Renting vs Owning Your Home

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Ben Mathew
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Renting vs Owning Your Home

Post by Ben Mathew » 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.
Last edited by Ben Mathew on Thu May 24, 2018 12:13 am, edited 1 time in total.

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unclescrooge
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Re: Renting vs Owning Your Home

Post by unclescrooge » Thu May 24, 2018 12:12 am

Yup. Except for the part where owning a home can limit your mobility in a recession, which could hurt you financially.

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tennisplyr
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Re: Renting vs Owning Your Home

Post by tennisplyr » Thu May 24, 2018 6:54 am

Sometimes life isn't about money.
Those who move forward with a happy spirit will find that things always work out.

desafinado
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Re: Renting vs Owning Your Home

Post by desafinado » Thu May 24, 2018 7:14 am

Renting does allow for more elasticity of housing services consumed. A person may first want to live in a two bedroom apartment with a roommate, then a one bedroom with a significant other, then a studio on the other side of town after a breakup and job change, and so on.

BogleMelon
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Re: Renting vs Owning Your Home

Post by BogleMelon » Thu May 24, 2018 7:33 am

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

1. OWNING IS CHEAPER
Only if you would buy the same home you would rent. Most people do not
Ben Mathew wrote:
Thu May 24, 2018 12:05 am
2. OWNING IS A TAX SHELTER

that investor has to pay income taxes on the rent they collect from you.
Banks too have to pay taxes on the gains they make out of you when they lend you the home money. The interest you pay to the bank is priced in accordingly
Ben Mathew wrote:
Thu May 24, 2018 12:05 am
3. OWNING IS LESS RISKY

So the house that you own is actually a pretty safe investment,
***
the risk of buying a house with hidden problems.
So it is not really that less risky. It just has its own set of risks.
Ben Mathew wrote:
Thu May 24, 2018 12:05 am

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.
How can you explain then the numbers of house poor people in the country?
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

KlangFool
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Re: Renting vs Owning Your Home

Post by KlangFool » Thu May 24, 2018 7:35 am

OP,

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?

If someone wants to spend more on housing, they should acknowledge that instead of playing games.

KlangFool

THY4373
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Re: Renting vs Owning Your Home

Post by THY4373 » Thu May 24, 2018 7:42 am

On point one i am reminded of the old saying that the plural of anecdote is not data. Also if one is truly willing to rent something less than they are willing to buy then that is truly the comparison they should be making in my opinion. I wouldn't buy the place I rent because the house is very cheaply built. As a renter I couldn't care less about it.

On point two that is going to vary on the individual. As a person who lives in a moderate tax state in a moderate cost of living area and with the recent tax overhaul it is unlikely I would get much benefit beyond the standard deduction if I owned (unless bought a place much more expensive than I rent). Also my alternative investment is a megabackdoor Roth 401k/backldoor Roth IRA which is also a tax shelter and would shelter my capital gains like owning a home.

On point three that is arguable. Yes in renting I take the risk of rent inflation though I just renewed my lease for the third year with no increase (I try to be a very low maintenance tenant and I am rewarded by my landlord who so far has kept my rent flat). Also my area is low to moderate cost so inflation risk of rent here is historically low. Finally I could easily downsize further if I had too. There are lots of risks to owning a home as it is a non-diversified investment, it can be destroyed any number of ways some which can be expensive to insure against (flooding, earthquakes, etc.). You can have major system failures, you can lose your job and be stuck with a home you cannot unload and therefore lose it and/or are unable to move, etc., etc.

I owned for two decades and did pretty well but right now I love the freedom of not owing. I have more time to do things I enjoy, I have the freedom to pick and move in four years when my son graduates from high school (my job is relatively location agnostic) and I am supercharging my retirement savings.

Honestly I think most folks make the decision on rent vs buy mostly on non-financial reasons and then try to justify that decision with numbers. Do what ever makes you happy and you can afford.

Edit: On asset protection that is also arguable since my 401k is also very well protected. You are correct on remodeling but that also costs money. I actually prefer renting because I don't get the remodeling bug that I did when I owned. More dollars in my pocket as well as more time since I did most remodeling myself. I also think your four year holding period is pretty optimistic given the transaction costs involved with real estate. It is probably fine for times and places with significant appreciation but that is probably not most of the US most of the time.

Honestly the only real negative I have with renting currently is the risk of having to move. Moving is a hassle and it does cost some money even though I'd do a lot myself. I haven't had to deal with that yet but it would not surprise me if I am forced to move before I chose to do so. That is the only negative I can think of with my current setup.

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Smorgasbord
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Re: Renting vs Owning Your Home

Post by Smorgasbord » Thu May 24, 2018 8:44 am

Before I bought my house, it was a rental so I have a good idea of what it would actually rent for. Running the numbers comparing the cost of renting the house vs buying it, it looks like buying was about 8% less expensive than renting. I was in the house for 7 years, and had I moved out much sooner it's quite possible that renting would have been the better option.

