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The problem w your response is financial is only one of the factors to consider whether to rent or own. That's why there is no right answer. If both sides who have hard core opinions on this understand that, they'll be less arguing.
No, this means the question of whether to rent or own is like asking which mountain is the most amazing to look at. Height is one (among many) factors to consider. But the existence of the other factors doesn't mean that if you say (for example) that Kilimanjaro is taller than Everest based on elevation from sea level, that you aren't objectively wrong.
Similarly, if you claim that owning is financially better than renting in a case where it isn't, I am perfectly within my rights to call you out on that claim, "other factors" notwithstanding.
I just posted a formula in another thread. Here is a formula that I saw.
Depending on the yield that you get will tell you if it is better to buy or rent.
You want a yield that is over 9% At that point it is cheaper to buy.
A yield under 5% means it is better to rent.
Between 5% and 8% means that you can buy if you want to stay 5 years or more and chances are you may not want to rent the place out. It may end up costing you money to rent it out.
We purchased out home for over $300,000 and owe less than $290,000 for it. Our neighborhood has a market rental value of $2,500 a month or $30,000 a year. We have a yield rate of around 10% meaning that for us we have a good deal.
To determine if buying a second home is a good deal I look at the current market rates of sale prices in my neighborhood. Homes are now selling in the $415,000 to $440,000 range in my neighborhood. Lets say that I found one for $420,000 and rents are currently in the $30,000 a year range, that would give me a market yield of 7.1% which is a border line move if I want to rent a home out. I would prefer a market yield over 8%.
Is this yield net of taxes, insurance, maintenance, etc.?
If not, I think that cutoff is absurdly low, because in the stock market you can get at least 8% above inflation.
Ok Kate lets say someone is deciding between buying or renting between two houses next to each other with the exact same value. Let’s say they are both worth 200K. Let’s also assume that they also do not plan on upgrading or downgrading their lifestyle ever in the future. This actually gives an edge to renting so I'm throwing it in there just to prove how much better owning is. Also keep in mind that I'm not stating that a primary home is an investment because its not. However, if you had to decide between buying a certain place to live vs. renting that place, you will always save more long term if you buy. This is because renting is almost always more expensive monthly then owning a property of the same value.
Someone always chimes in with “well you can rent a place that’s cheaper then the 200K place and save money on rent and invest that into equities and make tons of money!!!” I will say to them “why don’t you go live in the ghetto the rest of your life to save even more on rent to make even more money in equities??” Most won’t do that because everyone has a MINIMUM comfort level in terms of lifestyle. And since renting is more expensive then owning at anyone’s minimum lifestyle they will always save more money then renting. So for this example I’m assuming that the 200K home is the minimum lifestyle for the individual. This has a universal application because if we take anyone’s minimum home level, renting will always be more expensive.
Renting is usually 9.6-13.2% of the home value. So if we take the median of those numbers for rent it will be 11.4% or $1900/mo. Now owning that same house with 10% down and 8% interest rate (historical average) equates to $1787/mo. This includes property tax, homeowners insurance and money set aside for repairs and maintenance. Also assume that there was 8K in closing costs.
I haven’t even taken into account the tax write off for owning the property. The minimum you have to earn to qualify for this loan would be 50K. This puts you at the 25% tax bracket. So when you add the interest payment and property tax it adds up to $16840. 25% of that is $4210. So $1787-350 = 1436/mo. So your monthly payment is significantly lower even with all the hidden costs of homeowner ship added in. And it gets better.
Landlords are legally allowed to raise rent every year by the inflation index. And most sensible ones will do so. Inflation is historically 3.5%, however I will calculate only a 3% raise in rent yearly. So in your second year your rent will go up to 1957/mo. So about after 2 years the owner is ahead of the renter in terms of money spent on the property. Before that the renter is ahead because of the closing cost the owner paid. This is why renting is better in the short term. I should point out that the owners monthly payment will also go up by about 3% yearly to account for the rising cost of property tax and insurance. However that amount is miniscule. Your rent goes up by $57 vs $7.50 for the owner.
