Renting forever: financial suicide?

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countofmc
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Renting forever: financial suicide?

Post by countofmc » Mon Aug 11, 2014 4:13 pm

My wife and I are DINK, early 30s, living in the SF Bay Area. In terms of saving, debt, retirement, etc, we feel like we are finally on a good path. However, the one missing component is the purchase of a home.

We both make fairly modest salaries for this area, and simply cannot afford to buy unless it's something like a 1 bedroom condo, or a house that will give us a 2 hour commute (or worse). We currently rent a 1 bedroom condo for an amount that would make most people in other parts of the country raise their eyebrows quite a bit, but we can't see ourselves actually buying a 1 bedroom condo.

That being said we both like our jobs, really like it here in the Bay Area, and don't have any immediate plans to move. We are starting to consider the very real possibility that we might be lifelong renters. But I'm also worried this might be financial suicide, so to speak. Even the most pessimistic "should you buy a home" calculators seem to weigh in favor of buying if you are going to stay in a location for a long period of time (as we are planning on doing). So I'm not sure if we should just bite the bullet and buy SOMETHING (even if it is a 1 br condo)? Thoughts would be appreciated.

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Re: Renting forever: financial suicide?

Post by Professor Emeritus » Mon Aug 11, 2014 4:27 pm

The rent versus buy decision has NO repeat no easy analytical solution. Unfortunately in places like the Bay area you are directly and negatively affected by all the various government housing policies and international economic trends. Your fundamental problem is not rent v buy, it is low income for the area in which you chose to live. Speculators in housing will rent at prices that would not pay for the property. They are betting on an increase in price. You can profit by renting these properties, but may have to move on short notice You will survive fine as long as you do not have children. Having kids is the financial suicide for moderate income people in a high cost area.

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Re: Renting forever: financial suicide?

Post by Gropes & Ray » Mon Aug 11, 2014 4:30 pm

I think I would make the decision based on the length of time you plan on living in whatever you buy. If you plan to have kids and move to a larger home in the next few years, the timeframe may not be conducive to buying. On the other hand, if you think you'll live in a one bedroom for the next 10 or more years, you may as well own it. This http://www.nytimes.com/interactive/2014 ... .html?_r=0 may be instructive for you.

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Re: Renting forever: financial suicide?

Post by killjoy2012 » Mon Aug 11, 2014 4:30 pm

Just my opinion, but buying a home is often over rated (financially). Yes, it's the American Dream. But once you factor in the maintenance costs, eventual renovation costs, property taxes, mortgage interest, PMI(?), the overall stress & worry, etc... you'll be lucky to break even over 10+ years. Odds get better the longer you hold.

- Are you and your wife from the Bay area?
- Do you work in IT and are you committed to working there for the next 10+ years?

If the answer to either is No, then I would certainly continue to rent. Aside from the $ aspect, owning a house is also an anchor.

In 2009, when we were in the 'Great Recession', I was extremely close to accepting a job with Ebay/Paypal and moving from the Midwest to San Jose. Given that my answers to both of those questions were either 'no' or 'i don't know', it was clear to me that renting was the only option. In talking to the people that I interviewed with, I almost had a heart attack when they told me a decently nice 2BR apt within 20 minutes of the office was probably going to run $4k/month... but it is what it is. I don't think buying provides a significant saving unless you make a very risky assumption that property values will continue to rise as they have there for the past 20 years. Something about that "buying high" idea not being a great idea.
Last edited by killjoy2012 on Mon Aug 11, 2014 4:35 pm, edited 3 times in total.

lawman3966
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Re: Renting forever: financial suicide?

Post by lawman3966 » Mon Aug 11, 2014 4:31 pm

There are many reasons why it's not financial suicide to be a lifelong renter. I will turn to the specific issue of buying a 1-br condo now, as I'm sure people smarter than me will chime in later with all sorts of more detailed financial data.

I think it would be a major error to buy a place, just to be an owner instead of a renter. Aside from anything else, if you move after only a couple of years, the transaction costs will likely exceed the capital gain on the sale. And, that's you have a capital gain instead of a loss upon selling the condo, which is not guaranteed.

I see owning as part lifestyle decision, and part financial decision. If you see a place you like, want to live in, expect to be there a long time, and better still have kids who would benefit from the local school system, buying a home makes a lot of sense.

However buying solely for financial reasons seems misguided to me. I recall seeing articles comparing long-term homeownership and long-term stock ownership over the long haul, with stock ownership usually coming out ahead. I don't have any cites handy, but you could readily research this topic before buying anything primarily to get tax deductions and capital gains.

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greg24
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Re: Renting forever: financial suicide?

Post by greg24 » Mon Aug 11, 2014 4:33 pm

Lots of people around here, including myself, think that purchasing a home is a lifestyle decision. I don't see anything in your post about your desire to purchase, only a fear of a financial mistake.

Given the many articles and studies questioning the long term return of owning a home, I don't think you need to fear the financial downside of rent.

I would rent forever, if I were in your shoes.

