Renting vs Owning Your Home

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THY4373
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Re: Renting vs Owning Your Home

Post by THY4373 » Fri May 25, 2018 9:53 am

willthrill81 wrote:
Fri May 25, 2018 9:33 am

That's why I specifically said "correlation does not equal causation." That being said, there's probably a reason that so many of the millionaires Stanley studied 20 years ago were shying away from imported vehicles. I seem to recall that he discussed it but don't recall his explanation.
You put that disclaimer but then said we should still pay attention to it as important so you were sort of having it both ways and I was just pointing out the inconsistency. When correlation agrees with our would view we assume it must mean causation and when it doesn't we don't. In the absence of any real evidence we don't know whether the fact that most millionaires own a place is part of their success or a reflection of it (lifestyle choice). Honestly it is probably a bit of both.

If you believe your home real estate is a cornerstone of you financial success that is great. For me personally and that is all I can speak to authoritatively it hasn't been very important. It was a net positive when I lived in a high cost of living area during the pre-great recession housing boom and a net negative when I moved to a lower cost of living area just before the great recession. Overall my home real estate ownership accounted for about 10% of my net worth prior to my divorce two years ago (we had about 50% equity in our house at that point) when my ex-bought out my share of the family home. I think the main message of Stanley's book is live below your means and make good income which is what drove my wealth. It is possible to LBYM both buying and renting there isn't a single right answer.

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willthrill81
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Re: Renting vs Owning Your Home

Post by willthrill81 » Fri May 25, 2018 10:12 am

THY4373 wrote:
Fri May 25, 2018 9:53 am
willthrill81 wrote:
Fri May 25, 2018 9:33 am

That's why I specifically said "correlation does not equal causation." That being said, there's probably a reason that so many of the millionaires Stanley studied 20 years ago were shying away from imported vehicles. I seem to recall that he discussed it but don't recall his explanation.
You put that disclaimer but then said we should still pay attention to it as important so you were sort of having it both ways I was just pointing out the inconsistency.
There is no inconsistency. Paying attention to a very strong correlation does not mean that you are saying that one of the variables involved is a cause of the other. There may be another variable at work that is impacting both of the variables being observed (e.g. something else is impacting both home ownership and being a millionaire), or the relationship could be completely spurious. Ideally, we would use an experiment to determine whether a causal relationship actually exists, but that's not possible here because we can't manipulate the hypothesized cause.

Using your logic, since no causal research has examined the relationship between smoking and lung cancer (it hasn't because the experiment would likely lead to many people dying), we shouldn't conclude that there is any likelihood of a causal relationship between the two. Sometimes, we have to do the best analysis we can with the data we have.

Again, I'm not saying that there is a cause-and-effect relationship between home ownership and being a millionaire, but the fact that over 90% of the millionaires Stanley studied were home owners should not be dismissed out of hand. There is clearly something going on here.
THY4373 wrote:
Fri May 25, 2018 9:53 am
In the absence of any real evidence we don't know whether the fact that most millionaires own a place is part of their success or a reflection of it (lifestyle choice).
You are saying that we don't know which came first, being a millionaire or a homeowner. It is true that for a causal relationship to exist, we must be able to demonstrate that the cause preceded the effect. In this case, Stanley's data can help us understand this. Most of the millionaires he studied purchased their homes before they became millionaires, not after.

Clearly, being a home owner is not requisite for being a millionaire, financially successful, or anything else. As you have noted in other posts, home ownership may be antithetical to the type of lifestyle you want to lead, and that's may be much more important than the financial implications.
“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

THY4373
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Re: Renting vs Owning Your Home

Post by THY4373 » Fri May 25, 2018 10:57 am

Dandy wrote:
Fri May 25, 2018 8:09 am
I just turned 70 and we have lived in our house for almost 44 years. As I age I am tired with home ownership that has served me well. Keeping up with the maintenance, landscaping, snow shoveling, leaf raking, gutter cleaning,etc. is getting old fast. Outsourcing those tasks is not the answer to me. I've seen the quick and dirty results and I would rather not.
You lasted longer than me. I was done at 47. I rent now and while I (or rather my son) has to mow the lawn that is about it for me now. It is awesome.
Dandy wrote:
Fri May 25, 2018 8:09 am
While I have a ranch the laundry is in the basement and not likely to be relocated and there is no garage. Also, I find unless you have a dog home ownership can be rather isolated. I am looking to sell and rent a condo or buy into a continuous care community. Probably the former first. I also want to get the house ready for sale while we are still have enough energy for the task. 44 years of accumulation can be an arduous task. Can't expect too much help from my children since both couples work in demanding jobs.
I agree on the company though my company is two cats. On the downsizing I am still working on this. Moving out of the marital home when I separated allowed me to unload a lot but I still have further accumulation to clear out. For a while I was working on clearing out one thing a day. But I have been lagging on that of late.
Dandy wrote:
Fri May 25, 2018 8:09 am
After 44 years since renting I'm sure it will be an adjustment having more noise next store and above that is why renting a condo might be the wise next move.
The condos you want to avoid for noise purposes are the low rise condos with wood framing. I lived in one when I was younger and you would have thought the petite lady (she was 5'2") who lived above me was an elephant. Concrete floors absorb at lot more noise (or live on top floor). I am also considering town homes but the problem with them is everything is on a different floor which isn't good as you age.

Afty
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Re: Renting vs Owning Your Home

Post by Afty » Fri May 25, 2018 11:10 am

Slacker wrote:
Thu May 24, 2018 6:34 pm
Do a ton of people really rent horrible little apartments/homes that they don't really want to live in? That seems very counter-intuitive.
We did, for many years. "Horrible" is an overstatement though, more like the houses we rented were not ones we would buy. The first one was poorly built but in a nice neighborhood/school district. The second was well built, but smallish and in a not-great school district (not bad, just not great). When we bought, we bought a much bigger house in the best school district in our town. We justified it because we planned to live in this house for 15+ years.

THY4373
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Re: Renting vs Owning Your Home

Post by THY4373 » Fri May 25, 2018 12:03 pm

willthrill81 wrote:
Fri May 25, 2018 10:12 am
Again, I'm not saying that there is a cause-and-effect relationship between home ownership and being a millionaire, but the fact that over 90% of the millionaires Stanley studied were home owners should not be dismissed out of hand. There is clearly something going on here.
I guess the issue I fundamentally have with your argument is why would we evaluate the value of owing real estate or anything else by analyzing millionaires? Shouldn't we just be evaluating owning our own home the same way we would would other consumption and investments? All the data is out there on home ownership. You plug in your numbers, make your assumptions, and make a decision.

I would guess there is a strong correlation with hedge fund investment and millionaires it doesn't mean that I should be investing in them either. I should run my numbers and make my decision that way.

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willthrill81
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Re: Renting vs Owning Your Home

Post by willthrill81 » Fri May 25, 2018 12:14 pm

THY4373 wrote:
Fri May 25, 2018 12:03 pm
willthrill81 wrote:
Fri May 25, 2018 10:12 am
Again, I'm not saying that there is a cause-and-effect relationship between home ownership and being a millionaire, but the fact that over 90% of the millionaires Stanley studied were home owners should not be dismissed out of hand. There is clearly something going on here.
I guess the issue I fundamentally have with your argument is why would we evaluate the value of owing real estate or anything else by analyzing millionaires? Shouldn't we just be evaluating owning our own home the same way we would would other consumption and investments? All the data is out there on home ownership. You plug in your numbers, make your assumptions, and make a decision.
If it was that simple, we wouldn't have so many people coming here to ask which is better for them. It can be a complex decision with no clear right or wrong answer.

