If You Are A Saver, Renting Superior To Buying

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DualIncomeNoDebt
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If You Are A Saver, Renting Superior To Buying

Post by DualIncomeNoDebt »

Interesting article and linked academic paper concluding renting was the superior economic choice from 1979 through 2009. http://economics21.org/commentary/renti ... ing-policy. Study shows "wealth gains" from home ownership come not from any intrinsic economic gain due to principal mortgage payments, but from being "forced" to make the principal payments as a function of the mortgage, i.e. forced savings to live in the asset (home).

Stated differently, if you (a) rented and (b) had the discipline to save the difference and put the savings in financial assets, you would have been much better off renting. I've always had the intuitive sense this was the case, due to the sky-high interest, transaction, insurance and maintenance costs associated with home ownership, together with the stunning bubble pricing from ~2002 through 2006, the resultant crash, and a general sense a house is a depreciating asset that fails to provide a monthly or quarterly return on capital (instead the house gets older, materials rot and rust, appliances and plumbing wear out, etc.). Mortgage interest is the real killer.


From the article:
The sense that homeownership was an essential building block to household wealth was a key psychological driver of the mortgage boom. . . . A new academic article in Real Estate Economics turns this conventional wisdom on its head. Using data from 1979 to 2009, the authors demonstrate that renting was the superior investment strategy for most of the past 30 years. Counterintuitive as the finding may be to some, it is actually quite logical. Unless someone possesses the cash necessary to buy a residence, he or she will be renting one way or another. The choice is between renting the property directly or instead renting the capital necessary to buy the property. The amount of capital to be rented is a function of house prices, while the bulk of a mortgage payment is interest, which is the rental payment on this capital. After 2 years, the typical 30-year amortizing mortgage balance has been reduced by less than 3%. This means that a household that took out a $300,000 mortgage with a 5% interest rate to buy a home has only reduced its mortgage balance by $8,600 after two years despite spending nearly $39,000 in total over this period.
They key to understanding why renting is so often superior are “price-to-rent ratios,” which reflect the difference between the monthly cost of renting or buying equivalent residences. While it is often less expensive to rent than it is to buy, the relationship can change over time causing one of the two options to be an especially (or comparatively) good deal in some circumstances. . . . From 1999 to the second quarter of 2006, the cost of buying a home doubled relative to what it would cost to rent the same property (on an average, community-wide basis). To put this change in concrete terms, imagine a two-bedroom, 1,800 square foot condo. In 1999, it required a $1,200 per month mortgage to buy, compared to a $1,000 monthly payment to rent (a price-to-rent ratio of 1.2). For the price-to-rent ratio to increase by 2.2-times over this period it might have cost $3,000 a month (in mortgage payments) to buy the property in 2006, compared to a $1,100 monthly rent payment. In retrospect, it is remarkable that it was the household spending $1,900 per month less to live in the same property that was considered to be "throwing money away." . . . .

Importantly, the authors make clear that in general, renting is only the superior financial choice if the renting household has the discipline to invest its marginal savings into financial assets. Renting generates residual savings because the cash outlays tied to housing consumption (or purchase) are lower. But if renting households, or the individuals themselves lack the discipline to save this money, and instead increase non-housing consumption, any wealth gains will clearly disappear. The basic intuition is that the principal portion of mortgages is what usually leads to more wealth. But as this article shows, that's because it represents incremental savings not because of anything intrinsic to the mortgage itself. Viewed in this light, the economic gains come not from “owning” a home but rather the forced savings generated by the principal portion of the monthly mortgage payment.

It is instructive that at the end of the analysis, the much-touted economic gains from homeownership really come from the forced savings of an amortizing mortgage. And this benefit only accrues to myopic households that would not otherwise save. Thus, the government could replicate the same economic benefit generated by federal housing policy through a simple deduction from checking accounts that could then be deposited into a tax-free savings vehicle. This is an important point to consider the next time someone argues that removing or lowering a housing subsidy will necessarily inflict an acute economic hardship on the nation.
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Re: If You Are A Saver, Renting Superior To Buying

Post by xerty24 »

I agree. The economics have to be really favorable to justify home purchase rather than rental - who thinks a 10x leveraged, illiquid and undiversified investment is the best use of most of your assets?
DualIncomeNoDebt wrote: It is instructive that at the end of the analysis, the much-touted economic gains from homeownership really come from the forced savings of an amortizing mortgage. And this benefit only accrues to myopic households that would not otherwise save. Thus, the government could replicate the same economic benefit generated by federal housing policy through a simple deduction from checking accounts that could then be deposited into a tax-free savings vehicle. This is an important point to consider the next time someone argues that removing or lowering a housing subsidy will necessarily inflict an acute economic hardship on the nation.
Don't give them any ideas, but that sounds a lot like social security.
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DualIncomeNoDebt
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Re: If You Are A Saver, Renting Superior To Buying

Post by DualIncomeNoDebt »

xerty24 wrote:Don't give them any ideas, but that sounds a lot like social security.
Good point.
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Re: If You Are A Saver, Renting Superior To Buying

Post by 2wolves »

From the paper. This doesn't seem to imply what the article referencing it implies.
"Out of the 28 areas considered, only Dallas has a required appreciation rate that is higher than the average return they experienced during the last 25 years. These results imply that if the average appreciation experienced during the past 25 years is a reasonable expectation for the future, buying is currently preferable to renting in most areas.
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Re: If You Are A Saver, Renting Superior To Buying

Post by White Coat Investor »

Back and forth the pendulum swings.