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Re: Renting forever: financial suicide?

Post by WhyNotUs » Mon Aug 11, 2014 4:33 pm

The SF market is very tough, high rents, low vacancy, and very high sales prices. There is no one right answer as a lot of it depends on unknowables about the future- future sales prices, future rents, future interest rates, future jobs, and your family plans.

Renting is not financial suicide. It is more of an inconvenience- moving, rent increases, inability to change unit. If you are saving and living within your means and enjoy where you live, then life is good.

I would look at how much my rent would buy after 20% downpayment and see what that could get me without moving in a way that increases travel time more than 15 minutes or into a neighborhood that I did not like. If that would buy something that would improve your quality of life, then it is worth considering. If not, most of the benefits of home ownership can be achieved for you by starting your investment life in your early 30's.

Unless the City is successful in dealing with rental shortage, everyone may end up in the east bay or beyond. In the meantime, if you like your unit see if you landlord is interested in a long term lease with rent escalation.
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Re: Renting forever: financial suicide?

Post by livesoft » Mon Aug 11, 2014 4:36 pm

This brought a smile to my face. We rented until we were in our late 30's. We missed out on several real estate bubbles. You all still have a few years to go before you should be asking about this particular topic.
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celia
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Re: Renting forever: financial suicide?

Post by celia » Mon Aug 11, 2014 4:48 pm

My aunt was a lifelong renter in Southern California until about age 60. As she was thinking about retiring, she was afraid of all the unexpected rent increases and what she would have to pay for rent 10, 20, 30 years down the road. We helped her locate a condo near us and she bought it, knowing her HOA and property taxes would increase much less than rent would. After she adjusted to fixed costs, she was very happy to retire at 65.
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Re: Renting forever: financial suicide?

Post by retiredjg » Mon Aug 11, 2014 4:51 pm

There was a time when buying a home had a definite financial advantage for many (most?) people who could afford it.

After the housing meltdown a few years ago, I'm no longer convinced that buying a home is an investment that can be depended on to be profitable or even to break even. I'm thinking now that it might be profitable and it might not - an unknown and one that is not necessarily tied to doing something stupid (like buying too much house).

So no. I don't think that renting forever is financial suicide. It may or may not be the best financial decision - we just don't know yet. But even when you can look back and say "we should have bought/not bought", I doubt the difference would amount to "financial suicide". Add in the particulars of the Bay area and I think the outcome is even less sure.

There is also more to owning a piece of property than the finances. There are emotions involved in this and you would ignore that at your peril. If you yearn to own, you probably should if you can afford it. If you don't yearn to own, you probably shouldn't, even if you can afford it. Owning a home is expensive. Owning a home is a pain in the rear. For some people it is worth it. For others...not so much.

From your post, I suspect you may fall into the "not so much" category. At least for now. In another 10 years, things might be different.

countofmc
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Re: Renting forever: financial suicide?

Post by countofmc » Mon Aug 11, 2014 5:20 pm

celia wrote:My aunt was a lifelong renter in Southern California until about age 60. As she was thinking about retiring, she was afraid of all the unexpected rent increases and what she would have to pay for rent 10, 20, 30 years down the road. We helped her locate a condo near us and she bought it, knowing her HOA and property taxes would increase much less than rent would. After she adjusted to fixed costs, she was very happy to retire at 65.


Well this is kind of our "back-up" plan. Just rent indefinitely, save as much $$$ as possible, and then when we get close to retirement see what kind of situation we are in. There are certainly very nice and much cheaper places to live in the East Bay area that would make commuting a huge pain in the butt, but if commuting was not in the picture we'd be happy to live in.

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Re: Renting forever: financial suicide?

Post by livesoft » Mon Aug 11, 2014 5:26 pm

Remember this poll about home values?

viewtopic.php?f=2&t=143735&newpost=2135806

A significant number of folks are still underwater.
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YttriumNitrate
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Re: Renting forever: financial suicide?

Post by YttriumNitrate » Mon Aug 11, 2014 5:36 pm

San Francisco's price-to-rent ratio is now at 30-1. By comparison, Chicago and New York are at 16-1 and 15-1, respectively. A better question might be whether or not it would be financial suicide to extend yourself to buy a house in that market.

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Re: Renting forever: financial suicide?

Post by Alskar » Mon Aug 11, 2014 5:44 pm

I don't think there is a clear answer to your question, but FWIW I personally would buy the 1 bedroom condo. I would do so to get some control of my housing expenses. The HOA fees for the condo will go up over time, but hopefully not as fast as rent. By buying vs renting you avoid having to move due to onerous rent increases and you get some control of your housing costs.

I'm not sure where all of the negatively about houses as an investment are coming from. I don't think homes in many parts of the country appreciate very quickly, but a home in SFO should do very well over the long haul. Buying a reasonably sized condo in SFO seems like a good idea to me.