Here are my rough numbers:

Costs of Owning:
$20,000 -- Investment loss due to down payment
$52,000 -- PITI
$20,000 -- Maintenance (~2% a year)
$12,000 -- Sale transaction costs (includes refinance costs)
-$7,500 -- Equity/Appreciation (definitely not on the coasts)
$96,400 -- Total

Costs of Renting
$105,000 -- Seven years of rent


So, looking back it does appear that owning was a bit cheaper, but the numbers are fairly close so it seems that changing a variable or two would have made renting cheaper.

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goingup
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Re: Renting vs Owning Your Home

Post by goingup » Thu May 24, 2018 8:49 am

Ben Mathew wrote:
Thu May 24, 2018 12:05 am
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 never got that impression. Most here are home owners, I'd wager. (Where is a poll when you need one?)

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Re: Renting vs Owning Your Home

Post by bloom2708 » Thu May 24, 2018 9:01 am

Smorgasbord wrote:
Thu May 24, 2018 8:44 am
Before I bought my house, it was a rental so I have a good idea of what it would actually rent for. Running the numbers comparing the cost of renting the house vs buying it, it looks like buying was about 8% less expensive than renting. I was in the house for 7 years, and had I moved out much sooner it's quite possible that renting would have been the better option.

Here are my rough numbers:

Costs of Owning:
$20,000 -- Investment loss due to down payment
$52,000 -- PITI
$20,000 -- Maintenance (~2% a year)
$12,000 -- Sale transaction costs (includes refinance costs)
-$7,500 -- Equity/Appreciation (definitely not on the coasts)
$96,400 -- Total

Costs of Renting
$105,000 -- Seven years of rent


So, looking back it does appear that owning was a bit cheaper, but the numbers are fairly close so it seems that changing a variable or two would have made renting cheaper.
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.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

LiterallyIronic
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Re: Renting vs Owning Your Home

Post by LiterallyIronic » Thu May 24, 2018 9:37 am

KlangFool wrote:
Thu May 24, 2018 7:35 am
Why justifying purchasing a house that you would never rent?
Because I'm willing to rent (and temporarily live in) a slum, but I wouldn't want to buy it. It's not buying a house that I'd never rent, it's renting a house that I'd never buy.
Last edited by LiterallyIronic on Thu May 24, 2018 9:43 am, edited 1 time in total.

Mike Scott
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Re: Renting vs Owning Your Home

Post by Mike Scott » Thu May 24, 2018 9:41 am

Buying a home is only partially a financial decision and a dubious investment at best.

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Sandtrap
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Re: Renting vs Owning Your Home

Post by Sandtrap » Thu May 24, 2018 9:44 am

The greatest benefits to owning one's own home cannot be put on a spreadsheet.
That said, purchasing a home as an "investment" with sound financial logic, raises the odds that owning that home will not jeopardize one's financial position going forward.

Renting is a viable option to owning a home . . . until one can own a home. But, life's situations can require either. It's apples and oranges.
j

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Alexa9
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Re: Renting vs Owning Your Home

Post by Alexa9 » Thu May 24, 2018 9:49 am

With most things, there are pros and cons to each.
Owning could be very much more expensive if there are major unexpected repairs (Crack in foundation $50k), significant decrease in home values (Detroit houses are auctioned at $1), higher mortgage rates (they've been historically low lately), etc.

GAAP
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Re: Renting vs Owning Your Home

Post by GAAP » Thu May 24, 2018 10:06 am

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

3. OWNING IS LESS RISKY

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.
I wish...

All Real Estate is local -- and local can be surprisingly small. I've been in exactly the opposite situation due to locality of the sale -- near a recently closed military base -- and the rest of the local market. Moving on a larger scale is even more uncertain.

I would never count on "less risky".

truenorth418
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Re: Renting vs Owning Your Home

Post by truenorth418 » Thu May 24, 2018 10:19 am

GAAP wrote:
Thu May 24, 2018 10:06 am
Ben Mathew wrote:
Thu May 24, 2018 12:05 am

3. OWNING IS LESS RISKY

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.
I wish...

All Real Estate is local -- and local can be surprisingly small. I've been in exactly the opposite situation due to locality of the sale -- near a recently closed military base -- and the rest of the local market. Moving on a larger scale is even more uncertain.

I would never count on "less risky".
I agree completely. When you buy your home, you are investing in the local neighborhood, the municipality, and the state. Lots of things can go wrong that are beyond your control. The reasons you bought your place in the first place are going to change or be less relevant over time.

In my neighborhood in NYC, for example, the quality of life has deteriorated - more panhandling, vagrancy, subway decline, etc. Meanwhile, the federal tax law makes ownership in NYC effectively less economical. All of these factors are completely out of my control.

I have decided to move to another state, but I own my place here, so it's going to cost me a lot of money and time to escape.

But if I were renting, I'd simply wait for the lease to end and walk away.

