Rent vs. Own

[brett]

I think that the real answer is a big 'it depends'.

I would think that theis decision would be a function of the current real estate market where you live, the type of housing that you prefer, and whether or not you plan to stay in the same housing for a few years.

 

[Rob]

I've never owned a home until last November, and I'm now 68 years of age. I enjoy this thread because it impacts me directly.

In retrospect, I should have gone into 55+ retirement apartments/senior retirement homes, where the chances are greater that it will be quieter. I rushed into buying. For some reason, at least in the Bellingham, Washington area, the 55+ apartments, or retirement homes are less expensive than regular apartments, and they all allow pets.

Now that I have my new house, I need to put things in perspective. I'm certainly not a prisoner, and I have two ideas or goals I focus on when I think I made a mistake buying this house. The first is that my mortgage, insurance and taxes all add up to $498/month, since I put so much down on the house. That's pretty inexpensive rent. Second, when I am approaching my mid-70's, I'll sell and move into a retirement apartment and look at this as being a very good experience. i'm always productive doing yard work, and that certainly has kept me healthy.

It's nice to own. It's nice to rent. You are never locked into either.

 

[nash031]

I think it boils down to where you are in life, and what your needs are.

Young? Single? Switch jobs alot? Renting is probably the better decision.

Married? Have kids / animals? Need 3+ bedrooms? Lean towards buy.

Retired? Might want to check out that 2 bedroom condo...

I rent, as I enjoy having an easy commute, and I only need one bedroom. Owning can't really compete. When / if I get married / have kids, I'll likely buy.

I refuse to be rushed into owning before I need to, just because the real estate market is heating up. I have faith that my investments will keep up with or exceed any return I might make on real estate.

Bingo. The answer is "it depends." Senator brings up a lot of great points, but I disagree strongly with his assertion that "to FIRE you rent." I've done both over the course of the last ten years, and currently own. I made $60,000 over two years on my first property, with nothing down. I turned around and lost about half of that the next two years as the bubble burst and I got out right before it got really bad. DW and I bought again in 2011, right around market bottom here in San Diego. Home values are appreciating nicely, and our mortgage/tax/HOA payment is now less than it would be if we were renting.

Now, we made a small sacrifice in terms of location (not terribly walkable, but right across the street from the Pacific Ocean, so not a bad trade), and we did have to put significant investable money down. Senator has a great point that we would've been better off investing that money in the stock market.

That said, the tax break keeps us in the 25% bracket. The expected appreciation on our property over the next five years (so 9 total) should out pace inflation by quite a bit, and in the event that we decide to move when my active duty time is done, we will be able to sell and take that equity to pay cash for our long(er) term home elsewhere. In the meantime, our housing costs are fixed, and thus decreasing in real terms as inflation creeps up.

None of that will prevent us from retiring early, and in fact the equity significantly reducing our year-over-year housing expenses will likely help.

The only bad decision, as others have pointed out, is buying OR renting more than you need, or buying without carefully looking at your specific market conditions (the old "house values never go down!"). Otherwise, it really depends on your wants and needs as to which is the better path.


Edit: one thing I should mention is that when I was 25 and buying my first property, I did not take a holistic approach to looking at my investments. Now, as I understand I have significant assets "tied up" in my home, I understand that my overall portfolio risk is not as great as I assume it to be based on 85/15. In other words, I didn't understand the opportunity costs of buying vs. renting as I do now. That said, making $30,000 over four years with nothing down and sub-letting a room of one house really made it a wise financial move (though the more wise financial move would've been to take my $60k and rent the second place). In short, I probably got lucky and used my VA loan privelege at a perfect time.

 

[GTFan]

This is a lifestyle question way more than it is a financial one.

Having said that, I've spent a TON less money owning my house for the last 20 years than I ever would have renting. Hell my yearly prop tax is less than one month's rent for an equivalent house. And I have an asset that I can sell for more than what I paid (under current conditions).

 

[Sunset]

Placebo effect?

As said above, you don't have to own your home to be a part of your community. I've rented all my life, and, until recently, the same place for 32 years (I'd say that's "putting down roots"), and have been part of my community. Still am, as I moved only a few blocks away from my old place.

You are a gift to your landlord.
My parents did the same type of thing, rented a place for 23 years. They essentially paid for the place for the landlord, then moved with nothing in their pocket.

 

[Birdie Num Nums]

You are a gift to your landlord.
My parents did the same type of thing, rented a place for 23 years. They essentially paid for the place for the landlord, then moved with nothing in their pocket.

I had extremely favorable rent. So favorable that I was able to FIRE at 55. I left with plenty in my pockets.

 

[Walt34]

My parents did the same type of thing, rented a place for 23 years. They essentially paid for the place for the landlord, then moved with nothing in their pocket.

Well, they did get something of value or they wouldn't have done it. They had the freedom to move anytime they wanted. They had the freedom to not have to think about setting aside cash for maintenance expenses on the house or worrying if the next roof would cost $8k or $18k. They didn't have to think about property values or property taxes.

