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Can real estate appreciation be compared to an index fund? You have to pay property tax, insurance, maintenance etc every year.
Of course you can’t compare the two directly. You can’t live in an index fund.
I was trying to show that even bonkers price growth in desirable towns couldn’t beat the most boring possible equity investment to put that bonkers growth in perspective. Housing isn’t a commodity and primary housing isn’t really a traditional investment.
Of course you can’t compare the two directly. You can’t live in an index fund.
I was trying to show that even bonkers price growth in desirable towns couldn’t beat the most boring possible equity investment to put that bonkers growth in perspective. Housing isn’t a commodity and primary housing isn’t really a traditional investment.
A primary residence definitely should not be viewed as an investment. As you say, it's first and foremost a place to live and everyone needs a place to live. Certainly, you want to decide how smart of a decision it is from a financial standpoint and also if you do buy you want to try and set yourself up for good odds for resale. However, buying a primary residence from a financial standpoint should only be compared to how smart of a financial decision other forms of housing are. It's usually a pretty safe bet that owning is better than renting for example because the rate of return on renting is 0% and the interest rate on renting is 100% essentially. Just saying that you'll never get rent money back and you'll certainly never get a rate of return on it.
Investment properties are a different beast though but the proposition is very different because someone else is paying your loan interest and also paying down your debt plus paying you a premium to live there on top of the appreciation of the home, the tax breaks, etc.
As in all things investing, it's typically not advised that you put all of your eggs in one basket. Real estate is a fabulous way to diversify your portfolio.
A primary residence definitely should not be viewed as an investment. As you say, it's first and foremost a place to live and everyone needs a place to live. Certainly, you want to decide how smart of a decision it is from a financial standpoint and also if you do buy you want to try and set yourself up for good odds for resale. However, buying a primary residence from a financial standpoint should only be compared to how smart of a financial decision other forms of housing are. It's usually a pretty safe bet that owning is better than renting for example because the rate of return on renting is 0% and the interest rate on renting is 100% essentially. Just saying that you'll never get rent money back and you'll certainly never get a rate of return on it.
Investment properties are a different beast though but the proposition is very different because someone else is paying your loan interest and also paying down your debt plus paying you a premium to live there on top of the appreciation of the home, the tax breaks, etc.
As in all things investing, it's typically not advised that you put all of your eggs in one basket. Real estate is a fabulous way to diversify your portfolio.
Financially speaking, owning is not “necessarily” better than renting, because when people rent, they tend to live a relatively simple life and spend much less on housing and other things. The rest of their money can “potentially” be invested in something else.
My property tax and mortgage interest last year were more than what I paid to live in an Arlington apartment several years ago. Not to mention I spent huge on renovation and landscaping, plus much higher utility bills.
If I didn’t need to pay mortgage, I could have paid off my student loan and car loan. I could also have purchased more stocks and put more in my 401k.
Financially speaking, owning is not “necessarily” better than renting, because when people rent, they tend to live a relatively simple life and spend much less on housing and other things. The rest of their money can “potentially” be invested in something else.
My property tax and mortgage interest last year were more than what I paid to live in an Arlington apartment several years ago. Not to mention I spent huge on renovation and landscaping, plus much higher utility bills.
If I didn’t need to pay mortgage, I could have paid off my student loan and car loan. I could also have purchased more stocks and put more in my 401k.
You have to make an apples to apples comparison. If you want to compare renting vs. buying a 2,000 sq ft home in updated condition that's one way to do it. In most markets around here it's going to cost you more to rent that than it will to buy it (assuming you have 20% down). If you want to compare what $3500/month is going to get you in a lease payment vs. a mortgage payment again in most markets around here you're going to get a nicer house with a mortgage payment.
When you start talking about what someone's habits are like if they're a renter then you're taking this train off the tracks. There are plenty of people who live modestly and own their home. If you own, (assuming you have a fixed rate mortgage) then you have much more control over your monthly expenses. Assuming you take out a mortgage and see it through to the end of 30 years if it's a fixed rate mortgage your payment never changes. That doesn't happen with rent. You also can't refinance rent and lower the payment. Maintenance and upkeep costs, insurance costs, and RE taxes may change a bit year to year. However, it's not unusual for a landlord to decide to change the rent by an amount the changes your spending by many hundreds every month. Even more importantly . . . if you rent for 30 years then you keep paying rent. Pay your mortgage for 30 years straight and . . . POOF! No more mortgage.
