long term housing..rent or buy

[ambition187]

wonder if my analysis is wrong..but I say rent!!!

http://www.economagic.com/em-cgi/data.exe/cenc25/c25q06

30 yr ROR on housing: 6%/yr (roughly)


Small Home Renting: http://phoenix.craigslist.org/apa/329255827.html 1100/mo = 13200 a year

Small Home Buying: http://phoenix.craigslist.org/rfs/328952930.html

down payment = 60k
mortgage=1600/mo
prop taxes=1000/yr
maintenance=5000/yr
per year expenses: 25200/yr

assumptions:
Rent increases at 6% a year
Maintenance and Prop-Taxes increase at 6% a year (mortgage payment stays constant)
Mortgage Rate 7% /yr, 30 yrs
Difference between rent and owning per year goes into stock market, increasing at 8% a year
Down payment also into stock market, increasing at 8% a year

At t=30,


DownPayment is worth 805,000
Rent/Mort Diff collected from every year is worth 697,882
net worth from renting over buying is 1.5 mil

House is worth 1.62 mil (after closing cost of 6% at t=30)


thus if housing slows down below 6% / yr or stocks beat 8% a year (or both) then renting is pretty much better than buying.

and one never has to water plants, paint, replace things..also can move fairly cheaply i think i like renting..but im curious to see if this analysis is bologna and why.

 

[mathjak107]

all boils down to one thing. quality of life. which ever way gives you the best quality and everything you want in a home thats the way to go.

you can argue buying or renting and investing the money you didnt spend until the cows come home.


right now we sold our home a few years ago and i really enjoy renting here in new york .

in a few years when we retire we will be most likely moving to a 55+ community in pa . we will buy then. its all about the quality of life we want.

 

[Brat]

I agree, it is a quality of life thing. There are few single family dwellings for rent that are consistent with my lifestyle.

In a year or two DH and I intend to sell our home and rent, but we will be renting a condo or an apartment, probably spending more per month than most of you would. Again, it is a lifestyle thing.

 

[Patrick]

Did you factor in income tax that you will have to pay on your stock market investment, which you won't have to pay on your house? Also, you get a tax break on your mortgage payment.

 

[mathjak107]

sure did. ill give you an example. my house was around 165,000 in the 80's. sold it a few years ago for around mid 300's. and this is in new york

the same amount in the newsletter i have been following for over 20 years
is now close to 1.75 million . lets see, after taxes how many homes can i buy today?

 

[mathjak107]

Did you factor in income tax that you will have to pay on your stock market investment, which you won't have to pay on your house? Also, you get a tax break on your mortgage payment.

the tax break on your mortgage is no break. your paying in an additional 1.00 on top of the house price to get back maybe 37 cents. on top of that every one gets the standard deduction even if they dont have a mortgage so you have to start figuring over and above what the standard deduction would give you.

 

[Patrick]

the tax break on your mortgage is no break. your paying in 1.00 to get back maybe 37 cents. on top of that every one gets the standard deduction even if they dont have a mortgage so you have to start figuring over and above what the standard deduction would give you.

True, but I was asking the OP if he had included these items in his analysis. They may have an effect on the results and conclusion.

 

[Patrick]

sure did. ill give you an example. my house was around 165,000 in the 80's. sold it a few years ago for around mid 300's. and this is in new york

the same amount in the newsletter i have been following for over 20 years
is now close to 1.75 million . lets see, after taxes how many homes can i buy today?

Did you buy the house for cash? If not, how can you use the same figure in the newsletter amount? You would need to borrow the balance of that sum over the down payment, right? What would the interest rate be on that? I think it would probably higher than on real estate. If you factor in those expenses, how much do you have at the end?

Or, you would need to reduce the amount invested in the newsletter to the down payment, which would reduce your final amount.

 

[Peaceful_Warrior]

Or, you would need to reduce the amount invested in the newsletter to the down payment, which would reduce your final amount.

True. One of the things I love about owning is getting 5 to 1 leverage on my money from the bank.

 

[sgeeeee]

The rent versus buy decision is almost always more about lifestyle choice than financial considerations. The best choice depends on the locality of the residence, timing of the purchase/rent decision, length of time the residence will be occupied, and priorities of the individual. Rent/buy comparisons are difficult to make for several reasons.