By analyzing those who have been financially successful, we may be able to gain insights into how we can replicate their success. But of course, YMMV.
“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 WhiteMaxima » Fri May 25, 2018 12:39 pm

In a desirable place such as SF, NYC, and Seattle, it is always better to own rather than rent even though current Buy/rent ratio is high. Housing price is always inrational. Don't blame it. You can always buy a cheap house in middle of US plain, but how many population growth will push the rent and price go up. You are not just buying a house (which is just lumber, plumbing and brick), you are buying a location and community. Even in Seattle metro area, there are pocket of high crime and poverty, the housing price is cheaper. You could retire wealthier if you bought at the right place.

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Re: Renting vs Owning Your Home

Post by delamer » Fri May 25, 2018 1:47 pm

THY4373 wrote:
Fri May 25, 2018 10:57 am
Dandy wrote:
Fri May 25, 2018 8:09 am
I just turned 70 and we have lived in our house for almost 44 years. As I age I am tired with home ownership that has served me well. Keeping up with the maintenance, landscaping, snow shoveling, leaf raking, gutter cleaning,etc. is getting old fast. Outsourcing those tasks is not the answer to me. I've seen the quick and dirty results and I would rather not.
You lasted longer than me. I was done at 47. I rent now and while I (or rather my son) has to mow the lawn that is about it for me now. It is awesome.
Dandy wrote:
Fri May 25, 2018 8:09 am
While I have a ranch the laundry is in the basement and not likely to be relocated and there is no garage. Also, I find unless you have a dog home ownership can be rather isolated. I am looking to sell and rent a condo or buy into a continuous care community. Probably the former first. I also want to get the house ready for sale while we are still have enough energy for the task. 44 years of accumulation can be an arduous task. Can't expect too much help from my children since both couples work in demanding jobs.
I agree on the company though my company is two cats. On the downsizing I am still working on this. Moving out of the marital home when I separated allowed me to unload a lot but I still have further accumulation to clear out. For a while I was working on clearing out one thing a day. But I have been lagging on that of late.
Dandy wrote:
Fri May 25, 2018 8:09 am
After 44 years since renting I'm sure it will be an adjustment having more noise next store and above that is why renting a condo might be the wise next move.
The condos you want to avoid for noise purposes are the low rise condos with wood framing. I lived in one when I was younger and you would have thought the petite lady (she was 5'2") who lived above me was an elephant. Concrete floors absorb at lot more noise (or live on top floor). I am also considering town homes but the problem with them is everything is on a different floor which isn't good as you age.
Most shared walls situation that I’ve lived in had noise transmission through the side walls too. The only exception were a couple of old city “rowhouses” — I am guessing because of the brick construction, but I don’t know.

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Re: Renting vs Owning Your Home

Post by Slacker » Fri May 25, 2018 3:14 pm

Very interesting...

-One respondent to my query stated that it was temporary because they were just starting out (however, we are in our 40s and have been around for a bit).
-One respondent stated that the homes were too poorly built to consider purchasing. That is valid, since we work from home - I"m not sure we'd move to that town at all.
-Others talked about short term living...I personally don't look forward to living in a house for just a short period. I like stability. It gets expensive constantly moving and I (as someone in my 40s with a great savings rate) see no reason to force our family to live in less than what we would purchase. In fact, some of the houses we looked at for purchase were in the same neighborhood and same model as the houses for rent.

We save 65% of after tax pay. Trying to rent a $800 2 bdrm apartment instead of a $1600 4 bdrm house for 2 adults, a cat, a dog, 2 teenagers, a home office and a home gym sounds penny wise and pound foolish (electromagnetic interference in an apartment makes our VPN connections run slow, pain to try to work from home with all the noise of an apartment complex, $800 potential savings likely decreased $80 to pay for gas since we won't be able to charge our electric car anymore and by $80 to pay for two gym memberships as we'd have no room for our home gym such that $640 additional savings per month when we already save around $8500 a month doesn't sound worth the headaches, inconveniences and decreased work performance which can lead to lower promotions/raises in the future).

The maintenance of the landscaping issue (have to maintain the landscaping the landlord put in place) tips it in favor of owning, for my particular case, because I certainly don't want large swaths of grass to mow and water every week and the majority of rentals seemed to only have grass lawns for 90% of the landscaping.

We've been renters for many years and home owners for a few years (now one of our investment properties) and will be home owners again - though we did try to rent an equivalent house first.

[EDIT: to add - clearly it is just my own personal incredulity at the idea of renting something less than what you actually want to live in or is it just that people, even on Bogleheads, are buying more house than what they actually need????]

THY4373
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Re: Renting vs Owning Your Home

Post by THY4373 » Fri May 25, 2018 5:25 pm

Slacker wrote:
Fri May 25, 2018 3:14 pm
We save 65% of after tax pay. Trying to rent a $800 2 bdrm apartment instead of a $1600 4 bdrm house for 2 adults, a cat, a dog, 2 teenagers, a home office and a home gym sounds penny wise and pound foolish (electromagnetic interference in an apartment makes our VPN connections run slow, pain to try to work from home with all the noise of an apartment complex, $800 potential savings likely decreased $80 to pay for gas since we won't be able to charge our electric car anymore and by $80 to pay for two gym memberships as we'd have no room for our home gym such that $640 additional savings per month when we already save around $8500 a month doesn't sound worth the headaches, inconveniences and decreased work performance which can lead to lower promotions/raises in the future).
Great savings rate mine is similar. Not sure why you think the only two options are renting a two bedroom apartment vs owning a 4 bedroom house. There is a whole middle ground in between those (I actually rent a 4 bedroom house even though I only need two bedrooms). Clearly owning works for you and that is great! As point of comparison I have one adult, .5 teenagers (I have him half time), two cats and a home gym. My car isn't electric. So your example doesn't apply to me at all. So no surprise I would have a somewhat different approach than you. I'll admit I had to chuckle at wireless interference leading to reduced job promotions 8-). I'll need to add that to my rent vs buy analysis next time.

Ben Mathew
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Re: Renting vs Owning Your Home

Post by Ben Mathew » Fri May 25, 2018 5:47 pm

THY4373 wrote:
Fri May 25, 2018 8:16 am
Perhaps it is my lack of imagination or coffee this morning but I don't get how the imputed tax free rent to myself would put even an extra dollar in my back pocket? I am a W2 employee so lets call my income and therefore tax more or less fixed. If I spend $1500 on rent or I pay zero because I own my home outright my taxes are the same (ignoring whatever deductions I may or may not get on property tax). Since my alternative investment options outside a house are also tax sheltered and I cannot quite fill them up with my current income (the remainder is filled up with re-balancing of my taxable account) I don't see where the imputed tax free rent to myself actually puts me in a better financial position?
If the alternative to home equity is also tax-sheltered, then the tax-free nature of imputed rent is not, by itself, a reason to own your home. But the high risk-adjusted rate of return from home ownership could still tilt the scales. See below for an example.

But tax shielded accounts will have many advantages that would have to be weighed against the high risk-adjusted returns of home equity. I think if someone has run out of tax shielded space, owning the home becomes really compelling. But when compared to tax-shielded investing, it's a tougher question.
ignition wrote:
Fri May 25, 2018 6:46 am
Seattle has a price to rent ratio of 25-35 depending on where I look on the internet. How can it be better to own in this case? (from a purely mathematical point of view)
Even with housing prices as high as it is in Seattle, I still find that owning is cheaper than renting here. Here's an example:

On Redfin, I searched for condos in Capitol Hill that sold in the past 6 months. On apartments.com, I searched for 2 bdrm condos for rent in Capitol Hill. I then tried to find a building which had a unit that sold in the last 6 months, and also has a unit currently listed for rent on apartments.com. I got 530 Broadway E -- Units 127 and 209 were sold in the last 6 mos, and Unit 138 is listed for rent on apartments.com.

