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ownership of a home eventually has little to do with net worth and everything to do with cost cutting.
comment after comment from folks who finally reached retirement have stated what let them retire is not the fact their home was worth a 100k ,500k or a million.
if you are living in it the value really means little. many folks do not downsize if they are happy, many have no interest in reverse mortgages , the NAME OF THE GAME FOR RETIREES IS COST CUTTING SINCE INCOME IS LIMITED.
just about every comment about ownership is that it cut their cost of housing low enough so they can make do with a whole lot less income.
while renters like myself can invest elswhere, get better returns and have an eventual higher income to cover the higher costs of renting few actually have the knowledge or discipline to do so.
paying off a home for most of america would be the best route.
i am also the biggest defender on city data of the fact renting may not be about throwing away money. in fact it may be the best way to grow money ,but the fact is few americans are capable of pulling it off long term.
I rented a three-bedroom house with a yard and a garage while raising my daughter. It was in a good town with good schools and my mother lived in town (it was my hometown), which I needed because my job was 30 miles away in the city. I was not in a position to buy a house in that town, and there were few other options--one or two apartment complexes, no condos. Besides, it's in an area where the property taxes are higher than normal even for New Jersey.
Once she graduated, I moved 60 miles south to an area where I could afford a condo. My payment with insurance and taxes plus my maintenance fee are hundreds of dollars less a month than it cost to rent that house. I'm glad I did it--my daughter was safe and not alone and the small town had a nice network of other mothers that I knew through her activities and she got a good public education. But of course, I was unable to save anything during those years.
But owning my own place--I can paint my walls whatever color I want. I can have pets (I lucked out because the house landlord was a vet, but very few rentals allow you to have pets). The LL got pissy when I moved and he had to paint over the colors I'd used in the house, so I lost my security, but it was worth it--I certainly didn't want to raise a child with white/offwhite friggin' walls all her life like she was in some kind of institution.
There are big expenses to owning, but that's to be expected. When I bought my condo, I knew I'd have to replace the furnace and ac compressor, and I did. Of course, when I rented and the upstairs heat went out one winter, I had to buy space heaters for the bedrooms while I waited for the landlord to return from his three week trip to Europe and get him to have the heat fixed. Space heaters were inexpensive, but it was annoying that I should have to do that when I'm paying $2200 a month for a place to live that should have reliable heat.
That's another down side of renting--Landlords are VERY reluctant to spend a dime to get things fixed, so often you have to live with leaky faucets, broken doors, cracked windows, etc--or no heat or air-conditioning until they decide in their own good time to do repairs. The down side of owning is that you pay for all repairs yourself--but you can get it done right away.
LOL--I rented an apartment in a two-family house in the interim while searching for my condo--and every time it rained the kitchen skylight leaked as well as three other places in the ceiling kitchen. I had to have four pots placed around to catch the water, and when I called the landlord to let him know, he just laughed heartily and said, "Yeah, I guess I have to get the roof fixed." He never did while I lived there!
I am likely a lifelong renter. I strongly disagree that owning is more logical. Historically, a residential property has returned about 1% above inflation, after factoring in all the costs of home ownership (homeowners rarely do). Equities return 7-9% above inflation. A renter who has the discipline to invest in the markets will likely acquire greater net worth than a similarly situated homeowner. In my own case, that has definitely proven to be the case.
You are comparing the investment rate of the delta between renting and owning, and are ignoring the cost of renting all together. The home will still be worth a certain amount of money when you die and leave it to your kids, the renting will not. Also its hard to compare the delta between renting and owning as some apartments can cost more than a home, and some homes can be lemons where others rarely have problems.
ownership of a home eventually has little to do with net worth and everything to do with cost cutting.
comment after comment from folks who finally reached retirement have stated what let them retire is not the fact their home was worth a 100k ,500k or a million.
if you are living in it the value really means little. many folks do not downsize if they are happy, many have no interest in reverse mortgages , the NAME OF THE GAME FOR RETIREES IS COST CUTTING SINCE INCOME IS LIMITED.
just about every comment about ownership is that it cut their cost of housing low enough so they can make do with a whole lot less income.
while renters like myself can invest elswhere, get better returns and have an eventual higher income to cover the higher costs of renting few actually have the knowledge or discipline to do so.
paying off a home for most of america would be the best route.
i am also the biggest defender on city data of the fact renting may not be about throwing away money. in fact it may be the best way to grow money ,but the fact is few americans are capable of pulling it off long term.
