Renting vs Owning Your Home

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ignition
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Re: Renting vs Owning Your Home

Post by ignition » Mon May 28, 2018 10:17 am

runner540 wrote:
Mon May 28, 2018 10:11 am
ignition wrote:
Mon May 28, 2018 9:52 am
Price to rent is about 30 in your example, so I would say renting is better by a wide margin. A price to rent ratio above 20 indicates renting is better than buying.
Price to rent can show general trends over time, but it's too blunt an instrument for an individual decision or market. For example, a simple price/rent ratio does not account for prop tax being 3% versus 1% in other locales.
Agreed, but it gives an indication when you don't have all the numbers.
Ben Mathew wrote:
Sat May 26, 2018 1:48 pm
Yes, renting and investing 100% in stocks will probably net you more, but I don't think that's a level of risk that most people are comfortable with. If on the other hand, you hold some bonds, home equity is probably a better substitute -- higher return than inflation adjusted bonds, lower risk than nominal bonds.
Ok, 100% stocks might be a bit aggresive :). Let's put the 800K in a balanced portfolio (60% stocks/40% bonds) that returns 3.5% per year after inflation.

That would mean your portfolio throws off 28K after inflation, making renting the better deal by about 9K per year.

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Re: Renting vs Owning Your Home

Post by Ben Mathew » Mon May 28, 2018 11:03 am

nexesn wrote:
Sun May 27, 2018 10:01 pm
I find this to be an interesting thread. I'd like to add New York City into the mix. I know earlier in the thread someone said that buying in NYC made a lot of sense. However, I've come to think it seems a little crazy, at least right now. However, I might look back and think that I was crazy not to try and buy now.

Here are the numbers.
Electric, internet, etc all being similar in price.

Buying a 2 bedroom 2 bath apartment in NYC, in a good school district (Roughly 1100 - 1200 sqf):
20% - 30% required downpayment.
Cost of apartment is 2.2 - 2.8 million (obviously there are more expensive 2 bedrooms)
One time 1% tax on total purchase due to home costing over 1 million (Known as the Millionaires tax in NYC)
Monthly Maintenance (this includes property taxes) $2000 - $3000
-If one decided to sell said apartment, you must pay brokers fee of 6% (3% to buyers agent and 3% to sellers agent). Most places also require that you pay a 1 - 2 percent seller tax to the apartment unit.

Renting a 2 bedroom 2 bath in similar neighborhood in NYC (sqf might be a little less):
$6000 - $8000

Are you still better off buying? Seems to me one is better off renting....
Nose-bleed prices! Let's calculate the yield on owning this condo in NYC.

ANNUAL COSTS:

RENT: $7,000 * 12 = $84,000

OWNING: $2,500 * 12 = $30,000

So $2.5 million buys you an tax free rental savings of $84,000 - $30,000 = $54,000/yr. That's a tax shielded real return of $54,000/$2.5 million = 2.2% with no real price appreciation. With a real price appreciation of .5% or 1%, that becomes 2.7% or 3.2%. (The higher price to rent ratio in cities like New York reflects the market's belief that there will be greater price appreciation than average.)

So putting aside the substantial transaction costs of buying and selling, that's a good return in the current environment. It's less than stocks, and more than bonds. If you're young or risk tolerant and have close to 100% of your portfolio in stocks, there's no reason to switch. But if you have a lot of bonds in your portfolio, consider substituting with home equity -- the risk to reward ratio is better IMO.

Now for those transaction costs: 1% millionaire's tax at buy, 6% commission at sell, and 1.5% sales tax at sell, all add up to a whopping 8.5%. So even if you stay for 8 years, you're losing about 1% per year. That brings down the real yield to 1.2% (no appreciation) to 2.2% (1% appreciation). So with these transaction costs, you would have to either live there for a very long time to amortize the transaction costs, or expect some price appreciation in real terms. Another option is to try to lower the 6% commission costs by using flat fee brokers both when you buy and when you sell. I used a flat fee broker when I bought my current house, and got a substantial rebate. I intend to do the same when I sell as well. It's a substantial reduction in the transaction costs of owning a house.

On a more general note, when we see nose-bleed high real estate prices like $2.5 million for a condo in NYC, it feels really expensive. And yes, it is really expensive compared to what it used to be. But the past is the past. We have to compare it to the other options on the table now. All assets have gotten really expensive. Stocks are much more expensive than they used to be. Bonds are much more expensive than they used to be. Compared to these, a condo in NYC, even when priced at $2.5 million, could be a good deal. If you don't like these slim pickings, the only alternative is to hope that the current low-yield environment will revert to historical norms, park your money in cash or short term bonds, and wait for asset prices to fall. But that's market timing, and I haven't figured out know how to do that successfully. If I had stopped investing when I felt prices became too high and yields became too low, I would have stopped investing several years ago.

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Re: Renting vs Owning Your Home

Post by Ben Mathew » Mon May 28, 2018 11:22 am

runner540 wrote:
Mon May 28, 2018 8:14 am
here is some of the info you requested:

Both units are SFH, no HOA.
rent is $1750, not including utilities.
Prop tax: 2.7%
I estimated another 1.3-2.3% annually for the insurance and maintenance, so 4-5% of home value total for annual expenses.
The house already sold, so my question for you is, when a similar house comes on the market, how high is too high a price to buy at?
ANNUAL COSTS:

RENTING: $1750 * 12 = $21,000

OWNING:
Property tax: 2.7% * $375K = $10,125
Maintenance and insurance: 1.8% * $375K = $6,750
Total: $16,875

$375K for a house buys you an annual savings of $21,000 - $16,875 = $4,125. That's a tax-free real return of $4,125/$375.000 = 1.1%. Unless you add in significant price appreciation, that's barely better than inflation-indexed bonds. Renting is the winner here. Thanks for providing a counterexample.
Last edited by Ben Mathew on Tue May 29, 2018 1:36 am, edited 1 time in total.

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Re: Renting vs Owning Your Home

Post by Ben Mathew » Mon May 28, 2018 11:43 am

ignition wrote:
Mon May 28, 2018 10:17 am
[
Ben Mathew wrote:
Sat May 26, 2018 1:48 pm
Yes, renting and investing 100% in stocks will probably net you more, but I don't think that's a level of risk that most people are comfortable with. If on the other hand, you hold some bonds, home equity is probably a better substitute -- higher return than inflation adjusted bonds, lower risk than nominal bonds.
Ok, 100% stocks might be a bit aggresive :). Let's put the 800K in a balanced portfolio (60% stocks/40% bonds) that returns 3.5% per year after inflation.
But why not 60% stocks/40% home equity ?

Or if you're not comfortable with that, 60% stocks/20 % bonds/20% home equity?

If owning your home is comparable in safety to bonds while providing a higher return, these portfolios would net a higher return with the same amount of risk.

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Re: Renting vs Owning Your Home

Post by THY4373 » Mon May 28, 2018 12:36 pm

Admiral wrote:
Mon May 28, 2018 7:30 am
For the vast majority of households in the US, their home is their most valuable asset by far.

What does that tell you? What it doesn't tell you is that there are tens or scores of millions of households with large (mid to high-six figure) portfolios that they accumulated by renting, saving the difference, and investing it. There have been numerous studies about redlining and how wealth has been passed down to generations, or not. What these have shown is those who were unable to buy a home and were forced to rent ended up with less family wealth, period. Strict correlation and causation. This is still happening.
To be blunt I don't want to be like most US households. Most US households suck at savings and investing so the "forced" savings of owning a home is better than nothing. Also I don't think you should confuse those "forced" to rent with those like me who choose to rent. Very different scenarios, I could easily afford to buy the place I rent outright, it wouldn't even be 15% of my net worth. That is a very different situation than somebody forced to rent because they cannot save the necessary down-payment.
Last edited by THY4373 on Mon May 28, 2018 8:33 pm, edited 1 time in total.

ignition
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Re: Renting vs Owning Your Home

Post by ignition » Mon May 28, 2018 1:57 pm

Ben Mathew wrote:
Mon May 28, 2018 11:43 am
ignition wrote:
Mon May 28, 2018 10:17 am
[
Ben Mathew wrote:
Sat May 26, 2018 1:48 pm
Yes, renting and investing 100% in stocks will probably net you more, but I don't think that's a level of risk that most people are comfortable with. If on the other hand, you hold some bonds, home equity is probably a better substitute -- higher return than inflation adjusted bonds, lower risk than nominal bonds.
Ok, 100% stocks might be a bit aggresive :). Let's put the 800K in a balanced portfolio (60% stocks/40% bonds) that returns 3.5% per year after inflation.
But why not 60% stocks/40% home equity ?

Or if you're not comfortable with that, 60% stocks/20 % bonds/20% home equity?

If owning your home is comparable in safety to bonds while providing a higher return, these portfolios would net a higher return with the same amount of risk.
I think houses are more volatile than bonds during an economic crisis (2008 for example). It's just less obvious as your house price isn't quoted every single day.

Liquidity is also an issue. You can't just sell your house when you need cash and stocks are in the gutter. That's when bonds come in handy as they usually go up when stocks crash and people flee to safety.