530 Broadway E #209
2 bed 1.75 bath 1076 sqft. Sold for $805,000 on Mar 6, 2018

530 Broadway E #127
2 bed 2.25 bath 1,333 sqft. Sold for $849,950 on Dec 22, 2017

530 Broadway E #138
2 bed 2.5 bath 977 sqft. Listed for rent for $3,050 per month. (It's not clear to me from the listing, but I don't think utilities are included.)

Both the rent and the prices seem to be on the high side of the range, so presumably this is a nicer building or location than the average Capitol Hill condo.

The rental is a bit smaller but has an extra 1/2 bath compared to the $805K. The sold units, especially the $850K one, looks nicer to me than the rental based on the photos. Let's take the $805K condo as comparable to the rental (more space, better interior, but missing 1/2 bath).

ANNUAL COSTS (excluding utilities):

RENTING

$3,050 * 12 = $36,600

OWNING

HOA: $623 *12 = $7476
property tax: $6,044
maintenance: $300 * 12 = $3,600
insurance: $500
inflation-adjusted appreciation: $0 (no appreciation beyond inflation)
TOTAL: $17,620

Let's assume for now that these numbers are constant in real terms. So rents and housing costs in Seattle will keep pace with inflation.

So what plunking down $805,000 for this condo buys you is a saving of $36,600 - $17,620 = $18,980 per year. That's a tax-free real return of $18,980/$805,000 = 2.4%. That's pretty darn good for a safe asset. I claimed in my original post that owning your home is safer than holding stocks and nominal bonds, and comparable more to holding inflation indexed treasuries (TIPS). 30 year TIPS right now yields a bit less than 1% real. Compared to that, a 2.4% real yield is really good. And remember, this is what you get with no real appreciation in housing in Seattle! I think that's pretty unlikely in the long term in a city that's seeing growth. If instead you assume .5% or 1% real appreciation, the real return jumps to 2.9% or 3.4%. That becomes pretty amazing for a safe asset! I don't think you can find that anywhere else.

If you have run out of tax-shielded space, owning a home is a no-brainer (as long as it's the right fit). But if, like THY4373, the alternative to parking money in home equity is also tax-shielded, the race gets tighter. Still, based on the numbers above, I think it would be very hard to find a safe asset that can match the rate of return on home ownership--even assuming zero real appreciation!

Note that the example above does not assume a mortgage. The return I calculated is the return from rent savings and potential price appreciation from owning your home free and clear. Most of us have to start out with a mortgage. When you are carrying a mortgage, it might be useful to construct a 100% mortgage scenario. You are somewhere on the spectrum between the 100% mortgage scenario and the 100% free-and-clear scenario. As you pay off the mortgage and build home equity, you are moving from the 100% mortgage end over to the 100% free-and-clear end. As most people know, the mortgage scenario is tax-advantaged as well, and the recent changes in tax laws have put a dent in that. But the tax advantage of the free-and-clear scenario remains unaffected by these changes. It will stay that way unless the US takes the highly unusual step of taxing imputed rent. To my surprise, according to this article, there actually are five countries in the world that do this, including Switzerland and the Netherlands. But most countries, including the U.S., do not. So what you have now is a stronger reason to speed up the move from the mortgage end to the free-and-clear end -- i.e. pay off the mortgage sooner.

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Re: Renting vs Owning Your Home

Post by randomguy » Fri May 25, 2018 6:09 pm

WhiteMaxima wrote:
Fri May 25, 2018 12:39 pm
In a desirable place such as SF, NYC, and Seattle, it is always better to own rather than rent even though current Buy/rent ratio is high. Housing price is always inrational. Don't blame it. You can always buy a cheap house in middle of US plain, but how many population growth will push the rent and price go up. You are not just buying a house (which is just lumber, plumbing and brick), you are buying a location and community. Even in Seattle metro area, there are pocket of high crime and poverty, the housing price is cheaper. You could retire wealthier if you bought at the right place.

Just wait until the 30 year trend of people finding cities attractive reverses and we have 30 years of people fleeing the cities. See New York in the mid 1970s.

Buying a house in any of htose areas in the past 30 years has been clearly the right move (even if you bought at the peak assuming you stuck around for 10 years). Projecting out is hard though.

There is a lot to be said for fixing your cost of housing. If you can do that by renting (rent controlled unit in say NYC or SF), great. But the only way most people can do it is through housing. It would be pretty painful to be forced to move at say 80 because your unit had a 15% rent increase that year:)

It is easy to run numbers on year 1 of ownership versus renting. Year 10 though requiries a really good crystal ball.

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Re: Renting vs Owning Your Home

Post by randomguy » Fri May 25, 2018 6:22 pm

ignition wrote:
Fri May 25, 2018 6:46 am
It all depends on where you live. You can't just take the numbers of your own city and extrapolate it to everyone.

Btw Seattle has a price to rent ratio of 25-35 depending on where I look on the internet. How can it be better to own in this case? (from a purely mathematical point of view)
Because the math clearly favors buying. 7%/year appreciation leverage up 4x builds wealth really rapidly. You can't use the appreciation rate (and hence what a reasonable price to rent ratio) of some fly off city to one that people actually want to live in.:) For the past 30 years, choosing to buy and hold has worked out. Who the heck knows if it will for the next 30 years.

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Re: Renting vs Owning Your Home

Post by BogleBoogie » Fri May 25, 2018 6:43 pm

randomguy wrote:
Fri May 25, 2018 6:22 pm
ignition wrote:
Fri May 25, 2018 6:46 am
It all depends on where you live. You can't just take the numbers of your own city and extrapolate it to everyone.

Btw Seattle has a price to rent ratio of 25-35 depending on where I look on the internet. How can it be better to own in this case? (from a purely mathematical point of view)
Because the math clearly favors buying. 7%/year appreciation leverage up 4x builds wealth really rapidly. You can't use the appreciation rate (and hence what a reasonable price to rent ratio) of some fly off city to one that people actually want to live in.:) For the past 30 years, choosing to buy and hold has worked out. Who the heck knows if it will for the next 30 years.
My opinion is that there is no definitive answer on which is cheaper, rent or own. It is too dependent on the housing market timing, the unknown repairs, your interest rate, et. The past 30 years quote and who knows on the next 30 years really sums it up. If you want to MINIMIZE spending then renting tends to be the cheaper option. Of course if you are talking about renting a 5 bedroom house versus buying one (apples to apples) it isn't definitive which will be cheaper. I can say from personal experience, which involved all luck, my first house purchase pre-housing market meltdown was tremendous! I bought and sold it for twice as much after 2 years. $200k buy, $400k sale. So much of this is speculative depending on timing, location, etc. In the end I'm of the mindset that rent vs own is more of a lifestyle choice. In terms of finances, I certainly didn't purchase a house with the expectation that it will cost less over time. If anything, I suspect it will cost more over the short term for our newest house due to the need to remodel.