Invest what? The amount you make less rent? Whats the difference between investing your hypothetical 2k a month after rent payment vs 2k a month after mortgage payment? The cost of maintaining a house can be negligible if you buy a good house. I have owned a house for 2 years now and have put nothing into it save for a lawn mower, weed whacker and about a gallon of gas every two months. My mortgage payment is less than my rent was in a 2/1. I also put 1000 a month towards retirement. When I retire Ill have my retirement account, PLUS a house. When you retire youll have about 50k more in it than me if we hypothetically put the same amount into it every month at the same rate. But Ill have whatever the future value of my currently 230k house is in my portfolio. Who won?
50k being the cost of a new roof maybe twice in the next 40 years, plus a new ac unit, water heater replaced once over. All estimates.
Buying isn't always the smarter option and renting isn't always the smarter option. There are too many variables at work to provide a clear answer. ...
At the same time, if you rent for the rest of your life its a pretty sure thing that you have screwed yourself in the long run. The reason being is that there is only a limited amount of land in the world. It is bound to increase in price.
... If you imagine America in 200 years that land you buy and pass onto your kids kids when you die will be worth significantly more in the long run.
There are indeed too many variables, both lifestyle and financial. Those who have families or movable-property that exceeds the capacity of apartments, would likely benefit from owning a house. Likewise for those in markets where the "price earnings ratio" of real estate is low... in other words, where rents are comparatively high, but houses are inexpensive. And likewise for places with vibrant economies where despite occasional oscillations, long-term real estate appreciation is reasonably safe.
But not all markets appreciate. If decade after decade, house prices lag inflation, it's hard to make a favorable financial case for owning. Then factor maintenance and property taxes. Then add costs such as higher utility bills for houses than apartments, and acquisition-creep (new appliances, more furniture, etc.) that house ownership entails.
I often wonder what would happen to the price of my house in 200 years. Would it track inflation? It's a substantial piece of land. Would it appreciate faster than inflation, as farmland is built-up, the suburbs expand, the population grows, agricultural land becomes more prized, and so forth? Maybe. But sometimes I think that in 200 years, this whole region will just be abandoned, with the vestigial remaining populace withdrawing into the city core, and all outlying areas left to return to forest.
Of course, pondering the 200-year future is purely an academic exercise. We're enthralled by the prospect of leaving a good legacy, of doing commendable things now in preparation for a future that's ultimately unknowable, but which preferably unfolds along lines that we prepared. More relevant is the 20-year future, long enough to smooth market oscillations, but short enough to be experienced. And for that future I am very pessimistic about local real estate. I don't see returning to the prices of the 1990s any time again within our lifespans.
Invest what? The amount you make less rent? Whats the difference between investing your hypothetical 2k a month after rent payment vs 2k a month after mortgage payment? The cost of maintaining a house can be negligible if you buy a good house. I have owned a house for 2 years now and have put nothing into it save for a lawn mower, weed whacker and about a gallon of gas every two months. My mortgage payment is less than my rent was in a 2/1. I also put 1000 a month towards retirement. When I retire Ill have my retirement account, PLUS a house. When you retire youll have about 50k more in it than me if we hypothetically put the same amount into it every month at the same rate. But Ill have whatever the future value of my currently 230k house is in my portfolio. Who won?