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Re: Renting vs Owning Your Home

Post by Earl Lemongrab » Thu May 24, 2018 11:48 am

The financials are important, but it's really lifestyle. If you're happy in an apartment or townhouse, renting can make a lot of sense. You have flexibility to get out if you don't like it, or noisy neighbors move in.

If you want a single-family home with three+ bedrooms, two baths, two-car garage, deck or patio, in a nice school district, well the rental inventory is very low in most places. That's just not the typical investor-owned property. What you do find is likely a case where the owner didn't want to sell for some reason. So you might find the lease not renewed after the year, and you're moving again.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

ralph124cf
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Re: Renting vs Owning Your Home

Post by ralph124cf » Thu May 24, 2018 12:09 pm

The changes to the tax law for 2018 change the rent vs. buy calculation.

The increased standard deduction means that, for many families, property tax and mortgage interest do not exceed the standard deduction.

The property tax deduction is severely reduced or eliminated for many higher income owners, but still fully deductible for landlords.

For landlords, repairs are deductible, and remodeling expenses can be written off over several years. Pool services and gardening expenses are also deductible on a rental.

This tax savings means that it should be possible to rent a house for less than the all in costs of owning it.

The best of all possible worlds would be for you and a trusted friend to buy nice houses and rent them to each other.

The IRS frowns on this arrangement, for some reason.

Ralph

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Pajamas
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Re: Renting vs Owning Your Home

Post by Pajamas » Thu May 24, 2018 12:24 pm

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

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.
Vacancies are also a significant factor, but profit is what takes everything into account. Simply acknowledging the fact that a landlord wants to make a profit would mean that buying should be less expensive than renting in general, all else being equal.

But all else is never equal and there are factors that can't be evaluated in dollar terms in making a rent vs. buy decision. Looking at buying or renting a condo is a good way to try to neutralize the apples to oranges problem.
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.
Yes, four or more often five years is generally what is stated as the time someone plans to stay put before buying makes sense financially because of transactional or frictional costs, although there are certainly other factors.

One thing to think about your perception of Bogleheads as somewhat differing on this question from other sources is that Bogleheads are focused on investing as a means of building wealth. People who are not focused on investing might be better off owning than renting simply because it is one way of building wealth. However, investing is generally a more efficient way of building wealth than home ownership.

ponyboy
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Re: Renting vs Owning Your Home

Post by ponyboy » Thu May 24, 2018 12:33 pm

Owning isnt cheaper imo. Yearly...the amount I pay in property taxes, insurance, and added utilities would nearly cover my rent for a year.

Now start adding upgrades, buying more stuff for the house...and fixing things when they break.

Oh and the amount of lost money due to not being able to invest that amount that goes up in thin air.

The only time owning is cheaper is when you buy a house and it appreciates like mad...then you sell it in a couple years and walk away with a boat load of money. Those are the people who think owning is so amazing.

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Re: Renting vs Owning Your Home

Post by DVMResident » Thu May 24, 2018 12:38 pm

ralph124cf wrote:
Thu May 24, 2018 12:09 pm
The best of all possible worlds would be for you and a trusted friend to buy nice houses and rent them to each other.

The IRS frowns on this arrangement, for some reason.

Ralph
^ Is this true? I've never seen any IRS guidance against this assuming the rent is at ~market rate.

JustinR
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Re: Renting vs Owning Your Home

Post by JustinR » Thu May 24, 2018 12:56 pm

Renting is cheaper because apartments are a thing.

In your post you're forcing the comparison of "apples to apples" when the whole point is that in real life you're able to choose between buying a house or renting something much smaller.

If you run the math of renting the smallest apartment that you need versus buying a house, renting will win almost every time. If it doesn't then you're likely forgetting some expense. This is coming from someone who's been both a landlord and renter.

Buying a house is a lifestyle choice. It's not a financial one. Don't fool yourself otherwise.

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Re: Renting vs Owning Your Home

Post by POLO » Thu May 24, 2018 4:06 pm

JustinR wrote:
Thu May 24, 2018 12:56 pm
Renting is cheaper because apartments are a thing.

In your post you're forcing the comparison of "apples to apples" when the whole point is that in real life you're able to choose between buying a house or renting something much smaller.

If you run the math of renting the smallest apartment that you need versus buying a house, renting will win almost every time. If it doesn't then you're likely forgetting some expense. This is coming from someone who's been both a landlord and renter.

Buying a house is a lifestyle choice. It's not a financial one. Don't fool yourself otherwise.
By that logic renting is a lifestyle choice and not a financial one if you compare it to living with your parents.

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Re: Renting vs Owning Your Home

Post by Dottie57 » Thu May 24, 2018 4:12 pm

POLO wrote:
Thu May 24, 2018 4:06 pm
JustinR wrote:
Thu May 24, 2018 12:56 pm
Renting is cheaper because apartments are a thing.

In your post you're forcing the comparison of "apples to apples" when the whole point is that in real life you're able to choose between buying a house or renting something much smaller.

If you run the math of renting the smallest apartment that you need versus buying a house, renting will win almost every time. If it doesn't then you're likely forgetting some expense. This is coming from someone who's been both a landlord and renter.