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Re: Renting vs Owning Your Home

Post by Cycle » Fri May 25, 2018 7:16 pm

The expenses I consider in an evaluation are: tax, utilities, misc expenses ($350/mo currently), insurance, lost investment gains (5% of property), sale (assume own for 7 yrs), rent credit (from other rented unit or ADU)

Expenses
-Current situation owning and landlording current Duplex - $15k
-Current situation but take out a 4% loan - $10.6k
-Sell current duplex and rent similar unit - $16.2k
-Sell current duplex and buy single family home ($400k) - $41.2k
-Sell current duplex and buy single family home ($400k w/loan @ 4%) - $32k
-Sell current duplex and rent equivalent family home ($2300/mo rent) - $28k

I also sunk hundreds of hours into renovating my current property, so i'd say the correct decision should have been to rent a nice apartment. I like owning property free and clear, so I pay 4.4k/yr for that freedom. If I were to want a single family home, which I don't, the best move financially would be to rent in my area.

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Re: Renting vs Owning Your Home

Post by ignition » Sat May 26, 2018 12:32 pm

Ben Mathew wrote:
Fri May 25, 2018 5:47 pm
ignition wrote:
Fri May 25, 2018 6:46 am
Seattle has a price to rent ratio of 25-35 depending on where I look on the internet. How can it be better to own in this case? (from a purely mathematical point of view)
Even with housing prices as high as it is in Seattle, I still find that owning is cheaper than renting here. Here's an example:
....
I guess it depends on what you would do with the 800k that frees up when you're renting. If you put that in the stock market and it returns 5% real, obviously renting is the better option.

If you put it in a house or get a mortgage and your house appreciates by 5% real per year, ok then I guess housing is the better deal. Still a very large part of your wealth will probably be stuck in your house allowing you a lot less flexibility compared to renting. You can't just sell your house if you need cash. Also, I don't know how realistic it is that houses keep going up like they have in the past in areas such as San Fransisco or Seattle.

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Re: Renting vs Owning Your Home

Post by SGM » Sat May 26, 2018 12:54 pm

Paying off our mortgage years ago with money that would have been in bonds was a good deal for us. What would have been continuing mortgage payments were then put into monthly stock purchases. Prices in this area have doubled since we paid off our mortgage. The stock market did well. If we had bought a house in the mill town I was born in there would have been no price appreciation.

Dad moved for better job opportunities. I took notes. :wink:

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Re: Renting vs Owning Your Home

Post by Ben Mathew » Sat May 26, 2018 1:48 pm

ignition wrote:
Sat May 26, 2018 12:32 pm
Ben Mathew wrote:
Fri May 25, 2018 5:47 pm
ignition wrote:
Fri May 25, 2018 6:46 am
Seattle has a price to rent ratio of 25-35 depending on where I look on the internet. How can it be better to own in this case? (from a purely mathematical point of view)
Even with housing prices as high as it is in Seattle, I still find that owning is cheaper than renting here. Here's an example:
....
I guess it depends on what you would do with the 800k that frees up when you're renting. If you put that in the stock market and it returns 5% real, obviously renting is the better option.
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.
ignition wrote:
Sat May 26, 2018 12:32 pm
If you put it in a house or get a mortgage and your house appreciates by 5% real per year, ok then I guess housing is the better deal.
The example shows that it's a great deal (compared to bonds) even if the house appreciates by 0% real per year. The rent flows (that you consume) is higher than bond yields.

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Re: Renting vs Owning Your Home

Post by Ben Mathew » Sat May 26, 2018 1:58 pm

SGM wrote:
Sat May 26, 2018 12:54 pm
If we had bought a house in the mill town I was born in there would have been no price appreciation.
Even in mill towns with no price appreciation, the rent savings could make a house purchase worth it. The price to rent ratio in low-growth towns is much lower than booming metros for this reason.

mcraepat9
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Re: Renting vs Owning Your Home

Post by mcraepat9 » Sat May 26, 2018 2:10 pm

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.
This is an interesting statement. I am having some difficulty rationalizing that people are comfortable owning a single piece of undiversified real property (the physical structure of which is actually rotting and becoming less valuable daily) but owning the rent/buy difference in 100% of a broad equity index fund with 3000+ companies is not "a level of risk that most people are comfortable with".
Amateur investors are not cool-headed logicians.

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Re: Renting vs Owning Your Home

Post by Ben Mathew » Sat May 26, 2018 2:54 pm

mcraepat9 wrote:
Sat May 26, 2018 2:10 pm
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.
This is an interesting statement. I am having some difficulty rationalizing that people are comfortable owning a single piece of undiversified real property (the physical structure of which is actually rotting and becoming less valuable daily) but owning the rent/buy difference in 100% of a broad equity index fund with 3000+ companies is not "a level of risk that most people are comfortable with".
An inflation adjusted treasury bill is a single asset, but we are comfortable saying it's safer than a broad equity index fund with 3000+ companies.

The home you live in is a unique asset that provides a special insurance to you. Buying it is equivalent to prepaying your rent forever. After you buy your house, the market price of your house going up or down doesn't really affect you--you still get to live in the house you bought for the price you paid. The same cannot be said about stocks. If stocks do well, you get to eat more. If it does badly, you get to eat less. You are not insured with stocks the way you are with home ownership.

Sure, home ownership is not perfect insurance because you might have unexpected repairs, move across markets that are not comparably priced, dip into home equity towards the end of life, and so on. But then no insurance is perfect. Home ownership is an imperfect but reasonably good insurance that, even after the recent run-up in prices, remains attractively priced when compared to other forms of insurance like inflation adjusted bonds.

mcraepat9
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Re: Renting vs Owning Your Home

Post by mcraepat9 » Sat May 26, 2018 3:31 pm

Ben Mathew wrote:
Sat May 26, 2018 2:54 pm
mcraepat9 wrote:
Sat May 26, 2018 2:10 pm
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.
This is an interesting statement. I am having some difficulty rationalizing that people are comfortable owning a single piece of undiversified real property (the physical structure of which is actually rotting and becoming less valuable daily) but owning the rent/buy difference in 100% of a broad equity index fund with 3000+ companies is not "a level of risk that most people are comfortable with".
An inflation adjusted treasury bill is a single asset, but we are comfortable saying it's safer than a broad equity index fund with 3000+ companies.We say that because it is a debt security backed by the full faith and credit of the United States government, and thus has no credit risk. I am not following the comparison here - your house is more akin to owning a single stock than it is a US Treasury security.

The home you live in is a unique asset that provides a special insurance to you. Buying it is equivalent to prepaying your rent forever. it is prepaying part of your rent forever - property taxes, maintenance etc will continue. And of course the question is always at what price? As rents go down, there is no chance for you to benefit.After you buy your house, the market price of your house going up or down doesn't really affect you--you still get to live in the house you bought for the price you paid. The same cannot be said about stocks. If stocks do well, you get to eat more. If it does badly, you get to eat less. You are not insured with stocks the way you are with home ownership.this insurance analogy is tough to follow - if your plan is never to sell, then price appreciation is meaningless for both stocks and your house. If your plan is to sell, then you are impacted in the same way (you are benefitting from the up and down, with the difference being your use of the house and the tax benefits).

Sure, home ownership is not perfect insurance because you might have unexpected repairs, move across markets that are not comparably priced, dip into home equity towards the end of life, and so on. But then no insurance is perfect. Home ownership is an imperfect but reasonably good insurance that, even after the recent run-up in prices, remains attractively priced when compared to other forms of insurance like inflation adjusted bonds.a single house is not insurance in any respect - comparing it to an inflation adjusted bond doesn’t make sense to me. Yes you can physically live in it as long as it hasn’t burned to the ground, but there are significant risks with owning as well. Anchoring to region (great! You can live in your house in detroit where there are no jobs but how does that help you earn a living?). There are definitely advantages to owning, but comparing it to inflation adjusted bonds is silly. The risk profile of your house is different from a US Treasury security. You absolutely can come out ahead by owning vs renting- but to say it is as clear cut as you have laid out here is not accurate and any comparison doesn’t take into account the risk you took in the interim
Amateur investors are not cool-headed logicians.

runner540
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Re: Renting vs Owning Your Home

Post by runner540 » Sat May 26, 2018 6:18 pm

Ben Mathew wrote:
Thu May 24, 2018 12:05 am
I started this post as a response to a specific rent vs buy thread, but decided to give it its own thread to allow for general discussion.