And I’m not even factoring in other things like approximately 4.7% yearly appreciation for the home owner or the fact that some of the money the owner is paying is going towards principle which can be borrowed against in the future. The renter loses ALL of his money. So comparing apples to apples the renter will NEVER have any money to invest over the owner after the first 2 years.
The third year the owner will have a whopping $6776 saved over the renter. This gap widens every single year. After 30 years when the owner has completely paid off his house, there is absolutely no comparison. I’m not going to calculate 30 years of inflation so if we use just the first years numbers (which will still be an accurate comparison) this is how far ahead the owner is yearly when he has paid off the house:
Renter monthly payment: $1957
Owner monthly payment: $ 414 (this is with tax deduction for property tax)
Owner savings: $1542 or $18504/yr
The owner also has 200K in equity for any emergencies, plus assuming he invested the yearly saving from year 3 on out he has a significant amount in investments after 30 years. The renter has absolutely nothing minus the 8K initial advantage which even if invested is negated after a few years because of rent increase. As you can see there in no comparison. Historically owning will always be better than renting.
If anyone has doubts about my estimates please ask me. I can quote the sources for all my numbers on request but I'm not going to make this longer then necessary. Anyone who has read any of my previous posts already know that I only post things that are verifiable.
Awesome Post. I bought at a good time my payments were so low and would have been 1,500 -1,800 for this type house in rent. I would not have had my pets, equity, garden etc. It has allowed me to save and now pay cash for another house that was a foreclosure and I got it for so low couldn't pass it up.
No, this means the question of whether to rent or own is like asking which mountain is the most amazing to look at. Height is one (among many) factors to consider. But the existence of the other factors doesn't mean that if you say (for example) that Kilimanjaro is taller than Everest based on elevation from sea level, that you aren't objectively wrong.
Similarly, if you claim that owning is financially better than renting in a case where it isn't, I am perfectly within my rights to call you out on that claim, "other factors" notwithstanding.
Absolutely. That goes with any claim. If someone is wrong their wrong....
I was saying that financial reasons (and I hate to repeat myself) was only one factor in what one should do.
after inflation market returns have been 6.8%.. we will average lower near term at least. low interest rates low dividend yields and high stock valuations almost guarantee it.
Someone always chimes in with “well you can rent a place that’s cheaper then the 200K place and save money on rent and invest that into equities and make tons of money!!!” I will say to them “why don’t you go live in the ghetto the rest of your life to save even more on rent to make even more money in equities??”
That's because it is possible to rent a one-bedroom apartment, but generally not possible to buy a one-bedroom apartment. Buying almost always means a house, while renting almost always means an apartment. The cost savings claimed by advocates of renting are largely contingent upon the rental being an apartment, not a house.
Quote:
Originally Posted by griffon652
Renting is usually 9.6-13.2% of the home value. So if we take the median of those numbers for rent it will be 11.4% or $1900/mo.
If renting were that expensive, then of course buying would be more sensible, unless the owner had to move after only a brief stay. As I posted before, the buy-vs-rent decision comes down to an effective price/earnings ratio. If that ratio is low enough, by all means buy!
Quote:
Originally Posted by griffon652
And I’m not even factoring in other things like approximately 4.7% yearly appreciation for the home owner
If annualized appreciation is that high, again buying becomes the proverbial no-brainer. But what if the annual "appreciation", say over 30 years is, -1%? To spell it out: negative one percent. I bought my house in 2001. According to zillow.com, today my house is worth approximately 15% less... and this is without accounting for its declining condition, on account of lack of maintenance on my part.
If you don't do the maintenance, simply take what you'd pay someone else to do it (mowing, gutters, etc.) as part of your maintenance costs. (Of course a case can be made for doing that in any case, as this represents the "opportunity cost" of the time you would spend doing that maintenance, but then again, that accounting method makes any leisure activity "very expensive".)
