Rent vs. Own

[Newventurer]

I always read with interest the discussions regarding rent vs. own (I have a mortgage) and am constantly weighing the issues of flexibility vs. stability as well as the financial impact on budget.

The recent financial news would have me believe that due to high demand from millenials (maybe also Retirees?) rents are seeing significant increases.

Are those of you that rent seeing these types of increases? Is there a pain point that would cause you to consider buying again or is this assumed in your original decision to rent. Do rents ever go down...or do you have to move to obtain the benefit of a market decline in rents?

I like a number of the benefits of renting but wonder if there is more risk (rising rents) than I have previously considered.

 

[ziggy29]

This "debate" (and it has often turned into exactly that) has been rehashed many, many times here, much like the "pay off debt or invest with a windfall" question.

You'll find a lot of true believers on both sides, but the truth is that there are a lot of moving parts and it depends on the individual and the situation they are in.

 

[Newventurer]

Most things discussed on these boards have been discussed previously, are you suggesting that we should therefore not ask questions about them in the future even when there appears to be new trends, which is what I am asking about?



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[ziggy29]

Most things discussed on these boards have been discussed previously, are you suggesting that we should therefore not ask questions about them in the future even when there appears to be new trends, which is what I am asking about?

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.

 

[Senator]

There are a lot of factors that are not in the picture with renting vs. buying. But from a financial perspective, renting is a better option.

I firmly feel if you want to be FIRE, you should rent and save. Do this at a younger age, and you will be better off.

Here is a pretty solid argument for renting.
Should You Rent or Buy a Home? - No Nonsense Landlord

 

[REWahoo]

But from a financial perspective, renting is a better option.

Except when it isn't.

 

[Newventurer]

Ok, perhaps I could have communicated my interest more clearly. I really am interested in housing trends vs. an individual decision to do one or the other.

Will increase in rents create an inflection point where those that rent decide to re-enter the 'own' market (whIch seems to coincide with an environment of increasing interest rates)?

Basically, will anything save housing?


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[Amethyst]

In my area, renting is a much better option than it used to be. When I first moved here in 1980, available rentals consisted of roach-filled apartments that deserved to be condemned, and I could hardly wait to get out of them and into my own place. Rents were relatively high because choices were limited. Nowadays, with all the building over the last 30 years and especially since 9/11/01, renters' choices are vast. Our last set of tenants could easily have afforded a house, but chose to rent to save money. Rents do appear to be rising in recent years - but so are renters' expectations.


Amethyst

 

[Senator]

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.

 

[clifp]

This "debate" (and it has often turned into exactly that) has been rehashed many, many times here, much like the "pay off debt or invest with a windfall" question.

You'll find a lot of true believers on both sides, but the truth is that there are a lot of moving parts and it depends on the individual and the situation they are in.

One of the difficulties in having this discussion is there are three separate ways to look at the question. Nationally, locally, and personally.

Nationally the Housing affordability index is quite high 158, well above historically levels. (The index means that median family, can qualify for an 80% mortgage that is 1.58 times the price of the median house). Nationally rents hit record levels this month which is also good for buying. On the downside it is not clear that Generation Y have much interest in buying which pushes demand down.

Locally there is a such huge difference between market that makes a discussion hard. I somewhat familiar with four markets, Honolulu, The SF Bay Area, Southern Oregon, and Las Vegas. Eventhough I own my home in Honolulu I think it makes very little sense to buy here. Even after figuring all the tax breaks etc, it is much cheaper to rent than to buy here. In contrast, Vegas is just the opposite despite a 50-75% price increase from depths of the Vegas foreclosure crisis, you can still generally get a mortgage, plus taxes and insurance for less than rent and that isn't considering the tax breaks you, get or the equity you are building up. IMO it makes slightly more sense to rent than own in the Bay Area,and slightly more sense to buy than rent in Southern Oregon.

But ultimately, the personal factors are what is most important. Those in turn can be divided into financial issues (tax rates, how long you intend to stay, expected investment return) and purely psychological reasons, which vary completely.

In many ways it only makes sense to discuss the issue in terms of national outlook, and personal financial decisions, but that never happens...

 

[W2R]

Ok, perhaps I could have communicated my interest more clearly. I really am interested in housing trends vs. an individual decision to do one or the other.

Will increase in rents create an inflection point where those that rent decide to re-enter the 'own' market (whIch seems to coincide with an environment of increasing interest rates)?

Basically, will anything save housing?

Housing seems to be saving itself quite nicely as the housing recovery progresses.