Buying a house is a lifestyle choice. It's not a financial one. Don't fool yourself otherwise.
By that logic renting is a lifestyle choice and not a financial one if you compare it to living with your parents.
And getting evicted when you still live with parents at age 30+. :shock:

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Pajamas
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Re: Renting vs Owning Your Home

Post by Pajamas » Thu May 24, 2018 4:22 pm

Dottie57 wrote:
Thu May 24, 2018 4:12 pm

And getting evicted when you still live with parents at age 30+. :shock:
It's hard to beat the way the Post reports on stuff like that!

https://nypost.com/2018/05/22/parents-w ... eir-house/

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Re: Renting vs Owning Your Home

Post by Nate79 » Thu May 24, 2018 4:32 pm

I agree with the OP that over the long run owning an equivalent place is better to renting if you extrapolate it out many years. I have done his personally. Buy a house at age 30. Extrapolate to living until 95. That is a long long time to be living with a paid for home. This assume that you do not continuously sell and buy a more expensive home. If you move you buy an equivalent priced home. Once its paid for you never have a mortgage again.

delamer
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Re: Renting vs Owning Your Home

Post by delamer » 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.

But an affordable home that you plan to live in for an extended period of time seems to be a typical Boglehead purchase.

How many Bogleheads are there who — not for lifestyle reasons — decided to rent rather than buy an affordable home so they could invest more?

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Pajamas
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Re: Renting vs Owning Your Home

Post by Pajamas » Thu May 24, 2018 4:50 pm

delamer wrote:
Thu May 24, 2018 4:45 pm
How many Bogleheads are there who — not for lifestyle reasons — decided to rent rather than buy an affordable home so they could invest more?
It seems more frequently to be a "pay off mortgage or invest" question on Bogleheads.

mbasherp
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Re: Renting vs Owning Your Home

Post by mbasherp » Thu May 24, 2018 4:52 pm

I generally agree with your original points. Certainly, there’s a local element at play here- my house is far cheaper to own than rent the equivalent even when factoring maintenance costs. I’m ahead every month even before any appreciation. Some aren’t that way.

But I’ve come to understand that perhaps the most important reason owning can beat renting is the power of long term, fixed rate leverage. Taking out a 30 year mortgage at a low rate when young and riding that sucker to maturity is both an inflation neutralizer and an investment return multiplier. I’m not sure how he’s viewed around here, but I’ve enjoyed the writings of Daniel Amerman on this subject. Basically, inflation arbitrage over long durations is indeed a free lunch in investing and with taxes. The turtle can win the race.

delamer
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Re: Renting vs Owning Your Home

Post by delamer » Thu May 24, 2018 4:59 pm

Pajamas wrote:
Thu May 24, 2018 4:50 pm
delamer wrote:
Thu May 24, 2018 4:45 pm
How many Bogleheads are there who — not for lifestyle reasons — decided to rent rather than buy an affordable home so they could invest more?
It seems more frequently to be a "pay off mortgage or invest" question on Bogleheads.
Yes, there always seems to be an active thread on that issue. And opinions seem to be split on the best choice.

But nobody recommends selling, renting, and investing the difference, as far as I can remember.

Yet the OP says “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.”

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Re: Renting vs Owning Your Home

Post by VictoriaF » Thu May 24, 2018 5:01 pm

Ben Mathew wrote:
Thu May 24, 2018 12:05 am
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.
It is precisely because outside the Bogleheads community, "a house as the ticket to wealth" is an indisputable truism, the Bogleheads emphasize situations when this is not true or is disputable. As a group, the Bogleheads are more educated, smarter, wiser, and better looking than the public at large, and they don't have an incentive to sell you Vanguard funds the way real estate practitioners sell you real estate.

Victoria
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Smorgasbord
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Re: Renting vs Owning Your Home

Post by Smorgasbord » 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.

My sense is that for equal sized places, utilities tend to be more when you rent. As an example, the first year in the house I put in $500+ worth of insulation which I certainly wouldn't have if I was just renting. Also, I doubt the house was a rental when a previous owner put in a 95% efficiency furnace. There are a several efficiency improvements that make sense financially when you own, but not when you rent.

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Re: Renting vs Owning Your Home

Post by thangngo » Thu May 24, 2018 5:07 pm


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Re: Renting vs Owning Your Home

Post by Ben Mathew » Thu May 24, 2018 5:51 pm

desafinado wrote:
Thu May 24, 2018 7:14 am
Renting does allow for more elasticity of housing services consumed. A person may first want to live in a two bedroom apartment with a roommate, then a one bedroom with a significant other, then a studio on the other side of town after a breakup and job change, and so on.
True. I would not advocate sacrificing on the right fit (job, roommates, neighborhood, etc.) in order to buy a house. Renting the right house is preferable to owning the wrong house.
BogleMelon wrote:
Thu May 24, 2018 7:33 am
Only if you would buy the same home you would rent. Most people do not.
Owning does not have to be restricted to single family houses in the suburbs. People renting long term in apartment complexes could consider owning a comparable condo instead.

