When does renting make sense

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wannabogle
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When does renting make sense

Post by wannabogle » Mon Aug 07, 2017 10:01 pm

When does renting a home make more sense than buying?

KlangFool
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Re: When does renting make sense

Post by KlangFool » Mon Aug 07, 2017 10:07 pm

wannabogle wrote:When does renting a home make more sense than buying?
wannabogle,

In general, financially, it does not make sense to buy a house. People tend to play mind game in order to justify their purchases. For example, they would never rent a single family home. But, they use that to justify their purchase when they are renting a townhouse.

You will spend more on your housing expense when you buy a house. It is a life style decision. It is not a financial justifiable decision.

KlangFool

usnaron
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Re: When does renting make sense

Post by usnaron » Mon Aug 07, 2017 10:12 pm

Use the New York Times rent vs own calculator, pretty good estimate if you use reasonable investment gain projections and housing appreciation projections.

LeeMKE
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Re: When does renting make sense

Post by LeeMKE » Mon Aug 07, 2017 10:31 pm

+1 KlangFool

A house is not an investment, it is an expense. Most folks josh themselves into thinking they are making money when they sell it for more than they paid. But they also conveniently ignore the costs of buying and selling, and all the maintenance they paid for and/or performed. If you tally everything up, many of us would be better off renting. But the attraction of owning your own place is strong and makes people feel settled.
The mightiest Oak is just a nut who stayed the course.

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FIREchief
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Re: When does renting make sense

Post by FIREchief » Mon Aug 07, 2017 10:44 pm

LeeMKE wrote:But they also conveniently ignore the costs of buying and selling, and all the maintenance they paid for and/or performed. If you tally everything up, many of us would be better off renting. But the attraction of owning your own place is strong and makes people feel settled.
I think a lot of home owners become victims to the TV telling them that their existing bathrooms/kitchen/etc. are no longer acceptable and they have to spend many thousands of dollars to "update" them. The toilets and showers still work the same. The food from the kitchen still tastes the same. But now they have something to be proud of! I especially get a kick out of the shows where they start ripping down walls so that everybody in the house will be in constant contact and know what everybody else is doing every minute. I seem to remember when "privacy" was mostly a good thing. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

DC3509
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Re: When does renting make sense

Post by DC3509 » Mon Aug 07, 2017 10:44 pm

This is likely self-evident, but houses are also not liquid, at all. Say you even hit the housing lottery, buy a house, fully pay it off, and even have minimal expenses through the years. Then what? You still need somewhere to live. So, you will just "stay" with it, or you can sell it but you need to buy something new or start renting again. If you buy something new, unless you are moving to a lower cost of living area, you likely won't make much from it.

I recently lived in a rent controlled apartment with all utilities covered. Yes, it was a small space, but I think this approach had its advantages.

denovo
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Re: When does renting make sense

Post by denovo » Mon Aug 07, 2017 11:49 pm

KlangFool wrote:
You will spend more on your housing expense when you buy a house.

KlangFool
[Citation needed]

denovo
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Re: When does renting make sense

Post by denovo » Mon Aug 07, 2017 11:55 pm

LeeMKE wrote:
A house is not an investment, it is an expense. Most folks josh themselves into thinking they are making money when they sell it for more than they paid. But they also conveniently ignore the costs of buying and selling, and all the maintenance they paid for and/or performed. If you tally everything up, many of us would be better off renting. But the attraction of owning your own place is strong and makes people feel settled.
Por que no los does (why not both) re investment and expense. Until you are dead, you will need shelter unless you plan on being homeless or moving in with someone who will let you freeload. Your living arrangements will always have a cost, whether rent or mortgage/property taxes upkeep. It may cost less in the long-run and have some positive appreciation if you own.

I actually have a question for you and Klang re this.
costs of buying and selling, and all the maintenance they paid for and/or performed. If you tally everything up, many of us would be better off renting.
Is it your assumption that when a home is rented, the landlord does not have to pay for upkeep or taxes or maintenance? Does the landlord not consider those factors when he decides on a rent price? How could you be better off renting? Is it your assumption that all the landlords are running a charity and paying for these things out of pocket and not out of your rent?

