Rent vs Buy: A different look?

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Alchemist
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Rent vs Buy: A different look?

Post by Alchemist » Sat Nov 28, 2015 12:44 am

I have been considering buying a home because paying rent currently feels like I'm sending money into the ether every month where as buying something would be building equity or a paid for property would save me the cost of rent. But of course, ownership has its own fixed costs like insurance and taxes. I also move fairly often for my career and so renting is attractive from a simplicity stand point since I would have to sell or rent out a home that I would purchase now.

So I decided to look at it from the perspective or would I rather have $200k in VTSAX or $200k paid for home. Keep in mind I am very debt averse, so if I did purchase a home I would put down a large downpayment (including money currently in my taxable account) and pay it off very quickly. Probably 3-5 years.

I assume the rent I could make from such a house would be about $1500. Then of course I have to minus taxes, insurance, property management fee, and assuming a $100 per month averaged out maintenance cost that means net it would bring in around $11,000 per year or save me the same amount if I were living in it as opposed to renting somewhere else. As for VTSAX it could bring in the same amount of money with a total return of just over 5% which I think is a reasonable expectation. Also keep in mind that I did not factor in any transaction costs for buying the property or the cost of any vacant months.

Looking at it that way, the money is essentially a wash and thus renting is the better option for me so long as I continue to move fairly often. And even then, buying is more a lifestyle choice once I settle down somewhere for a long time.

Caveats: yes, this is not Apples to Apples. The risks and volatility considerations are completely different between equities and real estate. However, the point is that renting is not sending money into the ether like the way I had been thinking about it and can indeed still make good financial sense.

So am I missing something or is buying vs renting really about the same for most locations from a net-worth perspective?

jjface
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Re: Rent vs Buy: A different look?

Post by jjface » Sat Nov 28, 2015 3:19 am

Transaction costs are a big factor to include but also house price increases. If you move often renting will probably work out cheaper due to transaction costs. If you plan to stay for say longer than 5 years buying usually works out cheaper. Further if the house is in a good area with the potential for house value increases it could tilt the advantage to buying. It is quite possible to see the house increase in value 5% or more each yr.

adamthesmythe
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Re: Rent vs Buy: A different look?

Post by adamthesmythe » Sat Nov 28, 2015 2:24 pm

"Move frequently" and "own home" don't go together unless you get a rather good relocation package.

Most of us, at some point, will decide that we want to own.

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JoMoney
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Re: Rent vs Buy: A different look?

Post by JoMoney » Sat Nov 28, 2015 5:40 pm

I'm with you. As Robert Shiller has said, 'Buying a house is a consumption choice, not really an investment'
https://www.youtube.com/watch?v=AGK4bRO ... e=youtu.be

If someone was planning on living in a home for a long period of time, it's worth considering that there are several tax benefits for owning your home. One of the notable ones, is that if you had a block of money to either invest and use the returns to pay rent, or to buy a house that you would live in rent free, you would have to pay taxes on the investment income, whereas the Imputed rent from living in the home is a tax free return.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

savemorelivebetter
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Re: Rent vs Buy: A different look?

Post by savemorelivebetter » Mon Nov 30, 2015 3:21 pm

As a general rule of thumb, transaction costs are 3% at the time of buying and 6% while selling.
It takes several years of owning a home to break even, compared to renting.
Plus, when its time to sell, there's a risk that your house won't sell easily and you're stuck with a huge asset that you cannot dispose.
When you move and if the home won't sell, you're stuck as a out of town homeowner which can be a nightmare!
Renting is the way to go for folks on the move!

ThankYouJack
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Re: Rent vs Buy: A different look?

Post by ThankYouJack » Mon Nov 30, 2015 3:39 pm

You're correct with factoring in the opportunity cost and extra expenses of home ownership.

Here's a nice calculator if you want to easily analyze more of the details and figure out a break even point - http://www.nytimes.com/interactive/busi ... ulator.php

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Watty
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Re: Rent vs Buy: A different look?

Post by Watty » Mon Nov 30, 2015 3:45 pm

Alchemist wrote:I have been considering buying a home because paying rent currently feels like I'm sending money into the ether every month where as buying something would be building equity or a paid for property would save me the cost of rent.
If renting is such a bad deal for you then it would be a wonderful deal for the landlord.

Owning a rental property can work out well for some people but as a general rule that is not easy money and there are lots of risks.