BogleMelon wrote:
Thu May 24, 2018 7:33 am
Ben Mathew wrote:
Thu May 24, 2018 12:05 am
3. OWNING IS LESS RISKY

So the house that you own is actually a pretty safe investment,
***
the risk of buying a house with hidden problems.
So it is not really that less risky. It just has its own set of risks.
There are a lot of money pit horror stories. But I don't think the risks are that high.
BogleMelon wrote:
Thu May 24, 2018 7:33 am
Ben Mathew wrote:
Thu May 24, 2018 12:05 am
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.
How can you explain then the numbers of house poor people in the country?
Buying more house than they need. Buying is cheaper than renting only if the homes are equivalent. Most people buy too much house on the assumption that it's an investment, not a consumption. It's really both consumption and investment. But people forget that when they live in the house, they are eating into the returns of their investment. When it's a big house, they're eating a lot!
THY4373 wrote:
Thu May 24, 2018 7:42 am
On point two that is going to vary on the individual. As a person who lives in a moderate tax state in a moderate cost of living area and with the recent tax overhaul it is unlikely I would get much benefit beyond the standard deduction if I owned (unless bought a place much more expensive than I rent).
The tax benefits I was referring to (imputed rent not being taxed) comes from owning the house. It does not assume a mortgage. Say you have a $500K house, with $300K left on the mortgage. The imputed rent tax benefit applies to the $200K home equity you have. The tax benefit from the $300K mortgage depends on the deductibility of mortgage interest, which the new tax laws have made more difficult. But the tax benefit from the imputed rent which flows from your $200K home equity remains unaffected.
THY4373 wrote:
Thu May 24, 2018 7:42 am
Also my alternative investment is a megabackdoor Roth 401k/backldoor Roth IRA which is also a tax shelter and would shelter my capital gains like owning a home.
Yes, when the alternative investment is also tax shielded, this advantage washes out. It's more of an issue if someone has run out of tax-shielded space. Building home equity then offers a new source of tax shielded space.
THY4373 wrote:
Thu May 24, 2018 7:42 am
On asset protection that is also arguable since my 401k is also very well protected.
Agree.
THY4373 wrote:
Thu May 24, 2018 7:42 am
I also think your four year holding period is pretty optimistic given the transaction costs involved with real estate.
I used a flat fee broker to buy my current house. That helps some. But yes, the break-even point might be more than four years.
Smorgasbord wrote:
Thu May 24, 2018 8:44 am
Before I bought my house, it was a rental so I have a good idea of what it would actually rent for. Running the numbers comparing the cost of renting the house vs buying it, it looks like buying was about 8% less expensive than renting. I was in the house for 7 years, and had I moved out much sooner it's quite possible that renting would have been the better option.

Here are my rough numbers:

Costs of Owning:
$20,000 -- Investment loss due to down payment
$52,000 -- PITI
$20,000 -- Maintenance (~2% a year)
$12,000 -- Sale transaction costs (includes refinance costs)
-$7,500 -- Equity/Appreciation (definitely not on the coasts)
$96,400 -- Total

Costs of Renting
$105,000 -- Seven years of rent


So, looking back it does appear that owning was a bit cheaper, but the numbers are fairly close so it seems that changing a variable or two would have made renting cheaper.
This is a neat data point -- thanks for sharing. Not sure I understand the $20K investment loss due to down payment. Isn't there an investment loss associated with all costs, not just the down payment?
goingup wrote:
Thu May 24, 2018 8:49 am
Ben Mathew wrote:
Thu May 24, 2018 12:05 am
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 never got that impression. Most here are home owners, I'd wager. (Where is a poll when you need one?)
I too would guess that many if not most are homeowners. But based on the advice given out, it sounds like owning a home is a luxury that you get to have after paying your dues renting. Renting is presented as virtuous, and house buying as an indulgence. My point is that buying a comparable house is often cheaper than renting. Maybe the unspoken subtext is that the rental is smaller or in a less expensive neighborhood than the house under consideration, but if so, that could use more clarity.
bloom2708 wrote:
Thu May 24, 2018 9:01 am
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.
It certainly does!
Alexa9 wrote:
Thu May 24, 2018 9:49 am
With most things, there are pros and cons to each.
Owning could be very much more expensive if there are major unexpected repairs (Crack in foundation $50k), significant decrease in home values (Detroit houses are auctioned at $1), higher mortgage rates (they've been historically low lately), etc.
The first two (foundation crack, local market tanking) are pretty scary. But I think they are not that common. The last one (higher mortgage rates) is more complicated. it's likely to affect prices everywhere. So there's some cancelling that would happen in the when you sell your current house and buy the new one.
GAAP wrote:
Thu May 24, 2018 10:06 am
wish...