Also, I'm not rich enough (yet?) to make a house 20 or 40% of my assets :)

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willthrill81
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Re: Renting vs Owning Your Home

Post by willthrill81 » Mon May 28, 2018 2:16 pm

ignition wrote:
Mon May 28, 2018 1:57 pm
Ben Mathew wrote:
Mon May 28, 2018 11:43 am
ignition wrote:
Mon May 28, 2018 10:17 am
[
Ben Mathew wrote:
Sat May 26, 2018 1:48 pm
Yes, renting and investing 100% in stocks will probably net you more, but I don't think that's a level of risk that most people are comfortable with. If on the other hand, you hold some bonds, home equity is probably a better substitute -- higher return than inflation adjusted bonds, lower risk than nominal bonds.
Ok, 100% stocks might be a bit aggresive :). Let's put the 800K in a balanced portfolio (60% stocks/40% bonds) that returns 3.5% per year after inflation.
But why not 60% stocks/40% home equity ?

Or if you're not comfortable with that, 60% stocks/20 % bonds/20% home equity?

If owning your home is comparable in safety to bonds while providing a higher return, these portfolios would net a higher return with the same amount of risk.
I think houses are more volatile than bonds during an economic crisis (2008 for example). It's just less obvious as your house price isn't quoted every single day.
But if we're treating the primary benefit of home ownership as the avoidance of rent, it's much more stable because rent prices don't fluctuate nearly as much as home prices do. During and after the financial crisis, rents in most areas hardly budged.
“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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Re: Renting vs Owning Your Home

Post by Ben Mathew » Mon May 28, 2018 4:34 pm

ignition wrote:
Mon May 28, 2018 1:57 pm
Ben Mathew wrote:
Mon May 28, 2018 11:43 am
ignition wrote:
Mon May 28, 2018 10:17 am
[
Ben Mathew wrote:
Sat May 26, 2018 1:48 pm
Yes, renting and investing 100% in stocks will probably net you more, but I don't think that's a level of risk that most people are comfortable with. If on the other hand, you hold some bonds, home equity is probably a better substitute -- higher return than inflation adjusted bonds, lower risk than nominal bonds.
Ok, 100% stocks might be a bit aggresive :). Let's put the 800K in a balanced portfolio (60% stocks/40% bonds) that returns 3.5% per year after inflation.
But why not 60% stocks/40% home equity ?

Or if you're not comfortable with that, 60% stocks/20 % bonds/20% home equity?

If owning your home is comparable in safety to bonds while providing a higher return, these portfolios would net a higher return with the same amount of risk.
I think houses are more volatile than bonds during an economic crisis (2008 for example). It's just less obvious as your house price isn't quoted every single day.
Even when the price of your home fluctuates, it won't affect your consumption because you still continue to live in it. That's the special insurance that home ownership provides, and why I consider it to be a safe asset comparable more to inflation-indexed bonds than to stocks or nominal bonds. Home price fluctuations become a problem only when you overbuy beyond what you need for your personal consumption (usually as a leveraged bet on house price appreciation).
ignition wrote:
Mon May 28, 2018 1:57 pm
Liquidity is also an issue. You can't just sell your house when you need cash and stocks are in the gutter. That's when bonds come in handy as they usually go up when stocks crash and people flee to safety.
Yes, liquidity during a downturn can be a problem. If your house is mostly paid off, you could dip into home equity. But if it's mostly financed, you could be underwater. So, if you lose your job during a downturn and need to live on your assets for a while, bonds would be better than a house with a mortgage. Note that the house with the mortgage is still safe in the long run. It just can't serve as a source of funds to tide you through a job loss during a downturn. Job loss alone is fine (you can dip into home equity). Downturn alone is fine (you can continue living in your house and paying your mortgage). But job loss + downturn together would be a problem. Bonds work best for that, but if you have enough stocks and home equity, that could work too.
ignition wrote:
Mon May 28, 2018 1:57 pm
Also, I'm not rich enough (yet?) to make a house 20 or 40% of my assets :)
The house does not have to be owned 100% free and clear to reap the benefits of ownership. You could start out with a mortgage, and work your way towards free-and-clear. You'll get the benefits in proportion to your home equity along the way.

usnaron
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Re: Renting vs Owning Your Home

Post by usnaron » Mon May 28, 2018 5:01 pm

I’ve been renting a 1500 sqft, two story townhouse in a very HCOL area in SoCal for the past 7 years. Similar ones are selling for 700-750k with 750/month HOA and 1.25% property tax. My rent is $2400 (was $2250 7 years ago). Appreciation has been negligible over the past 7 years. My monthly rent is only about $1k per month short of the hoa and tax bill each month. There is no way that buying would make financial sense for me. Instead I just continue to invest the extra $2k per month rental equity I’m earning.

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celia
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Re: Renting vs Owning Your Home

Post by celia » Mon May 28, 2018 6:07 pm

delamer wrote:
Thu May 24, 2018 4:45 pm
The OP’s premise seems false to me.

Bogleheads don’t advocate overbuying a house —

1. At the expense of investing.
2. Due to the high carrying and maintenance expenses.
3. With the idea that you can make a profit, particularly in the short run.
Not only are some Bogleheads renters and some are homeowners, but some are also landlords, so they can have another income stream and/or build wealth off the properties once they are sold. They are pretty much owning the rentals after making a financial decision.

We, on the other hand, decided to buy a house to avoid ever-increasing future rents, get all our "rent" back when we sell, and to deduct interest on our tax returns (financial decisions) and to provide stability (an emotional decision). We weren't specifically thinking of building wealth at the time. But 30-plus years later, we realized that it was also a financial decision in that our living expenses dropped after the house was paid off. It made the retirement timing decision easier.

Smorgasbord wrote:
Thu May 24, 2018 5:05 pm
bloom2708 wrote:
Thu May 24, 2018 9:01 am
This is good. Did you factor in home owners insurance vs renters insurance? $1,300 vs $70, so $1,230 per year more being in the house. Our home utilities are more than if we rent, but I can see why excluding that makes sense. Utilities and related vary quite a bit.

There is also a time/money factor with owning. It is kind of like having another .25 time job. Akin to having rental property. It takes work/time to keep and maintain and fix your home.
No, I didn't factor in renters insurance. I probably should have, but since before buying the house I was like the 63% of renters without renter's insurance, I didn't factor it in. Adding the insurance certainly would shift the numbers a bit, but probably not change the overall result.
To be fair, this insurance discussion is still not comparing apples to apples. The renter buys rental insurance to cover her clothes, furniture and electronics (the contents in the rented space), while the homeowner is insuring the building as well as the contents. I think the contents are insured for 10% more than the building is (unless you have riders), so the comparison of the cost of renter's insurance and homeowner's insurance premiums should probably multiply the renter's insurance premium by 11 to get an apples to apples comparison.

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Re: Renting vs Owning Your Home

Post by usnaron » Mon May 28, 2018 8:06 pm

THY4373 wrote:
Mon May 28, 2018 12:36 pm
Admiral wrote:
Mon May 28, 2018 7:30 am
For the vast majority of households in the US, their home is their most valuable asset by far.

What does that tell you? What it doesn't tell you is that there are tens or scores of millions of households with large (mid to high-six figure) portfolios that they accumulated by renting, saving the difference, and investing it. There have been numerous studies about redlining and how wealth has been passed down to generations, or not. What these have shown is those who were unable to buy a home and were forced to rent ended up with less family wealth, period. Strict correlation and causation. This is still happening.
To be blunt I don't want to be like most US households. Most US households suck at savings and investing so the "forced" savings of owning a home is better than nothing. Also I don't think you should not confuse those "forced" to rent with those like me who choose to rent. Very different scenarios, I could easily afford to buy the place I rent outright, it wouldn't even be 15% of my net worth. That is a very different situation than somebody forced to rent because they cannot save the necessary down-payment.
+1

lkeeble
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Re: Renting vs Owning Your Home

Post by lkeeble » Mon May 28, 2018 10:03 pm

I think there are too many variables to be able to say with any certainty whether a particular person with his/her own lifestyle and preferences will benefit more from one versus the other. For example:
* What will house prices do? Usually up, but sometimes down.
* If you buy, will you remain for a long time and pay off the house? Could be very good.
* If you buy, will you need to relocate after a short period? Could be very bad.
* Will you buy a house that ends up having expensive problems?
* What if your landlord decides to raise the rent by a lot?
* Lifestyle issues - maybe you'll want a dog and the landlord won't let you.
* What if you get divorced? Might be easier for you both if you are renting versus having to sell a house.
* Do you plan on having children? If so what about the school district and how does buying/renting affect that?
...and on and on, this is just off the top of my head.

Having said that, buying a house basically forces a person to save money and build equity. For most people I think that if they spent less by renting and had some extra money in their pocket they would be tempted to spend it. So I think buying a house *on average* results in a higher net worth. For people who have the intelligence and self control, renting and investing the savings in the stock market could be more profitable. But how many people have that level of intelligence and self control?

Finally, financial considerations aside, spending money often leads to more fun. So maybe the renter would have a more enjoyable life than the house owner even if they didn't have a higher net worth.

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Re: Renting vs Owning Your Home

Post by JustinR » Mon May 28, 2018 10:24 pm

lkeeble wrote:
Mon May 28, 2018 10:03 pm
I think there are too many variables to be able to say with any certainty whether a particular person with his/her own lifestyle and preferences will benefit more from one versus the other. For example:
* What will house prices do? Usually up, but sometimes down.
* If you buy, will you remain for a long time and pay off the house? Could be very good.
* If you buy, will you need to relocate after a short period? Could be very bad.
* Will you buy a house that ends up having expensive problems?
* What if your landlord decides to raise the rent by a lot?
* Lifestyle issues - maybe you'll want a dog and the landlord won't let you.
* What if you get divorced? Might be easier for you both if you are renting versus having to sell a house.
* Do you plan on having children? If so what about the school district and how does buying/renting affect that?
...and on and on, this is just off the top of my head.

