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I think your $1500 rent for a house that costs $400,000 is a bit off. Houses in my neighborhood are selling at just about $400k (some more, some less). And one rental (which is identical to my house) rents for $2,800 per month. Plus, rent won't stay the same for 30 years like in your projection. It will go up.
Well how much of this rent does the owner keep vs. spending on taxes, insurance, maintenance?
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Originally Posted by jillabean
And the renters still need to do some upkeep (not repairs, but they have to get out there and mow their lawns, weed their gardens, and clean their houses like the rest of us). The landlord doesn't come do it.
Ok, but the landlord or management does a lot of the stuff on the house itself, right?
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Originally Posted by jillabean
Now if you are comparing renting an apartment for $1500 vs buying a house, I can see it. But that's not really apples to apples and I would still argue that rent will go up in 30 years.
Rent going up or not isn't what matters. It's the present value of the total stream of payments. A $1500 rent that goes up may be less in present value terms than a $2500 ownership cost that doesn't (or doesn't as much).
Don't forget that the renter can invest an amount equal to the down payment and closing cost at the beginning of the period.
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Originally Posted by jillabean
Plus, after 30 years, the homeowner pays nothing (assuming a 30-year mortgage). The renter has to keep renting for another 30 years in your model (which goes to 60 years with that big nest egg). You stop right when the homeowner reaps one of the biggest benefits, no housing costs in old age. Unless he or she buys a place (which I suppose he or she could do with their investment from the original $80k, but that would effect the final number).
You are ignoring the opportunity cost of the owner's equity, or equivalently, arguing about instantaneous cash flow rather than the present value of all future costs. Instantaneous cash flow is not relevant unless there is a liquidity crunch, which a tenant would not have if the NPV of their rent 30 years ago was lower than the NPV of buying at the same time. In that case they would have a stock portfolio worth more than the value of the house that was bought 30 years previously.
I think your $1500 rent for a house that costs $400,000 is a bit off. Houses in my neighborhood are selling at just about $400k (some more, some less). And one rental (which is identical to my house) rents for $2,800 per month. Plus, rent won't stay the same for 30 years like in your projection. It will go up. And the renters still need to do some upkeep (not repairs, but they have to get out there and mow their lawns, weed their gardens, and clean their houses like the rest of us). The landlord doesn't come do it.
Now if you are comparing renting an apartment for $1500 vs buying a house, I can see it. But that's not really apples to apples and I would still argue that rent will go up in 30 years.
Plus, after 30 years, the homeowner pays nothing (assuming a 30-year mortgage). The renter has to keep renting for another 30 years in your model (which goes to 60 years with that big nest egg). You stop right when the homeowner reaps one of the biggest benefits, no housing costs in old age. Unless he or she buys a place (which I suppose he or she could do with their investment from the original $80k, but that would effect the final number).
1. I did say "my example" which can be found on page 14, this example is for CA, not necessarily have to be LA or SF-Bay Area. I even included an example of where the owner could rent out for $2K/mo.
And you made my point, "rent won't stay the same for 30 years", thus the renter is not locked in to paying 1500-2K/mo or in your example, 2800/mo. When the nest is empty, people will down-size, you cannot argue against this point.
2. False, after 30 yrs, the owner will pay (for eternity) tax, insurance and maintenance (and HOA fee if applicable).
"With my $400K house example, your [first] 30 yr expense is roughly $700K.
[At 55] Your next 30 yr of renting out the house at $1500/mo bring in $540K income minus 50K in upkeeps/repairs/tax/insurance.
(25+30+30) At 85 years old, you're still short $210K (700K - 490K), or $30K (if rented for $2K/mo)...assuming with no breaks in vacancies."
3a. Thank you for acknowledging this point:
"At 85, a renter would have at least $2.15 mil. in the bank (80K down payment invested for 60 yrs at the super conservative 5.5% rate of return)."
3b. No, it does not have to affect the final number.
The owner and the renter are the same person, i.e., if the owner can pay for a $400K house, his salary is "good enough" to sustain him from age 25 to age 55, and from age 55 to age 85.