-) It is difficult to find identical rental and sale property. Most people who look at rent vs. buy end up comparing apples-to-watermellons.

-) Rental cost projections are usually based on guess work. National average inflation in rent is not meaningful. The local situation will determine rents and that situation can change in a short period of time.

-) The value of a purchased house is also determined by local (not national) conditions. In one city house values might rise dramatically while in another they decline.

 

[mathjak107]

True. One of the things I love about owning is getting 5 to 1 leverage on my money from the bank.

by the time you pay for the house you arent using leverage. you paid for the house plus all the interest. in fact you may be paying as much 3x the purchase price depending on interest rates. we havent even considered propert taxes and insurance . we arent talking investment property where a tenant pays ,we are talking the home you live in.

fact is our homes only averaged long term a growth rate just over the rate of inflation, maybe 3 or 4% . the markets over 10%.

again we buy our homes for quality of life and a place to live , if you timed it lucky and made alot of money so much the better .

 

[chinaco]

-) It is difficult to find identical rental and sale property. Most people who look at rent vs. buy end up comparing apples-to-watermellons.

Yup!

 

[cho oyu]

fact is our homes only averaged long term a growth rate just over the rate of inflation, maybe 3 or 4% . the markets over 10%.

again we buy our homes for quality of life and a place to live , if you timed it lucky and made alot of money so much the better .

Again, this is very much dependent on the market. Especially on the coasts (i.e. SF or NY), housing has significantly outpaced inflation over the long run.

Saying that, if you disregard quality of life issues, I don't know how monetary returns compare between rent and purchase when taking all costs into consideration.

 

[mathjak107]

not true i live in nyc. we averaged just under 5% except manhattan which always is the exception and does far better


i can tell you first hand even figuring rent all those years plus appreciation of the home wouldnt even bring you up to 40% of the stock portfolios return.

 

[honobob]

sure did. ill give you an example. my house was around 165,000 in the 80's. sold it a few years ago for around mid 300's. and this is in new york

the same amount in the newsletter i have been following for over 20 years
is now close to 1.75 million . lets see, after taxes how many homes can i buy today?

Do you have any longer term appreciation rates for NYC? I bought 30 miles out from San Francisco in the 80's for half of what you did and could sell for not quite twice of what you did. It sounds like you might have bought at the peak in the 80's and sold at the bottom in 2000's.

My minimum appreciation has been 9% and I've bought in 3 western states in each of the last 4 decades. Was it the Doors that sang "the west is the best"?

 

[mathjak107]

dont forget we had the stock market crash and changes in tax laws that caused a terrible drop in the 80's in new york. values plunged over 20%.

an investment co-op we bought went from 75,000 to 53,000 in 2 years. most of the time was spent coming back to the pre crash levels . in fact it took almost a decade to recover.

http://www.forbes.com/home/realestate/2005/05/27/cx_sc_0527home.html

 

[honobob]

an investment co-op we bought went from 75,000 to 53,000 in 2 years. most of the time was spent coming back to the pre crash levels . in fact it took almost a decade to recover.

It seems like the comparison is totally missing the leverage aspect of real estate. In 1986 I bought a $85K SFH with $5K down. My PITI was about $500 a month over renting for maybe 5 years, equaled for maybe 5 and the last ten has been about a thousand a month under renting. My market value is over $600K. What would I have bought in 1986 for $5K to return the same? Can you buy $5000 worth of the S&P500? I don't think the Forbes article is comparing apples to apples.

I'm curious about the rents for your coop during the down time. did they go down proportionately? My experience has never to have rents drop, only stay flat for awhile. Thanks.

 

[justin]

It seems like the comparison is totally missing the leverage aspect of real estate. In 1986 I bought a $85K SFH with $5K down. My PITI was about $500 a month over renting for maybe 5 years, equaled for maybe 5 and the last ten has been about a thousand a month under renting. My market value is over $600K. What would I have bought in 1986 for $5K to return the same? Can you buy $5000 worth of the S&P500? I don't think the Forbes article is comparing apples to apples.

Honestly Hocobob, you are an investing moron (I mean that in the nicest possible way!). Why did you waste your money on poorly appreciating real estate when you could have made some real money on a real investment.