Having said that, buying a house basically forces a person to save money and build equity. For most people I think that if they spent less by renting and had some extra money in their pocket they would be tempted to spend it. So I think buying a house *on average* results in a higher net worth. For people who have the intelligence and self control, renting and investing the savings in the stock market could be more profitable. But how many people have that level of intelligence and self control?

Finally, financial considerations aside, spending money often leads to more fun. So maybe the renter would have a more enjoyable life than the house owner even if they didn't have a higher net worth.
All of those "renter" problems are easily mitigated, especially if you're the typical Boglehead and have money. Renting gives you extreme flexibility, while allowing you to amass a bunch of money. Win-win.

Whereas if you buy, you basically have no control over any of those issues after the fact.

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Re: Renting vs Owning Your Home

Post by DVMResident » Mon May 28, 2018 10:47 pm

lkeeble wrote:
Mon May 28, 2018 10:03 pm
* What will house prices do? Usually up, but sometimes down.
...
Having said that, buying a house basically forces a person to save money and build equity. For most people I think that if they spent less by renting and had some extra money in their pocket they would be tempted to spend it. So I think buying a house *on average* results in a higher net worth.
Another reason buying *on average* results in higher net worth is inflation on leverage.

Hypothetical illustration: $100k house with $20k down experiences a 0% real/2% nominal gain. That's a $2k/10% gain (minus the costs of borrowing) on $20k equity the first year. The average results are quite good in addition to the forced savings. Of course, people sometimes end up underwater tragically and this benefit decays as a percent ROI overtime as equity builds, but has worked out for most Americans most of the time.

runner540
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Re: Renting vs Owning Your Home

Post by runner540 » Tue May 29, 2018 1:18 am

celia wrote:
Mon May 28, 2018 6:07 pm

To be fair, this insurance discussion is still not comparing apples to apples. The renter buys rental insurance to cover her clothes, furniture and electronics (the contents in the rented space), while the homeowner is insuring the building as well as the contents. I think the contents are insured for 10% more than the building is (unless you have riders), so the comparison of the cost of renter's insurance and homeowner's insurance premiums should probably multiply the renter's insurance premium by 11 to get an apples to apples comparison.
Celia, this is not the correct way to look at insurance. We are are trying to compare the "all in" costs of renting and buying. For renting, the structural insurance is baked into the rent they pay, because it's the landlord's problem. Same reason that we aren't adding property taxes to the rent: because the renter doesn't pay thise directly - they're again baked into rent.

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Re: Renting vs Owning Your Home

Post by VictoriaF » Tue May 29, 2018 11:28 am

lkeeble wrote:
Mon May 28, 2018 10:03 pm
Finally, financial considerations aside, spending money often leads to more fun. So maybe the renter would have a more enjoyable life than the house owner even if they didn't have a higher net worth.
A renter has a more enjoyable life because:
- she moves close to the job and avoids commute
- she spends less time with real estate agents, lawyers, and bankers
- she spends less time with plumbers, electricians, landscapers, and tree removers
- she spends less time at malls and with decorators
- she leaves home for long trips on a short notice, and
- she enjoys her Vanguard balance far more than she would have ever enjoyed home listings.

Victoria
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Re: Renting vs Owning Your Home

Post by Pajamas » Tue May 29, 2018 11:35 am

nexesn wrote:
Sun May 27, 2018 10:01 pm
One time 1% tax on total purchase due to home costing over 1 million (Known as the Millionaires tax in NYC)
That's generally referred to as the "mansion tax":

https://www.tax.ny.gov/bus/transfer/rptidx.htm

The "millionaires' tax" generally refers to a proposed tax on those with high incomes to raise funds for critical subway projects:

http://www.nydailynews.com/new-york/mil ... -1.3742858
nexesn wrote:
Sun May 27, 2018 10:01 pm
Are you still better off buying? Seems to me one is better off renting....
In NYC there is generally a huge difference between living in a co-op or condo apartment that you own vs. living in a rental building because the people who live in a condo or co-op building control the management of the building. Night and day difference in most cases. Might be less difference when comparing very expensive apartments or when renting in a co-op or condo building, but for anything around the average or below in a rental building, that is generally true.

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Re: Renting vs Owning Your Home

Post by willthrill81 » Tue May 29, 2018 3:04 pm

VictoriaF wrote:
Tue May 29, 2018 11:28 am
A renter has a more enjoyable life because...
Another list could be created as to why homeowners have a "more enjoyable life." In reality, it all depends on what each person wants. There's no need to attempt to convince anyone that owning or renting is 'better' because it's dependent on the person and the situation.
“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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Re: Renting vs Owning Your Home

Post by Engineer250 » Tue May 29, 2018 6:55 pm

Admiral wrote:
Mon May 28, 2018 7:30 am
Why would I not want to a) have an inflation-protected, cost-controlled asset as my largest monthly payment each month
I think this is the biggest advantage assuming you can afford it.

When I bought my home payment total was $2100 (I'm including taxes and insurance) and rent for a similar house in my neighborhood was $1800. That was at the bottom of the housing drop, and I only put 5% down before they started tightening requirements and wanting 20% again. You might think if I'd put $300 extra a month into the stock market I'd have done a lot better over the last 10 years, but rents don't stay flat.

I refinanced to lower rates and now pay $1600 a month, my pay has gone up, and the house next door to me was renting for $2700 a month. So while I may have missed out on investing for a few years, if I'd kept renting I'd have less money to invest now by that comparison. Rent is going up here faster than pay. Not enough building was going on during the recession, and combined with inflation and rising rates, rent is shooting up all over the city.

Everyone should do what works best for them and not get too hung up on telling other people how to live their lives. If renting works better for you, I am all for it. If buying works better, go for it.
Where the tides of fortune take us, no man can know.

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Re: Renting vs Owning Your Home

Post by Admiral » Tue May 29, 2018 7:18 pm

Engineer250 wrote:
Tue May 29, 2018 6:55 pm
Admiral wrote:
Mon May 28, 2018 7:30 am
Why would I not want to a) have an inflation-protected, cost-controlled asset as my largest monthly payment each month
I think this is the biggest advantage assuming you can afford it.

When I bought my home payment total was $2100 (I'm including taxes and insurance) and rent for a similar house in my neighborhood was $1800. That was at the bottom of the housing drop, and I only put 5% down before they started tightening requirements and wanting 20% again. You might think if I'd put $300 extra a month into the stock market I'd have done a lot better over the last 10 years, but rents don't stay flat.

I refinanced to lower rates and now pay $1600 a month, my pay has gone up, and the house next door to me was renting for $2700 a month. So while I may have missed out on investing for a few years, if I'd kept renting I'd have less money to invest now by that comparison. Rent is going up here faster than pay. Not enough building was going on during the recession, and combined with inflation and rising rates, rent is shooting up all over the city.

Everyone should do what works best for them and not get too hung up on telling other people how to live their lives. If renting works better for you, I am all for it. If buying works better, go for it.
Agreed. There is no "right" answer, since a) all real estate is local and b) all situations are different.

That said, there are some generalities that hold true. A home is an inflation hedge: the payment (P+I) stays the same regardless of inflation. I don't care how you feel about renting, or what your opinion is, but you simply cannot make a convincing argument that rents go down over long periods. They don't. At the very least, they keep up with inflation. So, even at a nominal inflation rate, rents may go up 1% per year. (And before you argue that r.e. taxes go up for owners: yes, I agree, and thus landlords raise rents.)

Even if we assume that a home has minimal appreciation (and, again, all r.e. is local), let's say that a home increases 1% in value each year.

So, 1% in value, 1% in inflation protection, or 2% per year, compounding over time. Add to that the forced savings (a portion of the money you pay goes into your own pocket in the form of equity) and in my view owning, in general, is a better deal, long term, PROVIDED one does not buy more home than one can reasonably afford AND provided one is not forced to sell at an inopportune time (like in 2008) AND provided one makes a reasonable downpayment so one has decent equity to start with.

Are there markets where renting can be a better deal? Of course. All r.e. is local. In NYC one may have $1500-$2500 in condo fees even for a modest apartment; in many other markets this expense simply does not exist. But, r.e. in NYC has also appreciated massively over the last 15-20 years, so perhaps it still works out for the buyer.

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Re: Renting vs Owning Your Home

Post by KlangFool » Tue May 29, 2018 7:40 pm

Admiral wrote:
Tue May 29, 2018 7:18 pm


Agreed. There is no "right" answer, since a) all real estate is local and b) all situations are different.

That said, there are some generalities that hold true. A home is an inflation hedge: the payment (P+I) stays the same regardless of inflation. I don't care how you feel about renting, or what your opinion is, but you simply cannot make a convincing argument that rents go down over long periods. They don't. At the very least, they keep up with inflation. So, even at a nominal inflation rate, rents may go up 1% per year. (And before you argue that r.e. taxes go up for owners: yes, I agree, and thus landlords raise rents.)

Even if we assume that a home has minimal appreciation (and, again, all r.e. is local), let's say that a home increases 1% in value each year.
Admiral,

The house's price over here in my neighborhood has not recovered back to the 2004/2005 level. Much less keeping up with the inflation.