Likewise, if he should be a renter instead of a home owner, his regular salary will sustain him just the same.
*Note: please see my original post on p.14 where I talked about "filing jointly" so when I say 'him,' I am referring to the husband and the wife.
Here's the trick behind owning and paying off the mortgage. I rent it back to other renters like you for example, and generates that $ "that could have been put to other uses in investments/retirement savings/paying down other debt(if any exists)."
Does that make sense to you at all ?
Let's say that you have 40% down on a $200k house($120k mortgage) and owe $300/month in taxes. Interest rate of 3.75%
That would make your monthly mortgage payment $555.
Let's assume you could make 3% if you put it in a conservative investment. That $40k earns $1200/year or $100/month.
Averaged over the first 10 years, the split between interest/principal payment is about 40% goes to principal. The other 60% of your mortgage is expense. So $333 per month is lost to interest.
For maintenance costs, we'll use the Fannie Mae recommendation of 2% of property value. So there's another $333 per month.(200k * 2% / 12)
So factoring all your costs, you need $766 to break even each month
I've heard a few suggestion for vacancy assumptions. Some use 10% of the rent as an expense, others use a 11/12 month assumption saying expect one vacant month a year. Using the 11/12 method, you'll actually need $835/month for a complete break even from a net income perspective. Keep in mind though that this isn't cash flow positive and that you're still paying down your principal yourself.
In order to break even and have your tennant pay down your principal, you need them to account for the other 40% of the mortgage I we left out earlier(the $222), so now we're at $1057 for a cash flow break even where your tennant pays down your mortgage.... except we're still not "quite" there.
The actual number will be even higher than that due to taxes, but that obviously depends on your situation. That gets into a whole lot of other numbers(depreciation, interest deduction, your tax bracket, state taxes, etc) that I don't care to go into, but let's just leave it at you need more than $1057 to really break even.
So, if you're in a market where you can rent a $200k for $1057 + taxes and you think it's worth your time to do so for $222/month, then great, go for it.
However, to think that it's as simple as "rent it back to other renters" is insanely foolish. There's a lot more to it.
Does that make sense to you at all ?
P.S. I own a property. I never said owning is bad. What I did emphasize is look at the real numbers.
Well how much of this rent does the owner keep vs. spending on taxes, insurance, maintenance?
I really don't know what the owner keeps. The house was a rental before I moved in and has been a rental for years according to the other neighbors. The lady who owned it lives in Europe now. All I know is I bought my home four years ago and my mortgage payment is $1800 (rounded up, and that includes my insurance and taxes). I spent $50 on home repair this year But my average for the four years I've owned is $500 (had a plumbing leak a few years back).
So figuring in taxes, insurance, repairs and HoA fees (I assume the owner pays that), If I rented my house, I would pocket about $850 a month. The other owner probably has a lower mortgage since the housing prices went up here (other than a blip in 2010 when they dropped... which is when I bought).
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Ok, but the landlord or management does a lot of the stuff on the house itself, right?
There is no management, the houses are owned by individual land lords. From what I've heard from renters, yes, the landlords take care of repairs and such. But things like carpet cleaning, yardwork, housekeeping, the renters have to do.
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Rent going up or not isn't what matters. It's the present value of the total stream of payments. A $1500 rent that goes up may be less in present value terms than a $2500 ownership cost that doesn't (or doesn't as much).
I was thinking it would matter because the projections on how much each person spent is based on rent never going up in 30 years. Rent goes up. Sure you can keep moving, but sooner or later you are going to be in the cheapest place possible and no place left to go where rent is cheaper. Rent goes up just as the price of everything goes up.
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Don't forget that the renter can invest an amount equal to the down payment and closing cost at the beginning of the period.
You are ignoring the opportunity cost of the owner's equity, or equivalently, arguing about instantaneous cash flow rather than the present value of all future costs. Instantaneous cash flow is not relevant unless there is a liquidity crunch, which a tenant would not have if the NPV of their rent 30 years ago was lower than the NPV of buying at the same time. In that case they would have a stock portfolio worth more than the value of the house that was bought 30 years previously.