I purchased my home in Portland, OR almost exactly 20 years ago. According to Zillow it is now worth more than 4x more than I paid for it. Yes, I've had maintenance, property taxes and such, but the rent on the accessory unit (mother-in-law apt) in the basement more than pays for property taxes, maintenance and such. I feel like my home, while not a true investment, has done rather well.
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Re: Renting forever: financial suicide?

Post by dbCooperAir » Mon Aug 11, 2014 5:54 pm

With todays rates I may think twice if this is an area you really plan on staying in. Maybe it will work, maybe not but you have to live some place.

If rates ever do rise, say 7%-10% you will look like a genius :wink:
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rob
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Re: Renting forever: financial suicide?

Post by rob » Mon Aug 11, 2014 6:10 pm

Don't underestimate how much of a money pit some houses are...... I wished I was renting the last decade in hind sight instead of the HUGE costs - new roof, water damage, basment issues, plumbing issues, new oil burner, air con, hot water, dishwasher, carpet, paint inside and outside and on and on.

I think it's FAR from financial ruin.......
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Re: Renting forever: financial suicide?

Post by kmok » Mon Aug 11, 2014 6:16 pm

Buying or rent, it is a huge gamble. At the Bay Area with such a high price/rent ratio and historical long term growth in price over inflation, you are gambling either way. If you buy at such high price/rent ratio means unless the price continue to rise significantly faster than inflation, you might be better off renting. If you rent, rent might go up significantly faster than inflation in the long term future and thus you would have been better off buying a house now even at the current high price/rent ratio. It is risky either way.

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Phineas J. Whoopee
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Re: Renting forever: financial suicide?

Post by Phineas J. Whoopee » Mon Aug 11, 2014 6:19 pm

Where I live the advice is don't, under any circumstances, buy a 1-bedroom apartment (regardless of the nature of the legal ownership arrangements) because the majority of ownership apartments are that size, therefore you'll not realize a really, really big capital gain when you sell two to four years later. Presumably it's obvious that the overall demand profile will shift.

My interpretation of such advice is that if one intends to live in a place for a long, long time one-bedroom apartments are the best there are. They're cheaper because adviser-believers think they may not be worth so much of a higher price in just a couple of years. Price makes a practical impact upon purchase and upon sale. Take the "they're all dreck" price today, and don't worry about what the price might be in three or four decades.

The majority of advisers, of course, are usually wrong.

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Re: Renting forever

Post by communipaw » Mon Aug 11, 2014 6:43 pm

My aunt was a lifelong renter in Southern California until about age 60. As she was thinking about retiring, she was afraid of all the unexpected rent increases and what she would have to pay for rent 10, 20, 30 years down the road.

I'm retired, live in the Washington DC area, 10 easy miles from the White House, in a condominium apartment with the mortgage paid off but with a high condominium fee, $600, that will keep going up with inflation. I really want to live in a rental apartment in the middle of DC and not own and can afford to do so ...now.
Just as the aunt of one of the posters, I am worried about inflation as a renter. But is that maybe an exaggerated fear?
Mortgage payments, if any, are stable but isn't everything else in a place that you own [utilities, maintenance, etc.] subject to inflation the way rent is? Did people who were renters during the 1970s to early 80s inflation suffer that much more than owners from inflation?

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Re: Renting forever: financial suicide?

Post by chameleon » Mon Aug 11, 2014 8:23 pm

It makes sense to buy in a high growth area and it makes sense to rent in an area with ridiculous price/rent ratio. I bought in a high growth neighborhood and my house appreciated 8% a year and was not effected nearly as much by the housing bust. You really have to select areas where there is a firm middle/upper middle class with good schools. As with all real estate appreciation location amd demographic is key.

Buying in the silicon valley seems like a loser's game though. There's a point in the future where a lot of those IT companies (and employees) will find it far more beneficial to relocate to cheaper states. You see some of this happening in Austin, Texas already but as those "new" cities continue to grow at a rapid pace and become cultural centers as well I imagine the move will pick up steam.

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Re: Renting forever: financial suicide?

Post by john94549 » Mon Aug 11, 2014 9:07 pm

Here we go again. My wife and I bit the bullet and bought in Sunnyvale in 1973 (for $43K). Sold in 1978 and bought in Lafayette (in 1978) for $180. Add a few zeros. We've been up and down the "assumed" property value ladder so many times it wants to make your head swim. Bottom line: if you find that "perfect house", and can afford it, buy it.

Not a big fan of renting (especially given mortgage rates these days), but others disagree.

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Re: Renting forever: financial suicide?

Post by Lancelot » Mon Aug 11, 2014 9:21 pm

I've done both, rented and owned. Renting allows freedom to move; ownership might give you a chance at a nice future capital gain.

After I ERd, I moved to Asia and I've always rented, rent is cheap and I can't legally own real property in Thailand (in my own name) so why buy. Besides, I like the freedom to move and not have to go through the hassle od selling/renting my property.

However, I'm considering moving back to the US but still doing a lot of travel. So I'm back to square one: Do I buy or do I rent :)
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Re: Renting forever: financial suicide?