I mean we have public data from REIT's, and all show positive income and cash flow even factoring depreciation, so I'd question any assumption that landlords are really dumb.
Last edited by denovo on Tue Aug 08, 2017 12:03 am, edited 2 times in total.

denovo
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Re: When does renting make sense

Post by denovo » Tue Aug 08, 2017 12:00 am

wannabogle wrote:When does renting a home make more sense than buying?
A couple of good reasons.

1. You have not settled down in an area, you may be there for only 1,2,3,4 years because of job or family situation or size of the place. I would not consider buying a home (condo/sfh/townhouse) unless you are sure you will be there for at least 5 + years.

2. You value mobility for work or other reasons, makes more sense when you are younger. If you find a new job across the country, easier to give your 30 or 60 days notice, put your stuff in a U-haul and pack, then trying to deal with selling a home, especially if you happen to be in a down market.

3. You have a high-stress job , limited time, or lazy and don't want to deal with home maintenance and repairs.

4. You can't afford it. And no, 2x, or 3x your income or any of those rules of thumbs should not be what you use to decide that.

sco
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Re: When does renting make sense

Post by sco » Tue Aug 08, 2017 12:01 am

General rules,
If you aren't staying in the same place at least 5-7 years, don't even consider purchasing. There are high transaction costs (front and back loads)
Don't underestimate the maintenance cost.
Don't overestimate how much your landlord must be making, just because a mortgage may be $500/mth cheaper (if that)

avalpert
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Re: When does renting make sense

Post by avalpert » Tue Aug 08, 2017 12:05 am

denovo wrote: Is it your assumption that when a home is rented, the landlord does not have to pay for upkeep or taxes or maintenance? Does the landlord not consider those factors when he decides on a rent price? How could you be better off renting? Is it your assumption that all the landlords are running a charity and paying for these things out of pocket and not out of your rent?
This caricature of markets is so obvious that it shouldn't need to be pointed out - but the idea that it reflects reality is so prevalent, most notably around rent/buy housing decisions, that the reasons it is wrong need to be repeated.

There are any number of reasons to think that profitable landlords (which of course not all will be) can provide housing cheaper than an individual can for themselves - from economies of scale to leveraging buying power in negotiations for service to better decision making that comes from having more experiences to draw from.

No, landlords aren't running charities - and no, that doesn't mean they will automatically be able to pass their costs on to their renters. Market prices don't care about a given landlord's costs and just because he would like to set rent at a price that covers his doesn't mean he can. The ones who will be successful, therefor, are the ones who can drive down costs to provide the service - and they should be able to drive them down more than an individual could for themselves.

KlangFool
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Re: When does renting make sense

Post by KlangFool » Tue Aug 08, 2017 7:13 am

denovo wrote:
wannabogle wrote:When does renting a home make more sense than buying?
A couple of good reasons.

1. You have not settled down in an area, you may be there for only 1,2,3,4 years because of job or family situation or size of the place. I would not consider buying a home (condo/sfh/townhouse) unless you are sure you will be there for at least 5 + years.

2. You value mobility for work or other reasons, makes more sense when you are younger. If you find a new job across the country, easier to give your 30 or 60 days notice, put your stuff in a U-haul and pack, then trying to deal with selling a home, especially if you happen to be in a down market.

3. You have a high-stress job , limited time, or lazy and don't want to deal with home maintenance and repairs.

4. You can't afford it. And no, 2x, or 3x your income or any of those rules of thumbs should not be what you use to decide that.
denovo,

1) You had answered your own question. One of the reasons why renting could be cheaper is an accidental landlord. Aka, people who bought the house without thinking about (1) to (4).

2) In any case, why should I care about whether the landlord is making money or not? That is his/her problem. As a renter and/or buyer, I only care about my own housing expense. Aka, whether it makes sense to buy or rent for my own shelter.

KlangFool

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bottlecap
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Re: When does renting make sense

Post by bottlecap » Tue Aug 08, 2017 7:29 am

Financially, I'm unaware of any rule of thumb.

I think it mostly has to do with whether you are likely to move and/or have a change in your situation that necessitates a move.

Renting can be cheaper if you look hard and find a good situation. People will sometimes rent out cheap(er) because it's short term, but people tend not to give deals when selling. Selling is forever.