The truth is that you should buy if you're going to be in a home for a long time. But that time period is a lot longer than the 3-4 years people used to quote.
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Re: If You Are A Saver, Renting Superior To Buying

Post by GregLee »

DualIncomeNoDebt wrote:
Unless someone possesses the cash necessary to buy a residence, he or she will be renting one way or another. The choice is between renting the property directly or instead renting the capital necessary to buy the property.
This is short-sighted and wrong, for a very obvious reason. One crucial different between rent and mortgage is that mortgages get paid off, but rents go on and on. Another is that rents go up and up with the cost of living, while mortgage payments don't.

After renting for many years, I noticed that my rent had gone up 100% and was just about to go up another 25%. So I finally decided to buy, and eventually paid off the mortgage. Now, no rent, no mortgage. It's nice having that all behind me.
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kenyan
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Re: If You Are A Saver, Renting Superior To Buying

Post by kenyan »

Didn't read the whole paper, but it appears that you're missing the context. Your statement comes from one set of assumptions - namely an 8-year stay and the risk-free rate of return on investments. The following statement uses different assumptions:

"For the U.S. as a whole, the required appreciation rate is 4.37% and ranges between 3.51% for Kansas-City to 8.08% for Honolulu. Compared with the appreciation rate experienced over the last 25-years, the current required appreciation rate is higher for U.S. as a whole, three out of its four regions and 19 out of the 23 cities included in the sample. The current required appreciation rate is still however, mostly lower than the appreciation rate experienced during the recent housing-boom period (columns 7 and 8). These results suggest that as of the end of 2009, individuals in most areas who expect to change the quality of their home in the future are likely to be better off renting rather than owning if their future price appreciation projections are based on past performance."

The second statement uses assumptions that the renter would invest with an equivalent level of risk to the risk in a house purchase. I didn't look into methodology at all, but that sounds a lot more reasonable than a saver/renter just investing in T-bills.

edit - was referring to 2wolves's post. Should've quoted.
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Muchtolearn
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Re: If You Are A Saver, Renting Superior To Buying

Post by Muchtolearn »

Nice post OP. I have "known" this for years. I remember lamenting that if the money I had put into the house was simply invested after subtracting the rent, I would have done just fine. (Now I rent.)
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Re: If You Are A Saver, Renting Superior To Buying

Post by yobria »

I've been in my condo in San Francisco for 12 years. During that time, its value has exactly doubled, as have rents in the units that are rented. The tax breaks, as well as the inflation/real estate hedge, have been substantial. And I've been able to renovate and customize it. When you own, time is on your side.
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Re: If You Are A Saver, Renting Superior To Buying

Post by Call_Me_Op »

Maybe it's just me, but after paying-off my mortgage, my expenses are so low that it is hard for me to believe I would be better-off renting for the next 30 years.
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Re: If You Are A Saver, Renting Superior To Buying

Post by dad2000 »

It's not this simple, and it depends on where you live. In my metro area, renting has almost always been more expensive than buying, and still is.
xerty24
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Re: If You Are A Saver, Renting Superior To Buying

Post by xerty24 »

Let's face it - housing (and rents) appreciate just a bit more than inflation over the long term, and so if you are willing to rent and invest in equities instead you're likely to come out ahead.

http://observationsandnotes.blogspot.co ... -1900.html
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Re: If You Are A Saver, Renting Superior To Buying

Post by rr2 »

xerty24 wrote:Let's face it - housing (and rents) appreciate just a bit more than inflation over the long term, and so if you are willing to rent and invest in equities instead you're likely to come out ahead.

http://observationsandnotes.blogspot.co ... -1900.html
Tell me how I'll come ahead by renting. My housing expenses (including mortgage/taxes/insurance/maintenance) are $1500/month. Equivalent rent for this house would be $1600-1700/month.
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Re: If You Are A Saver, Renting Superior To Buying

Post by plnelson »

The problem with this report is that it's an apples-and-oranges comparison.

Renting and owning are two completely different experiences; to try to compare them just on a dollars-and-cents basis is like comparing a week in Atlantic City to a week in Paris on a dollars-and-cents basis. There are various reasons why one might prefer one over the other, in both examples, but they are so different that it's unreasonable to treat the underlying taxonomical category ("roof-over-ones-head" or "vacation") as some sort of commodity.
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Re: If You Are A Saver, Renting Superior To Buying

Post by clueless_dude »

I often wonder : if you had enough money to buy a house with cash (no mortgage), would you be better off purchasing the house or investing the money in REITs and using the income generated by the REITs to rent?

I suggest REITs not necessarily because of their relation with the real-estate market but because they pay out a lot in dividends. REITs would be a more diversified and liquid option. On the other hand, you will have to pay tax on the capital gains if/when you sell it. So which one is best?
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Re: If You Are A Saver, Renting Superior To Buying

Post by Littlefinger »

Renting is more annoying in my experience.
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Re: If You Are A Saver, Renting Superior To Buying

Post by MWCA »

Never ceases to amaze me how emotional some home buyers get.
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Re: If You Are A Saver, Renting Superior To Buying

Post by Zander »

I am very content to own. Especially at today's interest rates.
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Re: If You Are A Saver, Renting Superior To Buying

Post by TA_Lurker »

[Rude comment removed by admin LadyGeek]
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Re: If You Are A Saver, Renting Superior To Buying

Post by texasdiver »

I tried very hard to find an acceptable rental house in 2008 when we were moving closer to the city. Had to be nice, well located to both my and my wife's work, in the right school district and school zones, etc. etc. I finally found a really nice house owned by one of the Baylor Assistant Football coaches who had been let go when the head coach was replaced. It was for sale but they were in a hurry and the real estate had them willing to do a year lease.