Post by rj49 » Mon Aug 11, 2014 9:42 pm

The unstable and uncertain status of marriage, employment, and other factors are good arguments to support a renting lifestyle, especially in a place where most housing is unaffordable for most. Either if you could lose a job, which could jeopardize paying a mortgage, but if you needed to move elsewhere for employment reasons, renting gives you that flexibility (from what I've read, people stuck in underwater mortgages is limiting job growth since people simply can't afford to move where jobs are more plentiful). Then it's not a pleasant prospect to plan for, but death or divorce could change your lives and a mortgage would also be an encumbrance in that situation as well. Then if you have kids and want to move for greater safety/better schools, then you can go elsewhere more easily without a mortgage. Then there's quality of life--a lot of people are giving up on Coastal cities and moving to inland states for a lower cost of living, maybe California droughts will eventually make living there too unpleasant, another big earthquake might come along, or maybe you'll just get sick of hills and tourists and traffic and insane street people, as I did in Seattle. Or maybe a city place will make you yearn for a suburb and a commute, or a suburb will make you miss urban opportunities and excitement and short commute.

As a lifelong renter, I've enjoyed the flexibility to move when I'm tired of a neighborhood or an apartment (especially discourteous or obnoxious neighbors). Especially in San Francisco, rent might be a way to get into a desirable neighborhood, whereas a condo or house would be unaffordable and scarce (especially in today's market, with bidding wars, Chinese and other foreign investors, and hedge funds buying up lots of homes as income sources). It seems like a challenging time to buying real estate in SF, not sure if it's a peak or will continue to climb forever, just as people decide they really need a high stock allocation after a long bull market.

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Re: Renting forever: financial suicide?

Post by angelescrest » Mon Aug 11, 2014 10:08 pm

john94549 wrote:Here we go again. My wife and I bit the bullet and bought in Sunnyvale in 1973 (for $43K). Sold in 1978 and bought in Lafayette (in 1978) for $180. Add a few zeros. We've been up and down the "assumed" property value ladder so many times it wants to make your head swim. Bottom line: if you find that "perfect house", and can afford it, buy it.

Past performance is not a.......

One thing the op should keep in mind is that condo ownership is not the same as owning a single family home. Lots of potential headaches/pitfalls that you need to be aware of. One bedroom condo? Been there and won't do it again.

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Re: Renting forever: financial suicide?

Post by HornedToad » Mon Aug 11, 2014 10:15 pm

Renting can be more profitable than owning. My suggestion is to find an older landlord of a house/condo that wants no hassle and is sufficiently well off on his own and then rent with him. You'll probably have below market rates for as long as you stay and don't bother the landlord with normal maintenance issues.

Good luck finding this, but if you can it can work out very well.

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celia
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Re: Renting forever: financial suicide?

Post by celia » Mon Aug 11, 2014 10:42 pm

There are a lot of places in San Francisco that are decent rentals and under rent control. Once you move in, the rent doesn't go up until after you move. AND you can ask the landlord to fix the toilet and he/she will.

SF (city) also has a program to help middle-income people buy their first property. It's called Below Market Rate (BMR). Basically the city says a certain number of units in newer developments have to be put into this plan and are sold at a steep discount from the other units. But when you sell, the city sets the selling price below market again, so your gain is less. There are qualifying restrictions on who is eligible and about 100 people usually enter the drawing for each unit.

Try googling: "San Francisco bmr"

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Re: Renting forever: financial suicide?

Post by Zabar » Tue Aug 12, 2014 8:10 am

I've been an owner and a renter--right now a renter. We will soon be moving to the SF Bay Area, and continuing to rent. There are advantages/disadvantages to each. Neither is "financial suicide."

Keep in mind that most home owners are actually renting. Instead of renting the physical property, they're using a mortgage to rent the money used to purchase that property. It's just a different set of bets. Right now, I choose not to put such a large part of my total investment portfolio into a single piece of real estate. I'd rather diversify through REIT mutual funds.

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Re: Renting forever: financial suicide?

Post by miles monroe » Tue Aug 12, 2014 8:37 am

by owning you lock in your housing cost. i would hate to be retired and have such a large monthly expense that is pretty guaranteed to increase every year.

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Re: Renting forever: financial suicide?

Post by rixer » Tue Aug 12, 2014 8:43 am

Financial suicide for most folks would be reaching retirement age and not having a house that's paid for.

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Re: Renting forever: financial suicide?

Post by Zabar » Tue Aug 12, 2014 8:51 am

miles monroe wrote:by owning you lock in your housing cost.

Property taxes? Insurance? Maintenance? HOA fees? Special assessments of condo owners? Indirect costs of illiquidity? You're only locking in one aspect of your housing costs.

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Re: Renting forever: financial suicide?

Post by kenyan » Tue Aug 12, 2014 8:58 am

I don't know all of your details, but I think it would be a much worse decision to force a house/condo purchase upon yourselves that you aren't ready for. Buying something that you'll likely sell in a few years, such as a 1-br condo, is throwing a huge chunk of money down the drain (transaction costs) and hoping that the already frothy market will help you out.