As others have mentioned, however, there are a lot of costs that go into home ownership, too.

JT

rob65
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Re: When does renting make sense

Post by rob65 » Tue Aug 08, 2017 8:11 am

Real estate is incredibly local so my comment won't apply to all markets. Sometimes rent vs buy isn't apples to apples, sometimes it's a choice between an apple and an orange. In my suburban area, there are lots of nice 1 and 2 bedroom apartments for rent and lots of nice 3+ bedroom houses for sale. There are virtually no 1 bedroom condos/townhouses and only a limited number of 2 bedroom condos/townhouses, which can be difficult to resell. If you only need 1 bedroom, it's probably better financially to rent rather than buy more house than you need.

A second observation. I think people dramatically underestimate the maintenance and repair costs of home ownership - he writes while sitting home waiting for estimate to replace hot water heater and debating whether to only replace the broken downstairs HVAC unit or to go ahead and replace 20 year old upstairs HVAC at the same time. Did I mention that it's also about time to repaint the exterior and that I'm hoping the mower makes it through one more season? :(

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Re: When does renting make sense

Post by flamesabers » Tue Aug 08, 2017 8:59 am

denovo wrote:
costs of buying and selling, and all the maintenance they paid for and/or performed. If you tally everything up, many of us would be better off renting.
Is it your assumption that when a home is rented, the landlord does not have to pay for upkeep or taxes or maintenance? Does the landlord not consider those factors when he decides on a rent price? How could you be better off renting? Is it your assumption that all the landlords are running a charity and paying for these things out of pocket and not out of your rent?

I mean we have public data from REIT's, and all show positive income and cash flow even factoring depreciation, so I'd question any assumption that landlords are really dumb.
Unless your lease is going to expire soon or you're renting on a month-to-month basis, it's not like landlords can whimsically decide to jack up your rent at a moment's notice. Nobody is saying landlords are running charities for their renters. Instead, the point is that it is the landlords that bear the responsibility of owning property that may incur high tax and maintenance liabilities. If taxes and maintenance gets too high, it's much easier for renters to not renew their lease then it is for homeowners to try to sell their house.

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Re: When does renting make sense

Post by JGoneRiding » Tue Aug 08, 2017 9:23 am

avalpert wrote:
denovo wrote: Is it your assumption that when a home is rented, the landlord does not have to pay for upkeep or taxes or maintenance? Does the landlord not consider those factors when he decides on a rent price? How could you be better off renting? Is it your assumption that all the landlords are running a charity and paying for these things out of pocket and not out of your rent?
This caricature of markets is so obvious that it shouldn't need to be pointed out - but the idea that it reflects reality is so prevalent, most notably around rent/buy housing decisions, that the reasons it is wrong need to be repeated.

There are any number of reasons to think that profitable landlords (which of course not all will be) can provide housing cheaper than an individual can for themselves - from economies of scale to leveraging buying power in negotiations for service to better decision making that comes from having more experiences to draw from.

No, landlords aren't running charities - and no, that doesn't mean they will automatically be able to pass their costs on to their renters. Market prices don't care about a given landlord's costs and just because he would like to set rent at a price that covers his doesn't mean he can. The ones who will be successful, therefor, are the ones who can drive down costs to provide the service - and they should be able to drive them down more than an individual could for themselves.
Actually its mostly because we are cheap! :) I mean seriously I am going to use the cheapest carpet that I think will wear ok because its going to get destroyed any way and I get zero enjoyment out of it, and I am going to use builder grade faucet and appliances (there is no plantinum in my places everything is white) and I buy the most on sale basic fridge etc etc. Where people spend a lot more money because the "own it"

Most people would be better off owning if they stay IF they bought apples to apples. But people will rent worse than they will buy. and then say they can't afford to buy because it costs so much but that is mostly because they want an orange.

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gasdoc
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Re: When does renting make sense

Post by gasdoc » Tue Aug 08, 2017 9:48 am

JGoneRiding wrote:
avalpert wrote:
denovo wrote: Is it your assumption that when a home is rented, the landlord does not have to pay for upkeep or taxes or maintenance? Does the landlord not consider those factors when he decides on a rent price? How could you be better off renting? Is it your assumption that all the landlords are running a charity and paying for these things out of pocket and not out of your rent?
This caricature of markets is so obvious that it shouldn't need to be pointed out - but the idea that it reflects reality is so prevalent, most notably around rent/buy housing decisions, that the reasons it is wrong need to be repeated.