All Real Estate is local -- and local can be surprisingly small. I've been in exactly the opposite situation due to locality of the sale -- near a recently closed military base -- and the rest of the local market. Moving on a larger scale is even more uncertain.

I would never count on "less risky".
The base closure was a pretty unfortunate outcome--sorry you experienced that. Local markets can get out of sync with what's going on in the rest of the city. But usually growth in one area of the city filters over to other neighborhoods. I'm seeing that in our metro area right now, and I'm sure that's true in many, many other cities. Most neighborhoods seem to have gone up with the overall city over the last five years-- some slower, some faster, but mostly in the same direction. On a larger scale, take a look at the Case Shiller Price Index for various cities. It's hard to deny that there's a substantial correlation in housing prices across most cities in the U.S. Most markets rose together pre-crisis, fell together during-crisis, and rebounded together post-crisis. It's a correlation. It's not perfect. But it's helpful.
ralph124cf wrote:
Thu May 24, 2018 12:09 pm
The changes to the tax law for 2018 change the rent vs. buy calculation.

The increased standard deduction means that, for many families, property tax and mortgage interest do not exceed the standard deduction.
Please see my comment above on tax advantage flowing from untaxed imputed rent from home equity. It's different from the mortgage tax deduction issue.

ralph124cf wrote:
Thu May 24, 2018 12:09 pm
The best of all possible worlds would be for you and a trusted friend to buy nice houses and rent them to each other.
No, it would be cheaper if you both bought your own house, paid rent to yourself, and not pay income tax on that imputed rent.
Pajamas wrote:
Thu May 24, 2018 12:24 pm
However, investing is generally a more efficient way of building wealth than home ownership.
I think that would be the case only if the owned home is replaced by riskier asset classes such as stocks. I doubt if comparable safe assets like inflation-adjusted bonds will build more wealth in the long run.
ponyboy wrote:
Thu May 24, 2018 12:33 pm
Owning isnt cheaper imo. Yearly...the amount I pay in property taxes, insurance, and added utilities would nearly cover my rent for a year.
Is that rent for a comparable home (size, neighborhood, schools, etc.) ?
JustinR wrote:
Thu May 24, 2018 12:56 pm
In your post you're forcing the comparison of "apples to apples" when the whole point is that in real life you're able to choose between buying a house or renting something much smaller.
Not necessarily. I would encourage the long term renter to consider owning a comparable condo.
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.

But an affordable home that you plan to live in for an extended period of time seems to be a typical Boglehead purchase.
All of this I would agree with. But the advice often given seems stacked against buying unless you are awash in cash. The buy bar is set too high IMO.
Last edited by Ben Mathew on Thu May 24, 2018 7:29 pm, edited 2 times in total.

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Re: Renting vs Owning Your Home

Post by balbrec2 » Thu May 24, 2018 6:12 pm

Own a home because you want to live there, period. If you want to invest in real estate
for profit, buy and manage property as a landlord or buy REIT's. A house you live in is
illiquid as an investment and does not offer the same advantages to you that a rental
property owner would get.

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Re: Renting vs Owning Your Home

Post by Slacker » 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 are buying a home that is virtually identical in all aspects to the homes we were trying to rent (too many Landlords were fighting against us on our two pets - particularly the cat - so we switched to purchase).

I find with the following assumptions, that buying is break even with renting for the area we are purchasing in (after 39 months):
1. Market returns (nominal) of 8% or less.
2. 20% downpayment + 1.2% closing costs
3. 15 yr mortgage
4. Inflation of 2.5% or more (equally applied to home value and rent paid)
5. Difference between Rent and PITI is invested in 100% stocks along with downpayment less security deposits and non-refundable fees
6. 5% cost of selling the property (the house we are buying, the seller is paying 2.4% to each of the selling and buying agents for 4.8% total cost).
7. $200 / month maintenance

Homes we were going to rent were in the 1750sq ft to 2000 sq ft size range. Home we are buying is 1890sq ft.

We would not want to and for various reasons cannot rent a 1 or 2 bdrm apartment...if we could and wanted to, we'd be buying a 1 or 2 bdrm condo instead of a house. Whether renting or buying, you still have to do lawn maintenance and pay the same amount for utilities.

If I own, I can call the plumber of my choice to come out at the time of my choosing (or fix it myself) while if I rent, the landlord can get around to getting a plumber after I've notified them multiple times and sent warning letters.

If I own, I can rent out a room or two. If I rent, I can say I've personally never seen a lease that allowed the renter to sublet - closest I've seen is if all "roommates" signed on to the lease at the same time.

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Re: Renting vs Owning Your Home

Post by Smorgasbord » Thu May 24, 2018 8:50 pm

Ben Mathew wrote:
Thu May 24, 2018 5:51 pm
This is a neat data point -- thanks for sharing. Not sure I understand the $20K investment loss due to down payment. Isn't there an investment loss associated with all costs, not just the down payment?
You're absolutely right that potential investment losses should also be factored in for the other expenses as well, but the down payment was a big expense where I remember the amount and date so it's easy to calculate how much I lost by putting down 20% :oops:

In the comparison, the investment losses on the theoretical rent paid in the first few years in excess of PITI would have pushed the scales a few thousand more in favor of buying. However, I do recall the first few years being particularly rough in terms of maintenance (new roof, etc.) and writing a few big checks while the last few years were comparatively low maintenance. That would balance out a bit of the investment losses from the theoretical rent paid in excess of PITI.