It was 2008 and yes, I knew we were in the middle of a housing crash (although not so much in Texas) and it was really dang hard to find a nice rental house that fit our criteria in terms of size or neighborhood. We only ended up finding the one house. Came very close to signing the lease but we decided to do a weekend house buying trip through the zip code and ended up finding two nicer houses that when we penciled out the mortgage cost vs renting it was about $500 cheaper to buy and that didn't even take into account the tax deduction. So in the end we bought and subsequently refinanced 2 years later into a 15 year that brought our monthly costs up to about what renting would have been. Given that the owners wanted to sell anyway, we probably would have been tossed out at some point for them to list and sell it so I'm very glad we didn't go that route.

I suppose in some areas renting is a comparable and viable option. But in this part of Central Texas all the nice stuff is pretty much all for sale not rent. With 3 kids and frequently rotating inlaws we need a large house. The typical 3 br 2 ba 1600 sf rental house you find around here in a beater neighborhood just isn't going to cut it.

I don't know if my experience was typical. I really wanted to rent but just couldn't make it work. Now I'm glad I own just for the stability and because I'm a DIY type. If I was single or we had no kids I'd probably feel somewhat different.
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Re: If You Are A Saver, Renting Superior To Buying

Post by BHCadet »

In the short term, renting is better. However, buying is superior to renting in the long run.
Mortgage will always be higher than rent in the beginning.
But, it will not go up with inflation like rent.
And after it is paid off, there is no more rent to pay except for maintenance, tax, and insurance.
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Re: If You Are A Saver, Renting Superior To Buying

Post by Nathan Drake »

Call_Me_Op wrote:Maybe it's just me, but after paying-off my mortgage, my expenses are so low that it is hard for me to believe I would be better-off renting for the next 30 years.
I currently rent, but if I were to own, the annual property taxes, maintenance, and insurance would easily exceed the amount I pay in rent. All of those costs rise accordingly with inflation.

Which is why I continue to rent, saving a significant amount by buying, and am funneling those savings into other investments.
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Re: If You Are A Saver, Renting Superior To Buying

Post by xerty24 »

rr2 wrote:Tell me how I'll come ahead by renting. My housing expenses (including mortgage/taxes/insurance/maintenance) are $1500/month. Equivalent rent for this house would be $1600-1700/month.
Assuming a typical rent ratio of 20, your house might cost around $400k. You invest the $400k you paid for the house instead in long term treasuries paying ~4%. You earn $16k/year or about $1k/month even after taxes. If you invest in stocks instead and make a risky 8%, you'll be ahead by $2k/month. Surely you can earn more than $200/month on several hundred grand?
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Re: If You Are A Saver, Renting Superior To Buying

Post by steadyeddy »

clueless_dude wrote:I often wonder : if you had enough money to buy a house with cash (no mortgage), would you be better off purchasing the house or investing the money in REITs and using the income generated by the REITs to rent?

I suggest REITs not necessarily because of their relation with the real-estate market but because they pay out a lot in dividends. REITs would be a more diversified and liquid option. On the other hand, you will have to pay tax on the capital gains if/when you sell it. So which one is best?
xerty24 wrote:
rr2 wrote:Tell me how I'll come ahead by renting. My housing expenses (including mortgage/taxes/insurance/maintenance) are $1500/month. Equivalent rent for this house would be $1600-1700/month.
Assuming a typical rent ratio of 20, your house might cost around $400k. You invest the $400k you paid for the house instead in long term treasuries paying ~4%. You earn $16k/year or about $1k/month even after taxes. If you invest in stocks instead and make a risky 8%, you'll be ahead by $2k/month. Surely you can earn more than $200/month on several hundred grand?
Tax rates are progressive, and imputed rent is not currently taxable. In retirement, one could withdraw $100k and pay rent, or $80k and own a residence. The latter is far more tax efficient. If a consumption tax is ever levied on imputed rent, the game changes.
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Re: If You Are A Saver, Renting Superior To Buying

Post by Startled Cat »

I was recently playing with the NYTimes buy-vs-rent calculator: http://www.nytimes.com/interactive/busi ... lator.html

I was surprised that variables like the duration of the mortgage and the rate of return on investments didn't have a huge impact on the breakeven. In some cases it made a difference, but these variables would generally wouldn't turn a bad deal into a good deal or vice versa.

What did make a difference was the rate of house price appreciation. With this set to 2%, most scenarios I looked at only broke even after 7-10 years, and the advantage of buying afterwards only grew at a modest pace. Set to 3%, though, breakeven tended to be closer to 5-6 years, and there was considerable upside after that.

This all makes sense because a mortgage lets you lock in today's price using leverage. If the house's appreciation is higher than the cost of leverage, it's generally a good bet. Your mortgage payment doesn't go up even though the value of the house does, but all other things being equal, rents should roughly track house prices. While the house purchase has opportunity costs like the down payment, the stream of mortgage payments gradually inflates away and eventually goes to 0, versus rent payments that will increase indefinitely. Thus even with a high rate of return on investments, renting isn't necessarily better.