Nothing wrong with being lifetime renters, if that's what you want. You'll just have to save more money to cover the imputed rent that a paid-off house delivers (which might not be that hard, if your rent is comparatively cheap to the house prices in your area).
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Re: Renting forever: financial suicide?

Post by Johno » Tue Aug 12, 2014 9:21 am

rixer wrote:Financial suicide for most folks would be reaching retirement age and not having a house that's paid for.

It's true a lot of people would put themselves in a bad position by saving less if they didn't have to pay a mortgage (the amortization of which is a form of savings). However, assuming a person has the discipline to save what they need to save to meet their goals for living standard in retirement based on realistic expected returns, there's no particular reason a house has to be one of the assets they own when they reach retirement. In order to say that, again under the assumption of self discipline, one has to say that houses are a categorically better investment in general than other things, which isn't true. I also agree that people who own a house and keep borrowing against it to consume more, thus reaching retirement still owing a lot on the house, are making a mistake. But again the mistake is over consuming (unless one plans for and accepts the prospect of poverty and dependence in old age), not whether to buy a house or not.

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Re: Renting forever: financial suicide?

Post by William4u » Tue Aug 12, 2014 10:06 am

Johno wrote:
rixer wrote:Financial suicide for most folks would be reaching retirement age and not having a house that's paid for.

It's true a lot of people would put themselves in a bad position by saving less if they didn't have to pay a mortgage (the amortization of which is a form of savings). However, assuming a person has the discipline to save what they need to save to meet their goals for living standard in retirement based on realistic expected returns, there's no particular reason a house has to be one of the assets they own when they reach retirement. In order to say that, again under the assumption of self discipline, one has to say that houses are a categorically better investment in general than other things, which isn't true. I also agree that people who own a house and keep borrowing against it to consume more, thus reaching retirement still owing a lot on the house, are making a mistake. But again the mistake is over consuming (unless one plans for and accepts the prospect of poverty and dependence in old age), not whether to buy a house or not.


NPR Science Friday had a show on the genetics of savers vs. spenders, and the researchers argued that about 17% of people are "genetic savers" and 83% "genetic spenders" across the globe. So most people are genetically disposed to consume their resources quickly, and a few are genetically disposed to save their resources for later.

The researchers argued that 100,000 years ago in the savannah, there was a natural selection advantage to consuming resources quickly rather than saving. Life was short then, and nomads couldn't save goods easily while constantly on the move, and money did not really exist. 100,000 years ago, consuming immediately generally better met the (often dire) needs of the moment.

I have read quite a bit on buying vs. renting. If you are one of the 17% ("the savers"), essentially the choice is between:
(a) putting money into a H (a house with mortgage loan, taxes, insurance, upkeep) for 30 years.
(b) putting money into R (rent) and M (a Mutual Fund Index) for 30 years.

Lets say that, initially, H=R+M, and H>R. The saver puts 100% of the money she would have put into H into her rent plus her index fund. So, on (b), the down payment for the house going into an Index Fund M, and the Index Fund M gets regular investment over time for 30 years.

Assume the stock market performs at historical averages (and the saver's spending habits are the same over 30 years for either (a) or (b)). Then it seems that (b) is often the better financial choice as measured by net worth. One reason is that the money "invested" in the house typically only grows a the rate of inflation, but the money invested in the Index Fund grows at a much higher rate (again, assuming historical averages).

HOWEVER, if you are one of the 83% ("the spenders"), essentially the choice is between:
(A) putting money into a H for 30 years.
(B) putting money into R and C (consuming/spending on fast depreciating assets) for 30 years.

The net worth of the spender who does option (A) will typically be higher than the spender who does option (B) after 30 years. For many people, having a mortgage just forces them to save, and they would spend otherwise. That is why so many homeowners think renters are suckers. They think that because homeowners generally save more money than renters, it is because renters are "throwing away their money on rent." But this is not quite right. It is really because one is generally forced to pay down one's mortgage, which is a kind of forced savings that the 83% would not do otherwise.

If one is in the 17%, then one more likely has the discipline to save and invest the Boglehead way. For this group, renting often comes out ahead (although there are many, many variables I have not mentioned). But 83% of people are not naturally predisposed to save that way, and they are generally better off buying a house.

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Re: Renting forever: financial suicide?

Post by placeholder » Tue Aug 12, 2014 12:25 pm

rixer wrote:Financial suicide for most folks would be reaching retirement age and not having a house that's paid for.

I think that's way overblown as pretty much anyone in retirement can alter their living circumstances so that rent or mortgage payments fit within their budgetary needs.

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Re: Renting forever: financial suicide?

Post by technovelist » Tue Aug 12, 2014 12:32 pm

Buying is much riskier than renting, and is therefore much likelier to be financial suicide.
And I say that as someone who has done both and has done okay with buying, so I'm not speaking from bitter experience.
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Re: Renting forever: financial suicide?

Post by camptalcott » Tue Aug 12, 2014 1:27 pm

Depends on what you consider financial suicide.