All in all, the numbers probably wouldn't shift by much if I worked out all expenses/investments on a monthly basis.

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Re: Renting vs Owning Your Home

Post by EddyB » Thu May 24, 2018 9:30 pm

KlangFool wrote:
Thu May 24, 2018 7:35 am
OP,

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?

If someone wants to spend more on housing, they should acknowledge that instead of playing games.

KlangFool
That’s an obviously flawed portrayal. An owner holds a bundle of rights much broader than the mere right of occupancy. One may be interested in the bundle of rights that comes with a higher-end property, but not willing to rent the same property (for mere occupancy) if its potential is not accessible for a tenant, if the certainty of continued enrollment in the neighborhood school isn’t assured, etc.

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Re: Renting vs Owning Your Home

Post by JustinR » Thu May 24, 2018 9:33 pm

Smorgasbord wrote:
Thu May 24, 2018 8:44 am
Before I bought my house, it was a rental so I have a good idea of what it would actually rent for. Running the numbers comparing the cost of renting the house vs buying it, it looks like buying was about 8% less expensive than renting. I was in the house for 7 years, and had I moved out much sooner it's quite possible that renting would have been the better option.

Here are my rough numbers:

Costs of Owning:
$20,000 -- Investment loss due to down payment
$52,000 -- PITI
$20,000 -- Maintenance (~2% a year)
$12,000 -- Sale transaction costs (includes refinance costs)
-$7,500 -- Equity/Appreciation (definitely not on the coasts)
$96,400 -- Total

Costs of Renting
$105,000 -- Seven years of rent


So, looking back it does appear that owning was a bit cheaper, but the numbers are fairly close so it seems that changing a variable or two would have made renting cheaper.
There's no point in comparing buying a house to renting that same house.

You're able to save and invest substantial amounts of money by renting a smaller place than you'd buy.

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Re: Renting vs Owning Your Home

Post by oldzey » Thu May 24, 2018 9:41 pm

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Re: Renting vs Owning Your Home

Post by willthrill81 » Thu May 24, 2018 9:56 pm

As others have noted, renting often looks cheaper than owning because people aren't comparing apples to apples. You can't rightly compare a small apartment to a typical single family dwelling.

When I recently did a comparison of our home (a 3/2 just shy of 1,200 sq. ft.) to comparable homes and factored in the cost of property taxes, maintenance, and homeowners insurance instead of renters, we are getting a little over a 5% return on the market price of our home, which is about 25% more than what we paid for it 3.5 years ago.

Stanley's study of American millionaires found that nearly all of them owned their homes. Obviously, correlation does not equal causation, but I don't think that finding should be taken lightly.

Where Americans have gone off the rails with homes is not in owning them but in demanding ever larger homes even as the number of people in the median home has declined.

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Re: Renting vs Owning Your Home

Post by Portfolio7 » Fri May 25, 2018 2:26 am

Circumstances matter. We've experienced every kind of financial result, but I'm not sure we'd change anything.

Our first home was purchased as the early 90's housing recession in our area was turning around. In 9 years it tripled in value. Near as I could estimate, we earned about 21% annually on that investment.

We had to move for my work. We made a quick decision on a new home, probably not the wisest thing, although DW is happy - and happy wife, happy life, right? The great thing about the new home is it barely dropped in price during the great recession. It also didn't go up much during the recovery. Only in the last few years has the price increased. Overall, net of taxes and tax benefits, insurance, etc, I estimate our return over 13 years just recently grew to hit breakeven, including the benefit of not paying rent in the equation. Once I add in some of the unique repairs we've had and HOA mandated costs, we likely would have been slightly better off renting.

Another property, purchased for family to live in, was the right home for them - but the return to us will be negative. There's a huge building boom there that's going to keep the price low, and it will likely be 4 or 5 years more before circumstances allow us to unload the property.
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Re: Renting vs Owning Your Home

Post by ignition » 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)

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Re: Renting vs Owning Your Home

Post by Dandy » 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.

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.

Finally, I seen the negatives of retirees aging in place in a house that is emotionally comfortable but unsuited to their emerging needs. Also, the burden of heirs trying to get the house ready for sale and the lack of an "estate" sale's pricing power. I want to spare our heirs of the stress of handling that part of the estate.

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.

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.

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Re: Renting vs Owning Your Home

Post by THY4373 » Fri May 25, 2018 8:16 am

Ben Mathew wrote:
Thu May 24, 2018 5:51 pm

The tax benefits I was referring to (imputed rent not being taxed) comes from owning the house. It does not assume a mortgage. Say you have a $500K house, with $300K left on the mortgage. The imputed rent tax benefit applies to the $200K home equity you have. The tax benefit from the $300K mortgage depends on the deductibility of mortgage interest, which the new tax laws have made more difficult. But the tax benefit from the imputed rent which flows from your $200K home equity remains unaffected.
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?