<<Even if we assume that a home has a minimal appreciation (and, again, all r.e. is local), let's say that a home increases 1% in value each year. >>

All housing is local. Any general assumption is pointless.

KlangFool
Last edited by KlangFool on Wed May 30, 2018 8:39 am, edited 1 time in total.

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Re: Renting vs Owning Your Home

Post by VictoriaF » Wed May 30, 2018 8:35 am

willthrill81 wrote:
Tue May 29, 2018 3:04 pm
VictoriaF wrote:
Tue May 29, 2018 11:28 am
A renter has a more enjoyable life because...
Another list could be created as to why homeowners have a "more enjoyable life." In reality, it all depends on what each person wants. There's no need to attempt to convince anyone that owning or renting is 'better' because it's dependent on the person and the situation.
Yes, of course, an enjoyable life is in the eyes of the beholder, and much depends on the composition of one's household and the location and prices. And certainly we, renters, are not trying to convince others that renting is a universally best course of action.

However, the general wisdom about renting vs. owning is highly asymmetric. There is a wide-spread public perception that home ownership is an indicator of maturity, that home ownership is the path to comfortable living, and that renting is a sign of irresponsibility, immaturity, or character flaws. And so it is important to provide counter-examples of how intelligent people can be financially successful without owning their homes.

Victoria
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Re: Renting vs Owning Your Home

Post by pascal » Wed May 30, 2018 9:00 am

VictoriaF wrote:
Tue May 29, 2018 11:28 am

A renter has a more enjoyable life because:
- she moves close to the job and avoids commute
- she spends less time with real estate agents, lawyers, and bankers
- she spends less time with plumbers, electricians, landscapers, and tree removers
- she spends less time at malls and with decorators
- she leaves home for long trips on a short notice, and
- she enjoys her Vanguard balance far more than she would have ever enjoyed home listings.

Victoria
As a homeowner who thinks owning a home was a great financial decision I agree with what you said! :sharebeer
"Never underestimate the ability of a bad situation to get worse...rapidly." Ninegrams

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Re: Renting vs Owning Your Home

Post by ignition » Wed May 30, 2018 10:15 am

willthrill81 wrote:
Mon May 28, 2018 2:16 pm
ignition wrote:
Mon May 28, 2018 1:57 pm
Ben Mathew wrote:
Mon May 28, 2018 11:43 am
ignition wrote:
Mon May 28, 2018 10:17 am
[
Ben Mathew wrote:
Sat May 26, 2018 1:48 pm
Yes, renting and investing 100% in stocks will probably net you more, but I don't think that's a level of risk that most people are comfortable with. If on the other hand, you hold some bonds, home equity is probably a better substitute -- higher return than inflation adjusted bonds, lower risk than nominal bonds.
Ok, 100% stocks might be a bit aggresive :). Let's put the 800K in a balanced portfolio (60% stocks/40% bonds) that returns 3.5% per year after inflation.
But why not 60% stocks/40% home equity ?

Or if you're not comfortable with that, 60% stocks/20 % bonds/20% home equity?

If owning your home is comparable in safety to bonds while providing a higher return, these portfolios would net a higher return with the same amount of risk.
I think houses are more volatile than bonds during an economic crisis (2008 for example). It's just less obvious as your house price isn't quoted every single day.
But if we're treating the primary benefit of home ownership as the avoidance of rent, it's much more stable because rent prices don't fluctuate nearly as much as home prices do. During and after the financial crisis, rents in most areas hardly budged.
All I'm saying is that a home is more volatile and illiquid than bonds so not a good substitute for bonds and not comparable in safety. In my eyes bonds are in a portfolio to provide stability and liquidity when you're withdrawing money from your portfolio ie you use bonds to cover your expenses in a downturn so you can let your stocks recover. A house can't do that effectively. They just have different functions in a portfolio.

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Re: Renting vs Owning Your Home

Post by willthrill81 » Wed May 30, 2018 10:46 am

ignition wrote:
Wed May 30, 2018 10:15 am
willthrill81 wrote:
Mon May 28, 2018 2:16 pm
ignition wrote:
Mon May 28, 2018 1:57 pm
Ben Mathew wrote:
Mon May 28, 2018 11:43 am
ignition wrote:
Mon May 28, 2018 10:17 am
[

Ok, 100% stocks might be a bit aggresive :). Let's put the 800K in a balanced portfolio (60% stocks/40% bonds) that returns 3.5% per year after inflation.
But why not 60% stocks/40% home equity ?

Or if you're not comfortable with that, 60% stocks/20 % bonds/20% home equity?

If owning your home is comparable in safety to bonds while providing a higher return, these portfolios would net a higher return with the same amount of risk.
I think houses are more volatile than bonds during an economic crisis (2008 for example). It's just less obvious as your house price isn't quoted every single day.
But if we're treating the primary benefit of home ownership as the avoidance of rent, it's much more stable because rent prices don't fluctuate nearly as much as home prices do. During and after the financial crisis, rents in most areas hardly budged.
All I'm saying is that a home is more volatile and illiquid than bonds so not a good substitute for bonds and not comparable in safety. In my eyes bonds are in a portfolio to provide stability and liquidity when you're withdrawing money from your portfolio ie you use bonds to cover your expenses in a downturn so you can let your stocks recover. A house can't do that effectively. They just have different functions in a portfolio.
I agree that they serve a different function, but a paid-off home does provide stability, arguably more so than a bond, and you can't live in a bond. :wink:
“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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Re: Renting vs Owning Your Home

Post by THY4373 » Wed May 30, 2018 11:37 am

VictoriaF wrote:
Wed May 30, 2018 8:35 am

Yes, of course, an enjoyable life is in the eyes of the beholder, and much depends on the composition of one's household and the location and prices. And certainly we, renters, are not trying to convince others that renting is a universally best course of action.

However, the general wisdom about renting vs. owning is highly asymmetric. There is a wide-spread public perception that home ownership is an indicator of maturity, that home ownership is the path to comfortable living, and that renting is a sign of irresponsibility, immaturity, or character flaws. And so it is important to provide counter-examples of how intelligent people can be financially successful without owning their homes.

Victoria
+1

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Re: Renting vs Owning Your Home

Post by THY4373 » Wed May 30, 2018 11:39 am

Admiral wrote:
Mon May 28, 2018 7:30 am
Why would I not want to a) have an inflation-protected, cost-controlled asset as my largest monthly payment each month
Personally I like my savings/investments to be my "largest monthly payment" each month but to each their own.

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Re: Renting vs Owning Your Home

Post by Ben Mathew » Wed May 30, 2018 12:46 pm

VictoriaF wrote:
Wed May 30, 2018 8:35 am
There is a wide-spread public perception that home ownership is an indicator of maturity, that home ownership is the path to comfortable living, and that renting is a sign of irresponsibility, immaturity, or character flaws.
That's because most people don't save much, period. In that world, homeowners come across as a bit more financially responsible because they sseem to have saved enough to make a down payment and, who knows, maybe built up some home equity over time. But with the easy access to HELOCs and refinancing, the home equity part is anybody's guess now. And with easier access to index funds, ETFs, online brokerages and workplace retirement accounts, combined with greater job mobility, high net worth renters such as yourself might become more common and familiar.
VictoriaF wrote:
Wed May 30, 2018 8:35 am
And so it is important to provide counter-examples of how intelligent people can be financially successful without owning their homes.
You could give the example of Sylvia Bloom, the Brooklyn secretary who quietly amassed more than $9 million. The article states she and her husband (a firefighter and schoolteacher) lived in a rent-controlled apartment.

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Re: Renting vs Owning Your Home

Post by KlangFool » Wed May 30, 2018 1:01 pm

Ben Mathew wrote:
Wed May 30, 2018 12:46 pm
VictoriaF wrote:
Wed May 30, 2018 8:35 am
There is a wide-spread public perception that home ownership is an indicator of maturity, that home ownership is the path to comfortable living, and that renting is a sign of irresponsibility, immaturity, or character flaws.
That's because most people don't save much, period. In that world, homeowners come across as a bit more financially responsible because they sseem to have saved enough to make a down payment and, who knows, maybe built up some home equity over time. But with the easy access to HELOCs and refinancing, the home equity part is anybody's guess now. And with easier access to index funds, ETFs, online brokerages and workplace retirement accounts, combined with greater job mobility, high net worth renters such as yourself might become more common and familiar.
Ben Mathew,

I disagreed.

1) Average people tend to overspend more on housing when they buy.

2) Average people have little to no savings. Aka, close to zero emergency fund.

3) So, if you throw in a minor financial emergency that occurs regularly in a person's life, the house owner is more likely to be totally wiped out than a renter.

KlangFool

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Re: Renting vs Owning Your Home

Post by TXJeff » Wed May 30, 2018 2:54 pm

Ben Mathew wrote:
Thu May 24, 2018 12:05 am

The home you own and live in should be viewed as a safe asset in your portfolio. In the risk spectrum, you should consider your owned home significantly safer than stocks or nominal bonds, and comparable really to inflation-indexed bonds.
OP, I admire your enthusiasm, but when it comes to Seattle real estate, I just can’t let this claim stand. It is simply wrong. Why? In a word: “earthquake.” Or make that three words: “Cascadia subduction zone.” Feel that clenching in the pit of your stomach? That’s you facing what experts know: there is a one in three chance that Seattle will experience an 8+ magnitude earthquake in the next 50 years. And only 11% of Seattle homeowners have earthquake insurance—a number that is low because coverage terms are generally so bad.

