The MATH of Buying vs Renting (bonus, year, price, raise)
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Why is it in these kinds of threads, people always talk about it as if you don't pay a mortgage you are free to invest "That money" elsewhere? You still need a place to live. What you have left over to invest is what you would have put down as a down payment and the difference between renting and a mortgage. And as time goes on an rent goes up with inflation, you lose that difference.
And why do they assume people who own still don't invest money? I max out my IRA, put 15% in my 401k, have other investments, and am a home owner. I don't see my home as an investment for the most part, but it is... and it diversifies things for me. Where else can I save money and make what I've made? I put $80k as a down payment on my house 5 years ago. Three houses just like mine just sold in my neighborhood. The equity in my home now based off recent similar sales, $180k.
And why do so many people assume those costs owners pay like HOA dues, taxes, maintenance, etc are "free" for renters? Landlords aren't in it for charity. They are in it for profit. Renters pay that too, it's just rolled into one nice monthly payment.
And why do renters always leave out their hidden costs in these discussions? Like moving costs (I have a neighbor who is upset because they are being forced to move in the coming months. Their landlord sold the house and the new owner wants to live in it, not rent). And what about damage caused by moving? I was moved for work for a few years and every move, EVERY move, stuff was damaged and needed to be replaced. And the "insurance" never quite covered the cost. What about increased utilities? When I lived in an apartment, it was so poorly insulated that my electric bill (heating and cooling) was $150 a month. My house (which is a lot bigger), costs me on average $70 a month because the homeowners before me installed good quality insulation and windows.
It's true that owning isn't always right for everyone, there are some places in this country where renting makes the best financial sense. But let's not pretend the extreme opposite is true. Renting isn't right for everyone either. It all depends on where you live, your goals in life, your investment strategy, etc.
Completely agree with you here. There are arguments for renting and for owning, but generally, the argument would favor owning more often than it gets credit for.
I'm assuming the pro-rent crowd assumes that the "spread" between renting and all of its associated costs plus PITI + maintenance/HOA fees and any other associated costs actually exists or the renter has sufficient disposable income to invest. As you accurately point out, rent goes up with inflation (likely at a much faster clip) and likely goes up far faster than one's wages will grow.
My rent is up 18% since I moved in here in 2014. My income has grown 20%. I'm one of the few who has had income growth outpace the rise in my rent, but that's not going to keep happening indefinitely. Meanwhile, my rent is going to keep going up, year after year. Like I said
The moving expenses are a good one - renters are generally going to move far more often than owners. If the rent is too damn high, your only option is to move and find somewhere with lower rent, and that often involves additional deposits, moving vans, potentially movers ($$$$) or any other equipment you need, and as you mentioned, insurance or the cost to replaced damaged goods. You're also having to take days off work to move, whereas an owner may stay put for ten years or so.
You seem to be the only person on the thread that is getting the point on the utilities. As a renter, I have no control over my insulation, my HVAC system, inefficient older appliances not replaced by the landlord, etc. My control over my utilities is basically relegated to turning off my TV and other electronics. Yes, all this stuff costs money, but one can replace some things incrementally. Like I said upthread, I'm running electric bills of $200/month in the summer due to the inefficient air conditioning, on a 900 sq foot apartment and none of my coworkers with homes or newer, more expensive apartments had electric bills this high, even with families. The AC may be fine with adequate servicing, but I can't get that done. The only people that are authorized to work on it are the property management company or their designee. If I don't like the diagnosis, I can't go get a second opinion like an owner could. I can't authorize to have the equipment worked on because I don't own it.
Landlords are in the business to make money. In tight rental markets, like what you find in most cities today, the market will stretch a lot. If there is a shortage of rentals and prices are rising across the board, do people honestly think the landlord isn't going to pass on all charges they possibly can? With rentals in a short supply, people will basically accept the few that are available.
if your house was paid off how much money do you have tied up in the house that you can't invest elsewhere vs your neighbor who rents but has that money liquid ?
that is our story , if i buy again the dough i give up on what would be spent and tied up in the house is greater then the savings i would see buying .
i can save 6k a year buying but i give up 12k on the money i would now tie up . being retired cash flow is a concern .
there is more to a comparison then it cost me x to own and if i rented it cost me y so owning is cheaper .
time is your greatest resource growing money so the fact you have extra money to invest 30 years down the road after a mortgage is paid is not the same as having liquidity 30 years earlier .
Agree with you, but you're assuming the renter has enough income left over to invest in liquid assets. Many renters are lower income and won't have much, if anything, to invest once the essentials are paid for.
if your house was paid off how much money do you have tied up in the house that you can't invest elsewhere vs your neighbor who rents but has that money liquid ?
that is our story , if i buy again the dough i give up on what is tied up in the house is greater then the savings i would see buying .
