Rent & Invest vs Mortgage for mid-30's saver

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Snowjob
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Rent & Invest vs Mortgage for mid-30's saver

Post by Snowjob » Wed Mar 21, 2018 5:23 am

I've been a renter my entire life, its been far cheaper than buying a house in my area. I've valued the flexibility it affords in the event of a relocation and I've been able to funnel the excess savings from not owning the house into the stock market. As I'm now in my mid 30's I've been thinking it would be a good experience to try home ownership, both from a learning perspective and to have a little more privacy and control complete over my space. The problem is I'm having difficulty making the switch from investing extra in the stock market to paying a mortgage! The market has been fantastic for the last 9 years and for the last 5 of those I've already reduced my savings to spend more on experiences, travel etc (great decision!)... but cutting back even further to buy a house?? I'm not sure I can stomach that. I've been wired to save. I came out of school about 18 months before the start of the great recession. Saw a bunch of my peers buying houses at the peak in 2007 and then struggle with that financially for quite some time. Those of us who rented and were lucky enough to keep our jobs were able to invest (if we chose) and reap the rewards of a great stock market recovery. Now I get valuations are nowhere near where they were back then, but there just seems to be this emotional hurdle about investing less. I suppose its a bit unreasonable for everyone to rent until they hit there retirement number before thinking of buying a house. For those of you who didn't buy a house out of necessity (family out grew a rental situation) did you cut back on your stock market contributions to do so? How did you rationalize that mentally?

pauliec84
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by pauliec84 » Wed Mar 21, 2018 6:54 am

I am in the exact same boat (mid-30's renter who has recently contemplated buying) and can definitely relate to not wanting to cut down on my monthly equity purchases (or for that matter liquidating some holdings to fund the down payment).

The main issue is to weigh the value of optionality/flexibility from renting, versus the gain in perhaps quality (for the price) in buying. Personally my biggest issue living in a large town/small city has been finding inventory at the price point we are looking at (we are a family who has outgrown our rental situation).

In terms of cost you need to compare the cost of renting with the the cost of the interest on the mortgage + taxes + maintenance estimate. If you can get something much better at that price from owning then it probably makes sense (depending on how much you value flexability). I made a reasonable spread sheet to model the decision that I can share with you if you PM me.

Another trick I employ is just multiplying the annual rent by your estimate of the rent vs own ratio (e.g. 20x assuming a 5% yield to landlord). That is an easy way quality of home for renting vs. buying.

bling
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by bling » Wed Mar 21, 2018 7:00 am

financially you'll almost always do better renting and investing the difference vs buying a home, but of course this depends on location and you'll want to do the calculations yourself.

however, people don't buy homes to be financially better off. they buy homes for other things like stability, size, good school districts, e.g. things that help you raise a family.

Jags4186
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by Jags4186 » Wed Mar 21, 2018 7:17 am

Buying is usually always more expensive than renting. But there are reasons beyond just running a rent vs buy calculation for that.

Most people who rent don’t care about the rental. I sure don’t. If something breaks where I live it doesn’t really bother me. Refrigerator is ugly? Oh well, not mine. Floors starting to warp a little? Don’t know why, don’t really care not my problem. If I owned I might want to upgrade the refrigerator, take care of little problems before they become big problems, fix little things which are cosmetic but don’t affect functionality.

Renting also allows you to live in a property for your needs right now, not your needs in the future. You might rent a 1 bedroom apartment with your new wife, but you wouldn’t raise a family in a 1 bedroom apartment. You could move to a 2 bedroom apartment when baby 1 comes, and then a 3 bedroom apartment when baby 2 comes. All the while you are paying for exactly what you need exactly when you need it. If you get married and decide to buy a home you aren’t going to buy a 1 bedroom home, then when baby 1 comes sell that house and buy a 2 bedroom home, then when baby 3 comes sell that house and buy a 3 bedroom home. You’re going to go out and buy a 3 bedroom home. This accellerates the cost of future needs into the present.