I’ll set aside the issue of who comes out with less financial devastation from this all-too-likely catastrophe, renters or homeowners—and just say that there is no good “foundation” for claiming that Seattle property is as risk free as as TIP’s.

For more info on Seattle’s earthquake risk, see this well-researched New Yorker article: https://www.newyorker.com/magazine/2015 ... ly-big-one

To calculate the risk to your particular property, use this handy-dandy “Seattle Natural Hazard Explorer” map. Just make sure you select the tab for “Earthquakes.” For the moment, ignore all those tabs labeled “Tsunami,” “Landslide,” “Flooding” and "Liquefaction."
http://seattlecitygis.maps.arcgis.com/a ... 71076f9b5b

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Re: Renting vs Owning Your Home

Post by Ben Mathew » Wed May 30, 2018 3:50 pm

TXJeff wrote:
Wed May 30, 2018 2:54 pm
Ben Mathew wrote:
Thu May 24, 2018 12:05 am

The home you own and live in should be viewed as a safe asset in your portfolio. In the risk spectrum, you should consider your owned home significantly safer than stocks or nominal bonds, and comparable really to inflation-indexed bonds.
OP, I admire your enthusiasm, but when it comes to Seattle real estate, I just can’t let this claim stand. It is simply wrong. Why? In a word: “earthquake.” Or make that three words: “Cascadia subduction zone.” Feel that clenching in the pit of your stomach? That’s you facing what experts know: there is a one in three chance that Seattle will experience an 8+ magnitude earthquake in the next 50 years. And only 11% of Seattle homeowners have earthquake insurance—a number that is low because coverage terms are generally so bad.
I am aware of the earthquake risks in Seattle, and have taken steps to mitigate them. I got a seismic retrofit done, and purchased the optional "earthquake and volcanic eruption" coverage on my homewoners insurance for an additional $445 / yr. The deductible on the earthquake insurance is 15%, which doesn't worry me too much. I'm much more worried about risks to life and limb in the event of "the big one". That wouldn't go away as a renter.
TXJeff wrote:
Wed May 30, 2018 2:54 pm
there is no good “foundation” for claiming that Seattle property is as risk free as as TIP’s.
Owning a home is not risk-free. Besides physical risks like earthquakes and floods, there are also the risks of hidden defects, changes in property tax rates or maintenance, home price declines when you need to tap into home equity (job loss, or end of life). We could differ in our estimates of how big these risks are. But note that TIPS are not perfectly safe either. The probability that the U.S. government will renege is negligibly small, but here are two non-trivial risks of TIPS that would worry me:

(1) There really are many ways to measure inflation. You are at the mercy of the official measure, which may or may not reflect your actual costs.

(2) Your costs in a high COLA could be much more than the average. Would purchasing TIPS years ago ensure you that you could continue to rent in NYC or San Francisco as rents soared? No! Owning would have protected you better.

Owning a home and holding TIPS are comparable in the sense that both are fairly safe but not perfectly safe. They are both a lot safer than nominal bonds and stocks. I grant however that all risks considered, TIPS is probably safer. I should have said "more comparable" instead of "comparable" in the earlier posts.

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Re: Renting vs Owning Your Home

Post by EddyB » Wed May 30, 2018 4:07 pm

VictoriaF wrote:
Tue May 29, 2018 11:28 am
lkeeble wrote:
Mon May 28, 2018 10:03 pm
Finally, financial considerations aside, spending money often leads to more fun. So maybe the renter would have a more enjoyable life than the house owner even if they didn't have a higher net worth.
A renter has a more enjoyable life because:
- she moves close to the job and avoids commute
- she spends less time with real estate agents, lawyers, and bankers
- she spends less time with plumbers, electricians, landscapers, and tree removers
- she spends less time at malls and with decorators
- she leaves home for long trips on a short notice, and
- she enjoys her Vanguard balance far more than she would have ever enjoyed home listings.

Victoria
I've been a renter (of numerous apartments and one house), a homeowner and a landlord. I've generally been happy with each, and haven't stressed out much over the related decisions. The time I had six weeks to clear out of a rental when my landlord decided to sell it, in a famously tight housing market, was the time I found housing to be most stressful. My prior (owned) home also turned out to be considerably cheaper than renting, although I wasn't counting on that when I bought it.

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Re: Renting vs Owning Your Home

Post by TXJeff » Wed May 30, 2018 4:09 pm

Ben Mathew wrote:
Thu May 24, 2018 12:05 am
I am aware of the earthquake risks in Seattle, and have taken steps to mitigate them. I got a seismic retrofit done, and purchased the optional "earthquake and volcanic eruption" coverage on my homewoners insurance
Kudos on the preparation, and I hope you never need to use that coverage!

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Re: Renting vs Owning Your Home

Post by VictoriaF » Wed May 30, 2018 4:25 pm

EddyB wrote:
Wed May 30, 2018 4:07 pm
VictoriaF wrote:
Tue May 29, 2018 11:28 am
lkeeble wrote:
Mon May 28, 2018 10:03 pm
Finally, financial considerations aside, spending money often leads to more fun. So maybe the renter would have a more enjoyable life than the house owner even if they didn't have a higher net worth.
A renter has a more enjoyable life because:
- she moves close to the job and avoids commute
- she spends less time with real estate agents, lawyers, and bankers
- she spends less time with plumbers, electricians, landscapers, and tree removers
- she spends less time at malls and with decorators
- she leaves home for long trips on a short notice, and
- she enjoys her Vanguard balance far more than she would have ever enjoyed home listings.

Victoria
I've been a renter (of numerous apartments and one house), a homeowner and a landlord. I've generally been happy with each, and haven't stressed out much over the related decisions. The time I had six weeks to clear out of a rental when my landlord decided to sell it, in a famously tight housing market, was the time I found housing to be most stressful. My prior (owned) home also turned out to be considerably cheaper than renting, although I wasn't counting on that when I bought it.
I had a similar situation about 10 years ago. I was renting in an older building in an excellent location. A developer has purchased several rental buildings on the block to build upscale condominiums. I was annoyed, obviously. However, in my case, the developer has hired a company to assist all residents with relocations. We had a 6-months notice about the need to vacate our apartments. For 6 months we were getting referrals to other rental buildings, to moving companies, financial support offered by the company, and our privileges for buying condominiums in the new building after it is complete. That was before the 2008-2009 crisis, and buying was actually difficult.

I have investigated rental options in the areas I wanted to live and found a few places that were suitable, but not excellent. Then, a few weeks before I had to leave my place, I found a perfect apartment and moved in immediately. My story had a positive outcome. But for the sake of the argument, I could have moved into a worse apartment, farther away from Metro or more expensive, and I would still be fine.

Compare this to recent Bogleheads sad stories of ownership. One guy is being sued by his neighbor because his contractor has replaced his roof shingles with a slightly different color. Another guy is annoyed with a new neighbor whose property looks like a war zone. There are many many more dismal ownership stories. Examples do not prove a rule, but logic suggests that when you wish to move out as an owner:
- it's a much more complex and expensive process than having to vacate a rented apartment, and
- the circumstances that force you to move out are also the circumstances that will reduce the pool of potential buyers.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Re: Renting vs Owning Your Home

Post by pascal » Wed May 30, 2018 11:36 pm

This discussion is like the one we had in elementary school of “which is the best color” which as we all know is RED :beer
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Re: Renting vs Owning Your Home

Post by AerialWombat » Thu May 31, 2018 1:08 am

pascal wrote:
Wed May 30, 2018 11:36 pm
This discussion is like the one we had in elementary school of “which is the best color” which as we all know is RED :beer
Now you listen here, if it ain’t PURPLE, it ain’t nothin’! :)

The rent vs buy debate is impossible to settle, because the correct answer is extremely individualistic. Factors such as ratio between market rents and market values, individual longevity in the home, etc. Too many variables for a blanket answer.

I do know this, however: In the two cities I own properties, all my tenants would be mathematically better off buying my houses instead of renting them IF they planned on staying for several years and IF they could get my same loan terms and IF they could buy at the prices I did over the last three years.

Why? Because I price maintenance, vacancy, and all my other costs into the rent PLUS a monthly profit for myself AND my local market conditions let me get away with charging that price.

See all the stars that have to align? I’m profitable, and my renters are paying for that. They are paying more than cost of ownership, plus I get the tax breaks.

This math doesn’t work in every part of the country. I know plenty of landlords with negative cash flow — they are effectively subsidizing their tenants cost of living. For their tenants, it’s cheaper to rent.

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Re: Renting vs Owning Your Home

Post by jehovasfitness » Thu May 31, 2018 6:45 am

tennisplyr wrote:
Thu May 24, 2018 6:54 am
Sometimes life isn't about money.

+1

longinvest
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Re: Renting vs Owning Your Home

Post by longinvest » Thu May 31, 2018 7:17 am

AerialWombat wrote:
Thu May 31, 2018 1:08 am
I do know this, however: In the two cities I own properties, all my tenants would be mathematically better off buying my houses instead of renting them IF they planned on staying for several years and IF they could get my same loan terms and IF they could buy at the prices I did over the last three years.

Why? Because I price maintenance, vacancy, and all my other costs into the rent PLUS a monthly profit for myself AND my local market conditions let me get away with charging that price.