I happen to think that inflation will be higher than 2% in the medium-term, which should push me in the direction of buying real estate. But I'm reluctant to tie myself down for at least several years, and I'm not comfortable with the extremely expensive real estate market in the city where I live. For now, I'm continuing to sit it out.
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Re: If You Are A Saver, Renting Superior To Buying

Post by turning_page »

xerty24 wrote:
rr2 wrote:Tell me how I'll come ahead by renting. My housing expenses (including mortgage/taxes/insurance/maintenance) are $1500/month. Equivalent rent for this house would be $1600-1700/month.
Assuming a typical rent ratio of 20, your house might cost around $400k. You invest the $400k you paid for the house instead in long term treasuries paying ~4%. You earn $16k/year or about $1k/month even after taxes. If you invest in stocks instead and make a risky 8%, you'll be ahead by $2k/month. Surely you can earn more than $200/month on several hundred grand?
You noticed the part where rr2 said "Mortgage" right? Assuming that rr2 is paying 4% interest on a 30 year note, 1.25% on taxes, 1.25% on insurance, and 1% on maintenance each year and put 20% down on the house then you are looking at a lot closer to a $220k house.

Now with that knowledge you would want to work with the ~44k down payment, hell lets round it up to $50k to assume high closing costs, even though they are generally covered by sellers these days. Annual returns from a "risky 8%" would be $4,000 to offset rental costs. Rent at $1650 x 12 = $19,800. Renters Insurance would be ~$600. Call it roughly $19,800 + $600 - $4,000 = 16,400 to rent and maintain the money for the down payment. Obviously higher if you went with "safer" returns.

Total P&I, Insurance, Taxes, and Maintenance are running $18,000 a year and first year principal payments would be aproximately $3100, so call it ($18,000 - $3,100 =) $14,900 per year to own.

Year one, apples to apples comparison shows that for rr2's situation it is very likely $16,400 to rent compared to $14,900 to own.

Then of course you have potential tax benefits of writing off $7,000 in interest payments and potential appreciation on the home, not to mention that the principal portion of the payments will increase every year - right along with the rent you would be paying on the equivilent house.

The real answer on the rent or buy equation is "it depends." How long are you going to stay in the house? What are the purchasing and rental markets like in the area? How good are you at negotiating favorable terms? What type of housing are you looking for? There are markets in the US where you could reasonably expect to buy rentals and receive immediate 17%+ annual cash on cash returns by buying and renting out the property. There are other areas where the break even on a rent/buy equation could be over 20 years with very little potential upside on a purchase. It depends, but you do have to do some better math!

Sorry for any poor spellings, drinking a fair bit tonight =)
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Re: If You Are A Saver, Renting Superior To Buying

Post by gd »

Given the financial variables over decades, given the ease of both home ownership and renting in the USA, and given the overwhelming impact of this decision on my life, I found it better to view home ownership as primarily a lifestyle choice.
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Re: If You Are A Saver, Renting Superior To Buying

Post by richard »

turning_page wrote:
xerty24 wrote:
rr2 wrote:Tell me how I'll come ahead by renting. My housing expenses (including mortgage/taxes/insurance/maintenance) are $1500/month. Equivalent rent for this house would be $1600-1700/month.
Assuming a typical rent ratio of 20, your house might cost around $400k. You invest the $400k you paid for the house instead in long term treasuries paying ~4%. You earn $16k/year or about $1k/month even after taxes. If you invest in stocks instead and make a risky 8%, you'll be ahead by $2k/month. Surely you can earn more than $200/month on several hundred grand?
You noticed the part where rr2 said "Mortgage" right? Assuming that rr2 is paying 4% interest on a 30 year note, 1.25% on taxes, 1.25% on insurance, and 1% on maintenance each year and put 20% down on the house then you are looking at a lot closer to a $220k house.
If a typical rent ratio is 20x and rent would be $1600-1700/month, then the equivalent house would cost about $400k ($1650*12*20 is about $400k), not $220k. The amounts you list increase the cost of home ownership, not decrease the cost of an equivalent house.

The main financial advantage of buying a house is leverage - you're borrowing the purchase price. If you make a leveraged bet and prices go up more than interest and other costs, you win. Leverage, however, is risky.
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Re: If You Are A Saver, Renting Superior To Buying

Post by xerty24 »

turning_page wrote:
xerty24 wrote:
rr2 wrote:Tell me how I'll come ahead by renting. My housing expenses (including mortgage/taxes/insurance/maintenance) are $1500/month. Equivalent rent for this house would be $1600-1700/month.
Assuming a typical rent ratio of 20, your house might cost around $400k. You invest the $400k you paid for the house instead in long term treasuries paying ~4%. You earn $16k/year or about $1k/month even after taxes. If you invest in stocks instead and make a risky 8%, you'll be ahead by $2k/month. Surely you can earn more than $200/month on several hundred grand?
You noticed the part where rr2 said "Mortgage" right? Assuming that rr2 is paying 4% interest on a 30 year note, 1.25% on taxes, 1.25% on insurance, and 1% on maintenance each year and put 20% down on the house then you are looking at a lot closer to a $220k house.

Now with that knowledge you would want to work with the ~44k down payment, hell lets round it up to $50k to assume high closing costs, even though they are generally covered by sellers these days. Annual returns from a "risky 8%" would be $4,000 to offset rental costs. Rent at $1650 x 12 = $19,800. Renters Insurance would be ~$600. Call it roughly $19,800 + $600 - $4,000 = 16,400 to rent and maintain the money for the down payment. Obviously higher if you went with "safer" returns.

Total P&I, Insurance, Taxes, and Maintenance are running $18,000 a year and first year principal payments would be aproximately $3100, so call it ($18,000 - $3,100 =) $14,900 per year to own.