There are any number of reasons to think that profitable landlords (which of course not all will be) can provide housing cheaper than an individual can for themselves - from economies of scale to leveraging buying power in negotiations for service to better decision making that comes from having more experiences to draw from.

No, landlords aren't running charities - and no, that doesn't mean they will automatically be able to pass their costs on to their renters. Market prices don't care about a given landlord's costs and just because he would like to set rent at a price that covers his doesn't mean he can. The ones who will be successful, therefor, are the ones who can drive down costs to provide the service - and they should be able to drive them down more than an individual could for themselves.
Actually its mostly because we are cheap! :) I mean seriously I am going to use the cheapest carpet that I think will wear ok because its going to get destroyed any way and I get zero enjoyment out of it, and I am going to use builder grade faucet and appliances (there is no plantinum in my places everything is white) and I buy the most on sale basic fridge etc etc. Where people spend a lot more money because the "own it"

Most people would be better off owning if they stay IF they bought apples to apples. But people will rent worse than they will buy. and then say they can't afford to buy because it costs so much but that is mostly because they want an orange.
I think this is the main reason renting is generally cheaper than buying- people do not even think of buying a place that they would be perfectly happy renting. When one buys a place, it is always larger and more fancy than what they would rent. In my situation, with about 5 years left to retirement, though I would like to downsize, I would not consider buying another house because five years is not enough time to recoup the front and back end costs. At some point, though, we may consider selling the big house and renting for the remaining of the 5 years. The rental we choose will be smaller and more cost efficient (that is, it will be cheaper for the landlord to maintain and make our rental expenses lower). It will most likely be a condo or cluster-type home, with minimal land around it.

gasdoc

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Re: When does renting make sense

Post by BanquetBeer » Tue Aug 08, 2017 10:09 am

True if you want an equivalent place buying is cheaper. I can rent for a low cost because market conditions force me to but also because I bought a while ago when things were cheaper.

When you own, you dump money in for upgrades. When you rent there is no incentive. You also buy more because there is a transaction cost for change when you own vs minor moving cost at a rental.

Rentals often have communal space so the private areas can be smaller without as much impact.

Rental is better when the total costs over the period are cheaper. I pay more per month to own than I would to rent but I get way more space than I would rent. I choose to pay for the space

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Re: When does renting make sense

Post by 2Birds1Stone » Tue Aug 08, 2017 10:37 am

My situation comes to mind.

DINK couple in HCOL area.

Median Home Price - $450k
Median Annual Taxes - $15k

Meanwhile, we are able to rent a 1 bedroom apartment that meets 90% of our needs for $1,100/month.....which would not even be enough to cover taxes on a home.

This is not an apples to apples comparison, but generally renters will rent less house than someone who is purchasing.

thangngo
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Re: When does renting make sense

Post by thangngo » Tue Aug 08, 2017 10:44 am

wannabogle wrote:When does renting a home make more sense than buying?
When it's temporary and the "premium"/"profit to the landlord" that you're paying is still less than the transaction cost in a purchase.

It also makes sense it you want to keep housing expense as low as possible.

Personally, I would prefer buying.

huskerfan
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Re: When does renting make sense

Post by huskerfan » Tue Aug 08, 2017 10:53 am

I also think family size and location stability plays a role. We have 3 kids, two boys and a girl. We would have to rent at least a 3-bedroom apartment or house. And in our area there's not a lot of 3-bedroom apartments, and they're fairly expensive. 3-bedroom houses are even more expensive. We rented for 11 years, even with 3 kids, but eventually we got to the point where we wanted more stability for our kids. We didn't want to have to worry about rents going up or the owner deciding to sell and so kicking us out and then having to scramble to be in the same school district.

So, for us it was a lifestyle choice. It may be a wash financially, but we are hoping to be in this house for 15 or so years, when our kids will all be graduated. And we were conservative in our choice of houses so that it wasn't too big of a shock to the wallet. Although we will be putting money into it for renovations through the years and that's where we have to be more careful.