Outside the Bogleheads community, many people feel that buying a house is the ticket to building wealth. Based on a few threads I've seen, it seems to me that many Bogleheads feel that renting and investing the difference builds more wealth.

I agree with Bogleheads on many things, but have to disagree on this one. Yes, many people buy houses as a leveraged bet on house price increases, and that is a dangerous game. But if you're buying a house with the clear understanding that you're consuming housing services, not primarily investing in real estate, buying has some significant advantages over renting.

1. OWNING IS CHEAPER

In every situation I've analyzed for myself or my family members over the years, my math came back saying that buying is likely to be significantly cheaper than renting. It's important to compare apples to apples though. You cannot compare renting a 1000 sqft apt to buying a 4000 sqft house on a half acre lot. But compare renting a 1000 sqft apartment to buying a 1000 sqft condo in the same neighborhood, or renting a 4000 sqft house to buying a 4000 sqft house in the same neighborhood, and the expected cost of buying almost always looked lower to me.

This makes sense at a fundamental level. When you rent, you are purchasing housing services from a landlord who has decided to invest in that property. When you buy, you are choosing to become that landlord. When you act as your own landlord, you save on landlording costs. If someone has to spend time and resources calling the plumber, collecting rent money, listing vacancies, and evicting deadbeat tenants, they have to charge you for it. So it makes sense that homeownership will be cheaper than renting.

Yes, real estate markets are not perfectly efficient, and prices can get so out of whack in some markets that owning becomes more expensive than renting. I just haven't seen it in the cities I've looked at in the U.S.

2. OWNING IS A TAX SHELTER

Unless the property is held by an investor in a tax-shielded account, that investor has to pay income taxes on the rent they collect from you. But if you become your own landlord and pay yourself the rent, the rent becomes invisible. It's imputed rent. You don't report it and it's tax free! This is a huge advantage. It's almost as good as holding your house in a Roth account. [Roth is still better because in addition to shielding rent, it would shield capital gains without limit. Ownership shields capital gains only up to $250K (single) or $500K (joint)]

3. OWNING IS LESS RISKY

When you rent, you don't know what your future housing costs will be. Rents could go up, down, or stay the same. But when you buy, you have effectively pre-paid future rents forever. Except for property taxes and maintenance costs, your housing costs are not going to change. If prices go up, you still have your house. If prices go down, you still have your house. Even if you move, you retain some protection because in a down market you'd sell low and buy low, and in an up-market, you'd sell high and buy high. So your gain or loss is limited as long as the real estate markets are comparable and you don't wait too long between selling and buying.

So the house that you own is actually a pretty safe investment, even if its price is fluctuating. Which brings me to an important point: 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. I often see people compare the returns of investing in a house to investing in the stock market. That's not the right comparison. A better comparison would be, how does it compare to the returns from the inflation-indexed bonds in your portfolio? When you look at it that way, adding your own home to your asset portfolio as a replacement for the lowest-yielding safe assets would probably look really attractive.

***

There are a few more advantages to owning your home such as asset protection and greater freedom to remodel and so on. The main disadvantages of ownership are the transaction costs of buying and selling, the hassle of home maintenance, the risk of buying a house with hidden problems, and maybe dealing with condo boards. But I think that if you are going to stay in one place for four or more years, owning will typically get you ahead financially.
You don't say much about valuation, but then you also say that you "ran numbers" for your family. Is there any relative price at which Someone should hesitate from buying?

Here's an different kind of anecdote: rent is $1750/month (annual rent of $21k). Comparable unit sells for $375k. Property taxes are 3% annually, plus maintenance and insurance. Should I have bought that house? Even before the mortgage, I'm looking at "throwing away" $15-20k a year, which is going to increase with inflation, similar to rent. And that's before any principal or interest! So I would have to assume that the house value appreciates faster than my investments and faster than rent for a long period of time.

Should I buy this house at $100k? At $1MM? Why or why not?

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Re: Renting vs Owning Your Home

Post by Ben Mathew » Sun May 27, 2018 10:14 am

runner540 wrote:
Sat May 26, 2018 6:18 pm
You don't say much about valuation, but then you also say that you "ran numbers" for your family. Is there any relative price at which Someone should hesitate from buying?

Here's an different kind of anecdote: rent is $1750/month (annual rent of $21k). Comparable unit sells for $375k. Property taxes are 3% annually, plus maintenance and insurance. Should I have bought that house? Even before the mortgage, I'm looking at "throwing away" $15-20k a year, which is going to increase with inflation, similar to rent. And that's before any principal or interest! So I would have to assume that the house value appreciates faster than my investments and faster than rent for a long period of time.

Should I buy this house at $100k? At $1MM? Why or why not?
A few posts upthread, I was asked how I can support buying right now with the high prices in Seattle. I responded with a comparison of buying an $805K condo vs renting a comparable unit in the same building for $3,050/mo.

I'd be happy to do a similar comparison for your example. It looks that you'd be spending $15-20K per year for the condo which comes close to wiping out all rent savings. That seems unusual. Can you break down the costs into hoa, property tax, maintenance, and insurance, so I get a sense of why it's so high? Could you also provide a few more details like location, size, building type, etc.?

JohnFiscal
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Re: Renting vs Owning Your Home

Post by JohnFiscal » Sun May 27, 2018 10:36 am

Interesting thread and viewpoints.

I do own my own home...at the urging of DW. Prior to getting married I rented for some years after having owned a condo and then a townhouse. The renting provided more flexibility I believed. But in any case, when I got married we bought soon thereafter.

I do greatly appreciate the fact that I did not "over buy" more house than I needed or could keep up and maintain. I was not stretched to the limit buying it, nor now maintaining it (paid-off the mortgage last month and I'm due to retire next month).

The house is only about 1/6 of my net worth. And throughout my life I strove to keep housing costs (all-in) to under 15-20 percent of my income.

Houses are not made of gingerbread where you can break off a piece when you're hungry. Don't be house poor. Especially in retirement.
Last edited by JohnFiscal on Sun May 27, 2018 10:42 am, edited 1 time in total.

KlangFool
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Re: Renting vs Owning Your Home

Post by KlangFool » Sun May 27, 2018 10:37 am

Ben Mathew wrote:
Sun May 27, 2018 10:14 am
runner540 wrote:
Sat May 26, 2018 6:18 pm
You don't say much about valuation, but then you also say that you "ran numbers" for your family. Is there any relative price at which Someone should hesitate from buying?

Here's an different kind of anecdote: rent is $1750/month (annual rent of $21k). Comparable unit sells for $375k. Property taxes are 3% annually, plus maintenance and insurance. Should I have bought that house? Even before the mortgage, I'm looking at "throwing away" $15-20k a year, which is going to increase with inflation, similar to rent. And that's before any principal or interest! So I would have to assume that the house value appreciates faster than my investments and faster than rent for a long period of time.

Should I buy this house at $100k? At $1MM? Why or why not?
A few posts upthread, I was asked how I can support buying right now with the high prices in Seattle. I responded with a comparison of buying an $805K condo vs renting a comparable unit in the same building for $3,050/mo.

