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A run down house in an affluent area is dollar for dollar worth more than a new contruction in a marginal area.
Location, location, location.
Costs being less (moneies needed to maintain /repair), is not the same as property value. Same location new vs existing house is a better comparison. Of course location is related to value.
no , my general assumption if you are reading what i wrote is not just invest the down payment money and the difference .
using the down payment can be one way but not the best way , eventually the rent will not leave you with much to invest so it will depend on how much of a down payment and what the spread and rent increases in the area look like . the outcome that way is unknown and will be very situation dependent . .
so no that is not my general premise to what i am saying because that situation may have someone with little money to invest like a first time home buyer. many times buying may be the better option . remember i said my daughter was in that position .
my first tenant would have done well because as i mentioned i closed 2 weeks before the stock crash in 1987 . real estate crapped the bed after that for years so rent increases were few and far between as property values fell by as much as 20% . she hypothetically would hve beat me with the down payment and closing costs invested plus that difference for years .
my general premise ,as i keep saying over and over and over is . folks have different resources available from different sources through life that may give them large amounts of cash and with that cash comes options if they are renters . it can even come from selling a house with equity in it and now deciding do we buy another or rent and buy a business or rent and invest it .
you keep bringing up that situation where a first time buyer has only the down payment money and a mortgage to pay vs renting and little money . but that is the most undependable situation as to outcome for the renter .
the real deal is when you are a renter who now came to money or sold a home and have a pile of cash and now have choices .
the real options and ability come as your resources become available .
you can't have options without money , period .
If someone has existing housing costs regardless of whether they currently own or rent and they come into a large sum of money, what options do they have as a renter that they don't have as an owner? Even putting aside the fact that in my market, it costs me close to $1000 per month more to rent a comparable property, why would my housing costs even be a part of the equation if I came into a lump sum? If anything, since I already do own my home, I would not even need to consider buying a home as a way to invest a lump sum the way that a renter would be likely to do.
And the same average Joe, while living check to check, will be magically able to pay for a $5,000 house repair without depleting the precious equity they are supposedly able to build by owning?
You act like they pop up every day, but yes, they'll figure it out. AC companies, roofers, foundation companies will finance. I've owned a house since 2008 and never had a larger expense than a few hundred on it. I have a home warranty in place for when the AC eventually goes out. Roof was new so should be good there for another 10-15 years barring hail damage (which insurance would cover.) IBuying still normally comes out cheaper than renting in my market.
On another house had to replace a water heater which was 750, and the ac coil went out (replaced by warranty) and then new unit was hit by lightening (replaced by insurance). I replaced the roof for 4 or 5k but knew it was coming so budgeted for it and should be good for another 30 on it now.
In most areas of the country, homeownership costs more than renting. Many economists with calculators claim the opposite, but the calculations and conclusions are often highly misleading. As is often the case, the devil is in the details. We recently reviewed one highly publicized calculation that owning was cheaper than renting in almost all markets.
That calculation had a number of outdated assumptions, including:
Outdated assumption #1: Buyers put down 20%. In reality, own versus rent is a first-time buyer decision, and the vast majority of first-time buyers today make down payments of 10% or less.
Outdated assumption #2: Buyers are in a 25% tax bracket and thus save 25% of their interest payment in taxes. Today, half of all home buyers obtain a mortgage less than the median resale price of $236K, and 100% of the annual interest on that mortgage is less than the standard itemized deduction of $12K per couple, so many entry-level buyers actually save ZERO dollars in taxes. Those that itemize likely only save a small percentage of the interest payment in taxes.
Outdated assumption #3: Future home price appreciation should be included in the own-versus-rent decision. Most indices show that home prices have historically appreciated 1%–2% faster than incomes, but over a 30-year period of falling mortgage rates. Assuming you believe rates will rise or at least stay flat, price appreciation might be an aggressive assumption.
When people say that the vast majority of economists are wrong, they are usually a moron that struggled in community college. In most areas, home ownership is a far better deal than renting in the current economy. Source: I'm a ****ing financial analyst and actually have the education that the author wishes they had.