If you won't even hire someone to do basic maintenance for you, then you ARE financially irresponsible, or put another way, you are 'splurging' on laziness, the cost being preventable house depreciation!
This is exactly my situation. I realized that the cost of either my time, or the time of a professional maintenance crew, is not justified by the value of the house. As with buying a used-car and driving it into the ground without so much as an oil change, likewise the value-proposition (for me) of house maintenance.
I hasten to add that this isn't really a suburban house, but something like a country estate, on sprawling acreage. Even if the house value falls to zero, there remains the land value. Yes, I quite literally "bought the farm".
That's because it is possible to rent a one-bedroom apartment, but generally not possible to buy a one-bedroom apartment. Buying almost always means a house, while renting almost always means an apartment. The cost savings claimed by advocates of renting are largely contingent upon the rental being an apartment, not a house.
Quote:
Originally Posted by ohio_peasant
Please read post #153, I describe this concept in detail in a way where its almost universal for all individuals. By the way I don’t know what you meant by its generally not possible to buy a one bedroom apartment. But if I take that statement at face value that’s completely inaccurate.
Quote:
Originally Posted by ohio_peasant
If renting were that expensive, then of course buying would be more sensible, unless the owner had to move after only a brief stay. As I posted before, the buy-vs-rent decision comes down to an effective price/earnings ratio. If that ratio is low enough, by all means buy!
It really is. This is from extensive research and owning properties myself. I literally know all the figures for rentals around the nation. I even know the legality behind it. Even the government has a rental guideline for all areas of the nation. And all of them will fall within the percentage range I gave. Those figures are 100% accurate. That’s why I said it literally doesn’t make any sense to rent if you plan on staying in one area for more then 2 years. Here is just one random link regarding the topic. If you doubt me do the research and you will see that all data will agree that the numbers in the link below are accurate:
If annualized appreciation is that high, again buying becomes the proverbial no-brainer. But what if the annual "appreciation", say over 30 years is, -1%? To spell it out: negative one percent. I bought my house in 2001. According to zillow.com, today my house is worth approximately 15% less... and this is without accounting for its declining condition, on account of lack of maintenance on my part.
Unfortunately there has been so little completely verifiable, completely accurate data on historical property appreciation that even among experts there is disagreement in terms of the appreciation. But general consensus is that its anywhere from .7-2% over inflation. So your chances of having a -1% is extremely low.
historically the national average for resi real estate has been 2% over inflation. rents are set by markets unless there sre stabilization laws.
i never ever knew anyone who used some gov't guideline for rent in a free market rental.
the real answer is alot of what you can get as rent is determined by wages in the area.
having a million dollar home in the poconos as an example will not get anything close to 11k a month in rent . in fact even a 250k home like ours wouldn't get 2700 a month. 12-1350 is the going price.
real estate is NOT LIKE EQUITIES where everyone gets the same deal and you can manipulate figures and draw a national conclusion . it is highly localized .
it is as varied as our net worth .
Last edited by mathjak107; 02-26-2014 at 03:02 AM..
Also see my earlier post (#138) about what "advice" to give to people who would/wouldn't invest in stocks, and please address that point.
So I still think my case for renting long-term , at least for stock investors, is unrefuted. I await counter-argument.
Thanks for listing your sources. It’s good to respond to someone who understands numbers because its easy for you to know if what I’m saying is crap or completely true based on the facts. First I want to address post #138. If you read my post #151 and the long last part of #153; I described extensively why mathematically it makes more sense to buy for most people. In fact you can actually invest MORE money in stocks by buying a property over renting. So based on the numbers from my posts you will see that it actually hurts stock investors to rent long term.
