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Greater DC area. The rent/mortgage ratio is very low downtown, although I don't live there.
Depends on what you mean by "losing money". Accounting profit is not the same thing as economic profit.
Again, you need to distinguish between accounting profit and economic profit.
Economic profit accounts for the opportunity cost of equity and the owner's time spent on the property, while accounting profit does not.
A landlord may make an accounting profit without making an economic profit.
Also, even the accounting profit is not the same as the cash flow. This is because cash flow treats principal portion of payments as an "expense" while accounting profit does not.
In addition, many landlords are "accidental" landlords who couldn't sell. Even if their "profit" in the THREE distinct senses of (1) CF, (2) accounting, and (3) economic profit is negative, they might be trapped with no other choice.
Or maybe they underestimated the costs.
"Buy a home now!" proponents almost always oversimplify the issue and make it seem like "duh, it's cheaper to own otherwise no one would be a landlord". But this is just that - an oversimplification which ignores the nuances of both finance and human decision-making which is not always rational.
Most places in the US this is not the case. In big cities that have some cost controlled mechanisms built in it might be the case. My mortgage (which includes insurance, etc.) is 1k/month. A house my size in my area would rent for at least $1.2-1.5k (Zillow says 1.8k, but that is high IMO). So outside of large cities it would be the opposite. Where the home owner would be saving an additional 4-500 a month while paying down principal on their home and deducting their mortgage interest.
I've never said buying is always better, but it seems to me like you are saying renting is always better. I don't think that is the case either.
Most places in the US this is not the case. In big cities that have some cost controlled mechanisms built in it might be the case. My mortgage (which includes insurance, etc.) is 1k/month. A house my size in my area would rent for at least $1.2-1.5k (Zillow says 1.8k, but that is high IMO). So outside of large cities it would be the opposite. Where the home owner would be saving an additional 4-500 a month while paying down principal on their home and deducting their mortgage interest.
I've never said buying is always better, but it seems to me like you are saying renting is always better. I don't think that is the case either.
You are leaving out repair and opportunity costs of equity and time yet again.
P.S. mortgage interest deduction can only help by marginal tax rate times the amount by which itemized deductions exceed the std deduction. Often the std deduction is almost as much as the itemized deductions anyway and there is negligible tax benefit.
I don't know if this is really true. All you ever really get when materialism is brought up is everyone attacking it, says how terrible it is. I reckon it's a definite minority of people who actually think that's what life is about.
The greedy masses fighting each other like they their lives depend on it for big screen TV's at WalMart on black Friday kind of disproves what you say.
You are leaving out repair and opportunity costs of equity and time yet again.
P.S. mortgage interest deduction can only help by marginal tax rate times the amount by which itemized deductions exceed the std deduction. Often the std deduction is almost as much as the itemized deductions anyway and there is negligible tax benefit.
Everything is an opportunity cost. Do you leverage your brokerage accounts 5x over? If not that is an opportunity cost too.
Maintenance fees on a newer house are about 2-3k/yr if that. I haven't had to make one significant repair to my house since I have lived here 2.5 years ago.
What you are forgetting is that most people that own a home will eventually pay it off and thus will only be paying insurance and property taxes. A rental will never end. Let's assume that rentals and home ownership costs even out.
Let's say you took 40k (20% down on a 200k home/condo) and invested it and only rented. You got 7% returns over 30 years.
Then let's assume your starting rent is 1k/month and prices only increased 3% over those 30 years.
Keep in mind your mortgage won't change in price at the level of rent, but for simplicity let's just say it did.
In 30 years your investment will be worth a little over 300k and your rent will be roughly 2.5k/month.
So let's say after maintenance, insurance, and property taxes the difference is roughly 1.5k/month or 18k/yr.
In order for your 300k to return the 18k a year difference between the rental and the home you need your investments to guarantee you a return of 6% tax free. This is after assuming your mortgage will increase at the rate of the rental market (which is completely unrealistic) and also over simplifies renting (i.e. first and last month's rent, deposit forfeiture, etc.) and the fact that the home itself is worth something as well.
Everything is an opportunity cost. Do you leverage your brokerage accounts 5x over? If not that is an opportunity cost too.
Maintenance fees on a newer house are about 2-3k/yr if that. I haven't had to make one significant repair to my house since I have lived here 2.5 years ago.
What you are forgetting is that most people that own a home will eventually pay it off and thus will only be paying insurance and property taxes. A rental will never end. Let's assume that rentals and home ownership costs even out.
Let's say you took 40k (20% down on a 200k home/condo) and invested it and only rented. You got 7% returns over 30 years.
Then let's assume your starting rent is 1k/month and prices only increased 3% over those 30 years.
Keep in mind your mortgage won't change in price at the level of rent, but for simplicity let's just say it did.
In 30 years your investment will be worth a little over 300k and your rent will be roughly 2.5k/month.
So let's say after maintenance, insurance, and property taxes the difference is roughly 1.5k/month or 18k/yr.
In order for your 300k to return the 18k a year difference between the rental and the home you need your investments to guarantee you a return of 6% tax free. This is after assuming your mortgage will increase at the rate of the rental market (which is completely unrealistic) and also over simplifies renting (i.e. first and last month's rent, deposit forfeiture, etc.) and the fact that the home itself is worth something as well.