See all the stars that have to align? I’m profitable, and my renters are paying for that. They are paying more than cost of ownership, plus I get the tax breaks.
The fact that the landlord is making a profit doesn't imply that a long-term renter is worst off due to various considerations:
  • The price of a rental building is sometimes significantly lower than the sum of the prices of individual condos in an identical condo building. (It's the case where I live).
  • City taxes on a rental building is sometimes significantly lower than the sum of city taxes on individual condos in an identical condo building. (It's the case where I live).
  • A landlord owning several rental buildings can benefit from economies of scale unavailable to individual unit owners and hard to get for home-owner associations composed of amateurs.
  • The landlord will try to minimize his costs; a management company serving a home-owner association will try to maximize its fees and the kickbacks it collects from friendly contractors (all paid by individual condo owners through higher condo fees).
  • Individual owners most often discount their own time, when working on various home-ownership tasks, at 0$/hour. This is time that renters get to enjoy or that they can use to make more money with a side job or with highly-paid overtime work.
What really makes a difference, in the end, is discipline. A renter who saves and invests is likely to end up in a good financial position. An owner who doesn't use his home as a piggy bank (with a HELOC) and also saves and invests (as not to end up house poor) is likely to end up in a good financial position, too.
Last edited by longinvest on Thu May 31, 2018 8:45 am, edited 4 times in total.
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Re: Renting vs Owning Your Home

Post by ignition » Thu May 31, 2018 7:28 am

willthrill81 wrote:
Wed May 30, 2018 10:46 am
ignition wrote:
Wed May 30, 2018 10:15 am
willthrill81 wrote:
Mon May 28, 2018 2:16 pm
ignition wrote:
Mon May 28, 2018 1:57 pm
Ben Mathew wrote:
Mon May 28, 2018 11:43 am


But why not 60% stocks/40% home equity ?

Or if you're not comfortable with that, 60% stocks/20 % bonds/20% home equity?

If owning your home is comparable in safety to bonds while providing a higher return, these portfolios would net a higher return with the same amount of risk.
I think houses are more volatile than bonds during an economic crisis (2008 for example). It's just less obvious as your house price isn't quoted every single day.
But if we're treating the primary benefit of home ownership as the avoidance of rent, it's much more stable because rent prices don't fluctuate nearly as much as home prices do. During and after the financial crisis, rents in most areas hardly budged.
All I'm saying is that a home is more volatile and illiquid than bonds so not a good substitute for bonds and not comparable in safety. In my eyes bonds are in a portfolio to provide stability and liquidity when you're withdrawing money from your portfolio ie you use bonds to cover your expenses in a downturn so you can let your stocks recover. A house can't do that effectively. They just have different functions in a portfolio.
I agree that they serve a different function, but a paid-off home does provide stability, arguably more so than a bond, and you can't live in a bond. :wink:
Sure, I don't think I said otherwise. I was comparing it to bonds when you need to withdraw cash from your portfolio.

What I'm saying is:

- based on the example Ben provided, renting is probably better from a purely mathematical point of view, unless the house (and rent) keeps appreciating at a rate higher than inflation.
- a house and bonds don't have the same risk profile

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Re: Renting vs Owning Your Home

Post by smitcat » Thu May 31, 2018 7:55 am

KlangFool wrote:
Wed May 30, 2018 1:01 pm
Ben Mathew wrote:
Wed May 30, 2018 12:46 pm
VictoriaF wrote:
Wed May 30, 2018 8:35 am
There is a wide-spread public perception that home ownership is an indicator of maturity, that home ownership is the path to comfortable living, and that renting is a sign of irresponsibility, immaturity, or character flaws.
That's because most people don't save much, period. In that world, homeowners come across as a bit more financially responsible because they sseem to have saved enough to make a down payment and, who knows, maybe built up some home equity over time. But with the easy access to HELOCs and refinancing, the home equity part is anybody's guess now. And with easier access to index funds, ETFs, online brokerages and workplace retirement accounts, combined with greater job mobility, high net worth renters such as yourself might become more common and familiar.
Ben Mathew,

I disagreed.

1) Average people tend to overspend more on housing when they buy.

2) Average people have little to no savings. Aka, close to zero emergency fund.

3) So, if you throw in a minor financial emergency that occurs regularly in a person's life, the house owner is more likely to be totally wiped out than a renter.

KlangFool
Hello KlangFool -
I took some liberties and 'fixed' this rule for what I have observed in life.
"1) Average people tend to overspend more on everything versus their income and budget when they buy."

KlangFool
Posts: 9969
Joined: Sat Oct 11, 2008 12:35 pm

Re: Renting vs Owning Your Home

Post by KlangFool » Thu May 31, 2018 8:28 am

smitcat wrote:
Thu May 31, 2018 7:55 am
KlangFool wrote:
Wed May 30, 2018 1:01 pm
Ben Mathew wrote:
Wed May 30, 2018 12:46 pm
VictoriaF wrote:
Wed May 30, 2018 8:35 am
There is a wide-spread public perception that home ownership is an indicator of maturity, that home ownership is the path to comfortable living, and that renting is a sign of irresponsibility, immaturity, or character flaws.
That's because most people don't save much, period. In that world, homeowners come across as a bit more financially responsible because they sseem to have saved enough to make a down payment and, who knows, maybe built up some home equity over time. But with the easy access to HELOCs and refinancing, the home equity part is anybody's guess now. And with easier access to index funds, ETFs, online brokerages and workplace retirement accounts, combined with greater job mobility, high net worth renters such as yourself might become more common and familiar.
Ben Mathew,

I disagreed.

1) Average people tend to overspend more on housing when they buy.

2) Average people have little to no savings. Aka, close to zero emergency fund.

3) So, if you throw in a minor financial emergency that occurs regularly in a person's life, the house owner is more likely to be totally wiped out than a renter.

KlangFool
Hello KlangFool -
I took some liberties and 'fixed' this rule for what I have observed in life.
"1) Average people tend to overspend more on everything versus their income and budget when they buy."
smitcat,

You are correct. But, the difference is

A) Buying a house tend to be the largest purchase of a person's life.

B) It is usually purchased with a long-term loan with a claim to future income.

Hence, the average person may recover from their overspending of other items. But, overspending on house purchase is one of those mistakes that is fatal to their financial lives.

KlangFool

smitcat
Posts: 1768
Joined: Mon Nov 07, 2016 10:51 am

Re: Renting vs Owning Your Home

Post by smitcat » Thu May 31, 2018 8:41 am

KlangFool wrote:
Thu May 31, 2018 8:28 am
smitcat wrote:
Thu May 31, 2018 7:55 am
KlangFool wrote:
Wed May 30, 2018 1:01 pm
Ben Mathew wrote:
Wed May 30, 2018 12:46 pm
VictoriaF wrote:
Wed May 30, 2018 8:35 am
There is a wide-spread public perception that home ownership is an indicator of maturity, that home ownership is the path to comfortable living, and that renting is a sign of irresponsibility, immaturity, or character flaws.
That's because most people don't save much, period. In that world, homeowners come across as a bit more financially responsible because they sseem to have saved enough to make a down payment and, who knows, maybe built up some home equity over time. But with the easy access to HELOCs and refinancing, the home equity part is anybody's guess now. And with easier access to index funds, ETFs, online brokerages and workplace retirement accounts, combined with greater job mobility, high net worth renters such as yourself might become more common and familiar.
Ben Mathew,

I disagreed.

1) Average people tend to overspend more on housing when they buy.

2) Average people have little to no savings. Aka, close to zero emergency fund.

3) So, if you throw in a minor financial emergency that occurs regularly in a person's life, the house owner is more likely to be totally wiped out than a renter.

KlangFool
Hello KlangFool -
I took some liberties and 'fixed' this rule for what I have observed in life.
"1) Average people tend to overspend more on everything versus their income and budget when they buy."
smitcat,

You are correct. But, the difference is

A) Buying a house tend to be the largest purchase of a person's life.

B) It is usually purchased with a long-term loan with a claim to future income.

Hence, the average person may recover from their overspending of other items. But, overspending on house purchase is one of those mistakes that is fatal to their financial lives.

KlangFool
Maybe based upon your experiences - I have these experiences very recently with many folks working with us....
- large car leases for luxury/sports cars (2 @ $600+ each)
- Credit card bills in excess of $20K balances with penalties
- School loans at $50K plus with 'minimum' pay reuslting in increassing balances
- Electronic devise bills reaching $500+ per month or more

With a home you can sublet a room, rent it, or sell it, as well as much lower credit terms - the items above have none of these flexibilities to help supply relief.

Admiral
Posts: 1303
Joined: Mon Oct 27, 2014 12:35 pm

Re: Renting vs Owning Your Home

Post by Admiral » Thu May 31, 2018 8:53 am

THY4373 wrote:
Wed May 30, 2018 11:39 am
Admiral wrote:
Mon May 28, 2018 7:30 am
Why would I not want to a) have an inflation-protected, cost-controlled asset as my largest monthly payment each month
Personally I like my savings/investments to be my "largest monthly payment" each month but to each their own.
You've confused "payment" with "investment" which I assume you understand was my point. But in fact you've inadvertently pointed out that a fixed mortgage payment is, partially and in an increasing percentage over time, an investment. It's an investment in real property, which you can keep and live in, or sell. Rent, on the other hand, is not an investment. It is a pure expense. You get something for it--a place to live--but you are not acquiring an asset.