Year one, apples to apples comparison shows that for rr2's situation it is very likely $16,400 to rent compared to $14,900 to own.

Then of course you have potential tax benefits of writing off $7,000 in interest payments and potential appreciation on the home, not to mention that the principal portion of the payments will increase every year - right along with the rent you would be paying on the equivilent house.

The real answer on the rent or buy equation is "it depends." How long are you going to stay in the house? What are the purchasing and rental markets like in the area? How good are you at negotiating favorable terms? What type of housing are you looking for? There are markets in the US where you could reasonably expect to buy rentals and receive immediate 17%+ annual cash on cash returns by buying and renting out the property. There are other areas where the break even on a rent/buy equation could be over 20 years with very little potential upside on a purchase. It depends, but you do have to do some better math!

Sorry for any poor spellings, drinking a fair bit tonight =)
Good post, i had overlooked his mortgage and was just doing a cash-purchase-vs-rent comparison. Using your $14900 estimate for annual home expense, about half of this is interest vs maintance, etc, so he's looking at around $7500 in annual ownership expenses if we strip out the leverage. That's about $9k cheaper than renting before opportunity costs, so if he can earn $9k more than the home appreciation on his investments then it will be better to rent;otherwise it will be better to own.

This is where value matters - if the home is $200k you probably are better off owning, while if it's $400k your better off renting. In the $400k case, figure home appreciation at 1% over the 3% inflation rate for a 4% hurdle, so if stocks return at least 6.25% the extra 2.25% excess return will cover the $9k difference in rental costs. I would say 6.25% for stocks is quite conservative for the long term; alternatively with only $200k of capital you'd need to make 4.5% excess return or about 9.5% for stocks to break even. That's a much more aggressive assumption and given the risks ownership would likely be better.

In general it's much easier to consider this comparisons on a preleverage basis. Sure if home ownership is good, 10x leverage makes it better... until you end up way underwater like in the recent crash. Similarly, if you leverage up your stocks, I'm sure you can do better than just 8-10%, especially when margin rates are only ~1%.
Last edited by xerty24 on Sat Aug 11, 2012 7:18 am, edited 2 times in total.
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Re: If You Are A Saver, Renting Superior To Buying

Post by Call_Me_Op »

Nathan Drake wrote:
Call_Me_Op wrote:Maybe it's just me, but after paying-off my mortgage, my expenses are so low that it is hard for me to believe I would be better-off renting for the next 30 years.
I currently rent, but if I were to own, the annual property taxes, maintenance, and insurance would easily exceed the amount I pay in rent. All of those costs rise accordingly with inflation.

Which is why I continue to rent, saving a significant amount by buying, and am funneling those savings into other investments.
That is certainly not the case where I live. To rent a place of comparable size, I would be paying 285% more (than my current taxes, insurance, plus maintenance), give or take. And renters also need insurance, so it' would be even worse than this. Don't forget that real-estate taxes are deductible. I am also sitting on an asset that will very likely be worth a lot more in 20 years.

And that's not to mention that owning a home, I call all of the shots. Nobody can announce next week that I have to leave, or tell me I cannot install something I want, etc.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
OutOfCyan
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Re: If You Are A Saver, Renting Superior To Buying

Post by OutOfCyan »

As always, the rent vs. buy question depends on what the rent-to-buy ratio is where you live. Renting doesn't pay off here - you don't save anything.

I live in a small city (Population density of about 4000 per square mile in my zip code). My home is worth about $160K. Two houses down from me is a single family house, unremodeled, renting for $1400/mo (excludes utilities).

At current rates, that's $1104/mo (2.99%) for a 15-year mortgage or $730/mo (3.64%) for a 30-year mortgage.

Add in property tax and insurance are another $200/mo. It's almost break-even on the 15-year, not accounting for the fact that you can write off the interest payments.

If I could do it over again, I'd take the 30-year and not prepay a cent. I would have invested the money that ended up going toward prepaying my principal.

My sister just closed on a house; her rent cost about $300/mo more than the mortgage does ($85K home in a small, quiet suburb). Her apartment was significantly smaller than her house is.
Muchtolearn
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Re: If You Are A Saver, Renting Superior To Buying

Post by Muchtolearn »

rr2 wrote:
xerty24 wrote:Let's face it - housing (and rents) appreciate just a bit more than inflation over the long term, and so if you are willing to rent and invest in equities instead you're likely to come out ahead.

http://observationsandnotes.blogspot.co ... -1900.html
Tell me how I'll come ahead by renting. My housing expenses (including mortgage/taxes/insurance/maintenance) are $1500/month. Equivalent rent for this house would be $1600-1700/month.
No down payment? What about large maintenance expenses that occur?
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Re: If You Are A Saver, Renting Superior To Buying

Post by Harold »

rr2 wrote:
xerty24 wrote:Let's face it - housing (and rents) appreciate just a bit more than inflation over the long term, and so if you are willing to rent and invest in equities instead you're likely to come out ahead.

http://observationsandnotes.blogspot.co ... -1900.html
Tell me how I'll come ahead by renting. My housing expenses (including mortgage/taxes/insurance/maintenance) are $1500/month. Equivalent rent for this house would be $1600-1700/month.
1) You shouldn't include your mortgage (except maybe your interest expense) in this comparison. That's just a loan you took out to buy an asset.

2) You're probably understating your remaining housing costs. (Many homeowners spend more than $300, or whatever left after your mortgage of that $1500, at Home Depot alone.)

