Renting vs Buying a Home (for sale, apartment, renter)

[motoman]

I've said here several times in various threads that buying a home is a terrible investment, particularly relative to the great investment most people think buying is.

Well, I don't write particularly well and am not always very effective in getting my point across, so I'll let the professional writer's tell you.

Here is a great article on renting vs buying.

[bhcompy]

will rent be the same in 10 years? 20? 30? no, it goes up with inflation. my mortgage wont though

[motoman]

If my rent is half your mortgage, maintenance, property taxes, and insurance, how long would it take for me to catch up with you?

What you say is true if your total housing costs are comparable to rents. That isn't the case in California in most areas. It's usually significantly cheaper to rent than to own.

There is a condo down the street from me that is the size of my apartment. The condo is listed for $600,000. Assuming it sells for that, if you could get 5% on a 30-year mortgage, your mortgage payment would be about $3,200 per month. On top of that, you'd have at least $500 per month in property taxes. Then you have HOA dues. And then you have maintenance that isn't covered by HOA, like if you want to paint, or put in new carpet, etc. So all in your monthly cost is about $4,000 per month. You'll get a tax deduction on your mortgage interest, which could be as much as $800 per month for the first year, assuming you're in the top tax bracket. So let's say your net cost is $3,200 per month to start.

My current rent is about $1,600 per month. Long-term, rents can only go up about 3% per year, although there are times of higher increases. So let's say they go up 5% per year. At that rate it would take 14 years for my rent to equal your beginning net monthly cost. And your net monthly cost will go up each year as you pay down your principal and you get less of an interest deduction, as property taxes go up, as HOA dues go up, etc. So let's say your net monthly cost goes up 2% per year.

Over that 14 years my rent will have averaged ($1,600 + $3,200)/2 = $2,400, for a total cost of (14x12x2400) = $403,200. Your net housing cost would average ($3,200 + $4,200)/2 = $3,700, for a total cost of (14x12x3700) = $621,600. A difference of $218,400 in my favor.

But you'll get price appreciation, and I won't. Long-term home price appreciation cannot outpace wage increases and have averaged around 3%-4% per year long-term. Your $600,000 condo in 14 years at 4% growth per year would be worth $1.039MM. If you wanted to sell, you'd pay 10% in total closing costs for a net of $935,000.

Sounds great. But you'd still owe $425,000 on your mortgage, so you'd net $510,000 on the sale. So it cost you $621,600 to net $510,000. But $175,000 is your own money, equity you built up by paying down your mortgage. So your "cost" would be $446,600, and you'd put in your pocket $510,000, a total net gain of $63,400 over 14 years.

In my case, I could have invested the $1,300 I could save in rent vs own cost and invest it. Let's say I could only get a 5% return. That $1,300 per month would be worth $315,000 in 14 years. So my rent would have cost me $403,200, $43,400 less than your net cost, and my pocket would have $315,000 in it after 14 years, whereas yours would have $63,400.

Which is better? Own = $63,400? Or rent = $315,000?

Again, unless your cost of owning is pretty close to the cost of renting, it's hard to make a case for owning a home. And given that the average homeowner is in a house no more than 5-7 years, for them it makes a horrendously bad investment.

[Charles]

Originally Posted by motoman

buying a home is a terrible investment...

...but renting is probably a worse investment.

In just about any ten year period, all else being equal (income, non housing expenses), a person's net worth will be higher if he bought versus rented a comparable home.

Things that make a difference: frequent moving, small comparison period (may weigh more heavily on a declining housing market), renting something of lower standard than the purchased home. In all likelihood, a ten year comparison period would allow a down market and an up market.

I don't have the data to back this up. This is just my hunch.

Also, if the assertion is true, why would anyone buy?

[Charles]

Originally Posted by motoman

If my rent is half your mortgage,

Are you renting the same size, quality, and neighborhood?

[motoman]

Originally Posted by Charles

...but renting is probably a worse investment.

In just about any ten year period, all else being equal (income, non housing expenses), a person's net worth will be higher if he bought versus rented a comparable home.

Things that make a difference: frequent moving, small comparison period (may weigh more heavily on a declining housing market), renting something of lower standard than the purchased home. In all likelihood, a ten year comparison period would allow a down market and an up market.

I don't have the data to back this up. This is just my hunch.

Also, if the assertion is true, why would anyone buy?

See my analysis above. If the cost of owning versus renting is pretty close, then it makes sense to own. But if the cost of owning is much higher than to rent, which is frequently the case in CA, then owning doesn't make sense, particularly given the short time frame most people are in a home.

People buy for many reasons which aren't financial. But unfortunately, people see that the price of their house goes up and when they sell they say they sold it for more than they paid, so they made money. They forget about all of the interest they paid, the maintenance the did on the property, the property taxes they paid, the fact that much of what they are getting back on the sale is their own money, equity paid towards the mortgage, etc. They also say that they sold it for $xx, but never mention that they also paid 10% of $xx in closing costs, so only netted 90% of $xx dollars.

I think it is just a general lack of education as to how mortgages and how the math works out. Call it a great sales job by the housing industry.

[motoman]

Originally Posted by Charles

Are you renting the same size, quality, and neighborhood?

The place for sale is one block from me on the same street. I don't know the condition of it, but it is the same size, about 900 sq. ft., so I don't know how you could turn a $1,600, 900 sq. ft. apartment, into a $3,200 apartment. Well, $4,000 apartment before the tax deduction.

[Charles]

Are we only considering Southern California?
What about when (if) housing prices in Southern California get to levels predicted by price/income models?

[motoman]

Originally Posted by Charles

Are we only considering Southern California?
What about when (if) housing prices in Southern California get to levels predicted by price/income models?

Then the case to own will become much more compelling. Let's say that $600,000 condo fell to $400,000. Total cost would fall to about $3,000 per month and the net cost would be about $2,400.

I don't feel like going through the math, but you should be able to see that the numbers get much closer together. For example, whereas before your net cost was $3,200, now it's $2,400 to start. All else equal, that's $800 per month you could invest at the same 5% the renter is investing at. That $800 per month over 14 years would be $194,000, or more than 3x what the $600,000 scenario would net the owner in my first scenario.

In most parts of the country is does makes sense to buy because renting and buying are pretty close together financially. The bubble markets got way out of whack, but are falling to more sustainable levels, at which point renting vs owning will be relatively similar. Although places like CA and NY will always have a larger differential between the two because of the large populations and the relative lack of housing. Owners are relegated to better-to-do families, and most of the population rents.

[Charles]

Originally Posted by motoman

Then the case to own will become much more compelling. Let's say that $600,000 condo fell to $400,000. Total cost would fall to about $3,000 per month and the net cost would be about $2,400.

I don't feel like going through the math, but you should be able to see that the numbers get much closer together. For example, whereas before your net cost was $3,200, now it's $2,400 to start. All else equal, that's $800 per month you could invest at the same 5% the renter is investing at. That $800 per month over 14 years would be $194,000, or more than 3x what the $600,000 scenario would net the owner in my first scenario.

In most parts of the country is does makes sense to buy because renting and buying are pretty close together financially. The bubble markets got way out of whack, but are falling to more sustainable levels, at which point renting vs owning will be relatively similar. Although places like CA and NY will always have a larger differential between the two because of the large populations and the relative lack of housing. Owners are relegated to better-to-do families, and most of the population rents.

Well then I guess that answers it; in a healthy, or normal economic housing environment, owning is the better idea unless someone is moving. It also supports what most everyone that can afford to buy a house does - they buy a house.