The numbers for buying an investment property are a bit different but if that does not look lucrative to you then you might want to reconsider buying a house to live in just for investment purposes.

That said, having enough to have a paid off home when you retire makes a lot sense for many people but you could just buy a home for cash then.
adamthesmythe wrote:"Move frequently" and "own home" don't go together unless you get a rather good relocation package.
+1

In addition I have seen job offers and promotions go to the person that can relocate the easiest. Even if you would expect to get a relocation package the cost of it will be a factor in making you an offer or not and what you would be paid

In one extreme case an offer of a promotion came with the requirement that the person be in the new location on Monday to start their new position to fill an urgent need. There were several qualified people but one person was single and rented so they were able to be there on Monday and they eventually flew back a couple of times to pack up their apartment and handle the move.

ursugardaddy
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Re: Rent vs Buy: A different look?

Post by ursugardaddy » Tue Dec 01, 2015 5:20 am

I do not view my main home as being an investment. Maybe my kids or grandkids(if I have any) would make it an investment for them by selling it. Within this life I will never put a "for sale" sign in the front of my lawn so I will never see any gains or profit. I had and receive a few offers for this beach house but I rejected them. I own other properties but this is my favorite place of peace. I worked my ass off obtaining this property...

I'll be here until I'm singing in the "upper room"

Best of luck to you

:beer
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Alchemist
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Re: Rent vs Buy: A different look?

Post by Alchemist » Fri Dec 04, 2015 2:16 am

I appreciate everyone's replies. As always, the Bogleheads are a good source of reason. I was tempted to buy mainly because a lot of my colleagues have purchased homes recently and have often voiced what they believe are the financial benefits of buying; even with the eventuality of being long distance land lords. But running the numbers and hearing from everyone here helped me solidify my decision to keep renting for now. I am sure I will eventually buy a house (and maybe even investment properties) once I settle down in a single location for a number of years. But for now, renting seems the better choice.

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William Million
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Re: Rent vs Buy: A different look?

Post by William Million » Fri Dec 04, 2015 3:28 am

You're missing nothing. You should rent.

Home ownership can sometimes work out quite well, but it is a generally overrated investment.

Johno
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Re: Rent vs Buy: A different look?

Post by Johno » Fri Dec 04, 2015 10:32 am

Watty wrote:
Alchemist wrote:I have been considering buying a home because paying rent currently feels like I'm sending money into the ether every month where as buying something would be building equity or a paid for property would save me the cost of rent.
If renting is such a bad deal for you then it would be a wonderful deal for the landlord.

Owning a rental property can work out well for some people but as a general rule that is not easy money and there are lots of risks.
There is though a 'dead weight loss' I think in between. A good deal of the risk of being a landlord is bad tenants. The individual good tenant knows they are a good tenant, but a landlord has more difficulty determining upfront which stranger is a good tenant. But I largely agree, if it was really obvious that owning dominated renting as a way to buy shelter, it would tend to imply that owning rental properties is an easier investment than it actually is.

Anyway moving fairly frequently and owning don't go together if an employer isn't subsidizing it, as several have mentioned. OTOH once and if you choose a place to settle down, the risk equation changes too, besides just avoiding transactions costs. If your career (and/or family life) becomes very attached to a place, the risk of underestimating real estate appreciation, say by assuming prices will only escalate at inflation* in a buy now/later analysis, also increases.

*probably a reasonable assumption nationally over a very long period, but it can be very different in particular places even over pretty long periods.

travellight
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Re: Rent vs Buy: A different look?

Post by travellight » Fri Dec 04, 2015 10:58 am

Did you forget to factor in the home mortgage tax deduction?

itstoomuch
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Re: Rent vs Buy: A different look?

Post by itstoomuch » Fri Dec 04, 2015 11:52 am

DS found a townhouse at 3x his rent, 8x living space, with dedicated parking, and a walk score of 95 up from 75. He Arbnb's a floor/whole house for 33% of PITI. He also did not contribute to 401k for 3 years to buildup for the near-term purchase.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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JoMoney
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Re: Rent vs Buy: A different look?