3) You've probably consumed more house by buying than you would have by renting. A renter consuming less home can spend on consumption elsewhere, or save more.
cheapskate
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Re: If You Are A Saver, Renting Superior To Buying

Post by cheapskate »

How can this question have a one-size-fits-all answer ? Even for prudent savers ?

1) The Rent Vs Ownership Cost equation varies dramatically from region to region.
2) In Boom-Bust prone areas (eg. coastal california, particularly SF Bay Area), whether buying is superior depends on whether one bought at the peak of a bubble or at the trough of a bust. For every person that claims they made money on real estate in the SF Bay Area, there is another who bought at the peak of one of the last 2 bubbles and is sitting on a large paper loss. Whereas in the fly-over states, which are generally less prone to booms and busts, where the rent vs ownership costs are less out of whack, buying is more likely to be the better option.

At the end of the day, home ownership seems more a lifestyle choice than an investment.

The constant drumbeat coming out of the real-estate-complex aimed at shaming renters into home ownership is just nonsensical.
lws6772
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Re: If You Are A Saver, Renting Superior To Buying

Post by lws6772 »

I think it depends on the house price. One thing I do miss about renting was all the spare time I had. On average, about an extra 30 hrs. per week.
So many fish, so little time.
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DiscoBunny1979
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Re: If You Are A Saver, Renting Superior To Buying

Post by DiscoBunny1979 »

Nathan Drake wrote:
Call_Me_Op wrote:Maybe it's just me, but after paying-off my mortgage, my expenses are so low that it is hard for me to believe I would be better-off renting for the next 30 years.
I currently rent, but if I were to own, the annual property taxes, maintenance, and insurance would easily exceed the amount I pay in rent. All of those costs rise accordingly with inflation.

Which is why I continue to rent, saving a significant amount by buying, and am funneling those savings into other investments.
-------------------------

This depends upon LOCATION. For instance, I live in California whereas Proposition 13 is still in effect. Therefore, property taxes are no more than 1% the purchase price of the home plus any outstanding bond issues. That makes my Propety tax about 1.20%. I purchased my current home in 2003 for about $175,000. However, I was able to transfer the prior tax basis to this house because I remained in the same county (another California loophole benefit depending upon county). Therefore, my tax basis stayed at $120,000. My Yearly Property Tax Bill, including bond issues is about $1,800. My Insurance is about $1,500. Not including maintenance, that's $3,300 I would not have to pay if I rented.

The question is, what does one consider "maintenance" versus "improvements"? If I were to seperate the two, meaning the house could not function properly without those maintenance items, I would suggest that the yearly budget would be about $5,000. Add the $5,000 to $3,300 and you get about $8,300. $8,300/12 = $691 per month. If I didn't have a mortgage, I don't know where I could rent a place for for $691 that would allow for my 2 dogs and the ability for me to transform it into the special haven I now have. Even if I add the "improvements" I've done that could put both the improvement and maintenance at about $12,000 per year, the total of $15,300 equals about $1,275 a month. Now with that I probably could find a house similar to mine to rent, but why bother? HomeOwnership in California has a few benefits - specifically the Homestead exemption in which one can have up to $100,000 in equity into a house, shielded from bankruptcy/creditors.

No one has figured into their 'savings' the issue of the Homestead exemption, or the fact that with MediCal, California's MediCaid, one can qualify for many welfare programs while owning their own house. Those are key benefits that should be factored into the equation. You might have good health care coverage now, but in the future who knows.

The other issue is that in the 1980s through the 1990s it was relatively easy to find a "fixer" below market, put some bucks into remodeling, and sell at a good profit, being your Primary Residence and turning those 'profits' into the next Primary Residence so that tax burden was essentially $0.00. Of course most folks didn't do that and now that "flipping' is so popular, the abilty to do that today still rests with Location of Property and Price - but the competition is more than what it was.
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Re: If You Are A Saver, Renting Superior To Buying

Post by Petrocelli »

On a related note, taking the bus is cheaper than driving a car.
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yobria
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Re: If You Are A Saver, Renting Superior To Buying

Post by yobria »

This is an endless debate, and there's no right or wrong answer. If you're an effective saver and investor, you'll wind up ok either way. Do what feels right, and don't worry too much about it.
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Re: If You Are A Saver, Renting Superior To Buying

Post by Default User BR »

lws6772 wrote:I think it depends on the house price. One thing I do miss about renting was all the spare time I had. On average, about an extra 30 hrs. per week.
Really? That's 4 hours a day. What exactly are you doing?


Brian
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Re: If You Are A Saver, Renting Superior To Buying

Post by Mudpuppy »

richard wrote:
turning_page wrote:
xerty24 wrote:
rr2 wrote:Tell me how I'll come ahead by renting. My housing expenses (including mortgage/taxes/insurance/maintenance) are $1500/month. Equivalent rent for this house would be $1600-1700/month.
Assuming a typical rent ratio of 20, your house might cost around $400k. You invest the $400k you paid for the house instead in long term treasuries paying ~4%. You earn $16k/year or about $1k/month even after taxes. If you invest in stocks instead and make a risky 8%, you'll be ahead by $2k/month. Surely you can earn more than $200/month on several hundred grand?
You noticed the part where rr2 said "Mortgage" right? Assuming that rr2 is paying 4% interest on a 30 year note, 1.25% on taxes, 1.25% on insurance, and 1% on maintenance each year and put 20% down on the house then you are looking at a lot closer to a $220k house.
If a typical rent ratio is 20x and rent would be $1600-1700/month, then the equivalent house would cost about $400k ($1650*12*20 is about $400k), not $220k. The amounts you list increase the cost of home ownership, not decrease the cost of an equivalent house.
Who says the "typical" rent ratio has to apply? The typical rent ratio reflects the fact that most people buy up when they go from renting to buying. Bogleheads in particular should know to buy laterally, not buy up. If you are paying $1650 on average for rent, a 400k home is buying up in most areas. It might be typical, but that doesn't mean it's fiscally prudent.