I'd be happy to do a similar comparison for your example. It looks that you'd be spending $15-20K per year for the condo which comes close to wiping out all rent savings. That seems unusual. Can you break down the costs into hoa, property tax, maintenance, and insurance, so I get a sense of why it's so high? Could you also provide a few more details like location, size, building type, etc.?
Ben Mathew,

You had stated that the calculation does not work if the household does not max out their tax-deferred accounts. Let's assume that it is 2 X 401K = 37K. So, that assumption immediately requires the household's income to be way above 250K or more.

KlangFool

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Re: Renting vs Owning Your Home

Post by Ben Mathew » Sun May 27, 2018 11:08 am

KlangFool wrote:
Sun May 27, 2018 10:37 am
You had stated that the calculation does not work if the household does not max out their tax-deferred accounts. Let's assume that it is 2 X 401K = 37K. So, that assumption immediately requires the household's income to be way above 250K or more.
No, what I said was when you are maxed out, owning is clearly better than bonds in a taxable account. When you are not maxed out, it's a tougher call. Buying will likely provide a higher return than bonds in a tax shielded account. But tax shielded accounts have a number of attractive features that could tip the scale -- for example, it's better to leave an IRA as an inheritance because it allows beneficiaries to extend the tax deferral (stretch IRA).

jminv
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Re: Renting vs Owning Your Home

Post by jminv » Sun May 27, 2018 12:53 pm

The premise of this thread is strongly absolutist when the rent versus own decision is unique to the individual and their circumstances. You cannot prove that owning is cheaper than renting in all cases because that is not the case. The post is not actionable, either, but rather a treatise on the superiority of home ownership.

Stating that most bogleheads believe that renting is generally better than buying is also not, from what I have seen, accurate. The majority of posters on this forum appear to own their houses. You get counter examples from people who point out holes in arguments that are 100% in favor of buying in all circumstances. You are correct, though, in stating that the majority of Americans view housing, even after the last downturn, as a great investment. I've bought and I've rented and I've also used rent vs buy calculators. Buying can make sense and so can renting but I don't care what the average person, who doesn't save, thinks is a great investment.

Buying is not always cheaper than renting despite the Seattle example given here, which given that it is an all cash transaction, would mean that it would not be the average American, either. Also, many people are invested in a portfolio tilted toward stocks rather than a 100% bond portfolio. If I were living in Capitol Hill in that apartment it's likely that I would be of the age that I should not be weighted towards bonds but rather stocks so the average person buying that house should be comparing their use of cash to an asset allocation that is weighted more toward stocks.

A poster noted that a single house is an undiversified asset which if you buy in cash would, for the average buyer, make up a significant portion of their wealth, then went on to detail the diversification versus concentrated risk concern. Responding that TIPs are undiversified is interesting since again, many people are not 100% invested in government bonds or interested in doing so and also TIPs/govt bonds are considered risk free assets. You will get your agreed principal and interest at the end of the term. Housing, especially a single house, is certainly riskier than TIPs which would mean that it is not the appropriate comparison despite the ending statement in the original post stating that it should be. A house cannot be considered equivalent to a risk free asset.

Just because something is tax advantaged doesn't follow that it's a great investment. Making an asset tax advantaged does tend to make its price higher, though. Your example about paying yourself rent versus collecting rent as a landlord who doesn't hold the property in a tax advantaged way also only works if you would actually consider owning a house to rent out as your next best alternative to owning a house. My next best alternative to owning the house I live in would be to rent a house since I need somewhere to live, not to buy to rent, and to put the 805k in the market.

Rental prices can increase and when they do, home prices have often increased as well. You see the rental increase but not the opportunity cost of not selling your house and realizing that increase (or cashing it out through a refinance, home equity loan, etc). If you are living in an area where average income renters are getting priced out while you as an average income home owner are not then it doesn't necessarily follow that this is a benefit and that you should remain in the area as you could realize your gains, avoid the local increases in the prices of many other goods, and move to a lower cost area.

A person who has to sell their home in a depressed market to move to a new market is likely someone who lost their job in one market. It does not necessarily follow that the new job is equivalent to the old one, that the new market is depressed to whatever extent the old market is (markets in usa tend to be local and regional not national), that the home owner can simultaenously sell one house and buy another, or that the home owner will buy instead of renting so you can't assume that a homeowner is protected on the downside by being able to sell low in one market and buy low in another. Owning a house can lead to people staying in a market and job (or a new job that pays less after losing the first job) that they might not have if they were renting instead. The lack of mobility, particularly in a downturn, is a risk factor that can hurt income and career progression.

Goal33
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Re: Renting vs Owning Your Home

Post by Goal33 » Sun May 27, 2018 1:06 pm

Dandy wrote:
Fri May 25, 2018 8:09 am
I think I can sell my house for about 10X what I paid for it. Sounds like a killing but probably close to about 5% compounded. Not bad but not a killing either.
I disagree. This is a killing. You likely financed 80-100% of this home 44 years ago. And you haven’t had to pay rent the entire time. You made a killing.
A man with one watch always knows what time it is; a man with two watches is never sure.

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Re: Renting vs Owning Your Home

Post by THY4373 » Sun May 27, 2018 1:20 pm

KlangFool wrote:
Sun May 27, 2018 10:37 am

You had stated that the calculation does not work if the household does not max out their tax-deferred accounts. Let's assume that it is 2 X 401K = 37K. So, that assumption immediately requires the household's income to be way above 250K or more.

KlangFool
I am curious why a couple would need that much income to save 37k in a 401k? I am single (divorced) make considerably less than $250k and yet I save 18.5k into trad 401k, approximately 20k into after tax non-Roth 401k (this is the new money I put in from current income) to Megabackdoor Roth + $5.5k into backdoor Roth IRA. So my tax advantaged savings (not counting employer match) is about $44k. I am clearly not your average American but I suspect i am not out of the ordinary for Bogleheads.

ssquared87
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Re: Renting vs Owning Your Home

Post by ssquared87 » Sun May 27, 2018 1:28 pm

mcraepat9 wrote:
Sat May 26, 2018 2:10 pm
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.
This is an interesting statement. I am having some difficulty rationalizing that people are comfortable owning a single piece of undiversified real property (the physical structure of which is actually rotting and becoming less valuable daily) but owning the rent/buy difference in 100% of a broad equity index fund with 3000+ companies is not "a level of risk that most people are comfortable with".
+1 this doesn’t make sense at all to me

By purchasing a house you’re making a bet on the state and local government as well as the local economy and on the housing preferences of people in the area over a 15, 20, 30 year period.

You’re also implicitly betting on your own personal situation not requiring you to move for better career opportunities or because you need a larger or smaller space.

If I ever want to buy a house I have nothing against it, but your analysis is ignoring many significant risks.

I’ll take my chances with 100% in an s&p index fun

KlangFool
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Re: Renting vs Owning Your Home

Post by KlangFool » Sun May 27, 2018 1:33 pm

THY4373 wrote:
Sun May 27, 2018 1:20 pm
KlangFool wrote:
Sun May 27, 2018 10:37 am

You had stated that the calculation does not work if the household does not max out their tax-deferred accounts. Let's assume that it is 2 X 401K = 37K. So, that assumption immediately requires the household's income to be way above 250K or more.

KlangFool
I am curious why a couple would need that much income to save 37k in a 401k? I am single (divorced) make considerably less than $250k and yet I save 18.5k into trad 401k, approximately 20k into after tax non-Roth 401k (this is the new money I put in from current income) to Megabackdoor Roth + $5.5k into backdoor Roth IRA. So my tax advantaged savings (not counting employer match) is about $44k. I am clearly not your average American but I suspect i am not out of the ordinary for Bogleheads.
THY4373,

What would be your household income in order to buy the 800+K condo? My 250K income statement is in response to OP's post that it is harder to beat the tax-deferred account's investment if someone cannot max the tax-deferred account in order to buy the 800+K condo.