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JoMoney
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Re: When does renting make sense

Post by JoMoney » Tue Aug 08, 2017 1:55 pm

denovo wrote:
KlangFool wrote:
You will spend more on your housing expense when you buy a house.

KlangFool
[Citation needed]
Here's one....
...Housing expenditures remained markedly different for homeowners and renters.
Homeowners continued to spend a larger sum of money on housing than renters did; however, renters spent a larger share of their expenditures on housing than homeowners.
https://www.bls.gov/opub/btn/volume-1/p ... enters.pdf
Image
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: When does renting make sense

Post by jimb_fromATL » Tue Aug 08, 2017 2:56 pm

JoMoney wrote:
denovo wrote:
KlangFool wrote:
You will spend more on your housing expense when you buy a house.

KlangFool
[Citation needed]
Here's one....
...Housing expenditures remained markedly different for homeowners and renters.
Homeowners continued to spend a larger sum of money on housing than renters did; however, renters spent a larger share of their expenditures on housing than homeowners.
https://www.bls.gov/opub/btn/volume-1/p ... enters.pdf
Image
That doesn't prove anything except that renters typically have a lot less income and live in a lot less expensive homes.

You can indeed rent more cheaply than buying provided you rent a less expensive place. You can also live in a van down by the river or in your mom's basement cheaper than renting a more comfortable place.

However, in normal markets and economic times --other than in bubble and burst periods -- the cost of renting will be about the same or more than buying a comparable home. If landlords could not get enough rent to recover the cost of the mortgage interest, taxes, insurance, maintenance and repairs, and make a little profit over the long term, then there would not be any voluntary landlords ... because there would not be any point in investing their money where it is not likely to give a decent return on the investment.

If you are going to buy a more expensive place of your own, you do need too be pretty sure that you are going to live in the home for a considerable length of time before buying ... in normal economic times and areas. There are substantially more costs associated with buying, getting a mortgage, and selling a home of your own compared to renting.

But when comparing renting versus buying comparable homes, and If you're going to be there long enough to be able ride out the ups and downs of the market without having to sell while the market is down; and long enough for the equity and appreciation to offset the costs of closing, financing, and selling; and provided up you can afford to have the money tied up in a relatively illiquid asset; then it really boils down to whether you want to be a homeowner buying your own home, or want to be the OP of OPM (Other Peoples' Money) fame -- who pays for the mortgage principal and interest, maintenance and repairs, while the landlord gets the equity and appreciation and tax breaks and ends up owning the property.

jimb

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weltschmerz
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Re: When does renting make sense

Post by weltschmerz » Tue Aug 08, 2017 3:36 pm

For me, renting currently makes more sense. My place, a 1500 sqft townhouse, rents for $2600/month. Similar units have sold recently for $750k.

If I apply Bill Bernstein's rule from The Investor's Manifesto (Don't pay more than 15 years worth of rental payments for a home), then the rent vs buy point of equivalence is:
15 years * 12 months * $2600 = $468k

In other words, if I have to pay more than $468k, then it's better to just rent. Since the current price is $750k, it's a no-brainer to rent. My rent would have to increase to over $4000 before it would make sense to buy.

However, my rent is low for 3 reasons:
1) The landlord keeps the rent lower than the market rate of about $3000 to encourage longer term tenants.
2) The property was purchased many years ago for $300k. In my neck of the woods (southern CA), we have this thing called Prop 19, which keeps the yearly property taxes at around 1% of the purchase price. So the current property tax is only $3000/year. If someone new bought the place for $750k, they would owe $7500/year, which would translate to an extra $375/month. I'm sure that would compel them to raise the rent.
3) The place could use some work. The kitchen is a bit dated. The carpeting is nasty. However, I don't to ask them to do any work, since I don't want them to raise my rent. That's the downside of renting: I can't update the place to my own standards.

Renting is also a lifestyle choice. It's just plain simpler. I have owned several homes in the past. My last one was a real money and time sink. Between maintenance and just sprucing the place up, and then adding in the transactional costs of selling, I had no profit at the end of that deal. But I did get to live there for a few years, which has a value.