If someone overpays for a home and thus negatively impacts their ability to save and invest versus someone who pays less in rent and invests more...then sure, that was not a wise purchase decision. But life is full of poor purchase decisions. All things being equal, I'd rather my housing money be put into an inflation-protected asset that I own, rather than something someone else owns. I take pleasure in personal agency: making my home exactly the way I want it, fixing it (or not) when and how I want to. Owning a home is not appropriate for every person, nor is renting.

In my experience, where I live, the homeowners (many of whom are my friends) care about their properties, care about the street, and care about the neighborhood. We understand that our actions impact the quality of life of others who live nearby. The renters--again, in my experience--tend to be transient and don't care. The landlords will do what is needed to maximize their profits but that's about it.

YMMV.

KlangFool
Posts: 9969
Joined: Sat Oct 11, 2008 12:35 pm

Re: Renting vs Owning Your Home

Post by KlangFool » Thu May 31, 2018 8:58 am

smitcat wrote:
Thu May 31, 2018 8:41 am
KlangFool wrote:
Thu May 31, 2018 8:28 am
smitcat wrote:
Thu May 31, 2018 7:55 am
KlangFool wrote:
Wed May 30, 2018 1:01 pm
Ben Mathew wrote:
Wed May 30, 2018 12:46 pm


That's because most people don't save much, period. In that world, homeowners come across as a bit more financially responsible because they sseem to have saved enough to make a down payment and, who knows, maybe built up some home equity over time. But with the easy access to HELOCs and refinancing, the home equity part is anybody's guess now. And with easier access to index funds, ETFs, online brokerages and workplace retirement accounts, combined with greater job mobility, high net worth renters such as yourself might become more common and familiar.
Ben Mathew,

I disagreed.

1) Average people tend to overspend more on housing when they buy.

2) Average people have little to no savings. Aka, close to zero emergency fund.

3) So, if you throw in a minor financial emergency that occurs regularly in a person's life, the house owner is more likely to be totally wiped out than a renter.

KlangFool
Hello KlangFool -
I took some liberties and 'fixed' this rule for what I have observed in life.
"1) Average people tend to overspend more on everything versus their income and budget when they buy."
smitcat,

You are correct. But, the difference is

A) Buying a house tend to be the largest purchase of a person's life.

B) It is usually purchased with a long-term loan with a claim to future income.

Hence, the average person may recover from their overspending of other items. But, overspending on house purchase is one of those mistakes that is fatal to their financial lives.

KlangFool
Maybe based upon your experiences - I have these experiences very recently with many folks working with us....
- large car leases for luxury/sports cars (2 @ $600+ each)
- Credit card bills in excess of $20K balances with penalties
- School loans at $50K plus with 'minimum' pay reuslting in increassing balances
- Electronic devise bills reaching $500+ per month or more

With a home you can sublet a room, rent it, or sell it, as well as much lower credit terms - the items above have none of these flexibilities to help supply relief.
smitcat,

But, the PITI is much higher than any of those. And, if it is underwater with a job loss, the hole will be big enough to wipe someone out quickly.

<<With a home you can sublet a room, rent it, or sell it,>>

In a recession, none of that could help.

KlangFool

smitcat
Posts: 1768
Joined: Mon Nov 07, 2016 10:51 am

Re: Renting vs Owning Your Home

Post by smitcat » Thu May 31, 2018 9:09 am

KlangFool wrote:
Thu May 31, 2018 8:58 am
smitcat wrote:
Thu May 31, 2018 8:41 am
KlangFool wrote:
Thu May 31, 2018 8:28 am
smitcat wrote:
Thu May 31, 2018 7:55 am
KlangFool wrote:
Wed May 30, 2018 1:01 pm


Ben Mathew,

I disagreed.

1) Average people tend to overspend more on housing when they buy.

2) Average people have little to no savings. Aka, close to zero emergency fund.

3) So, if you throw in a minor financial emergency that occurs regularly in a person's life, the house owner is more likely to be totally wiped out than a renter.

KlangFool
Hello KlangFool -
I took some liberties and 'fixed' this rule for what I have observed in life.
"1) Average people tend to overspend more on everything versus their income and budget when they buy."
smitcat,

You are correct. But, the difference is

A) Buying a house tend to be the largest purchase of a person's life.

B) It is usually purchased with a long-term loan with a claim to future income.

Hence, the average person may recover from their overspending of other items. But, overspending on house purchase is one of those mistakes that is fatal to their financial lives.

KlangFool
Maybe based upon your experiences - I have these experiences very recently with many folks working with us....
- large car leases for luxury/sports cars (2 @ $600+ each)
- Credit card bills in excess of $20K balances with penalties
- School loans at $50K plus with 'minimum' pay reuslting in increassing balances
- Electronic devise bills reaching $500+ per month or more

With a home you can sublet a room, rent it, or sell it, as well as much lower credit terms - the items above have none of these flexibilities to help supply relief.
smitcat,

But, the PITI is much higher than any of those. And, if it is underwater with a job loss, the hole will be big enough to wipe someone out quickly.

<<With a home you can sublet a room, rent it, or sell it,>>

In a recession, none of that could help.

KlangFool
"But, the PITI is much higher than any of those."

Nope - not here anyway. $1,400mo school loans/ $1,200 month car leases / $500 month devices = $40K per year and no tax write-offs with no residual value.

"And, if it is underwater with a job loss, the hole will be big enough to wipe someone out quickly."
Not here anyway - rentals and room sublets are the first line of defense, making lower payments is the second , selling the home is the third , living in the homes for years without full pay and then abandoning it is the last (not available for school loans) - after bankruptcy they start over building savings but not with school loans.

"In a recession, none of that could help."
2008 thru 2010 as one example - young adults with homes were much more likely to come out the other side well or have a shorter period of financial 'disaster' than those without. We are in the NE near NYC where the recession was larger and more pronounced than in other areas.

Your expericnes may vary but the subset of folks who can own a home are smaller and typically in much better shape with a recession and the eventual turnaround.

KlangFool
Posts: 9969
Joined: Sat Oct 11, 2008 12:35 pm

Re: Renting vs Owning Your Home

Post by KlangFool » Thu May 31, 2018 9:22 am

smitcat wrote:
Thu May 31, 2018 9:09 am
KlangFool wrote:
Thu May 31, 2018 8:58 am
smitcat wrote:
Thu May 31, 2018 8:41 am
KlangFool wrote:
Thu May 31, 2018 8:28 am
smitcat wrote:
Thu May 31, 2018 7:55 am


Hello KlangFool -
I took some liberties and 'fixed' this rule for what I have observed in life.
"1) Average people tend to overspend more on everything versus their income and budget when they buy."
smitcat,

You are correct. But, the difference is

A) Buying a house tend to be the largest purchase of a person's life.

B) It is usually purchased with a long-term loan with a claim to future income.

Hence, the average person may recover from their overspending of other items. But, overspending on house purchase is one of those mistakes that is fatal to their financial lives.

KlangFool
Maybe based upon your experiences - I have these experiences very recently with many folks working with us....
- large car leases for luxury/sports cars (2 @ $600+ each)
- Credit card bills in excess of $20K balances with penalties
- School loans at $50K plus with 'minimum' pay reuslting in increassing balances
- Electronic devise bills reaching $500+ per month or more

With a home you can sublet a room, rent it, or sell it, as well as much lower credit terms - the items above have none of these flexibilities to help supply relief.
smitcat,

But, the PITI is much higher than any of those. And, if it is underwater with a job loss, the hole will be big enough to wipe someone out quickly.

<<With a home you can sublet a room, rent it, or sell it,>>

In a recession, none of that could help.

KlangFool
"But, the PITI is much higher than any of those."

Nope - not here anyway. $1,400mo school loans/ $1,200 month car leases / $500 month devices = $40K per year and no tax write-offs with no residual value.

"And, if it is underwater with a job loss, the hole will be big enough to wipe someone out quickly."
Not here anyway - rentals and room sublets are the first line of defense, making lower payments is the second , selling the home is the third , living in the homes for years without full pay and then abandoning it is the last (not available for school loans) - after bankruptcy they start over building savings but not with school loans.

"In a recession, none of that could help."
2008 thru 2010 as one example - young adults with homes were much more likely to come out the other side well or have a shorter period of financial 'disaster' than those without. We are in the NE near NYC where the recession was larger and more pronounced than in other areas.

Your expericnes may vary but the subset of folks who can own a home are smaller and typically in much better shape with a recession and the eventual turnaround.
smitcat,

<<Nope - not here anyway. $1,400mo school loans/ $1,200 month car leases / $500 month devices = $40K per year and no tax write-offs with no residual value.>>

Please provide the house's price and PITI payment.

KlangFool

smitcat
Posts: 1768
Joined: Mon Nov 07, 2016 10:51 am

Re: Renting vs Owning Your Home

Post by smitcat » Thu May 31, 2018 10:33 am

KlangFool wrote:
Thu May 31, 2018 9:22 am
smitcat wrote:
Thu May 31, 2018 9:09 am
KlangFool wrote:
Thu May 31, 2018 8:58 am
smitcat wrote:
Thu May 31, 2018 8:41 am
KlangFool wrote:
Thu May 31, 2018 8:28 am


smitcat,

You are correct. But, the difference is

A) Buying a house tend to be the largest purchase of a person's life.

B) It is usually purchased with a long-term loan with a claim to future income.

Hence, the average person may recover from their overspending of other items. But, overspending on house purchase is one of those mistakes that is fatal to their financial lives.