For some reason in this country we have been taught that life is not worth living if one does not own a house. It's like that and going to Disney world are some sort of Cosmic report card on how well you life has gone. Don't own a house? That's 20 demerits.

Let me just say that I was born and raised in Manhattan. My parents provided a wonderful childhood and life for 4 children in an apartment. they worked retired, traveled and died without ever owning their home.

Now I don't know the reason behind them never buying, never thought to ask. My dad was a Vietnam and Korean war vet so I'm assuming he could have gotten a mortgage via the VA administration. who knows?

So in answer to your question. No I don't think it's financial suicide to never own a home.
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Re: Renting forever: financial suicide?

Post by Raladic » Tue Aug 12, 2014 2:47 pm

William4u wrote:I have read quite a bit on buying vs. renting. If you are one of the 17% ("the savers"), essentially the choice is between:
(a) putting money into a H (a house with mortgage loan, taxes, insurance, upkeep) for 30 years.
(b) putting money into R (rent) and M (a Mutual Fund Index) for 30 years.

Lets say that, initially, H=R+M, and H>R. The saver puts 100% of the money she would have put into H into her rent plus her index fund. So, on (b), the down payment for the house going into an Index Fund M, and the Index Fund M gets regular investment over time for 30 years.

Assume the stock market performs at historical averages (and the saver's spending habits are the same over 30 years for either (a) or (b)). Then it seems that (b) is often the better financial choice as measured by net worth. One reason is that the money "invested" in the house typically only grows a the rate of inflation, but the money invested in the Index Fund grows at a much higher rate (again, assuming historical averages).

HOWEVER, if you are one of the 83% ("the spenders"), essentially the choice is between:
(A) putting money into a H for 30 years.
(B) putting money into R and C (consuming/spending on fast depreciating assets) for 30 years.

The net worth of the spender who does option (A) will typically be higher than the spender who does option (B) after 30 years.


This only holds true if there is a saving to be achieved by renting, aka rent is less than mortgage PITI.

If renting is more expensive or a wash, then there is no extra money you can put into your Index Fund, so at the end of 30 years, your index fund is worth $0, while with the mortgage you will now have some value, it may not be as much as it was at the beginning, but anything is better than nothing, as after the 30 years your payment will go down to just Taxes&Insurance.

If you're in a HCOL area with much demand and no control over rent increases, then you will probably save more by getting a mortgage (assuming you can come up with the downpayment, which in reality is one of the bigger problems for many people that are not good at saving) in the long term.

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Re: Renting forever: financial suicide?

Post by Johno » Tue Aug 12, 2014 2:55 pm

Re: William4u: you've explained in more detail my general idea. I don't know the %'s exactly, but I'm a saver. I own a house, but it's not really a factor in how much I save, so if I were in the OP's position getting myself to save would not be a consideration.

But going in the other direction from personal to 'Everyman', a lot of people can benefit from subsidies if they rent. It's only for relatively upper middle class people that the mortgage interest deduction subsidy is significant, the implicit assumption of many such discussions. And at lower income levels one might qualify for (subsidized) 'affordable housing' which is often a rental. Also in some places there's rent control or stabilization. NYC was mentioned, it's a major factor in housing decisions there. And such rent regulations where they exist are not typically means tested as to the tenant's income, and 'affordable housing' programs vary widely as to whether the tenant can *stay* if income rises, though at least in theory they usually have to meet a need requirement to get in. This issue can have political overtones, but from the individual investor POV it's quite actionable: ever buying a house is not a wise decision strictly financially if you can get long term below market rent, and that's not a super rare situation.

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Re: Renting forever: financial suicide?

Post by Johno » Tue Aug 12, 2014 3:04 pm

Raladic wrote:
William4u wrote:I have read quite a bit on buying vs. renting.


This only holds true if there is a saving to be achieved by renting, aka rent is less than mortgage PITI.

If renting is more expensive or a wash, then there is no extra money you can put into your Index Fund, so at the end of 30 years, your index fund is worth $0,

Mathematically true of course, but this is where the cultural indoctrination toward home ownership* comes in, leading people to overestimate the strictly financial benefits, if any, of home ownership. It varies widely, by particular situation of person, rental/purchase market, rates, and expected return on various houses or the asset category in genreal.

*in part inspired by the perceived social good of tying people down with mortgages the amortization of which is forced savings.

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Re: Renting forever: financial suicide?

Post by sevenseas » Tue Aug 12, 2014 3:47 pm

I live in NYC, where the real estate market is as frenzied this year as it has ever been. Bidding wars, lines around the block at open houses, etc., very similar to the situation in SF. I happen to be a long-time renter (rent stabilized but probably paying just a hair below market rate). Having an intent to buy eventually, I've watched prices fall 25-30% during the financial crisis, only to suddenly bounce back over the last year or two. We are now close to or maybe at our previous highs. Knowing that it is never smart to try to time the real estate market, I have nonetheless held off on buying. Things in the RE market just don't seem rational to me at this point. As Wall Street goes, so goes the local economy here in NYC, real estate included...and what goes up can certainly come down. SF of course is in a parallel situation with the tech industry.