While the income tax situation is true, the author has grossly misunderstood how appreciation works. The simple fact is that even if future prices are not factored in, the future expected rent increases are factored in. When I made the decision to buy a house, I built the financial models for doing the analysis. It turned out that after 30 years I could cancel my insurance, burn the house to the ground, and walk away having made a financial decision that would have been superior to renting due to the simple discounted cash flow savings over the years from the PITI (principle, interest, taxes, insurance) payment being materially less than renting an equivalent structure from day one.
The author really needs a better education, especially if they are going to claim to do "consulting". It appears their only MBA was in marketing as they have done a great job of branding their opinion as having some value for the moron that might pay them for their services.
Their claim:
"Below is a chart of major US markets and the premium it costs to own versus rent as seen through the eyes of most first-time buyers. We assume that the decision is between renting an apartment in a large apartment complex and buying a home valued at 80% of the median home price (a reasonable assumption for first-time buyers) with a 95% LTV loan."
They are comparing renting an apartment in a large complex with buying a home valued at 80% of the median home price, but 80% of the median home price would buy exceptional condo that is dramatically superior to the average apartment. There is a huge flaw in comparing a simple apartment, such as a two bed two bath to a free standing home where the median is likely to be a 3 bed, 3 bath or a 4 bed, 3 bath. Further the median house will contain a garage while most apartment complexes will rent out those garages separately. As a result they are dramatically miscalculating the costs between owning a home and renting an apartment. This is good quality work for someone trying to do it as a group project while getting a Bachelor's degree but it is terrible for a "consulting" group.
This just in, renters can save money by renting a ****hole rather than a luxury apartment. O M G? Really? That is so cool. Tell me more....
I'm off to work. Anyone listening to this fool is doing themselves a disservice. PS. I live near Denver, one of the areas where his blog says the cost of home ownership was +$250 per month compared to renting. I can assure you that the assertion is both false and downright stupid.
In most areas of the country, homeownership costs more than renting. Many economists with calculators claim the opposite, but the calculations and conclusions are often highly misleading. As is often the case, the devil is in the details. We recently reviewed one highly publicized calculation that owning was cheaper than renting in almost all markets.
That calculation had a number of outdated assumptions, including:
Outdated assumption #1: Buyers put down 20%. In reality, own versus rent is a first-time buyer decision, and the vast majority of first-time buyers today make down payments of 10% or less.
Outdated assumption #2: Buyers are in a 25% tax bracket and thus save 25% of their interest payment in taxes. Today, half of all home buyers obtain a mortgage less than the median resale price of $236K, and 100% of the annual interest on that mortgage is less than the standard itemized deduction of $12K per couple, so many entry-level buyers actually save ZERO dollars in taxes. Those that itemize likely only save a small percentage of the interest payment in taxes.
Outdated assumption #3: Future home price appreciation should be included in the own-versus-rent decision. Most indices show that home prices have historically appreciated 1%–2% faster than incomes, but over a 30-year period of falling mortgage rates. Assuming you believe rates will rise or at least stay flat, price appreciation might be an aggressive assumption.
When people say that the vast majority of economists are wrong, they are usually a moron that struggled in community college. In most areas, home ownership is a far better deal than renting in the current economy. Source: I'm a ****ing financial analyst and actually have the education that the author wishes they had.
While the income tax situation is true, the author has grossly misunderstood how appreciation works. The simple fact is that even if future prices are not factored in, the future expected rent increases are factored in. When I made the decision to buy a house, I built the financial models for doing the analysis. It turned out that after 30 years I could cancel my insurance, burn the house to the ground, and walk away having made a financial decision that would have been superior to renting due to the simple discounted cash flow savings over the years from the PITI (principle, interest, taxes, insurance) payment being materially less than renting an equivalent structure from day one.
The author really needs a better education, especially if they are going to claim to do "consulting". It appears their only MBA was in marketing as they have done a great job of branding their opinion as having some value for the moron that might pay them for their services.