If you go into small cap stocks for 30 years you are very unlikely to make less than 7% CAGR, and most likely will be around 12%. So there. In your example renting wins.
If you go into small cap stocks for 30 years you are very unlikely to make less than 7% CAGR, and most likely will be around 12%. So there.
So you are going all small cap. GL with that. I have been investing in the Russell 2k for over a year and I am up 1.6%.
If you are so sure, just leverage the sh&t out of your brokerage account. It would be silly for you to not be borrowing 500k from your broker at 5-7% when you are so certain a small cap index fund will return you 12%.
If you could guarantee yourself 12% then renting would be a better option.
But if I return 12% a year on my investments I will also be worth 20 million by the time I am 65, so the extra 600k in growth from investing the 20% won't really matter much will it?
So you are going all small cap. GL with that. I have been investing in the Russell 2k for over a year and I am up 1.6%.
If you are so sure, just leverage the sh&t out of your brokerage account. It would be silly for you to not be borrowing 500k from your broker at 5-7% when you are so certain a small cap index fund will return you 12%.
They don't allow such ratios - and there is too much margin call risk
Quote:
Originally Posted by mizzourah2006
If you could guarantee yourself 12% then renting would be a better option.
Double standard - why must the renter guarantee the return when the owner doesn't have to? An owner has risks as well - for example, might need to relocate for a job offer when underwater on the house.
Neither stocks nor RE are guaranteed, especially in the short run.
Quote:
Originally Posted by mizzourah2006
But if I return 12% a year on my investments I will also be worth 20 million by the time I am 65, so the extra 600k in growth from investing the 20% won't really matter much will it?
Buying -vs- renting will always illicit strong opinions from both sides, but most people who believe that buying is the best way to building wealth are simply living in the past.
My mom and dad purchased their 2nd home in 1976. It was a foreclosure on a large, 3000 s/f, 3 bdr, 3 bath suburban home that was lived in less than a year. They paid $76,000 for it at that time. The neighborhood grew and flourished, the 70's, 80's and most of the 90's came and went and after my dad died, my mom sold that same home for $264,000 in 1999. Because it was new when they bought it, they were able to enjoy their home without sticking a lot of money into it. Undoubtedly, it was an excellent purchase at a great time in a fabulous neighborhood.
Over the course of 23 years the value of the home increased $188,000 for a total return of 274%. Stretched out over 23 years, that would equate to approximately 12% per year. Ahhhh yes...those were the days.
Of course, when she decided to sell that home, the market was still pretty good, and there was a balance of buyers and sellers available for just about any kind of property. So she decided to purchase a much smaller home in the city. After searching, she finally found a 2 bdr, 1 bath home for $85,000.
Over the course of the 13 years she lived there until she died in 2012, the perceived home value increased a whopping $14,000 for a return of 16%. Stretched out over 13 years, that would equate to approximately 1.2% per year. And if I were to include all the money she put into a new roof, new furnace, new deck, new siding, new flooring, etc., there would be a negative return.
Certainly, a home is much more than a place to live if you figure in the investment families make in their communities. Neighborhoods are rife with manicured lawns, suv's and children. But plunking down a stack of cash to buy their version of the American dream does come at a price not everyone can afford.
I have owned 5 homes and benefited nicely from the sale of the previous 4, but this is a different world...a different economy...and a different class of buyers that homeowners will have to deal with and I am certainly no exception. As much as I have enjoyed living in this area, it was gutted by the downturn and it is not uncommon for homes to sit on the market for years before they sell for sometimes one half of their original inflated purchase price.
So while there is no guarantee that the markets would necessarily bless my investments with hefty returns (had I chosen to simply invest and rent rather than buy), there is also the fact that owning a home does not guarantee appreciation of value over time. Yes...one must pay something toward their housing in the form of rent or house payment, liability insurance and property taxes, but unless you live in a highly coveted real estate market, you can't be sure you'll cash out of a home sale with anything, regardless of how many years you own the property. And really, if you look at the historical data (which was written about in 2012 in this article: History says home real estate is a bad investment - CBS News), buying a home would not necessarily make economic sense from an investment point of view.
ask most retirees and what let them retire early was usually a paid off home. it is rarely the value of the home. cutting costs lets you make do with less income needed and that is pretty much what a house does.
it isn't an investment as much as it is buying something that will hopefully slash costs down the road giving you better cash flow on less income.
throw in the fact it is a forced savings as most renters lack discipline to invesat the difference or the knowledge and it can be quite a good deal for many folks.
financially it is not the best way to grow wealth as other investments have historically blown it away so renting and investing especially if you already have a lump sum to invest can be far better.
Over the course of 23 years the value of the home increased $188,000 for a total return of 274%. Stretched out over 23 years, that would equate to approximately 12% per year. Ahhhh yes...those were the days.
I don't disagree with your main point, but this calculation is way off. an increase from $76k to $264k over a 23 year period works out to 5.56% per year due to compounding: (1.0556)^23 = 264/76. Not bad, but pretty modest compared to what the stock market did during the same period.
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