While I have always owned a house as soon as I could, not having rented an apartment since 1979, there are valid reasons to rent instead of own. It's just that so far none of them has applied to me.

 

[RobLJ]

If you maximize the renting experience, by only buying the size of rental you need, when you need it, you are better off.

Then further maximize the experience by living where the commute times are shortest, and taking jobs where the income is maximized, rather than close to where you live, you are better off.

Then, do not get all cluttered with 'stuff', so you can travel lite, you have more money to save.

Of course, if you want to "own a piece of land", owning is better.

Shorter term, you probably would have been right. Since we stayed in the same home 25 years and raised the boys, we were paying $450 for the first note, until we paid it off last summer. Not sure what renting would have resulted in, but I'm pretty sure, the last 10-15 years of paying between 1200 to 450/month we came out ahead.
To be sure, most don't stay in the same home for 25 years.

 

[48Fire]

You are right. Though I somehow have different feel for 2 places where I own versus 10 plus places where I lived in my life.

I can not put a finger on it.

There is a definite bias against renters in our neighborhood. I think in general it comes from the fact that owners tend to take of their house better than a landlord, where it is mainly a business decision.

 

[ReadySkiDaddy]

Here's a little tid bit that is rarely considered...
When you own a house, if you sell one day many years later for a BIG profit you will have to realize that capital gain all in ONE year. This compares with owning investments like stocks, bonds and ETF's in which you can stagger selling in pieces in different years, and thus perhaps dropping down to a lower tax bracket.

 

[mathjak107]

by the same token you can't 1031 exchange a stock.

we were big investors in real estate here in nyc and live in a rent stabilized apartment as tenants. renting and not having the money tied up in a house has let us take advantage of some great deals. i would never have had the money to invest if i owned. taking an equity loan for investments that may take a few years to pan out was not an option as i wouldn't be able to afford the payments nor would i risk my house for a venture...

but now that i am retiring in 10 months i am no longer the aggressive investor i was. the opportunity costs are far less and now things may be better measured in costs cut vs gains.

we are watching that line carefully now and may end up buying a co-op again in the near future.

the savings may end up being greater than the income generated with that money which will then be tied up in the apartment.

 

[Newventurer]

Nope, just setting expectations, since that's how this discussion always goes.

If you perform an advanced search looking for the word "rent" using the "titles only" option you will see many threads on this topic, and they usually do wind up going this way.

You were right


Sent from my iPad using Early Retirement Forum

 

[Senator]

Shorter term, you probably would have been right. Since we stayed in the same home 25 years and raised the boys...

Your are correct. When you live in a place like you own it, for a long period of time, you are better off buying.

But you did, early on, have the peace of mind that you could move very easily, very inexpensively. And if the neighborhood went to crap, you could move without losing money. Bad neighbors or better job, just pack and go.

 

[Sunset]

Here's a little tid bit that is rarely considered...
When you own a house, if you sell one day many years later for a BIG profit you will have to realize that capital gain all in ONE year. This compares with owning investments like stocks, bonds and ETF's in which you can stagger selling in pieces in different years, and thus perhaps dropping down to a lower tax bracket.

If it's a home you live in, then the first $500,000 of profit is tax free, but if it's an investment, then yes it's a big hit.

 

[mathjak107]

the thing is though markets historically blew away residential real estate by 5 to 6x.

compared to how our house did vs markets over the same time frame i could have subtracted out all the rent we would have payed and the taxes and bought 2 homes today maybe more and we live in queens in nyc...

 

[jonc]

In my neighborhood, rental rates smell like they are approaching a "bubble" state.

Annually I pay about $400 / month in property taxes. I retired my mortgage after 13 years of servicing that debt.

A comparable home across the street is a rental property.

It was vacant for a few hours while advertised as shelter for $1700 / month.

Renters converged and a bidding war ensued.

It is now rented for north of $2100 / month.

My last mortgage+property tax+home owner insurance payment was about $2250. If I purchased today, with my inflation-adjusted 1998 down payment, it'd be closer to $3500 per month.

The tenants across the street are over 30 years of age. One is a tenured instructor at a local university and the other is a graphic designer. They have a 6 or 7 year old child.

In 2008 the same home was vacant, costing its owner mortgage, insurance, property tax and minimal utility bills, for the better part of two years (or was it three years?).

For me, owning shelter puts me in a better position to FIRE.

For the tenants across the street, renting is the cost of a short commute to work, more quality time with family, the privilege of sending their kid to a good public school and avoiding a heftier monthly shelter fee.


-Jon

 

[Sunset]

the thing is though markets historically blew away residential real estate by 5 to 6x.

compared to how our house did vs markets over the same time frame i could have subtracted out all the rent we would have payed and the taxes and bought 2 homes today maybe more and we live in queens in nyc...