Their claim:
"Below is a chart of major US markets and the premium it costs to own versus rent as seen through the eyes of most first-time buyers. We assume that the decision is between renting an apartment in a large apartment complex and buying a home valued at 80% of the median home price (a reasonable assumption for first-time buyers) with a 95% LTV loan."
They are comparing renting an apartment in a large complex with buying a home valued at 80% of the median home price, but 80% of the median home price would buy exceptional condo that is dramatically superior to the average apartment. There is a huge flaw in comparing a simple apartment, such as a two bed two bath to a free standing home where the median is likely to be a 3 bed, 3 bath or a 4 bed, 3 bath. Further the median house will contain a garage while most apartment complexes will rent out those garages separately. As a result they are dramatically miscalculating the costs between owning a home and renting an apartment. This is good quality work for someone trying to do it as a group project while getting a Bachelor's degree but it is terrible for a "consulting" group.
This just in, renters can save money by renting a ****hole rather than a luxury apartment. O M G? Really? That is so cool. Tell me more....
I'm off to work. Anyone listening to this fool is doing themselves a disservice. PS. I live near Denver, one of the areas where his blog says the cost of home ownership was +$250 per month compared to renting. I can assure you that the assertion is both false and downright stupid.
The author does not have an MBA, you may be confusing him with the company eponym. The author Erik Franks, holds a B.A. in Business and Communications from the University of California, Davis. Not that I think it matters in this case, just noting it for accuracy.
Don't be so quick to dismiss the benefit of the income tax benefit. Note that the cities where the author notes the largest benefits to renting also are the largest real estate costs and, presumably, the larger interest expense eligible for deduction. Also, these households tend to have other higher deductible expanses, most notably state taxes and/or property taxes and charity. In fact, I would guess most in these high income areas have cleared the standard deduction hurdle with these before they even consider the interest deduction. Particularly single people. And, finally, the standard deduction is NOT an allowable AMT deduction but the primary home interest deduction is so even if you have not hit the standard deduction limit, it can make a difference.
But, the biggest flaw, as was pointed out by SFBayBoomer way back in Post 11 is the author compared median detached house price to an average effective rent in a large complex. Given that latitude, I could make a case that a Porsche costs less than a Volkswagen
This whole discussion of the costs of renting vs. owning depends heavily on where one lives. A one-size-fits-all philosophy doesn't work for everyone.
Where I live in So. Cal, renting is cheaper. But I know in other parts of the country owning is cheaper. I envy those who live in a part of the U.S. where they're able to buy a reasonably priced property with few repair costs. That was not our experience. I thought I'd miss home ownership once we started renting, but I really haven't. Oh sure, I miss my colored walls and the newly remodeled kitchen we had vs. the white walls and white tiled counters of our rental. Part of me misses being able to customize our house, but a bigger part is more relieved not to feel obligated to update everything. Because that's a major factor in the resale value of a home here. Maybe not so much in other parts of the country, but in So. Cal, buyers want granite countertops and updated bathrooms & kitchens. Once we got the equity out of our house, I was relieved to be out from under the financial burden of property taxes and frequent home repairs.
Real estate prices in So. Cal are insane. And landlords here can't pass on all the related property taxes and repair costs to the tenant because the market won't support it. I rent a 3 bedroom home for less than I paid for a mortgage on an equivalent house. As a renter I don't have taxes, repair costs, or the burden of HOA fees for the nice tract we rent in. I know the owner is losing all that money because she would have to charge another $500 a month to break even, but her house would also sit unrented if she did that. She's just trying to make most of her mortgage and has to eat a big chunk of her monthly expenses. I know this because we're in a similar situation. We own a 2 bedroom condo and had to rent it out when we needed a larger place for our growing family. We couldn't sell it at the time because it was 50% underwater, so we became reluctant landlords. It's been 5 years and we're still underwater. We lose money every month, but we get the majority of the mortgage paid thanks to our renters. I would need to charge $250 more a month than I do just to break even--forget about making a profit. But the market for the area won't support a higher rent to cover all of our costs.