$5k (leveraged 20-to-1) on MSFT in May 1986 (split and dividend adjusted price of $0.10) would be worth $30.1 million today. Looks like you are a sucker, huh? Even avoiding the leverage on MSFT, you still should have cleared at least $1.5 million if you were a reasonably adequate investor. All you needed to do was buy the right stock. :

 

[cho oyu]

dont forget we had the stock market crash and changes in tax laws that caused a terrible drop in the 80's in new york. values plunged over 20%.

an investment co-op we bought went from 75,000 to 53,000 in 2 years. most of the time was spent coming back to the pre crash levels . in fact it took almost a decade to recover.

http://www.forbes.com/home/realestate/2005/05/27/cx_sc_0527home.html

Looking at the plot in the link provided is a bit misleading on a one-to-one basis. It assumes that one had $100k to invest in 1980 and compares relative growth in that respect. Note that it only includes SFHs (no multi-family residences), no mortgages over approx $340k, and no tax benefits. However, very few people pay cash for their residence; this plot ignores the very high leverage aspect of home mortgages.

A more appropriate comparison would have been to look at a rent v. buy equation and compare total receipts after this 30 year period. (i.e. if rents are cheaper than housing and you invested that difference, would your net worth be higher than having owned a house).

In any case, NY housing has still beaten inflation over the years, unlike most of the US.

 

[honobob]

Honestly Hocobob, you are an investing moron (I mean that in the nicest possible way!). Why did you waste your money on poorly appreciating real estate when you could have made some real money on a real investment.

Ouch, Justircest, you call'em as you see 'em, but in my defense it's all I knew and I am here to learn so I won't cry over missed opportunities. I've have learned in real estate that "today is the best day to buy/sell real estate"

You've intrigued me with your right stock plan. It seemed easy but perhaps complicated to just buy $5000 worth of the S&P 500 but ya gotta think that at least 250 of those drag down the top 250 so if I could just concentrate my funds on the "right one" ..... :

 

[justin]

You've intrigued me with your right stock plan. It seemed easy but perhaps complicated to just buy $5000 worth of the S&P 500 but ya gotta think that at least 250 of those drag down the top 250 so if I could just concentrate my funds on the "right one" ..... :

you've missed my point. I'm not saying to buy the top 250 of the S&P 500. That's 249 too many. Just buy the highest performing stock so you can maximize profits. Why waste time in real estate where you can only make $600,000 from a $5000 investment, when you can make $30 million from the same investment in stocks.

Unless you're saying it is hard to pick which stock is the right stock to buy. And of course I'd argue the same problem applies to real estate. But if you want, keep buying bubbly real estate. I'm sure it will keep going up regardless of the fundamentals.

 

[honobob]

Unless you're saying it is hard to pick which stock is the right stock to buy.

Exactly!!!! I do disagree with you about the real estate picking. I know I can go out today and get 8% appreciation over time. You let me pick the property, I'll put up the down, you get the financing and we'll split the profits equally but I pick the sell date within the next 15 years. I'll guarantee you the 8%!

But why split $800,000 with me when you can make us tens of millions! Com'on, what do I have to do, buy your newsletter? Take debit or credit?

 

[Sam]

Exactly!!!! I do disagree with you about the real estate picking. I know I can go out today and get 8% appreciation over time.

We have a genius among ourselves. Either that or totalled disillusioned.

 

[justin]

We have a genius among ourselves. Either that or totalled disillusioned.

I think "disillusioned" will describe honobob in 15 years if his real estate speculating doesn't go quite as planned!

 

[justin]

Exactly!!!! I do disagree with you about the real estate picking. I know I can go out today and get 8% appreciation over time. You let me pick the property, I'll put up the down, you get the financing and we'll split the profits equally but I pick the sell date within the next 15 years. I'll guarantee you the 8%!

Wait a sec... you want me to borrow hundreds of thousands of dollars to buy speculative real estate on the cusp of a bubble, and all you are promising me is 8% returns?!?! At least during the 200 P/E ratio dot com tech stock bubbles, the promises were of 40-50% returns going forward to compensate for all that risk.

If I wanted 8% returns over a 15 year horizon, I'd go with some much less risky investments that are liquid.