OP, I guess my advice to you would be to do what I'm doing: watch and wait, and keep saving money with a mind to a possible downpayment one day. Don't get caught up in the frenzy of "buy now or be priced out forever". Nobody can predict how RE prices will go in the future, but I personally believe that everything is cyclic. The NYT Rent vs buy calculator has been of great help to me...every time I check, it still tells me I am better off renting, at least for now. Meanwhile, my savings continue to increase, I can call the super whenever my tub gets clogged, and my rent will only go up by 1% next year. :sharebeer

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Re: Renting forever: financial suicide?

Post by surfstar » Tue Aug 12, 2014 3:56 pm

Renting never brought down an economy :D


[happily renting]

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Re: Renting forever: financial suicide?

Post by William4u » Tue Aug 12, 2014 4:05 pm

Raladic wrote:This only holds true if there is a saving to be achieved by renting, aka rent is less than mortgage PITI.

If renting is more expensive or a wash, then there is no extra money you can put into your Index Fund, so at the end of 30 years, your index fund is worth $0,


There are many unstated variables that would go into the overall calculations. For example, I was presuming that what would have been the down payment at least was in the Index Fund. So the Index Fund would at least be worth more than $0.

Here is a short video that goes through some calculations that, given some assumptions, shows that renting might be better (the assumptions in part presume a HCOL area in CA, and the interest rate is from about 2007).

https://www.khanacademy.org/economics-f ... ing-a-home

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Re: Renting forever: financial suicide?

Post by wantrepreneur » Tue Aug 12, 2014 4:57 pm

My wife and I are in our early 30s, yearly income is more than 250K, but we still rent and will continue to rent as long as we live in Bay Area. Whichever way I run the numbers (specially for condos), it makes more sense to rent than buy at current prices. Also, if you live in Bay Area long enough and continue to save + invest, you can buy when the current tech bubble bursts. Trust me, it will - I just don't know when.

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Re: Renting forever: financial suicide?

Post by Bungo » Tue Aug 12, 2014 5:22 pm

It's tough in the Bay Area. I rented until my early 40s and finally decided to buy in early 2012 because prices had dipped and rents had risen to the extent that both options were (briefly) comparable in cost.

I bought substantially below my means because I need to save for retirement and don't consider a house to be a good savings vehicle; the decision to purchase was mainly a lifestyle choice (an expensive one, at that) and an attempt to gain at least the illusion of control over my future housing costs. I say "illusion" because, very likely, the cost of maintenance/repairs/remodeling will more than offset any savings resulting from a fixed mortgage payment vs. presumably rising rent.

Somewhat paradoxically, I was only able to justify buying under the assumption that I will NOT be staying in the Bay Area for retirement. Too much money tied up in house = need to save more for retirement = necessity to work to an unacceptable age. Selling house at, say, age 55 = ability to move to a much cheaper location and retire early.

Since you are in your early 30s, the numbers should work out more favorably to buy vs. rent, except prices have shot up so much in the past few years that buying may be an unacceptable financial burden. If the mortgage will be so high that you can't afford to save fully for retirement, or if the downpayment will wipe out your savings completely, then you are probably better off renting, although I recognize that the rental market is horrible now as well.

If I were faced with the decision of renting now vs. buying now in the Bay Area, I would very seriously look at plan C: move somewhere else entirely.

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Re: Renting forever: financial suicide?

Post by LeeMKE » Tue Aug 12, 2014 7:25 pm

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?ref=realestate&_r=0

I've owned and now we are renters.

Condos do not "lock in" your costs. In my experience, they actually increase your costs, sometimes substantially. When amateurs manage large buildings, they tend to defer maintenance and end up with costs multiplying as a result of delay. But the owners pick up the tab. Here in Milwaukee, where I live, multi-million dollar repairs are everywhere, and many of these would have been 1/3 the cost if the repairs had been performed early enough to avoid collateral damage.

Now, I rent from a landlord who moved to make structural repairs as soon as they found evidence of a problem. No HOA would have approved these repairs as promptly, and once the foundation was opened up, it was obvious they saved themselves much more serious expense.

We like urban life, so aren't interested in suburban homes any longer. And now that we have a great landlord, it's no temptation to consider buying a condo.
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Re: Renting forever: financial suicide?

Post by DonCamillo » Tue Aug 12, 2014 7:55 pm

There seems to be general agreement that it is not "financial suicide" to either buy or rent.

I wonder if it is "lifestyle suicide" to make this decision on financial grounds.

There are many non-financial components to renting or buying. It may be a tradeoff between urban or suburban living, going to the theater or tending a garden, having a lawn versus taking your children to the park, having access to shared facilities like a pool versus maintaining one yourself, between walking to work or commuting, spending your weekends doing chores or letting the maintenance staff do it, having adequate parking or not needing to own a car, being comfortable sharing a wall with your neighbors or liking to play your tuba at home in the evenings.