Rarely is the choice of rent vs buy really an option of rent property X or buy property X. Usually you are either going to rent property X or buy property Y. And when people buy they are more likely to overspend to get something “nice”. I know we sure are!

onetwothree
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by onetwothree » Wed Mar 21, 2018 7:22 am

I’m in a similar boat. Early thirties and just finally getting to maxing out all tax advantaged accounts. I’m having a real hard time justifying the purchase of a house; even though, our family will be growing to 5 members in the near future. I want a house so that I can provide my children with that American dream upbringing, but I’m having a hard time with reducing savings to pay a mortgage.

I hope some of the older members could chime in if they were in a similar situation, give their take on what they’ve done, and if they would’ve done it any differently.

gmaynardkrebs
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by gmaynardkrebs » Wed Mar 21, 2018 7:32 am

The answer is, it depends. New York Times has a rather sophisticated rent vs buy calculator that allows you to model your personal scenario. www.nytimes.com/interactive/2014/upshot ... lator.html (registration may be required). It includes inputs what you might earn by investing elsewhere, income tax rates, property taxes, maintenance/condo fees, insurance, how long you will stay, expected appreciation of both rents and property values, etc. I ran a few scenarios just to see. My takeway is that, given the huge tax advantages of owning, the mortgage interest deduction (recently narrowed, but still generous), and the hidden imputed income "deduction," as well as the possible, or perhaps likely, appreciation in home values, the rent and invest the difference school of thought starts out at a pretty large disadvantage when comparisons are made. But, for some situations, renting does make a lot of sense.

rudeboy
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by rudeboy » Wed Mar 21, 2018 10:18 am

Same boat as well. I'm self employed and income is finally getting to where I can max out tax-deferred investing space. I can sock away almost 55k and pay 12% tax on 38k taxable income.

Buying a house would mean a) I couldn't save as much, which would lead to b) a higher taxable income. It's like a double-whammy. I really don't think home ownership is worth it for me right now.

asif408
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by asif408 » Wed Mar 21, 2018 10:54 am

I live in a LCOL area than most here, and rents got to the point where they were about the same as a mortgage with taxes and interest. If I lived in an area where that was not the case, I would not rush out to buy a house. My situation was also where my spouse wanted to own vs rent, and once the rent vs. owning costs were similar, it pushed me in the direction of owning. If it was just me I would probably do as you do, and rent and invest.

As others have said, do the math and if it costs more to buy stick to renting. Also consider newer vs. old homes. We bought a new home, so our maintenance costs have been low. Older homes likely have more maintenance costs, so even if the cost estimate is close, the cost for buying an older home should be lower than a newer home vs renting.

Nate79
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by Nate79 » Wed Mar 21, 2018 12:09 pm

Make an excel chart and run the numbers out until age 100. Be sure to include all assumptions like tax/maintenance, appreciation, inflation, etc. You could run the numbers as a 15 year mortgage and once mortgage is gone to invest the mortgage payment, etc.

runner3081
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by runner3081 » Wed Mar 21, 2018 2:40 pm

bling wrote:
Wed Mar 21, 2018 7:00 am
financially you'll almost always do better renting and investing the difference vs buying a home, but of course this depends on location and you'll want to do the calculations yourself.

however, people don't buy homes to be financially better off. they buy homes for other things like stability, size, good school districts, e.g. things that help you raise a family.
Just curious, in markets where the cost of rent is double what the mortgage is, how does the math work (our mortgage is $850/month, it would be $1,800 to rent)? I do realize you have maintenance, prop taxes, etc, but there can still be a significant difference.

Also, once retired, is the theory that the money you invested will pay for 20+ years of rent compared to someone who paid off their mortgage and did not invest?