Post by JoMoney » Fri Dec 04, 2015 3:34 pm

travellight wrote:Did you forget to factor in the home mortgage tax deduction?
While it may make this form of debt more appealing than say.. a credit card, I don't think it's the selling point some make it out to be. You're only writing off the interest you give a bank, not the amounts being paid to the principal value.
You could give the money to a charity or put it in a retirement account and get the same deduction and a personal benefit instead of giving that money to a bank for the privilege of being in debt to them.
If you're going to be in debt anyways, it might be nice to be able to consolidate personal credit cards and the like to a tax deductible mortgage, but some people might rather not be paying interest at all.
For people that like the idea of leveraging up their investments, you can get a deduction on margin interest with stock brokerage account as well.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

leod
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Re: Rent vs Buy: A different look?

Post by leod » Fri Dec 04, 2015 7:34 pm

Hone ownership as investment is dependent on location, and moving frequently is not a good sign of buying due to high transaction cost

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unclescrooge
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Re: Rent vs Buy: A different look?

Post by unclescrooge » Fri Dec 04, 2015 9:18 pm

One benefit of home ownership inn California is prop 13 - your property taxes stay essentially flat for ever.

I pay 8 times the property taxes of my immediate neighbour, and live in a 25% smaller house, with a smaller yard and no pool.

In 30 years, I'll be in his position, and wearing silk pajamas and robes 24/7!

KarenC
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Re: Rent vs Buy: A different look?

Post by KarenC » Fri Dec 04, 2015 9:33 pm

From an interesting article I ran across earlier today:
Put more simply: More renters should be buying homes. It would be the cheaper option for a lot of them. Except for in the cities where housing prices are simply soaring (New York, San Francisco, and Washington, D.C., to name three), more renters ought to be availing themselves of homeownership.
Why Rent Is Still Rising In Places Where It's Cheaper To Own
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Alchemist
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Re: Rent vs Buy: A different look?

Post by Alchemist » Fri Dec 04, 2015 11:29 pm

Mortgage interest deduction isn't a factor for me because I neither itemize my taxes nor would I carry the mortgage for more than a few years anyway due to my strong aversion to debt. Even "good" debt like mortgages.

As for the article, it definitely shows that this question is very geographically dependent. However, as I am not in Miami but am in Florida that map in the article shows why renting is a pretty decent option in my current location. For instance a 15 year mortgage payment (including taxes, insurance, and HOA) on the place I am currently renting would be about the same as my rent.

stoptothink
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Re: Rent vs Buy: A different look?

Post by stoptothink » Sat Dec 05, 2015 8:57 am

Alchemist wrote:Mortgage interest deduction isn't a factor for me because I neither itemize my taxes nor would I carry the mortgage for more than a few years anyway due to my strong aversion to debt. Even "good" debt like mortgages.

As for the article, it definitely shows that this question is very geographically dependent. However, as I am not in Miami but am in Florida that map in the article shows why renting is a pretty decent option in my current location. For instance a 15 year mortgage payment (including taxes, insurance, and HOA) on the place I am currently renting would be about the same as my rent.
:sharebeer Exact same deal here. Regarding the (town)home we just bought last week, if we paid what it would currently rent for towards mortgage (plus taxes and HOA) every month, it would be paid off in ~12yrs. With our current budget, we are expected to have it paid off in about 8yrs. If our careers progress as expected, that could be significantly sooner.

Although home prices in our area have exploded (the home we bought has appreciated over 25% since it was built in '12), thanks to the onslaught of large tech companies moving in, it was still a no-brainer for us financially to buy as I couldn't continue to convince my wife to raise our two kids in a ~750^sq. ft. condo.

TallBoy29er
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Re: Rent vs Buy: A different look?

Post by TallBoy29er » Sat Dec 05, 2015 9:05 am

Alchemist wrote:... and assuming a $100 per month averaged out maintenance cost...
Sorry, but had to laugh at that. Homes have big things that can go wrong. Roof. Hot water heater. Appliances. Then of course, things get dated, and need to be replaced to remain relevant if you were to sell. Others may spend less, but that number is much too low from my experience.

cutterinnj
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Re: Rent vs Buy: A different look?

Post by cutterinnj » Sat Dec 05, 2015 9:12 am

When I started my job, I rented for the first 15 months until my wife told me we HAD to buy.
I loved not having to worry about maintenance or any of the other non-sense you deal with when it comes to house ownership.

The primary advantage to owning is that to get into the nicer communities, there were few (if any) rental options around. Since we were starting a family and wanted a nice house to raise our kids in, we were basically forced into buying.

If I did not have kids, I would be a VERY happy renter, not paying landscapers, handymen, cleaning ladies, etc...

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