Oh, no I get the whole opportunity cost of the owner's equity. You get better returns in other investments. But you do get some return on your investment in 30 years with most houses. You are right that it's not liquid though.
So yes, if someone invests their money in the stock market they will do a lot better and have more money than someone who puts a 20% down payment on a house like I did. This is just a guess mind you, but I venture to guess most people don't do that though. Most people who are renting aren't smart like you and invest the extra money. I base this guess on net worth of average renters vs average home owners (Google it, the numbers vary, but homeowners come out on top).
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Originally Posted by R2Max
1. I did say "my example" which can be found on page 14, this example is for CA, not necessarily have to be LA or SF-Bay Area. I even included an example of where the owner could rent out for $2K/mo.
And you made my point, "rent won't stay the same for 30 years", thus the renter is not locked in to paying 1500-2K/mo or in your example, 2800/mo. When the nest is empty, people will down-size, you cannot argue against this point.
Sorry, that's my fault. I over looked it as being your example. I don't live in California, so things are probably different there than what I am used to. But like I said, even if a renter isn't locked into a rent and can move, there is only so much moving one can do until you can't escape rising rent costs. It looked like your example assumed a renter could pay the same rate for 30 years, I just don't see it.
I live in a small house (townhouse) it's usually a starter home for some renters, they tend to "move up" from here. A lot buy their homes when they start having kids. A few people downsize to my size house too though. We have a few older couples that move in. I always wonder about that because of all the stairs, but I guess they all have good knees
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2. False, after 30 yrs, the owner will pay (for eternity) tax, insurance and maintenance (and HOA fee if applicable).
"With my $400K house example, your [first] 30 yr expense is roughly $700K.
[At 55] Your next 30 yr of renting out the house at $1500/mo bring in $540K income minus 50K in upkeeps/repairs/tax/insurance.
(25+30+30) At 85 years old, you're still short $210K (700K - 490K), or $30K (if rented for $2K/mo)...assuming with no breaks in vacancies."
You are right that an owner will always pay for tax and insurance. I meant no housing costs (didn't say no insurance and tax costs). But for the sake of argument, the renter will pay these too. If I were a landlord, I would roll those costs into the rent and pass them along to the consumer.
Quote:
3a. Thank you for acknowledging this point:
"At 85, a renter would have at least $2.15 mil. in the bank (80K down payment invested for 60 yrs at the super conservative 5.5% rate of return)."
Well, it's a good point. And the strongest argument for renting.
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3b. No, it does not have to affect the final number.
The owner and the renter are the same person, i.e., if the owner can pay for a $400K house, his salary is "good enough" to sustain him from age 25 to age 55, and from age 55 to age 85.
Likewise, if he should be a renter instead of a home owner, his regular salary will sustain him just the same.
I was just saying it would effect the final number because the renter would have to take some of that nest egg out if he were to buy a house for retirement. My guess is he'd still come out ahead with plenty of money to spare, but it would be less after he took out money to buy a house (if he does this).
This post was long... my whole point is (and I brought this up before) rent vs buy is very situational. It depends on the market you are in, where you are in your live, and your personality. If there was a clear "winner" there would be no debate at all.
But there is a debate. In some cases renting is better, in some buying.
Let's say that you have 40% down on a $200k house($120k mortgage) and owe $300/month in taxes. Interest rate of 3.75%
That would make your monthly mortgage payment $555.
Let's assume you could make 3% if you put it in a conservative investment. That $40k earns $1200/year or $100/month.
Averaged over the first 10 years, the split between interest/principal payment is about 40% goes to principal. The other 60% of your mortgage is expense. So $333 per month is lost to interest.