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willthrill81
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by willthrill81 » Wed Mar 21, 2018 2:44 pm

gmaynardkrebs wrote:
Wed Mar 21, 2018 7:32 am
The answer is, it depends. New York Times has a rather sophisticated rent vs buy calculator that allows you to model your personal scenario. www.nytimes.com/interactive/2014/upshot ... lator.html (registration may be required). It includes inputs what you might earn by investing elsewhere, income tax rates, property taxes, maintenance/condo fees, insurance, how long you will stay, expected appreciation of both rents and property values, etc. I ran a few scenarios just to see. My takeway is that, given the huge tax advantages of owning, the mortgage interest deduction (recently narrowed, but still generous), and the hidden imputed income "deduction," as well as the possible, or perhaps likely, appreciation in home values, the rent and invest the difference school of thought starts out at a pretty large disadvantage when comparisons are made. But, for some situations, renting does make a lot of sense.
That NYT calculator is excellent.

From what I've seen, it seems that the 100 largest metro areas in the U.S. are usually more favorable to renting and investing the difference, while owning is usually preferable elsewhere. For instance, rent on our home would be roughly equivalent to our 15 year mortgage, taxes, and insurance. Consequently, home ownership is far superior for us.
runner3081 wrote:
Wed Mar 21, 2018 2:40 pm
Just curious, in markets where the cost of rent is double what the mortgage is, how does the math work (our mortgage is $850/month, it would be $1,800 to rent)? I do realize you have maintenance, prop taxes, etc, but there can still be a significant difference.
In that situation, owning is almost certainly preferable to renting unless you plan on moving soon. If your net cash outflow is greater for renting than owning a similar home, it's virtually impossible for renting to come out ahead.
runner3081 wrote:
Wed Mar 21, 2018 2:40 pm
Also, once retired, is the theory that the money you invested will pay for 20+ years of rent compared to someone who paid off their mortgage and did not invest?
The theory is that if renting costs significantly less than owning an equivalent home, investing the difference in something like equities will eventually come out ahead. A small difference may not be enough to create this result, however, because your home equity is building over time with the mortgage due to principal reduction, inflation, and, potentially, appreciation.
Last edited by willthrill81 on Wed Mar 21, 2018 2:49 pm, edited 1 time in total.
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privatefarmer
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by privatefarmer » Wed Mar 21, 2018 2:52 pm

NYT has a good calculator on this.

When determining cost of ownership remember to subtract any appreciation you expect from the cost. For example, if you own a 500k house and expect it to keep pace with inflation, and appreciate by 3%/year, which is reasonable, you would SUBTRACT $15k/year from the cost which is very substantial.

But also, as you pay down your mortgage the interest cost obviously goes down HOWEVER the opportunity cost of having money tied up in equity instead of invested goes UP. And the opportunity cost is likely greater than the rate of interest, especially after the tax deduction, which is why many recommend keeping a big mortgage.

I recently purchased and can definitely say that there is a big quality of life increase from going to an apartment to a house. But I would not consider renting the same house, it’d cost too much. So if you’re comparing renting an apartment to owning a home you have to keep in mind that your QOL will likely be higher in the home.

All in all I would say that if you’re going to stay put for multiple decades owning a home likely is more cost efficient due to even modest price appreciation in your home. Even if your house simply keeps pace with inflation that can be tens of thousands of dollars/year. However the flexibility of renting cannot be overstated. I already have experienced looking into a new job and being “stuck” in the small geographical area that i am. Selling a house simply is too expensive when considering transaction costs, cannot be done overnight and is a lot of work/stress. So definitely keep in mind the HUGE gain you get in flexibility when renting in

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willthrill81
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by willthrill81 » Wed Mar 21, 2018 2:59 pm

For what it's worth, of the millionaires studied by Thomas Stanley, 97% of American millionaires owned their home. The 'affluent' seem strongly biased toward home ownership. Further, those same people Stanley studied only spent an average of about 1.5x their annual income on their home.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Meg77
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by Meg77 » Wed Mar 21, 2018 3:00 pm

Financially speaking, it's generally better to rent - especially when it costs less to rent than to own in your area for a similar property. This is largely because most people don't BUY what they would otherwise be comfortable RENTING. And they tend to upgrade their lifestyle dramatically when they go from renters to owners as well (suddenly you can justify everything from buying art to nicer furniture and landscaping).