I think you should check your numbers, as I just looked up VTI and it went to $22,8xx from $10,000 in the last 10 years, thats 2004 - 2014 from the Vanguard site, ( the S&P when to $21,8xx).

https://personal.vanguard.com/us/funds/snapshot?FundId=0970&FundIntExt=INT#tab=1

So in the last 10 yrs the market has roughly gone up 2.2x , which is pretty far from 5x - 6x

I agree that housing in the last 10 yrs has for most folks only come back to where it was, basically flat in the USA.

 

[mathjak107]

my numbers are fine long term. i bought my house for 169k in 1987. today is worth 525.00

169k in the growth model i followed from fidelity insight in the same year is around 3.2 million. even the s&p is about 2.5 million.

the last decade was very untypical for equities. in fact older money since 2000 has been up less than 2% real return for almost 15 years. however most home prices are still below where they stood.

 

[ReadySkiDaddy]

If it's a home you live in, then the first $500,000 of profit is tax free, but if it's an investment, then yes it's a big hit.

I thought it was 250K? Did they raise it to 500K?

 

[zedd]

We close on a property tomorrow. The seller bought it in 1964 for $14k. We got it for $215k. If I'm doing this calculation correctly that's a return rate of 5.62%. Figure inflation has averaged 3%, maintenance 1% and taxes another 1%.
Was the property a good investment for 50 years?
I'm thinking not so much. But you gotta live somewhere.

 

[Senator]

I thought it was 250K? Did they raise it to 500K?

$500K for a couple, $250K for an individual.

 

[Lakedog]

We close on a property tomorrow. The seller bought it in 1964 for $14k. We got it for $215k. If I'm doing this calculation correctly that's a return rate of 5.62%. Figure inflation has averaged 3%, maintenance 1% and taxes another 1%.
Was the property a good investment for 50 years?
I'm thinking not so much. But you gotta live somewhere.

Based on your numbers, it seems the previous owners did fine if they were able to live there essentially for free (or with a slight profit). Compare that to what rent would have cost them over those 50 years.

 

[Birdie Num Nums]

Based on your numbers, it seems the previous owners did fine if they were able to live there essentially for free (or with a slight profit). Compare that to what rent would have cost them over those 50 years.

Then there are all the other variables omitted from that calculation: real estate sales commissions; non-deductible interest paid on the mortgage; what if some/most of the $ tied up in that home had been invested instead, as mentioned in other posts; personal time spent maintaining and fixing the property that a renter usually does not incur; freedom of a renter to move on a month's notice. I'm sure there are others. Then there are the personal benefits of homeownership. Some, like me, might consider it a wash--financially and personally. It then all comes down to: do I like living where I do, regardless of whether I own or rent the place? It doesn't always come down to the last nickle and dime to figure out whether your home is "worth it" to you personally.

 

[haha]

In my neighborhood, rental rates smell like they are approaching a "bubble" state.

Annually I pay about $400 / month in property taxes. I retired my mortgage after 13 years of servicing that debt.

A comparable home across the street is a rental property.

It was vacant for a few hours while advertised as shelter for $1700 / month.

Renters converged and a bidding war ensued.

It is now rented for north of $2100 / month.

My last mortgage+property tax+home owner insurance payment was about $2250. If I purchased today, with my inflation-adjusted 1998 down payment, it'd be closer to $3500 per month.

The tenants across the street are over 30 years of age. One is a tenured instructor at a local university and the other is a graphic designer. They have a 6 or 7 year old child.

In 2008 the same home was vacant, costing its owner mortgage, insurance, property tax and minimal utility bills, for the better part of two years (or was it three years?).

For me, owning shelter puts me in a better position to FIRE.

For the tenants across the street, renting is the cost of a short commute to work, more quality time with family, the privilege of sending their kid to a good public school and avoiding a heftier monthly shelter fee.


-Jon

It takes leverage to produce a bubble. Rental payments are not leveraged, so it is impossible to have a true bubble in rents. When debt is used to finance an asset, that is when bubbles occur. Clearly there are cycles. I am not sure where your neighborhood is, but central Seattle is likely due for a slowdown. There are cranes everywhere and have been for >2 years. Often rent increases will flatten out when there is enough building to push up vacancy rates a bit. If this coincides with or is followed by a business slowdown, rents can fall as in 2008-2009. Then projects will be abandoned, holes in the ground can stay holes in the ground for a while/. But if industry in an area is fundamentally strong and growing, this will not last longer than a few years.

Rental rates are somewhat like the price of tomatoes. Supply and demand always in tension.

Ha

 

[Cobra9777]

We close on a property tomorrow. The seller bought it in 1964 for $14k. We got it for $215k. If I'm doing this calculation correctly that's a return rate of 5.62%. Figure inflation has averaged 3%, maintenance 1% and taxes another 1%.
Was the property a good investment for 50 years?
I'm thinking not so much. But you gotta live somewhere.

Based on your numbers, it seems the previous owners did fine if they were able to live there essentially for free (or with a slight profit). Compare that to what rent would have cost them over those 50 years.

According to ********, $14K invested in 1964, in a 70/30 portfolio, would be worth $989K in 2014. That difference (vs $215K home value) would have paid all the rent and then some. No monthly payment does not equal "free."