The housing recovery has pushed up home prices nearly everywhere. Over the past year, home prices rose in 225 of the 276 cities tracked

Housing Outlook, 2014-Kiplinger

The above quote was early in 2014, but here's one from August, 2014:

The realtor. com August National Housing Trend Report shows the housing market slowly improving with strong prices, limited inventory and steady demand.

Real Estate Market Data and Statistics from realtor.com - realtor.com®

Maybe a newly invigorated job market and employment situation might spur faster housing recovery. My possibly erroneous perception is that a lot of younger people are not inclined to buy, because they may have to move to find a new job if they get laid off.

 

[wolf]

Own. Do not rent. When you are retired, it's to late to go back and try

and own. (cost of living, inflation, less job/income security as you age).

 

[Walt34]

Basically, will anything save housing?

I just ordered one of these and will let you know in a few days.

 

[pb4uski]

DD is facing this issue right now as she is changing jobs and may rent for a while rather than buy. (She currently owns in a different city too far from her new job).

 

[eta2020]

In a big picture it makes nor difference if you own or rent provided you own/rent modest place.

Real estate is not big part of NW for people who want/can FIRE.

But owning means you put roots down and become part of community and I like THAT.

 

[steelyman]

Renting does not preclude you from being part of the community. You just have to engage.

 

[eta2020]

Renting does not preclude you from being part of the community. You just have to engage.

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.

 

[NYEXPAT]

For me, I have found the right balance of financial upside/flexibility is to "own where you rent and rent where you live". But I always zig when others zag.

 

[FIREd]

I enjoy being a renter very much. At this point in our lives, flexibility is highly valuable. Our rent increases every year and, since it represents more than half of our expenses, that is always a concern. Our personal rate of inflation has gone up quite a bit compared to our homeownership days. But we made sure to rent a place that we could easily afford and the rent is still far from being an unbearable financial hardship.

 

[Cobra9777]

I've been analyzing whether we should rent or buy when it comes time to downsize. I've got a fairly comprehensive spreadsheet that yields results quite similar to the NYT Calculator (without quite so many variables). Rents in our target area currently average 62 cents per square foot per month, vs purchase price of around $100/sf. At that rate, renting is clearly cheaper using either calculator.

BUT... so much depends on the assumed investment rate of return. I think the historical average for a 60/40 portfolio is 8.9%. Using that figure, rents would have to increase 24% to 77 cents just to reach the inflection point that the OP asked about. But at a more moderate 7% assumption, rents would only need to increase 3% to 64 cents to change the conclusion. At 6.7% and below, the models favor buying over renting. I've also used FIRECalc and ******** to model success rates on the rental option, which come out at a relatively high 74% using my 62 cent rental rate against a 60/40 portfolio equal to the purchase price.

Ignoring all the non-financial reasons why one might prefer to rent vs buy (DW and I are still debating some of those), I think the financial answer for us is to buy. The reason is the same as why we paid off the mortgage, and elected the annuity option on our pensions instead of lump sum. These actions reduce risk and uncertainty in retirement. Yes, you forego some upside potential if the market performs as well as it has historically. But for us, it's more important to know that we don't need to rely on market performance to make the mortgage payment, or to pay the rent, or to generate the annuity payment we could have had. We just take those items off the table entirely, and work with a smaller budget, smaller portfolio, and more guaranteed income.

 

[Birdie Num Nums]

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.

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.

 

[Newventurer]

I just ordered one of these and will let you know in a few days.

Ha! Did you buy it or rent it?


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[mortal]

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.

 

[SVHoper]

IMHO national, demographic and macro economic trends matter, but what really matters, even more than: location, location, location... is the individual personal housing decision (equivalent of single stock selection can be great even in a bull market or bad in a bear market or disaster in any market).

For many real estate generalizations, I know of a counter example

My own generalization is: if you are considering buying own home then attempt to treat it as an investment decision... of course you can overlay lifestyle priorities! E.g. Depending upon your personal musthaves and constraints, it should be possible to buy at 10% - 25% discount to "retail" pricing.

I am very pro-real estate >50% net worth, where even own home has been a stock beating investment, however, although two of my kids have funds to buy --> I don't believe they should as they have no commitment to a location (nor sufficient funds to allow investment purchase and possible future own home).

That is why I like the NY times calculator mentioned by Cobra - it won't necessarily tell you the right answer (I think real estate outcomes depend upon future guesstimates)... but at least the advanced options ask all the right questions.

 

[imoldernu]

After the employment years, renting or owning is a matter of preference for a couple as long as the combined finances can withstand a five year nursing home cost of a half million dollars, should one partner need it.