For maintenance costs, we'll use the Fannie Mae recommendation of 2% of property value. So there's another $333 per month.(200k * 2% / 12)
So factoring all your costs, you need $766 to break even each month
I've heard a few suggestion for vacancy assumptions. Some use 10% of the rent as an expense, others use a 11/12 month assumption saying expect one vacant month a year. Using the 11/12 method, you'll actually need $835/month for a complete break even from a net income perspective. Keep in mind though that this isn't cash flow positive and that you're still paying down your principal yourself.
In order to break even and have your tennant pay down your principal, you need them to account for the other 40% of the mortgage I we left out earlier(the $222), so now we're at $1057 for a cash flow break even where your tennant pays down your mortgage.... except we're still not "quite" there.
The actual number will be even higher than that due to taxes, but that obviously depends on your situation. That gets into a whole lot of other numbers(depreciation, interest deduction, your tax bracket, state taxes, etc) that I don't care to go into, but let's just leave it at you need more than $1057 to really break even.
So, if you're in a market where you can rent a $200k for $1057 + taxes and you think it's worth your time to do so for $222/month, then great, go for it.
However, to think that it's as simple as "rent it back to other renters" is insanely foolish. There's a lot more to it.
Does that make sense to you at all ?
P.S. I own a property. I never said owning is bad. What I did emphasize is look at the real numbers.
You have a valud point but your math isnt the same as mine. My math does not involve a mortage.
You have a valud point but your math isnt the same as mine. My math does not involve a mortage.
If your math does not involve a mortgage, than how are you having the renters pay down a mortgage?
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Originally Posted by ameridreamNoT
Here's the trick behind owning and paying off the mortgage.
Also, I'm going to correct my own typo in the oppourtunity cost above. I said $40k earns $100/month, but it should have been 40%, or $80k, meaning an extra $100 at the end($200 total oppourtunity cost).
Paying off the mortgage would eliminate the interest($333) but would increase the opportunity cost by $300 since if you were to sell the house, you could have put the whole $200k in the market at 3%.
True number with mortgage: $1,157 + taxes
True number without mortgage: $1,124 + taxes
This is just a guess mind you...Most people who are renting aren't smart like you and invest the extra money. I base this guess on net worth of average renters vs average home owners (Google it, the numbers vary, but homeowners come out on top).
I was just saying it would effect the final number because the renter would have to take some of that nest egg out if he were to buy a house for retirement. My guess is he'd still come out ahead with plenty of money to spare, but it would be less after he took out money to buy a house (if he does this).
...rent vs buy is very situational. It depends on the market you are in, where you are in your live, and your personality. If there was a clear "winner" there would be no debate at all.
But there is a debate. In some cases renting is better, in some buying.
Yes, don't you want to b***h slap the proverbial lottery winners who lost it all?
eventually if you rent and invest elsewhere the income coming in from the investments actually subsidizes the rent. we pay 19k or so in rent a year but we average way more than that on the money we would have to spend to buy.
now that we are retiring i won't be investing so aggressively so we may give up 14-15k a year in income by buying a co-op but with expenses cut way down by buying the trade off is getting close to being worth it. trading income for cost cutting may eventually be the better deal.
it all boils down to dollars and cents and the thinking that renting leaves you with nothing is only true if you let it be true. as i said earlier renting let us develop a very lucrative real estate holding LLC which had i owned a home and not rented and had the money tied up in a house i never could have done the investments i did..
anyone who just states renting leaves you with nothing has really little clue about all the options out there as well as how you do is an individual thing.
throwing these hypothetical numbers out here are just a waste of time. everyones is going to be different.
It's not the 90's anymore. Renting is not a bad thing. And owning a home (especially to invest and then unload) is not the gospel anymore.
Agreed.. I'm renting and have no plans to stop renting.
I'm single, have a nice place and pay virtually none of the $2000 a month household rent + utilities expense... because I have a couple roommates that I charge enough to cover 90% of those costs.
I didn't own a place prior to moving here either... which made it that much easier to pack up and move cross country when I got a job offer here. I wasn't tied down to a house in a (at the time) horrible housing market.
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But my average for the four years I've owned is $500 (had a plumbing leak a few years back). 