50k being the cost of a new roof maybe twice in the next 40 years, plus a new ac unit, water heater replaced once over. All estimates.
you are thinking with blinders on.
well for starters there are closing costs up front to buy as well as in many more desireable areas a spread as much as 30% between buying or renting that could take years to cross but most important you are thinkiing in terms of folks with no money up front.
as an example folks get inheritances,insurance settlements, gifts ,sell businesses ,sell properties and get money many other ways and have the money to plunk down on a home or rent and invest elsewhere.
when we bought our first home back in the 1980's in kewgardens queens we paid 169k cash after selling other property . when we got divorced we sold it in 2004 for 335k.
in the mean time that same amount in the fidelity insight portfolio which we followed since then and used plain old fidelity funds was worth 1.8 million.
that would have been enough to buy 2 homes even after subtracting out every penny of rent over that time.
in fact right now to buy a place like we live in now .just the income from investments pay our rent easily and then some. we would have to spend 900 a month more to buy if we wanted to.
the fact is you are only thinking in terms of those with no choice as to plunking down a large sum of money into a higher yielding investment and renting or tying up that money in the slower growing house with possibly cheaper housing costs. even with a mortgage eventually that money is still tied up in the home when paid off.
i never enjoyed owning our homes and so i prefer to rent and buy investment real estate instead. i can tell you this, owning my home and the drop in housing costs could never compare to the returns we got elsewhere especially because of the fact we used alot of the money we had tied up in the house we sold to buy into a successful real estate partnership.
by taking the money from the sale and renting and using that money to put towards the investment in the partnership we made many times that 335k, in fact today that home if we kept it is worth 450-475k. even figuring rent savings over that time is well behind our investments.
but don't get me wrong ,not everyone has the knowledge and skill to invest so for them a home may be a better choice.
most americans benefit from the retirement cost cutting of expenses a home can have not its value.
Last edited by mathjak107; 02-17-2014 at 01:44 PM..
I read so many articles that say renting is a better option than owning. Logically, owning makes more sense, but I see many people who buy a house in an expensive area and spend half their life paying off a giant mortgage. And of course that affects travel, leisure, kids, etc.
I agree with mathjak. You are ignoring the opportunity cost of owning. The mortgage finance industry has basically suckered the entire country into believing that home ownership is the route to financial security. In actuality, it is a poor investment compared to others. If one has the self-discipline to take advantage of those opportunities, renting will usually prove more lucrative in the final net worth analysis.
Quote:
Originally Posted by thatguydownsouth
You are comparing the investment rate of the delta between renting and owning, and are ignoring the cost of renting all together. The home will still be worth a certain amount of money when you die and leave it to your kids, the renting will not. Also its hard to compare the delta between renting and owning as some apartments can cost more than a home, and some homes can be lemons where others rarely have problems.
I read so many articles that say renting is a better option than owning. Logically, owning makes more sense, but I see many people who buy a house in an expensive area and spend half their life paying off a giant mortgage. And of course that affects travel, leisure, kids, etc.
Do you rent or own and why?
From a financial perspective, there is only one reason to own a home, and it isn't the reason most people think it is. It is NOT about deducting mortgage interest.
The reason to own a home is that by owning that home you "pay yourself rent" and that phantom income is tax free. Tax free. This isn’t immediately obvious to some people.
To illustrate the point, imagine two identical houses next to each other. You own one & live in it. I own the other & live in mine. Imagine our respective IRS Form 1040s. We each have income, deductions, and a tax obligation.
Now imagine that you own your home but rent it to me to live in. I own my home but rent it to you to live in. We each pay the other rent... and because these are identical houses next to each other, we each pay the same fair market rental rate which is the same dollar amount of rent to each other. Crazy, I know, but if you've read this far, you might as well continue.
Imagine our respective IRS Form 1040s. We each have income & deductions as before, but we each also have rental income (and some extra deductible expenses). But, because we each show more Adjusted Gross Income in the form of rental income, we each owe taxes on that extra rental income. Our lives are really no different between the two scenarios -- it is just that in the silly 2nd scenario we have extra income on which we pay extra income tax, so our after-tax situation is worse.
So what is REALLY happening when we own a home & live in it is that we "pay ourselves rent" in the amount of the fair market rental rate, and that rent is tax free!
Let's make this more concrete.
Let's say the fair market rent of a home in your neighborhood is $2000 per month. By living in the house you own, you "pay yourself" $2000 per month, yet you pay no income tax on that phantom income because it is, well, phantom.
While this argument is somewhat academic, it is one factor in deciding if it makes sense to own vs. rent.
we live in a great hi rise with amenities and decent rent
we get returns many many many times greater elsewhere easily paying rent and rent increases for a lifetime.
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