For example, many young people are comfortable renting small 1 bedroom apartments. But then they buy 3-4 bedroom single family homes further away from their jobs when they get ready to buy. So obviously that's going to be dramatically more expensive than renting an apartment.

I bought a 1 bedroom condo in the same building/neighborhood I would have rented a similar apartment when I was 22. I took 20% out of the stock market for the down payment. Ten years later I sold it after getting married and moving. It went up in value (from $145k to $200k) despite the recession that took place during that time. But the stock market went up too. Even after the tax advantages of deducting some mortgage interest for a bit, and despite some increase in rents during that time, I calculated that I probably would have come out ahead leaving the down payment invested and just renting.

I don't regret buying/owning. I'm still a homeowner. But it's not cheaper by a long shot. And it's much bigger pain. Waking up at 3am to the water heater having ruptured, replacing the HVAC system which requires a crane rental, upgrading the countertops and having to research all that and deal with contractors, attending HOA meetings and dealing with lawsuits and drama there. Weekends wasted at Home Depot and completing basic DIY maintenance yourself. Ugh.

Here's another reason to rent: you sound single. Given your age, you may well find a partner in the next 5 years. If and when you want to live with said partner, buying and maintaining a home can be something you do together. Moving into someone else's place isn't ideal when you can start fresh together picking out a place and decorating it.
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bling
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by bling » Wed Mar 21, 2018 5:58 pm

willthrill81 wrote:
Wed Mar 21, 2018 2:59 pm
For what it's worth, of the millionaires studied by Thomas Stanley, 97% of American millionaires owned their home. The 'affluent' seem strongly biased toward home ownership. Further, those same people Stanley studied only spent an average of about 1.5x their annual income on their home.
too bad they don't break it down further. i'd be curious to see of that 97% what proportion don't have kids.

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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by spdoublebass » Wed Mar 21, 2018 6:55 pm

Thank you for starting this thread, I've learned a lot.

For some reason, I always had it in my head that it is better to own something. After talking to more people (my father being one of them), they all said renting is typically better financially. I was shocked to realize this, of course every situation is different.

My wife and I move frequently, and also with our work have to keep the possibility of a move always in our mind.

As stated above...I like the fact I'm only paying for what I need. I also have been very lucky so far finding places to rent that are also enjoyable to live in.

I do not mean to high jack your thread, but I'm curious if renting has lead you to hold REIT's in your portfolio separate, or if you hold them at market weight. There are several other posts on this subject. I had "heard" many times you might want to overweight REIT's some if you rent, but from reading the previous posts on the subject, some argue renting may not be a sound reason to overweight them. (Of course there are many other reasons for one to hold REIT's above market weight, I was just curious what other renters have been doing)
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quantAndHold
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by quantAndHold » Wed Mar 21, 2018 7:26 pm

Renting is almost always better than buying “right now.” But home ownership is a very good inflation hedge. If you’re planning on staying put for ten or 20 years, you’ll likely come out ahead if you own.

Bonhomie
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by Bonhomie » Wed Mar 21, 2018 8:16 pm

Agree with many posters that houses open the door for more spending than just the mortgage (furnishings, repairs, renovations, etc.). Houses can be money pits, time drains, and ball and chain. Stay flexible, rent a modest place, and invest the difference until you “need” a house. My 2-cents.