You have to make an apples to apples comparison. If you want to compare renting vs. buying a 2,000 sq ft home in updated condition that's one way to do it. In most markets around here it's going to cost you more to rent that than it will to buy it (assuming you have 20% down). If you want to compare what $3500/month is going to get you in a lease payment vs. a mortgage payment again in most markets around here you're going to get a nicer house with a mortgage payment.
When you start talking about what someone's habits are like if they're a renter then you're taking this train off the tracks. There are plenty of people who live modestly and own their home. If you own, (assuming you have a fixed rate mortgage) then you have much more control over your monthly expenses. Assuming you take out a mortgage and see it through to the end of 30 years if it's a fixed rate mortgage your payment never changes. That doesn't happen with rent. You also can't refinance rent and lower the payment. Maintenance and upkeep costs, insurance costs, and RE taxes may change a bit year to year. However, it's not unusual for a landlord to decide to change the rent by an amount the changes your spending by many hundreds every month. Even more importantly . . . if you rent for 30 years then you keep paying rent. Pay your mortgage for 30 years straight and . . . POOF! No more mortgage.
There are some points:
1. Very few single men would rent a 2000 sqft home. They just need 700 sqft. However, buying a 700 sqft SFH may not be practical so most will buy 2000 sqft (or something close to that). It’s a complicated decision with many things involved. (Yes they may start a family soon etc but that’s a different story)
2. The property tax, mortgage interest and insurance are just like “rent”. You pay them to the government or financial institutions, like paying a landlord. It’s typical that the mortgage interest accumulates to 50%~100% of your loan.
3. There are always cheaper apartments to move to, if your financial situation changes. The government even pay your rent if you are in absolute difficulties.
Yes, having a house is more fun. In a nice day, I like to do some gardening and watch the birds. Life is better.
However we were only talking about financial aspects.
You have to make an apples to apples comparison. If you want to compare renting vs. buying a 2,000 sq ft home in updated condition that's one way to do it. In most markets around here it's going to cost you more to rent that than it will to buy it (assuming you have 20% down). If you want to compare what $3500/month is going to get you in a lease payment vs. a mortgage payment again in most markets around here you're going to get a nicer house with a mortgage payment.
When you start talking about what someone's habits are like if they're a renter then you're taking this train off the tracks. There are plenty of people who live modestly and own their home. If you own, (assuming you have a fixed rate mortgage) then you have much more control over your monthly expenses. Assuming you take out a mortgage and see it through to the end of 30 years if it's a fixed rate mortgage your payment never changes. That doesn't happen with rent. You also can't refinance rent and lower the payment. Maintenance and upkeep costs, insurance costs, and RE taxes may change a bit year to year. However, it's not unusual for a landlord to decide to change the rent by an amount the changes your spending by many hundreds every month. Even more importantly . . . if you rent for 30 years then you keep paying rent. Pay your mortgage for 30 years straight and . . . POOF! No more mortgage.
Agreed. Apartment living should be compared to the cost of a condo in the same complex or a similar sized unit in the same area. In general, it's better to own the 700sf condo instead of renting it if you're there for many years.
At the end of the day the numbers need to be run and include things like maintenance costs and transaction fees. Not enough people do that but will automatically say things like “rent is throwing money away”.
There are some points:
1. Very few single men would rent a 2000 sqft home. They just need 700 sqft. However, buying a 700 sqft SFH may not be practical so most will buy 2000 sqft (or something close to that). It’s a complicated decision with many things involved. (Yes they may start a family soon etc but that’s a different story)
2. The property tax, mortgage interest and insurance are just like “rent”. You pay them to the government or financial institutions, like paying a landlord. It’s typical that the mortgage interest accumulates to 50%~100% of your loan.
3. There are always cheaper apartments to move to, if your financial situation changes. The government even pay your rent if you are in absolute difficulties.
Yes, having a house is more fun. In a nice day, I like to do some gardening and watch the birds. Life is better.