The only number I could find is the Seattle example under "Step 1". It gives P/R = 18.8 which is a 5.3% R/P. Unlike future stock returns, the location in which one would be renting/buying IS a priori known. If you think 5.5% is unreasonable, I say: It depends! The ratio is higher in some places and lower in others.
This is actually the most integral part of my numbers from post #151. This one factor alone makes buying an overwhelmingly better option then renting. What’s interesting is even the link you provided shows that in almost every area of the country it’s cheaper to buy. I hate to put it this way but my real estate knowledge is second to none. And I can tell you that the range that I quoted for R/P is very accurate. In fact, even the government has guidelines for charging fair rent based on the area where your property is located.
This ensures that no one is getting charged too much or too little. Those numbers will fall within the range I gave you for R/P. You can look those up if you’re really curious. Here is one link that breaks down the typical R/P that’s charged. If you wish to verify this yourself please do some research into the subject. All the data you find will be very close to my numbers and the numbers in the link below.
I picked this link was because his numbers is a standard guideline that most landlords should follow. If you’ll notice he recommends to NEVER charge less then 9.6%/yr to avoid chances of having a negative return on your rental. My recommendation for 8.4%-13.2 is for expert landlords who have experience and can adjust according to the current situations in regards to their rental. But someone would have to be a fool to go under 8% R/P. They might as well take that money and burn it.
Quote:
Originally Posted by ncole1
Well I put 1/1/1950 to 12/31/2013 in CAGR of the Stock Market: Annualized Returns of the S&P 500 (to start at mid-20th century, not cherry picked) and it spit out a 12.9% CAGR, including dividends. I'm sure if you only look at the last 30 yrs it's lower, and 11% is an entirely reasonable middle of the road. And that is for large cap only - keep in mind that the returns from small cap stocks and even mid-cap tend to be higher still. So I STILL await an argument as to how 11% total annualized return is not reasonable!
That’s a great link you posted! It’s very accurate. But are you sure you looked at the results correctly? The true CAGR for that time period is 11.38%. The 12.9% is the average. Another thing to note is that the link above is very accurate assumption of stock returns for beginners to get their feet wet. There are many other factors that will affect your return to where although 11% return is reasonable; it is NOT a reasonable MIDDLE OF THE ROAD return. Let me explain what I mean.
First, to get a true picture of the S&P average return you have to include the periods of the depression. This is because people who were around 60 years old in the 50’s/60’s/70’s that invested in stocks would be affected by that.
Also it gives you a better risk assessment for this current recession we just went through because the post depression average gives you a glimpse into what MIGHT happen to the average return 25-30 years from now. Here is a great link that has an amazing amount of data and is very useful for those that are adept at making manual/advanced calculations. You can use to make calculations by yourself to verify my numbers if you wish:
Based on the whole historical range of the S&P you will have a 50.81% probability having a return in the range of 8-10%. But this is just a “raw” probability. There are more advanced factors you have to consider that will most likely lower your return. I don’t want to write a book so I will just use one of those factors as an example:
The individual yearly contribution and long term return factor is probably the most important. Every calculator/data sheet (including your link and my link) that calculates average return over a certain period for a stock/S&P/mutual fund/hedge fund or whatever calculates their return using this following method:
“If you put in a lump sum of $XX on year XX what would the average annualized return be for ONLY for that lump sum in year XX.”
This is important because most people don’t just put XX amount into a fund and wait 25/30 years for a return. Most people don’t have a significant amount of money to do that. Even the top 1% of income earners CAN’T do that. Approximately about .5% of income earners can accomplish this. The rest of us contribute monthly or yearly to whatever investment we have. Based on history in most cases this will lead to a lower return than what can be predicted using the raw probability.
Here is a very simple example of this factor: Suppose that you started to invest money into the S&P 500 in 1948. And the only other year you contributed was1949. I chose these years because on a 25 year average return 1948 has a significant higher return then 1949. Also the years in between were not volatile. Meaning there was years of great returns and the typical years of loss but no extremely major depression occurred. So it gives an accurate estimation of returns.