I do aspire to own again in the future, but it has to be the right place. The older I get, the smaller of a place I want. Ideally, I would have a tiny house (600-800 sqft) located on many acres of land (for privacy). This situation doesn't really exist in southern CA, so I'll just keep renting and saving for the future.

Oh yeah, here's another reason I like renting. My place, and end-unit, only has 1 neighbor. For the last few years, it's been 1 elderly woman, who was the best neighbor ever. Unfortunately, she recently moved to a retirement home, and guess who moved in next door...a family of 5! Two of the kids are little, and they like to play and scream all day right outside my windows. I'd be pretty bummed if I owned this place, but as a renter, I can keep my cool. If it gets real bad, I can easily find a different place.

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Re: When does renting make sense

Post by avalpert » Tue Aug 08, 2017 4:00 pm

BanquetBeer wrote:True if you want an equivalent place buying is cheaper.
Just to reiterate - no, that really isn't true by any law of economics or reality.

It can very well be the case, and often is, that renting an equivalent place is cheaper than buying. Every market is different, and markets change over time so no rule of thumb is really helpful. You need to evaluate each situation on its own merits.

To answer the OP directly, it makes sense to rent when it is cheaper than buying - whether it is cheaper in a given case requires its own analysis.

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Re: When does renting make sense

Post by 2m2037 » Tue Aug 08, 2017 4:00 pm

jimb_fromATL wrote:
JoMoney wrote:
denovo wrote:
KlangFool wrote:
You will spend more on your housing expense when you buy a house.

KlangFool
[Citation needed]
Here's one....
...Housing expenditures remained markedly different for homeowners and renters.
Homeowners continued to spend a larger sum of money on housing than renters did; however, renters spent a larger share of their expenditures on housing than homeowners.
https://www.bls.gov/opub/btn/volume-1/p ... enters.pdf
Image
That doesn't prove anything except that renters typically have a lot less income and live in a lot less expensive homes.

You can indeed rent more cheaply than buying provided you rent a less expensive place. You can also live in a van down by the river or in your mom's basement cheaper than renting a more comfortable place.

However, in normal markets and economic times --other than in bubble and burst periods -- the cost of renting will be about the same or more than buying a comparable home. If landlords could not get enough rent to recover the cost of the mortgage interest, taxes, insurance, maintenance and repairs, and make a little profit over the long term, then there would not be any voluntary landlords ... because there would not be any point in investing their money where it is not likely to give a decent return on the investment.

If you are going to buy a more expensive place of your own, you do need too be pretty sure that you are going to live in the home for a considerable length of time before buying ... in normal economic times and areas. There are substantially more costs associated with buying, getting a mortgage, and selling a home of your own compared to renting.

But when comparing renting versus buying comparable homes, and If you're going to be there long enough to be able ride out the ups and downs of the market without having to sell while the market is down; and long enough for the equity and appreciation to offset the costs of closing, financing, and selling; and provided up you can afford to have the money tied up in a relatively illiquid asset; then it really boils down to whether you want to be a homeowner buying your own home, or want to be the OP of OPM (Other Peoples' Money) fame -- who pays for the mortgage principal and interest, maintenance and repairs, while the landlord gets the equity and appreciation and tax breaks and ends up owning the property.

jimb
[Citation needed] :happy

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Re: When does renting make sense

Post by surfstar » Tue Aug 08, 2017 4:04 pm

usnaron wrote:Use the New York Times rent vs own calculator, pretty good estimate if you use reasonable investment gain projections and housing appreciation projections.
This. The rent vs buy calculator is all one needs to determine the financial side of the financial + emotional aspects of buying a house.

What I did was to run the calculator, record the output, change a variable, record the output, and repeat and repeat.
I then had a spreadsheet of "what ifs" and results. Example: what if homes didn't appreciate and rents did? Over 5yr? 10yr? 15yr?
Then I'd adjust a different variable and get the output for 5/10/15 years.

I would then compare these results to rental prices in our area and create a green/yellow/red for the price comparison outcome.

The takeaway that this exercise gave us, was that, as long as home prices didn't tank or stay flat AND we didn't sell within 5/10 years, we were better off buying. The AND was key. As long as we didn't sell during a dip and held on for long-term, as we had planned, it made more financial sense to buy.