Of course, the renting vs buying question is also highly localized to your particular market. Around here, most of the town was built using single family homes, so one can often buy an equivalent home at the same, or lower, cost as renting (even after one factors in property tax, insurance and maintenance). If one lives in a metropolitan area, the housing dynamic is entirely different, with dense housing ruling the day and land at a premium. In that situation, renting very well could be better than buying.

Now as for the study the OP posted. There are several fundamental modeling assumptions that bias the model towards concluding that renting is better than buying. First, they use "typical" modeling atypically. They use national averages (typical numbers) for some of the model (value of property, rental costs, mortgage rates, 8 years between buying properties, 6% real estate fees when selling, 1.5% property tax), but they do not use typical numbers for other parts of the model (instead, everyone pays 20% down payment, has a 30 year mortgage, pays 2% of purchase price for closing costs, and pays 2% of current market price for annual maintenance+insurance). Even though these "atypical" numbers were used by other models, it does not make them appropriate analogs to the actual national averages for those time periods. Second, they assume that a renter would redirect the money that would otherwise be used for the down payment and closing costs as a lump sum seed to an investment account, without backing that up by typical renter behavior. Third, I don't see anywhere in their model where a home owner finally pays off the mortgage and only has annual maintenance+insurance costs. Instead they have homeowners constantly changing houses every 8 years and never paying anything off. Finally, they use data primarily from dense housing metropolitan areas and do not explain how they account for location in the model. Indeed, if you look at the first table which does list specific metropolitan areas, you can see a correlation between density and the modeled appreciation rate (denser areas had higher housing appreciation rates needed to break even with renting) which would suggest they did not adequately account for location in their model.

One can easily see how the model is biased towards the renter and towards the rent-vs-buy question for densely populated metropolitan areas, given these flaws in the model. I would not advocate using this study as "proof" that renting is "always" better than buying. For Bogleheads in particular, this model falls flat on several assumptions, particularly that one would change homes every 8 years, always pay high closing costs, always get a 30 year mortgage, and never pay the mortgage off.
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Re: If You Are A Saver, Renting Superior To Buying

Post by turning_page »

richard wrote:
turning_page wrote:
xerty24 wrote:
rr2 wrote:Tell me how I'll come ahead by renting. My housing expenses (including mortgage/taxes/insurance/maintenance) are $1500/month. Equivalent rent for this house would be $1600-1700/month.
Assuming a typical rent ratio of 20, your house might cost around $400k. You invest the $400k you paid for the house instead in long term treasuries paying ~4%. You earn $16k/year or about $1k/month even after taxes. If you invest in stocks instead and make a risky 8%, you'll be ahead by $2k/month. Surely you can earn more than $200/month on several hundred grand?
You noticed the part where rr2 said "Mortgage" right? Assuming that rr2 is paying 4% interest on a 30 year note, 1.25% on taxes, 1.25% on insurance, and 1% on maintenance each year and put 20% down on the house then you are looking at a lot closer to a $220k house.
If a typical rent ratio is 20x and rent would be $1600-1700/month, then the equivalent house would cost about $400k ($1650*12*20 is about $400k), not $220k. The amounts you list increase the cost of home ownership, not decrease the cost of an equivalent house.

The main financial advantage of buying a house is leverage - you're borrowing the purchase price. If you make a leveraged bet and prices go up more than interest and other costs, you win. Leverage, however, is risky.
A national "typical rent ratio" doesn't matter if you are speaking about specific houses or markets. rr2 gave enough specific numbers to do a real apples to apples comparison. If rr2 has a 30 year note on a $400k house and paid 20% down has realistic costs for taxes insurance and maintenance then he would have to have a -5.7% interest rate (yes I said negative) on his mortgage for the home to be purchased at $400k and carry a cost of $1500/mo on all expenses.

There are many markets in the US right now where a typical rent ratio of 20x is just not realistic; many of them it is too agressive, many where it is too conservative. I personally own two rentals where purchase price was less than half of that ratio and you are more than welcome to rent one of them from me at my asking price of ~150% of my total expenses and believe you are taking me to the cleaners though.
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Re: If You Are A Saver, Renting Superior To Buying

Post by lawman3966 »

GregLee wrote:
DualIncomeNoDebt wrote:
Unless someone possesses the cash necessary to buy a residence, he or she will be renting one way or another. The choice is between renting the property directly or instead renting the capital necessary to buy the property.
This is short-sighted and wrong, for a very obvious reason. One crucial different between rent and mortgage is that mortgages get paid off, but rents go on and on. Another is that rents go up and up with the cost of living, while mortgage payments don't.

After renting for many years, I noticed that my rent had gone up 100% and was just about to go up another 25%. So I finally decided to buy, and eventually paid off the mortgage. Now, no rent, no mortgage. It's nice having that all behind me.
No doubt this is true in many locations and jurisdictions. However, some costs of ownership endure after the mortgage is paid including maintenance, insurance, and critically, property taxes. People have told me that the annual toll on homes in NJ suitable for a middle class family run from $12K on up. In such a high-tax environment, one is never "through paying" for the home. In effect, independently of the mortgage loan, the home owner "rents" his property from the state forever, even after the mortage is paid off. Some people have left NJ upon retirement over this issue, in spite of having strong ties to both family and friends here.