I think you really need to know who you are and what you want out of life, then make a housing decision that supports your lifestyle.
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Re: Renting forever: financial suicide?

Post by MossySF » Tue Aug 12, 2014 8:06 pm

If we are talking "suicide", seems like way more people did this financially during the most recent bubble by buying -- especially stretching for housing priced way beyond their means.

If you're just talking about "better", you never know until after the fact what direction the wind is blowing. But if you're wrong renting, it's doubtful it would be on the level of "suicide".

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Re: Renting forever: financial suicide?

Post by kmok » Tue Aug 12, 2014 8:34 pm

William4u wrote:If one is in the 17%, then one more likely has the discipline to save and invest the Boglehead way. For this group, renting often comes out ahead (although there are many, many variables I have not mentioned). But 83% of people are not naturally predisposed to save that way, and they are generally better off buying a house.


I think this statement is true only if you compare investing in stocks unleveraged and investing in a house unleveraged. If comparing investing in a stocks unleveraged and buying a house with 20% down payment, renters don't more than often comes out ahead. How often? I dont' know. Now in this comparison the risk is different, but these are the most common options people choose for various reasons, many of which are very rational. For example, one of the reason is that getting a mortgage is most likely the least risky way to be in debt of that size in dollar value. The other reason is that a house is so expensive that many people have no choice but to get a mortgage to buy a house.

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Re: Renting forever: financial suicide?

Post by madbrain » Tue Aug 12, 2014 9:35 pm

rixer wrote:Financial suicide for most folks would be reaching retirement age and not having a house that's paid for.


Housing is never really paid for, even if there is no mortgage.

Property taxes are recurring expenses. Their increase is capped with Prop 13 in California however, which is an incentive to buy a house and stay in it for a long period of time.

Maintenance is also a recurring expense.

HOA fees also apply to condos.

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Re: Renting forever: financial suicide?

Post by madbrain » Tue Aug 12, 2014 10:11 pm

kmok wrote:Buying or rent, it is a huge gamble. At the Bay Area with such a high price/rent ratio and historical long term growth in price over inflation, you are gambling either way. If you buy at such high price/rent ratio means unless the price continue to rise significantly faster than inflation, you might be better off renting. If you rent, rent might go up significantly faster than inflation in the long term future and thus you would have been better off buying a house now even at the current high price/rent ratio. It is risky either way.


Yes, the price/rent ratio (price to annual rent) is a huge problem right now in many parts of the bay area. But all real estate is local. The P/R is not the same in SF, Cupertino or Palo Alto, vs East Palo Alto, East San Jose or Santa Clara.

When I bought a townhome in 1997 in Santa Clara, the price to rent ratio was about 12. I had no plans to move. That made it a a no-brainer for me to buy it at the ripe old age of 21.
I no longer own that home, but currently, price to rent for that property based on zillow estimates is about 17, which is not excessive. A P/R of 15 is considered balanced.
I moved out in 2010 and sold it in 2012 after first failing to sell it during the credit crunch, and then renting it for about a year, before it sold for about 19 times the amount of the previous year's rent.
Both rents and prices have gone up a lot since I sold it 2 years ago, but apparently, rents have gone up faster than prices since for that particular area.

It's not really possible to ascertain which will go up faster in the future - rents or prices.
If you buy, you are betting that rents will go up more. If you rent, you are betting that prices will go up more.
A rise in interest rates will probably cool down the mad increase in prices, but we have all been expecting rates to rise for years, and it hasn't happened.
If you choose to buy and the P/R is too much above 15 , that increases your risk that your bet will go sour. IMO, buying at a P/R of 25-30 is crazy. Buying at a P/R of 15-20 is probably OK. Between 20-25, it is risky.

Of course, you should only buy if you intend on staying in the area for the long-term - that means 7 years+ IMO. Otherwise, the transaction costs (commissions, etc) can make it uneconomical.

And as to what size you buy, you should buy something of a size that will meet your need for at least that period of time. If you intend on having a child or more in the next 7 years, then buy a property that will be large enough to accommodate them. If you want to remain childless for the foreseeable future, then buying a 1 B/R condo might be OK, though 2 B/R is better even for just a couple. When I bought my townhome in 1997, it was a 3 BR/2.5BA and I knew I would never have children (being gay simplifies that, there cannot be accidental children, only adopted children). I still managed to outgrow the place. Personal property can fill up the space too, not just children. I also got tired of the proximity of the homes and having an inept HOA , I'm glad that's in the past.

If you don't intend to have children in the near future, then you have a lot more freedom in what area you decide to buy . There are still plenty of neighborhoods in San Jose or Santa Clara that don't have the greatest public schools, and have not seen as much of a crazy rise in prices as a result. I would in particular recommend the city of Santa Clara which has its own electric utility which reduces cost of living, yet is much cheaper than nearby Sunnyvale, and only a little bit more than the nearby parts of San Jose. I think you can find condos and townhomes with P/R between 15-20 which is still not excessive, if you are intent on buying.

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