That being said, I know there are parts of the country where rentals are profitable for landlords precisely because it costs more to rent than to own in those areas. I just don't happen to live there. So people can't generalize. Renting vs. owning depends heavily on where one lives. I don't know that I'll ever own a house in So. Cal again. Believe me, I would love, love, love to leave Commifornia but my husband's job prospects are best here. If we can leave this God forsaken state in a few years once our oldest child is in college, we may once again own a home.
So you can't apply the costs of renting vs. owning equally across the country. There are many factors that come into play.
74% of renters have household incomes under 51k . they are likely dead in the water either way depending where they live . . they just may not be able to afford to buy or ever invest .
according to an article in TIME based on a paper published by the National Bureau of Economic Research:
Half of Americans Can’t Raise $2K in 30 Days
A quarter wouldn't be able to come up with $2,000 at all, and another 19% would have to pawn or sell some of their possessions to do so.
About what I would expect...
Some just spend like no tomorrow and make no excuses...
Many families are on some kind of assistance and having or earning too much threatens their way of life...
Decades of low income rental management leaves me with less than 5 success stories of people rising about and leaving assistance behind.
The opposite with generational dependence is the norm...
I abhor reoccurring expenses... that is why I have never paid for a cell, cable, etc... overtime the monthly charges add up to real money as one of my elderly friends was fond of saying.
If renting were cheaper the landlord wouldnt rent it to you. Over a long enough time owning is always cheaper hence why landlords can profit off of renting out a house.
Short term, renting may be cheaper. But over a long term buying is always cheaper.
1. Rent goes up every year. Mortgage payment doesn't.
2. PMI eventually goes away even if it means refinancing.
3. Eventually, the house is paid off.
4. Equity is a safety net in case you need cash. Rent is getting evicted right after a missed payment.
This is SO true! We make about 15% profit on our investment, annually, on our rental properties. If any of our tenants were to buy the multifamily, instead of renting a unit, they would not only be living for free, they would be making money.
If someone has existing housing costs regardless of whether they currently own or rent and they come into a large sum of money, what options do they have as a renter that they don't have as an owner? Even putting aside the fact that in my market, it costs me close to $1000 per month more to rent a comparable property, why would my housing costs even be a part of the equation if I came into a lump sum? If anything, since I already do own my home, I would not even need to consider buying a home as a way to invest a lump sum the way that a renter would be likely to do.
well say you owned a house and sold it or even rented and sold your business or inherited 500k , took a buy out at work , won a law suit etc .
you have 500k in cash . you could buy another house or a house if renting for cash and have maximum cost cutting with no mortgage .
you could rent and have somewhat higher costs but invest the 500k in a commercial property as an example with great growth potential then either the home appreciation or cost cutting ability of the house
you could take a mortgage , put down a chunk of money and buy the house and invest but depending on mortgage rates you may eat well in to the profits on the investment or in my case both wouldn't have enough money to buy the investment and at 6-7% mortgages couldn't afford the payments back then so doing both was out . .
so that is the options a renter with money can have .
in fact if you were a renter with money when i bought my first house in the early 1980's .
i paid 169k for my house and today it is worth 500-550k . so if you were a renter with some dough and decided to rent my house and put 169k in to the same fideity insight newsletter i use , the growth model would be worth 3.4 million today using just plain old fidelity funds . .
we could subtract decades of rent and taxes and buy two homes today .
so how each renters own personal situation stacks up and the resources they have are going to matter
Last edited by mathjak107; 09-08-2015 at 01:43 PM..
I believe it here in the Silicon Valley. My $1600 apartment rent equates to $350K+ for a starter 1 bed condo with $300+ HOA. Property tax goes up every year and HOA's like to hit you with assessments for maintenance projects. Plus it's up to you to repair or replace anything that breaks. Not seeing the value there.
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