KlangFool
Maybe based upon your experiences - I have these experiences very recently with many folks working with us....
- large car leases for luxury/sports cars (2 @ $600+ each)
- Credit card bills in excess of $20K balances with penalties
- School loans at $50K plus with 'minimum' pay reuslting in increassing balances
- Electronic devise bills reaching $500+ per month or more

With a home you can sublet a room, rent it, or sell it, as well as much lower credit terms - the items above have none of these flexibilities to help supply relief.
smitcat,

But, the PITI is much higher than any of those. And, if it is underwater with a job loss, the hole will be big enough to wipe someone out quickly.

<<With a home you can sublet a room, rent it, or sell it,>>

In a recession, none of that could help.

KlangFool
"But, the PITI is much higher than any of those."

Nope - not here anyway. $1,400mo school loans/ $1,200 month car leases / $500 month devices = $40K per year and no tax write-offs with no residual value.

"And, if it is underwater with a job loss, the hole will be big enough to wipe someone out quickly."
Not here anyway - rentals and room sublets are the first line of defense, making lower payments is the second , selling the home is the third , living in the homes for years without full pay and then abandoning it is the last (not available for school loans) - after bankruptcy they start over building savings but not with school loans.

"In a recession, none of that could help."
2008 thru 2010 as one example - young adults with homes were much more likely to come out the other side well or have a shorter period of financial 'disaster' than those without. We are in the NE near NYC where the recession was larger and more pronounced than in other areas.

Your expericnes may vary but the subset of folks who can own a home are smaller and typically in much better shape with a recession and the eventual turnaround.
smitcat,

<<Nope - not here anyway. $1,400mo school loans/ $1,200 month car leases / $500 month devices = $40K per year and no tax write-offs with no residual value.>>

Please provide the house's price and PITI payment.

KlangFool
"Please provide the house's price and PITI payment"

I believe you are missing the point that there are many other ways to overbuy other than a home.
Your question … one example of the home $350K and about $1,600.

KlangFool
Posts: 9969
Joined: Sat Oct 11, 2008 12:35 pm

Re: Renting vs Owning Your Home

Post by KlangFool » Thu May 31, 2018 10:38 am

smitcat wrote:
Thu May 31, 2018 10:33 am
KlangFool wrote:
Thu May 31, 2018 9:22 am
smitcat wrote:
Thu May 31, 2018 9:09 am
KlangFool wrote:
Thu May 31, 2018 8:58 am
smitcat wrote:
Thu May 31, 2018 8:41 am


Maybe based upon your experiences - I have these experiences very recently with many folks working with us....
- large car leases for luxury/sports cars (2 @ $600+ each)
- Credit card bills in excess of $20K balances with penalties
- School loans at $50K plus with 'minimum' pay reuslting in increassing balances
- Electronic devise bills reaching $500+ per month or more

With a home you can sublet a room, rent it, or sell it, as well as much lower credit terms - the items above have none of these flexibilities to help supply relief.
smitcat,

But, the PITI is much higher than any of those. And, if it is underwater with a job loss, the hole will be big enough to wipe someone out quickly.

<<With a home you can sublet a room, rent it, or sell it,>>

In a recession, none of that could help.

KlangFool
"But, the PITI is much higher than any of those."

Nope - not here anyway. $1,400mo school loans/ $1,200 month car leases / $500 month devices = $40K per year and no tax write-offs with no residual value.

"And, if it is underwater with a job loss, the hole will be big enough to wipe someone out quickly."
Not here anyway - rentals and room sublets are the first line of defense, making lower payments is the second , selling the home is the third , living in the homes for years without full pay and then abandoning it is the last (not available for school loans) - after bankruptcy they start over building savings but not with school loans.

"In a recession, none of that could help."
2008 thru 2010 as one example - young adults with homes were much more likely to come out the other side well or have a shorter period of financial 'disaster' than those without. We are in the NE near NYC where the recession was larger and more pronounced than in other areas.

Your expericnes may vary but the subset of folks who can own a home are smaller and typically in much better shape with a recession and the eventual turnaround.
smitcat,

<<Nope - not here anyway. $1,400mo school loans/ $1,200 month car leases / $500 month devices = $40K per year and no tax write-offs with no residual value.>>

Please provide the house's price and PITI payment.

KlangFool
"Please provide the house's price and PITI payment"

I believe you are missing the point that there are many other ways to overbuy other than a home.
Your question … one example of the home $350K and about $1,600.
smitcat,

1) Thanks.

<<I believe you are missing the point that there are many other ways to overbuy other than a home.>>

2) I was blinded by my environment. In my neighborhood of annual median household income of 150K, the only way to overbuy is a house. The median house price here is 500K to 600K.

KlangFool
Last edited by KlangFool on Thu May 31, 2018 10:48 am, edited 1 time in total.

smitcat
Posts: 1768
Joined: Mon Nov 07, 2016 10:51 am

Re: Renting vs Owning Your Home

Post by smitcat » Thu May 31, 2018 10:45 am

KlangFool wrote:
Thu May 31, 2018 10:38 am
smitcat wrote:
Thu May 31, 2018 10:33 am
KlangFool wrote:
Thu May 31, 2018 9:22 am
smitcat wrote:
Thu May 31, 2018 9:09 am
KlangFool wrote:
Thu May 31, 2018 8:58 am


smitcat,

But, the PITI is much higher than any of those. And, if it is underwater with a job loss, the hole will be big enough to wipe someone out quickly.

<<With a home you can sublet a room, rent it, or sell it,>>

In a recession, none of that could help.

KlangFool
"But, the PITI is much higher than any of those."

Nope - not here anyway. $1,400mo school loans/ $1,200 month car leases / $500 month devices = $40K per year and no tax write-offs with no residual value.

"And, if it is underwater with a job loss, the hole will be big enough to wipe someone out quickly."
Not here anyway - rentals and room sublets are the first line of defense, making lower payments is the second , selling the home is the third , living in the homes for years without full pay and then abandoning it is the last (not available for school loans) - after bankruptcy they start over building savings but not with school loans.

"In a recession, none of that could help."
2008 thru 2010 as one example - young adults with homes were much more likely to come out the other side well or have a shorter period of financial 'disaster' than those without. We are in the NE near NYC where the recession was larger and more pronounced than in other areas.

Your expericnes may vary but the subset of folks who can own a home are smaller and typically in much better shape with a recession and the eventual turnaround.
smitcat,

<<Nope - not here anyway. $1,400mo school loans/ $1,200 month car leases / $500 month devices = $40K per year and no tax write-offs with no residual value.>>

Please provide the house's price and PITI payment.

KlangFool
"Please provide the house's price and PITI payment"

I believe you are missing the point that there are many other ways to overbuy other than a home.
Your question … one example of the home $350K and about $1,600.
smitcat,

1) Thanks.

<<I believe you are missing the point that there are many other ways to overbuy other than a home.>>

2) I am blinded by my environment. In my neighborhood of annual median household income of 150K, the only way to overbuy is a house. The median house price here is 500K to 600K.

KlangFool
We have similar areas I bet - these are entry level homes for entry level buyers, not median. Out here viable homes/condos are considered within about a one hours commute. Doing a realtior search within one hour drive woudl likley yield a whole host of options.

But better on topic -I think (I am) we are attempting to post about populations and areas in general. If i was to use my exact area it would not apply to the entry buyer or to the masses as it is much higher than yours.

Calico
Posts: 144
Joined: Thu Jan 01, 2015 5:45 pm

Re: Renting vs Owning Your Home

Post by Calico » Thu May 31, 2018 11:02 am

This is a wonderful thread!

I currently own my home, but I am considering renting later. So it's been fun to read it all.

I am happy I own the home I have. When I first bought it, the mortgage payment plus HOA fees was about the same as the rentals. Now, where I pay $1950 a month (mortgage, taxes, insurance, and HOA fees combined), townhouses on my street, just like mine, rent for $2700-$2800 a month. Even when you factor in maintenance costs, I come out ahead (I fix a lot of things on my own). When I sell, I can get a lot of my money back (the house was $370k when I bought it, they are currently selling at $500k and getting asking price).

I live where I do because of the schools and her being close to her dad. I bought the house before I was a booglehead and did so because I just thought buying is always better. I do like my house and my neighborhood, but I hate the general area. It's too urban for this country girl. I know I don't want to stay there longer than I have to. When my daughter moves out and goes off to college, it's going to be just me and the dog. I want to sell the house because it's just too big for me even though it's just a 1800 sq foot townhouse. I don't even use two of the rooms.

I am considering two options. Buying a condo farther away from my high cost of living area, for cash with the equity when I sell my house. My other option would be to invest the cash and rent something really small. I just don't want to bother with home maintenance (much) and it's hard to find something to buy that's nice and small (aside from apartment-like condos). My concerns with an apartment-like condo is noise. If I rent and it's bad, I can move more easily. But if I buy and am miserable (I lived in some cheap apartments before), then I may be stuck.

The problem is, both options aren't so hot for the idea of moving back home (rural area). The houses there that are the size I want are run down shacks. Plus, there is a lot of property maintenance to do.

What I really want is to live in a condo in this small beach town I like. It can be crowded in the summer, but other times of year it's a small town. There are condos there too (that are built out of cement and are quite). I know this because my mom owns one that she rents out to summer beach goers. The problem with buying there is I won't be able to buy the condo for cash (and the condo fees are pretty high).

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