck or smarts?

 

[RunningBum]

So we're supposed to compare a 1BR apartment with a 3 BR house? Of course financially it's usually going to come out ahead. So is eating cat food instead of salmon and steak. Why own a car? You can take a bus instead, hopefully there's a stop by the Goodwill so you can shop for clothes. Vacation? Let's compare the financials of that vs. staying at home.

 

[nash031]

The answer, of course, is "it depends". Wife and I are going through some churn right now with respect to our own living situation.

We own our home, with about 40% of value left in a mortgage. We bought in a relatively depressed market time. Given the state of the RE market here, I'm an advocate for selling our home, locking in a 200% gain on our down payment, but about a 100% gain on our total equity investment (paid off a HELOC in about 8 months as well) in a little over six years. That gain is based on an identical unit which just sold last week. Their location is slightly better, our home is more well appointed, so it's probably about the same in value.

The question then becomes, if we were to sell, do we attempt to buy or rent? I'm an advocate for renting, because I think housing prices in this area are very volatile, and we're in an "up" time right now. Market timing? Sure. Will the housing market here depress again? Maybe not absolutely, but relatively, I think it will. I'm in favor of pulling capital out of our current home, renting for a little bit, and being positioned to make another move when the market depresses. As someone else said, some people always need to sell.

Part of the motivation for this is that our current home isn't our "forever" home. We need a place to live, yes, but I perceive an opportunity here...

To answer the OP question: long term, I fully intend to buy regardless of which one makes the most financial sense. At the point where we are in our forever home, the decision to buy will not markedly impact whether or not our retirement plan works. Removing that from the equation, the security in owning the roof over my head forever, and the ability to modify the home to suit our tastes and needs outweighs anything else. YMMV.

 

[exnavynuke]

This post made.me think that if you are on this forum you were likely successful with your real estate approach and just as an aside, health/employment issues did not get in the way of wealth accumulation.

Perhaps our real estate success was based upon our ability to survive difficult times and not needing to sell at market lows. Luck or smarts?

I sold my previous house in April of 2009... while not the exact low of the market, it was pretty darn close.

 

[pb4uski]

I just ran the numbers that we used to decide to buy our winter condo through the NYT Tool using the same assumptions that I used in my analysis. They came up with a annual rental cost of $13.5k a year and my analysis was $12.5k... so pretty close.

A friend of mine rents a 2 bedroom for 3 months for $11k (our is a 3 bedroom) and we use it for 6 months so I think we are better having bought than renting. Besides, if I want to put a nail in a wall I don't think twice about it.