In any case, I will no longer comment on this thread. It is obvious that OP's is pushing folks to buy a house regardless of individual circumstances.

KlangFool

Dandy
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Re: Renting vs Owning Your Home

Post by Dandy » Sun May 27, 2018 1:34 pm

I disagree. This is a killing. You likely financed 80-100% of this home 44 years ago. And you haven’t had to pay rent the entire time. You made a killing.
Don't misunderstand I am glad I bought the house. Two comparisons one is a house as an investment. a 5+% return compared to a moderately aggressive investment for those 44 years - don't think the house is a winner. People who think their house is an investment are taking a chance on something that usually keeps up with inflation - with notable exceptions both ways.

Next is compared with renting. Two different experiences kind of like comparing apples to oranges. All expenses considered I think renting overall is cheaper in most cases. Of course it depends a bit on how much extra you put into a house. Of course that also assumes that savings from a cheaper rent is put into investing vs upping lifestyle. Kind of like assuming buying term vs whole life the savings is actually saved not spent.

THY4373
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Re: Renting vs Owning Your Home

Post by THY4373 » Sun May 27, 2018 1:39 pm

KlangFool wrote:
Sun May 27, 2018 1:33 pm
What would be your household income in order to buy the 800+K condo? My 250K income statement is in response to OP's post that it is harder to beat the tax-deferred account's investment if someone cannot max the tax-deferred account in order to buy the 800+K condo.

In any case, I will no longer comment on this thread. It is obvious that OP's is pushing folks to buy a house regardless of individual circumstances.

KlangFool
Ok that makes more sense then. BTW I actually also disagree with with OP (in the sense that rent vs buy will depend on a lot of variables and no absolute statement can be made either way on which is superior) and I am currently renter.
Last edited by THY4373 on Sun May 27, 2018 1:43 pm, edited 2 times in total.

KlangFool
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Re: Renting vs Owning Your Home

Post by KlangFool » Sun May 27, 2018 1:40 pm

Folks,

It is very simple.

1) Do not overspend on housing expense. This is true regardless of renting or buying.

2) But, it is harder to overspend on renting. And, the risk is lower. Since at the most, the person has only one-year leases. Plus, folks will not have the illusion that renting the house is an investment.

3) Buying a house is a 15 to 30 years commitment. Folks tend to overspend on housing when they buy. It is a big purchase and a big risk.

4) Then, usually, folks cannot max up their tax-deferred accounts and buy the house at the same time. As a result, they will pay a lot more taxes for the additional housing expense (see (2)).

In the end, folks are "House Poor" and all it takes is a minor bump in their financial lives to send them over the cliff.

KlangFool

KlangFool
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Re: Renting vs Owning Your Home

Post by KlangFool » Sun May 27, 2018 1:45 pm

THY4373 wrote:
Sun May 27, 2018 1:39 pm
KlangFool wrote:
Sun May 27, 2018 1:33 pm
What would be your household income in order to buy the 800+K condo? My 250K income statement is in response to OP's post that it is harder to beat the tax-deferred account's investment if someone cannot max the tax-deferred account in order to buy the 800+K condo.

In any case, I will no longer comment on this thread. It is obvious that OP's is pushing folks to buy a house regardless of individual circumstances.

KlangFool
Ok that makes more sense then. BTW I actually also disagree with with OP and I am currently renter.
THY4373,

I bought a house. But, I only buy a house that I was preparing to rent. And, the PITI was 20% to 30% lowered than renting. I have no illusion that even in my case, owning the house cost about the same or slightly higher than renting.

And, to further lower my risk, I have enough asset to pay off my mortgage at any time if I want to.

KlangFool

KlangFool
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Re: Renting vs Owning Your Home

Post by KlangFool » Sun May 27, 2018 1:48 pm

Folks,

http://www.thomasjstanley.com/2011/11/m ... rule-1-49/

<<The original title of The Millionaire Next Door was That’s Why They’re Wealthy. One of the main reasons that they are wealthy is that they live in an easily affordable home. I have found that when millionaires made their first home purchase, the ratio of the purchase price over their annual household income was just 1.49 [median]. >>

"The millionaire next door" did not get rich from their houses. In fact, they get rich by buying fewer houses than most folks. They only upgraded their houses when they became much richer.

KlangFool

dknightd
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Re: Renting vs Owning Your Home

Post by dknightd » Sun May 27, 2018 2:11 pm

KlangFool wrote:
Thu May 24, 2018 7:35 am
Why justifying purchasing a house that you would never rent? Then, claim that you are saving money based on the house that you will never rent?
I would have rented the house I bought. But it was not for rent, it was for sale. So I bought it. 28 years later it turns out to have been a good decision ;)

halfnine
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Re: Renting vs Owning Your Home

Post by halfnine » Sun May 27, 2018 2:59 pm

I'd state that in most cases renting vs owning an equivalent house can only be known in hindsight. Certainly owning a home as well as stocks/bonds diversifies one's exposure and eliminates having a concentrated risk in either real estate or stocks/bonds.

KlangFool
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Re: Renting vs Owning Your Home

Post by KlangFool » Sun May 27, 2018 3:56 pm

halfnine wrote:
Sun May 27, 2018 2:59 pm
I'd state that in most cases renting vs owning an equivalent house can only be known in hindsight. Certainly owning a home as well as stocks/bonds diversifies one's exposure and eliminates having a concentrated risk in either real estate or stocks/bonds.
halfnine,

<<I'd state that in most cases renting vs owning an equivalent house can only be known in hindsight. >>

I disagreed. That statement is only true if a person buys more house than he/she is willing to rent. Aka, that person considers the house as an investment. The house is bought with the assumption that the house appreciates X% after 20 to 30 years.

But, that is not the only way to evaluate house purchase. You could "make money when you buy". I consider the whole PITI as housing expenses. And, it has to be 20% to 30% lower than renting in order to compensate for the additional housing expense and the opportunity cost of the down payment. In this case, I make money by pure imputed rent. The house does not have to worth anything for me over the next 20 to 30 years for me to break even.

KlangFool

nexesn
Posts: 43
Joined: Mon Jan 01, 2018 9:15 pm

Re: Renting vs Owning Your Home

Post by nexesn » 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....

Jags4186
Posts: 2476
Joined: Wed Jun 18, 2014 7:12 pm

Re: Renting vs Owning Your Home

Post by Jags4186 » Sun May 27, 2018 10:09 pm

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....
You’re better off living in NJ, Westchester, or Long Island.

Admiral
Posts: 1368
Joined: Mon Oct 27, 2014 12:35 pm

Re: Renting vs Owning Your Home

Post by Admiral » 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.

Here's some info:
https://www.nytimes.com/2017/08/24/upsh ... cades.html
The black-white gap in homeownership in America has in fact changed little over the last century, according to research by Robert Margo and William Collins. That pattern helps explain why, as the income gap between the two groups has persisted, the wealth gap has widened by much more.
Why would I not want to a) have an inflation-protected, cost-controlled asset as my largest monthly payment each month, as opposed to giving this money to a landlord; or b) put my largest monthly payment into something that I can eventually either sell for a significant gain (likely, not assured, of course) or at the very least get my money back? (Yes, it's possible one may take a loss, just as one may take a loss by investing).

If it is affordable I see no reason not to choose buying over renting in most (most, not all) cases.

KlangFool
Posts: 10197
Joined: Sat Oct 11, 2008 12:35 pm

Re: Renting vs Owning Your Home

Post by KlangFool » Mon May 28, 2018 8:01 am

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.