Thing is, I don't want to invest elsewhere. I have roughly 74% of my money in stocks (mutual funds). If anything, I need to diversify more. The house makes a good place to "save money" since it overall seems to be giving a bigger rate of return than something like savings or CDs. Heck, it's even outperforming my 401k right now, although I don't expect it to do so long-run. In reality, long run, it's more like a hedge against inflation. But the point is, if I had the equity, it would end up probably in T-bills or something.
The real payoff will be when the house is paid off. Then my biggest monthly expense will be gone for the most part (Yes, I'll still need to pay taxes and insurance but that's a fraction of the bill). Or I might sell before then and move someplace cheaper and buy a new house outright. Then I will have no payments.
we have a very large stock and bond portfolio but when the opportunity presented itself to buy in to a real estate partnership with one of the country's biggest real estate moguls i was glad we had not decided to buy and lost the liquidity of that money .
but i get it , not everyone can or should invest as an alternative to owning . in fact the way most small investors do i strongly suggest buying .
but i still like to see proper facts and comparisons made .
Thing is, I don't want to invest elsewhere. I have roughly 74% of my money in stocks (mutual funds). If anything, I need to diversify more. The house makes a good place to "save money" since it overall seems to be giving a bigger rate of return than something like savings or CDs. Heck, it's even outperforming my 401k right now, although I don't expect it to do so long-run. In reality, long run, it's more like a hedge against inflation. But the point is, if I had the equity, it would end up probably in T-bills or something.
The real payoff will be when the house is paid off. Then my biggest monthly expense will be gone for the most part (Yes, I'll still need to pay taxes and insurance but that's a fraction of the bill). Or I might sell before then and move someplace cheaper and buy a new house outright. Then I will have no payments.
Percentages of money in various asset classes is a very muddled issue when you are carrying debt. Technically you have more than 100% of your money in the combination of the house and the stocks and because money is fungible, the question of what money is owed on (i.e. mortgage vs. margin) really should not affect what percentage you say is in what asset.
The thing is most people invest a significant chunk of money to have a reasonable mortgage. How much equity is in your house for the payment to be $1,800? In other words if someone wanted to live on your street they could rent a house for $2,500 with very little cash outlay(and no maintenance costs) or they could buy and have an $1,800 mortgage with a down payment of ______. I imagine it's a big number. So you have a cheaper house payment and more money to invest but probably made a huge cash outlay the renter didn't, which they can invest. There are a lot of moving parts in the calculation which I think people who think one way is always right don't get.
But you're right it varies by situation, and mostly timeframe. If someone is staying in their house for 20 years buying will almost always win. The thing is people move a lot. And every time you move you reset your mortgage to where it's mostly interest(not principal) for the first half of the mortgage so you're paying it down very slowly.
It depends on where you're at.
In expensive areas, yeah, it may take a large initial investment to get that mortgage down to a reasonable amount, but after a few years, how much does it matter once you compare it to renting the same property? Let's say he's been there ten years and the started out with that $1,800 mortgage, and the nearby house was renting for $1,600. His payment stayed the same while the renters are now paying $700/month more.
Agree with you, but you're assuming the renter has enough income left over to invest in liquid assets. Many renters are lower income and won't have much, if anything, to invest once the essentials are paid for.
not assuming anything . not everyone has choices of renting and investing elsewhere or buying but as i mentioned with 43% of home sales all cash many folks do have that choice .
i am not saying they should invest , only that they could and do have the resources and the outcomes are very different as opposed to it cost me 1200 to buy and 1700 to rent . for someone renting and investing the renting may actually be a far superior deal . it was for us .
personally i will go on record saying most folks will likely do better buying then trying to invest and rent . that is because most suck at investing .
The renter would have those investments, PLUS extra, if and when their out of pocket payments were less than the owner's. Only the difference matters. The fact that the owner can have some investments is a red herring, because it is the DIFFERENCE that is relevant.
Landlords charge what the market will bear. It does not matter if a landlord just had $30k in flood damage that insurance would not cover, if they raise the rent over market value by $200 the tenant will likely move out. The tenant is NOT paying for it!
Why do owners ignore the lost wages due to inability to relocate, or the added commuting costs of not being able to move closer to a new job, or the added costs of moving compared to a renter's move?
Yes.
The renter is unlikely to have total out of pocket payments less than an owner's unless you are comparing unlike markets (1 BR apartment vs. 3 BR suburban house) or are talking about owning over a very short duration.