Furthermore, I’m only doing 2 years because I don’t want to manually make over 50 calculations for every year in between. However, the concept is the same regardless of how many years you include. Now lets say you had a crystal ball in 1948 you would think “wow I’m going to make a 12.22% return in 25 years.” That would be inaccurate. Your actual return on your money will be roughly 11.3% because of the money invested in 1949. Now if we calculated every single year in between it would be even lower. Just based on browsing over the number in between I would say your return will be in the 9-10.1% range. And that’s just taking into account this one factor.
Also, since I did not include any volatile period it makes the numbers nicer. If we included the 2 25 year periods from the great depression and our great recession the return will be even lower. Those 2 periods together account for about 65% of the average returns for the S&P. So very roughly speaking you have a 60-70% of having returns in the range of 8-10%. This is why I was stating that 11% is too high. You may get lucky and get that return or even higher but you can’t make calculations based on luck.
Quote:
Originally Posted by ncole1
The rate of increase of the market value of the average home is not the same as the average over single homes. This is because, ceteris paribus , newer houses are more valuable than older ones. You can't compare a 10-year-old home today to a 10-year-old home of 50 years ago. A 10 year old home of 50 years ago is now 60 years old. So an inflation + 1.2% increase in the median home value does NOT imply that we expect a given home to increase by that, on average!
I agree. I would also like to add that there’s so little 100% substantiated data on the subject that even experts don’t have a majority consensus on a number. My 1.2% was my educated guess. The number could very well be .5% as you stated.
Quote:
Originally Posted by ncole1
Perhaps the 2.5-3% is a more recent thing - http://www.usinflationcalculator.com/ gives a factor of 23.39 for the last 100 yrs (1914-2014). This corresponds to an annualized rate of 100% * (23.39^(1/100)-1) = 3.2%. I will give you a partial concession here to 3.2%
Quote:
Originally Posted by ncole1
I used the official government inflation calculator for my calculations
My 3.5% is based on that. To be honest that’s a conservative calculation. The government likes to paint as pretty a picture as possible so they twist the numbers in a way where the true inflation rate is not calculated. This is very obvious in the categories of healthcare, food and education.
Here is an example that you can easily verify:In 06’ a can of great value (Wal-Mart generic brand) tuna cost $.63. That same can cost $.78 in 14’. So it seems as if it went up by the typical inflation rate of around 2.975%/yr.
However, what almost every company has done since the recession is keep the packaging size the same but reduce the amount of food in the packaging to give us the illusion of low inflation. In 06’ that can had 2.5 oz. of tuna but starting in 11’ it had only 2.0 oz. so actual inflation in this case is an astounding 6.845%/yr!!! But the government doesn’t calculate food inflation by what I just stated so therefore the official inflation for food comes in at less thenhalf of 6.845%.
Another factor to consider is that modern inflation meaning 1960-present; is significantly higher then years prior to that. I can write another book on why but lets just say we started to stray more and more away from the fundamentals that helped make the USA the superpower it is.
Here are the official rosy inflation numbers from the government themselves. The dates I list are for inflation from that date to the present:
1980: 3.1%
1970: 4.17%
1960: 3.9%
1950: 3.63%
So even by the governments own admission the inflation rate was much higher then the 3.5% I stated. Notice how the inflation rate gets higher the closer we get to our present year but then magically drops? This is because in the late 70’s the government started to change how they calculated inflation to make it appear that it was low. This is the same as how they have changed the way unemployment is currently calculated. Based on empirical evidence I would estimate the actual inflation rate since the 80’s at 3.9-4.2% but just to stick to facts lets leave it at 3.5% based on official numbers.
I hope that gave you a deeper insight behind how I calculated all the data. Feel free to ask me any questions you may have or provide a mathematical rebuttal.
Last edited by griffon652; 02-26-2014 at 03:12 AM..
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