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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by willthrill81 » Wed Mar 21, 2018 8:54 pm

bling wrote:
Wed Mar 21, 2018 5:58 pm
willthrill81 wrote:
Wed Mar 21, 2018 2:59 pm
For what it's worth, of the millionaires studied by Thomas Stanley, 97% of American millionaires owned their home. The 'affluent' seem strongly biased toward home ownership. Further, those same people Stanley studied only spent an average of about 1.5x their annual income on their home.
too bad they don't break it down further. i'd be curious to see of that 97% what proportion don't have kids.
Without having all of the data in front of me, I couldn't say with confidence, but based on the interviews and other data provided, I'm sure that at least 80% have children, probably more like 90%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

ETadvisor
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by ETadvisor » Wed Mar 21, 2018 9:11 pm

Wow NYT calculator indicated that I would save over $1k owning rather than renting in my location.

gmaynardkrebs
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by gmaynardkrebs » Wed Mar 21, 2018 9:19 pm

ETadvisor wrote:
Wed Mar 21, 2018 9:11 pm
Wow NYT calculator indicated that I would save over $1k owning rather than renting in my location.
$1K per what?

ETadvisor
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by ETadvisor » Wed Mar 21, 2018 9:38 pm

gmaynardkrebs wrote:
Wed Mar 21, 2018 9:19 pm
ETadvisor wrote:
Wed Mar 21, 2018 9:11 pm
Wow NYT calculator indicated that I would save over $1k owning rather than renting in my location.
$1K per what?
I apologize for not being more specific. The calculator stated I would need to rent $1600 per month or lower based on the numbers I inputed.I know in my location SFH comparable to my personal residence can easily rent for $2800 per month or more. Hence over 1k per month difference. My PITI is greater than $1600 per month but less than $2800.

gmaynardkrebs
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by gmaynardkrebs » Wed Mar 21, 2018 9:57 pm

ETadvisor wrote:
Wed Mar 21, 2018 9:38 pm
gmaynardkrebs wrote:
Wed Mar 21, 2018 9:19 pm
ETadvisor wrote:
Wed Mar 21, 2018 9:11 pm
Wow NYT calculator indicated that I would save over $1k owning rather than renting in my location.
$1K per what?
I apologize for not being more specific. The calculator stated I would need to rent $1600 per month or lower based on the numbers I inputed.I know in my location SFH comparable to my home can easily rent for $2800 per month or more. Hence over 1k per month difference. My PITI is greater than $1600 per month but less than $2800.
That's interesting. In my area (DC), what I discovered playing with the NYT calculator is that if you buy a house and live in it yourself, you come out ahead after just three years, due to the favored tax treatment (this is for itemizers). These same tax subsidies have raised the prices so much, that buying a house for investment purposes and renting it out is usually cash flow negative. The rents, while high, will never cover your costs. The recent tax law changes have somewhat reduced the owner subsidy, but prices have not gone down, as least yet.
Last edited by gmaynardkrebs on Thu Mar 22, 2018 6:42 am, edited 1 time in total.

DoubleDraw
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by DoubleDraw » Wed Mar 21, 2018 11:18 pm

If you are single and don’t have a long term significant other or a dog then stick to renting as long as you can. The fewer things you have anchoring you in one place the better. It opens you up to so many opportunities in life. Relocate over seas? Easy. Take a work hiatus and travel for 6 months, pack your stuff in a storage unit and go. A work friend ends up moving and needs someone to house sit their house for a year. Free rent boom. Makes you a more flexible partner housing wise for anyone you start dating long term too.

Just my .02 - I bought a condo when I was young (24) and ended up regretting it even though it worked out ok in the end

MiddleOfTheRoad
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by MiddleOfTheRoad » Thu Mar 22, 2018 1:56 am

Take a step back and evaluate what life GOALS you are saving/investing for. If one of those goals is owning a house then make the necessary adjustments then buy it. Saving more for the sake of saving and ignoring your goals will cause regrets.

Snowjob
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Re: Rent & Invest vs Mortgage for mid-30's saver

Post by Snowjob » Thu Mar 22, 2018 6:25 pm

Thank you all for the responses I'll be reflecting on this more and revisiting the discussion this weekend. As with most big decisions there is a lot to go into it and I value all of your input =)

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