However we were only talking about financial aspects.
1. You're taking the train off the tracks again. I'm just throwing those numbers out to flesh out my example. If you want to substitute into the example a 700 sq ft condo instead then the same thing applies. The mortgage payment will likely be cheaper than the rental payment. At the end of the day, a lease payment is basically just paying someone else's mortgage, insurance, HOA fees, RE taxes, and upkeep plus some profit on top. I used to live in a 1,000 sq foot condo and back then I was paying about $1500 for the mortgage and HOA fee. I saw one pop up for rent recently that wasn't even as nice as mine was and they were asking $2500/month. That's a pretty significant difference. If I had kept living in that unit, I'd be saving $1K/month at this point in owning vs. renting.
2. Yes you don't get those payments back, but you do realize when you pay rent you're basically just paying them for someone else don't you? Also, if you itemize you can deduct them from your taxes. Yes, mortgage interest adds up for sure but again . . . you do realize if you're renting that you're just paying that for someone else anyway don't you?
3. Yes. There are always cheaper homes to move to as well. I'm not sure what your point is there. You can also sell your home and become a renter but again I'm not sure what your point about moving was. At least with refinancing you can stay in the same home and make the monthly payment cheaper. Moving costs money too. Also, if you're in such dire financial straits that the government is paying your rent (vis-a-vis Section 8) then you're likely not going to qualify to be a homeowner anyway. So that's kind of irrelevant. If you want to talk about renting vs. owning we need to keep this to people who actually have that choice.
Quote:
Originally Posted by simplexsimon
At the end of the day the numbers need to be run and include things like maintenance costs and transaction fees. Not enough people do that but will automatically say things like “rent is throwing money away”.
Ummm . . . that's because paying rent is like throwing money away. Have you ever heard of anyone getting some of their rent payment back? At least when you're paying a mortgage part of that payment (unless you took out an interest only loan) is principal and in theory when you sell your house you should get that money back.
Of course, when you pay rent you get a place to live so it's not literally like throwing money away because you do get something back in return (i.e. a place to live). However with a mortgage, you also get a place to live plus the likelihood that you'll get part of your monthly payment back.
Not everyone is qualified to buy a home and buying a home is not the right situation for everyone as well. If you're moving for a job and you know it's temporary why would you buy a home for 1 year? That's likely not going to be a smart financial decision given the amount of RE transaction costs. However if you're going to be somewhere for a while, owning often works out better for those who financially qualify than renting.
1. You're taking the train off the tracks again. I'm just throwing those numbers out to flesh out my example. If you want to substitute into the example a 700 sq ft condo instead then the same thing applies. The mortgage payment will likely be cheaper than the rental payment. At the end of the day, a lease payment is basically just paying someone else's mortgage, insurance, HOA fees, RE taxes, and upkeep plus some profit on top. I used to live in a 1,000 sq foot condo and back then I was paying about $1500 for the mortgage and HOA fee. I saw one pop up for rent recently that wasn't even as nice as mine was and they were asking $2500/month. That's a pretty significant difference. If I had kept living in that unit, I'd be saving $1K/month at this point in owning vs. renting.
If it was that easy, then more people would try to play landlord. It's not. HOA's can go off the rails, Special assessments, big maintenance costs, etc.
Plus condo RE prices are a lot more volatile than SFH, as 2008 showed. Not to mention in the 80s/early 90s.
If it was that easy, then more people would try to play landlord. It's not. HOA's can go off the rails, Special assessments, big maintenance costs, etc.
Plus condo RE prices are a lot more volatile than SFH, as 2008 showed. Not to mention in the 80s/early 90s.
HOA's are like being forced to spend your money based on how someone else thinks it should be spent. While it might be great not to have to worry about having to do the landscaping, plowing, taking trash to the dump, etc...based on the condo fees I've been seeing, it makes me wonder. Say you bought a $500K condo and the HOA fee is $300/month. Doesn't sound that bad right? However, does it really cost $300/month for your share of the trash, plowing, and mowing of your little patch of grass outside your door? Doubt it. You're giving up a lot to the reserves fund that you'll never get back or reap the benefits of if you don't stay in the unit long term.
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