The 2 BR I rent for $850 is not quite as nice as this condo that is $62,000. I don't have hardwood, ceiling fans, am on the second level, and no garage or green space. Granted, I live in a nicer town, but that's really it. Living in this cheap condo would be a big step up for me.
PITI, with a 20% downpayment of $12,500, is estimated at just a nudge under $300. I can't imagine the condo fees being significant here. Even if you could only do 5% down, your total costs with PMI are still likely to be under $400, and that rate is "locked in." I'm paying double that in rent, and rent is just going to keep going up. My commute would be about 25 miles, but can be done in 30 minutes on the interstate instead of the stop-go suburban traffic I get through now.
I wouldn't buy a little condo like that hoping for big equity gains - it's in a small town that's seen better days and will likely go up nominally, if at all. Still, it shields you from these rent increases and gives you the tax advantages of home ownership.
You're also assuming that even if landlord A incurs some big expense, that rents are also not going up across the board. If my rent goes up $200/month, but everywhere else it goes up $100/month, it's likely going to cost me the other $1,200 that first year in moving costs and deposits at the other place - that's not even counting my hassle.
Last edited by Serious Conversation; 04-19-2016 at 08:30 AM..
The renter is unlikely to have total out of pocket payments less than an owner's unless you are comparing unlike markets (1 BR apartment vs. 3 BR suburban house) or are talking about owning over a very short duration.
The 2 BR I rent for $850 is not quite as nice as this condo that is $62,000. I don't have hardwood, ceiling fans, am on the second level, and no garage or green space. Granted, I live in a nicer town, but that's really it. Living in this cheap condo would be a big step up for me.
PITI, with a 20% downpayment of $12,500, is estimated at just a nudge under $300. I can't imagine the condo fees being significant here. Even if you could only do 5% down, your total costs with PMI are still likely to be under $400, and that rate is "locked in." I'm paying double that in rent, and rent is just going to keep going up.
I wouldn't buy a little condo like that hoping for big equity gains - it's in a small town that's seen better days and will likely go up nominally, if at all. Still, it shields you from these rent increases and gives you the tax advantages of home ownership.
You're also assuming that even if landlord A incurs some big expense, that rents are also not going up across the board. If my rent goes up $200/month, but everywhere else it goes up $100/month, it's likely going to cost me the other $1,200 that first year in moving costs and deposits at the other place - that's not even counting my hassle.
That may be so in Indiana, but it is quite different in the expensive metros near both coasts.
So I have more money to invest now. If I stayed where I was renting, I'd be paying more now than my $1800 a month mortgage. And part of my mortgage is an investment too, so there is that. Maybe it's not the best investment out there, but it beats a lot of other options and I am not about to put everything (all my eggs) in the stock market basket.
And rentals are hard to find in my area. So renting here costs more than owning. The problem for most people is houses are so expensive that they can't save the down payment and we have a large military community too that move a lot. So renting is their best option.
If I need to move, I can rent my house and make a tidy profit each month (heck, I would rent it cheap and still be ahead based on the other houses and what they rent for on my street). I don't, "have" to sell just because I want to move and I am not stuck either. I just become a landlord. But if I wanted to, I don't think it would be an issue. The three houses that just sold on my street, all where on the market less than a month. But that's specific to my area, and I get that.
The renters on my street pay the same commuting costs I do. So I am not sure what that would be an issue. It's not like they get a free ride to work.
EDIT: Had to update, I googled it. The house next to min rents for exactly $2595 per month.
One thing to remember is that if someone is single, especially a single parent, it's hard to save for a deposit on a house.
I make $60k with a 5% bonus in Indianapolis at 29. Between my 6% 401k contribution, medical/dental/vision insurance, federal/state/county income taxes/FICA/Medicare, and a $30 biweekly HSA contribution, I net $1,514 every two weeks. Rent is $850 - 28% of my income, not including utilities. I'm already on the upper bound of what most financial advisers consider a "safe" amount in rent and utilities, that ratio is likely to worsen, and I have a reasonably good income for the broader metro area (not so much my affluent county).
Rents aren't that much cheaper in the city, and we're a pretty reasonable area. Even moderate income ($30k-$40k) single renters are going to struggle here, and it just gets worse on the coasts. At my previous employer, I had a colleague in my role in Boston making roughly $80k, but he lived in a rooming house with four other guys, splitting the $4,000 rent five ways to be able to save. When someone is making $80k and has to go to this extreme to save, something is off.
Quote:
Originally Posted by ncole1
That may be so in Indiana, but it is quite different in the expensive metros near both coasts.
People make a decision to remain in those areas. There are plenty of midsize metros in the Midwest and South where rent and home prices are literal fractions of what they are on the coasts, and a lot of these places have decent economies.
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