Now if I was retired and did have some control over my income there very clearly could be an advantage in owning but this seems a highly YMMV situation pretty like every other aspect of this analysis.
Last edited by THY4373 on Fri May 25, 2018 8:39 am, edited 2 times in total.

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Re: Renting vs Owning Your Home

Post by THY4373 » Fri May 25, 2018 8:32 am

willthrill81 wrote:
Thu May 24, 2018 9:56 pm
As others have noted, renting often looks cheaper than owning because people aren't comparing apples to apples. You can't rightly compare a small apartment to a typical single family dwelling.
There is a huge middle ground beyond tiny apartment vs 3000 square foot house. I rent a single family home and when I ran the numbers rent vs own it was largely a wash and in any case I would not own this particular home because it is built very poorly. If I did buy I would probably buy a smaller home than I rent though it would be a higher end town home so more expensive. And in any case if truly your options are rent 800 square foot apartment vs 3000 square foot house then those are your options and you can compare them. They may not be the options you would consider but it might be for others.

willthrill81 wrote:
Thu May 24, 2018 9:56 pm
Stanley's study of American millionaires found that nearly all of them owned their homes. Obviously, correlation does not equal causation, but I don't think that finding should be taken lightly.
Stanley also found a strong correlation between millionaires and ownership of large domestic cars if I recall. So clearly the path to becoming a millionaire is home ownership and Crown Victorias (except they aren't made any more so we are doomed!).

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Re: Renting vs Owning Your Home

Post by Pajamas » Fri May 25, 2018 9:16 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.
Sure they do, often starting with a dormitory. There's a big difference in what you might choose when you expect to be living in a place indefinitely as opposed to just a year or even a few years.

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Re: Renting vs Owning Your Home

Post by LiterallyIronic » Fri May 25, 2018 9:28 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.
I don't know about a ton of people, but we certainly did. Rented a poorly insulated and poorly lit basement with no kitchen for $400/month. It wasn't counter-intuitive at all. It allowed us to save money for a 29% down payment while also paying my university tuition in cash. But that was no place to raise a baby, so we bought a house. Renting a dump allowed us to save enough money to make our mortgage PITI $808. Shortly after moving in, our neighbor bragged to us that she bought her house ten years ago when the housing market tanked, so her mortgage was only $1,200. I didn't have the heart to tell her that that was 50% higher than ours.

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Re: Renting vs Owning Your Home

Post by willthrill81 » Fri May 25, 2018 9:33 am

THY4373 wrote:
Fri May 25, 2018 8:32 am
willthrill81 wrote:
Thu May 24, 2018 9:56 pm
Stanley's study of American millionaires found that nearly all of them owned their homes. Obviously, correlation does not equal causation, but I don't think that finding should be taken lightly.
Stanley also found a strong correlation between millionaires and ownership of large domestic cars if I recall. So clearly the path to becoming a millionaire is home ownership and Crown Victorias (except they aren't made any more so we are doomed!).
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.

In the absence of causal research, which is highly impractical in this topic, we must make the most reasonable conclusions we can with the data we have. Stanley also found that over 90% of the millionaires he studied had at least a four year degree. Do you doubt that there is likely some kind of causal relationship between education and net worth? I certainly don't.

Regarding nearly all millionaires owning rather than renting, Stanley believed that this was partially due to millionaires settling down in one place and not moving around nearly as much as others. Setting down roots in one place allowed them to build relationships with others as well as their reputation, business, practice, etc. So perhaps it wasn't entirely due to the finances associated with home ownership as it was the other factors, but that doesn't mean that we can say that if they had rented instead that their outcome would have been the same.

I don't claim to fully grasp everything that is going on here, but as I said, I don't think we should take Stanley's finding too lightly.
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Re: Renting vs Owning Your Home

Post by THY4373 » Fri May 25, 2018 9:36 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.
I certainly would not call where I rent horrible not by a long shot but there are some things that would prevent me buying here:
  • House are cheap builder grade spec homes. They aren't aging particularly gracefully and I would not want to take on the maintenance they need and will continue to need over time.
    Neighborhood is close to son's private school but the folks who live here and I don't have a whole lot in common (not a value judgement but this is not a place I would put roots down in).
    I don't really want a single family home in the long run. I would prefer a condo or townhome however those are more than I want to pay and/or not well located to son's school (which he'll be graduating from in four years).
    I plan to vagabond (travel around the world) in my early retirement in ten years or less and I am not sure buying now makes sense if I want to do that.
    I am burned out on home maintenance, yard work, etc. If I owned I would feel the urge to do a lot more than I do as a renter. I love having additional free time/money.
Last edited by THY4373 on Fri May 25, 2018 9:59 am, edited 1 time in total.

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