Here's some info:
https://www.nytimes.com/2017/08/24/upsh ... cades.html
The black-white gap in homeownership in America has in fact changed little over the last century, according to research by Robert Margo and William Collins. That pattern helps explain why, as the income gap between the two groups has persisted, the wealth gap has widened by much more.
Why would I not want to a) have an inflation-protected, cost-controlled asset as my largest monthly payment each month, as opposed to giving this money to a landlord; or b) put my largest monthly payment into something that I can eventually either sell for a significant gain (likely, not assured, of course) or at the very least get my money back? (Yes, it's possible one may take a loss, just as one may take a loss by investing).

If it is affordable I see no reason not to choose buying over renting in most (most, not all) cases.
Admiral,

http://www.thomasjstanley.com/2011/11/m ... rule-1-49/

<<The original title of The Millionaire Next Door was That’s Why They’re Wealthy. One of the main reasons that they are wealthy is that they live in an easily affordable home. I have found that when millionaires made their first home purchase, the ratio of the purchase price over their annual household income was just 1.49 [median]. And today they have seven times more wealth [median] than their non millionaire neighbors. In Stop Acting Rich I mentioned that:>>

Many millionaires buy fewer houses than the general public when they bought their first house. The ratio of house price over their household income is 1.49. The general public's idea of affordability is above 3 times their annual household income.

<<If it is affordable>>

The devil is in the detail. Everyone believe that they can afford their houses. But, it cannot be true in all cases.

KlangFool

runner540
Posts: 739
Joined: Sun Feb 26, 2017 5:43 pm

Re: Renting vs Owning Your Home

Post by runner540 » Mon May 28, 2018 8:14 am

Ben Mathew wrote:
Sun May 27, 2018 10:14 am
runner540 wrote:
Sat May 26, 2018 6:18 pm
You don't say much about valuation, but then you also say that you "ran numbers" for your family. Is there any relative price at which Someone should hesitate from buying?

Here's an different kind of anecdote: rent is $1750/month (annual rent of $21k). Comparable unit sells for $375k. Property taxes are 3% annually, plus maintenance and insurance. Should I have bought that house? Even before the mortgage, I'm looking at "throwing away" $15-20k a year, which is going to increase with inflation, similar to rent. And that's before any principal or interest! So I would have to assume that the house value appreciates faster than my investments and faster than rent for a long period of time.

Should I buy this house at $100k? At $1MM? Why or why not?
A few posts upthread, I was asked how I can support buying right now with the high prices in Seattle. I responded with a comparison of buying an $805K condo vs renting a comparable unit in the same building for $3,050/mo.

I'd be happy to do a similar comparison for your example. It looks that you'd be spending $15-20K per year for the condo which comes close to wiping out all rent savings. That seems unusual. Can you break down the costs into hoa, property tax, maintenance, and insurance, so I get a sense of why it's so high? Could you also provide a few more details like location, size, building type, etc.?
I read the Seattle example. This case Seems unusual to you because you are anchored to owning being better. I'm not going to provide my address or neighborhood, but 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?

I look at it as, if I have $375k in taxable investments, I can pay ~$20k/year for a certain size/location of living space:
Rent: $20k of rent will go up, and so will my $375k of diversified, liquid investments.
Buy: move $375k from those diversified, liquid investments, into a single home in a single neighborhood, and pay ~$20k/year in expenses that go up just like rent.

No way would I make that trade for financial reasons, unless I were speculating that that house would go up faster than rent and investments for an extended period.

Disclaimer: I am saving for a home because I expect to buy someday for nonfinancial reasons. I just don't think buying a home is the best for everyone, at any time and any valuation.

JustinR
Posts: 706
Joined: Tue Apr 27, 2010 11:43 pm

Re: Renting vs Owning Your Home

Post by JustinR » Mon May 28, 2018 8:21 am

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.

Here's some info:
https://www.nytimes.com/2017/08/24/upsh ... cades.html
The black-white gap in homeownership in America has in fact changed little over the last century, according to research by Robert Margo and William Collins. That pattern helps explain why, as the income gap between the two groups has persisted, the wealth gap has widened by much more.
Why would I not want to a) have an inflation-protected, cost-controlled asset as my largest monthly payment each month, as opposed to giving this money to a landlord; or b) put my largest monthly payment into something that I can eventually either sell for a significant gain (likely, not assured, of course) or at the very least get my money back? (Yes, it's possible one may take a loss, just as one may take a loss by investing).

If it is affordable I see no reason not to choose buying over renting in most (most, not all) cases.
Spoken like someone who hasn't done the math correctly.

"As opposed to giving this money to a landlord..." - Banal common wisdom spouted off by anyone's in-laws, grandparents, and coworkers. I'm sure ALL of us have heard it a thousand times from random people in our lives. Yes, why wouldn't you take such common cliche advice from people that otherwise have no financial sense.

Yes, many wealthy people buy a house. That's what the typical person in our society does when they have the money to. They would be wealthier if they didn't, though. Once again, buying a house a lifestyle choice. One that many wealthy people choose to do. Doesn't mean you should draw any financial conclusions from it.

ignition
Posts: 185
Joined: Sun Dec 11, 2016 11:28 am

Re: Renting vs Owning Your Home

Post by ignition » Mon May 28, 2018 8:38 am

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 tells me is that most people are bad at saving. And that paying off a house is a forced saving which lets people at least build up some wealth, which they otherwise would spend probably.

nexesn
Posts: 43
Joined: Mon Jan 01, 2018 9:15 pm

Re: Renting vs Owning Your Home

Post by nexesn » Mon May 28, 2018 9:10 am

Jags4186 wrote:
Sun May 27, 2018 10:09 pm
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....
You’re better off living in NJ, Westchester, or Long Island.
For my example, I wasn't looking for alternative living locations, I was looking to hear what others think. I agree, there are obviously cheaper places to live. But, since this was an owning versus buying thread, and at some point, someone said your always better off buying in NYC, instead of renting, I'd like to hear the an opinion about the above question. It's also a genuine scenario given prices in Manhattan right now.

ignition
Posts: 185
Joined: Sun Dec 11, 2016 11:28 am

Re: Renting vs Owning Your Home

Post by ignition » Mon May 28, 2018 9:52 am

nexesn wrote:
Mon May 28, 2018 9:10 am
Jags4186 wrote:
Sun May 27, 2018 10:09 pm
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....
You’re better off living in NJ, Westchester, or Long Island.
For my example, I wasn't looking for alternative living locations, I was looking to hear what others think. I agree, there are obviously cheaper places to live. But, since this was an owning versus buying thread, and at some point, someone said your always better off buying in NYC, instead of renting, I'd like to hear the an opinion about the above question. It's also a genuine scenario given prices in Manhattan right now.
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.

runner540
Posts: 739
Joined: Sun Feb 26, 2017 5:43 pm

Re: Renting vs Owning Your Home

Post by runner540 » Mon May 28, 2018 10:11 am

ignition wrote:
Mon May 28, 2018 9:52 am
nexesn wrote:
Mon May 28, 2018 9:10 am
Jags4186 wrote:
Sun May 27, 2018 10:09 pm
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....
You’re better off living in NJ, Westchester, or Long Island.
For my example, I wasn't looking for alternative living locations, I was looking to hear what others think. I agree, there are obviously cheaper places to live. But, since this was an owning versus buying thread, and at some point, someone said your always better off buying in NYC, instead of renting, I'd like to hear the an opinion about the above question. It's also a genuine scenario given prices in Manhattan right now.
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.

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