Since I move fairly frequently for work, it's a no brainer. I will rent rather than own in NJ. However, I don't doubt that there are circumstances in which people are better off buying.
plnelson
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Re: If You Are A Saver, Renting Superior To Buying

Post by plnelson »

Nathan Drake wrote:
Call_Me_Op wrote:Maybe it's just me, but after paying-off my mortgage, my expenses are so low that it is hard for me to believe I would be better-off renting for the next 30 years.
I currently rent, but if I were to own, the annual property taxes, maintenance, and insurance would easily exceed the amount I pay in rent.
How is this possible? Doesn't your landlord have to cover those costs in what he charges you for rent?
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Re: If You Are A Saver, Renting Superior To Buying

Post by GregLee »

lawman3966 wrote:
GregLee wrote:... no rent, no mortgage.
No doubt this is true in many locations and jurisdictions. However, some costs of ownership endure after the mortgage is paid including maintenance, insurance, and critically, property taxes.
As you say, location matters. My property taxes on my $600k house on Oahu are $2k/year (they're reduced for over-65 owners, which I am), and the maintenance expenses I see others estimating seem much higher than mine, too. I suppose it helps not to need a heating or an air conditioning system.
Greg, retired 8/10.
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Re: If You Are A Saver, Renting Superior To Buying

Post by AndroAsc »

For all those pro-buyers, who compare prices of rent vs mortgage, please factor in the cost of home ownership too. As a renter, my insurance is much cheaper and I don't have to fork out money to repair/maintain the house. As a homeowner, your insurance are higher and you'll have to fork out money for repair and maintenance costs. Yes, it is true that those extra costs are "priced in" into the monthly rent, which is why it is important to make proper comparisons to mortgage+maintenance prices.

Perhaps someone can do a real analysis of rent vs buy, and explicitly state out how much is the mortgage, and how much is the cost for repair and maintenance. If you want to be nitpicky, one should factor in the time spent on maintaining the house.
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Re: If You Are A Saver, Renting Superior To Buying

Post by 22twain »

GregLee wrote:As you say, location matters.
Indeed. We paid off the mortgage on our 3br 2ba 2000sf house a couple of years ago. Basic recurring costs (taxes, insurance, electricity, gas, water, sewer but not maintenance) came to about $4400 last year. (We really should check our insurance coverage, though.)

This is in a small town in the "flyover country" between the Northeast Corridor and Florida. Not near the beach or in the mountains. The house is in a decent (although not "deluxe") neighborhood on the edge of town and would probably sell for around $150K.
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Re: If You Are A Saver, Renting Superior To Buying

Post by yobria »

AndroAsc wrote:For all those pro-buyers, who compare prices of rent vs mortgage, please factor in the cost of home ownership too. As a renter, my insurance is much cheaper and I don't have to fork out money to repair/maintain the house. As a homeowner, your insurance are higher and you'll have to fork out money for repair and maintenance costs. Yes, it is true that those extra costs are "priced in" into the monthly rent, which is why it is important to make proper comparisons to mortgage+maintenance prices.

Perhaps someone can do a real analysis of rent vs buy, and explicitly state out how much is the mortgage, and how much is the cost for repair and maintenance. If you want to be nitpicky, one should factor in the time spent on maintaining the house.
Right, time is why renting should always cost more than owning over the long term -- your landlord expects compensation for his. If renting is cheaper than owning, your landlord is paying you for the pleasure of fixing your leaky toilet.
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Re: If You Are A Saver, Renting Superior To Buying

Post by xerty24 »

plnelson wrote:
Nathan Drake wrote:i currently rent, but if I were to own, the annual property taxes, maintenance, and insurance would easily exceed the amount I pay in rent.
How is this possible? Doesn't your landlord have to cover those costs in what he charges you for rent?
Maybe the landlord is an optimist on RE appreciation going forward?
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Random Poster
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Re: If You Are A Saver, Renting Superior To Buying

Post by Random Poster »

I've never owned a house in my life, and I don't want to until I can pay cash for the place.

That being said, I'm getting to the point where I would like to have the benefits (as I envision them) that having a house would provide. Things like space for a garden, a small shop for tinkering on a car, a place where you don't have to worry about what next year's rent will be or if you'll even get to stay in your place next year.

Of course, I am probably ignoring the likely downsides, like being responsible for upkeep and the probable headaches involved in selling the place.

Renting may be more care-free, but it does limit your options in various ways.
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Re: If You Are A Saver, Renting Superior To Buying

Post by cheapskate »

Random Poster wrote:I've never owned a house in my life, and I don't want to until I can pay cash for the place.

That being said, I'm getting to the point where I would like to have the benefits (as I envision them) that having a house would provide. Things like space for a garden, a small shop for tinkering on a car, a place where you don't have to worry about what next year's rent will be or if you'll even get to stay in your place next year.

Of course, I am probably ignoring the likely downsides, like being responsible for upkeep and the probable headaches involved in selling the place.

Renting may be more care-free, but it does limit your options in various ways.
Yes. Both renting and ownership have their pros and cons.

One problem with ownership is lack of mobility, which hit lots of people in the current downturn. Unable to sell their current home, they can't move to another location where they could get a job (or a better job). Historically labor mobility has been an important factor in the US economy.
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