This was for a VHCOL area, and where the rental market is also high and tight. (Santa Barbara, CA)

your results may vary - put I highly recommend you do a similar exercise if you need help sorting out the financial thoughts of home ownership

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jimb_fromATL
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Re: When does renting make sense

Post by jimb_fromATL » Tue Aug 08, 2017 4:07 pm

imperio wrote:
jimb_fromATL wrote: That doesn't prove anything except that renters typically have a lot less income and live in a lot less expensive homes.

You can indeed rent more cheaply than buying provided you rent a less expensive place. You can also live in a van down by the river or in your mom's basement cheaper than renting a more comfortable place.

However, in normal markets and economic times --other than in bubble and burst periods -- the cost of renting will be about the same or more than buying a comparable home.
,,,
when comparing renting versus buying comparable homes...
jimb


[Citation needed] :happy

Arithmetic.

jimb

avalpert
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Re: When does renting make sense

Post by avalpert » Tue Aug 08, 2017 4:08 pm

jimb_fromATL wrote:
However, in normal markets and economic times --other than in bubble and burst periods -- the cost of renting will be about the same or more than buying a comparable home. If landlords could not get enough rent to recover the cost of the mortgage interest, taxes, insurance, maintenance and repairs, and make a little profit over the long term, then there would not be any voluntary landlords ... because there would not be any point in investing their money where it is not likely to give a decent return on the investment.
Another good example of how this caricature of markets leads to wrong ideas. Why would a landlord expect to recover mortgage interest in a normal market? Another landlord could buy the property without a mortgage, have lower costs and charge less for rent. Why should we expect a landlord who owns multiple properties, can buy materials in bulk, set up favorable contracts with contractors whom he works with more often than an individual homeowner etc. to have the same maintenance and repair costs of an individual homeowner (or one-off landlord)? Why should we think the overall likelihood of making a decent return as a landlord is the same thing as the certainty that a landlord is going to make a decent return on any given property? And why should we think that a landlords cost+profits is the same as a homeowners?

OPM is a marketing gimmick designed to convince people they should aspire to be homeowners - it isn't a real notion of economics that should be the basis for evaluating any given situation.

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Re: When does renting make sense

Post by KlangFool » Tue Aug 08, 2017 4:27 pm

Folks,

It is obvious from multiple and repeated discussion that

A) In general, people buy more house versus when they rent.

B) So, all those rent versus buy calculator does not make any sense when you are comparing Apple versus Orange.

Because of (A), my observation of people spends more on housing when they buy will held true most of the time. I was the few exception. I choose to buy the same townhouse versus renting.

KlangFool

RRAAYY3
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Re: When does renting make sense

Post by RRAAYY3 » Tue Aug 08, 2017 4:34 pm

at 32, a lot of my friends are buying homes ... all i see is the same circle of people high fiving and congratulating each other ...

while i continue to invest rather than put money into that seemingly never-ending sink hole. i'm also so sick of hearing about how a house is "an investment" - no, it's a major expense and often a liability.

longinvest
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Re: When does renting make sense

Post by longinvest » Tue Aug 08, 2017 5:18 pm

I would think that wholesale rental real estate is cheaper than retail real estate. An investor should be able to buy a 100-units rental building for much less than the price of 100 individual condos. The rental building owner can also benefit from economies of scale unavailable to individual condo owners (buying 100 fridges and ovens at wholesale prices, for example).

It would seem difficult for a condo owner to lease his unit at a competing rent while still making a profit, unless there was a shortage of similar units in rental buildings nearby. In theory, at least. In real life, retail and rental markets often evolve independently, and can be very location dependent.

As for the choice, the final decision between buying or renting is seldom purely financial; it often ends up being more of a lifestyle choice.

It's probably best to choose based on whatever lifestyle one prefers, as long as it remains below one's financial means.

wiki: Living below your means
Last edited by longinvest on Tue Aug 08, 2017 6:08 pm, edited 1 time in total.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

bigred77
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Re: When does renting make sense

Post by bigred77 » Tue Aug 08, 2017 5:28 pm

Renting is a fine choice and has a lot of benefits: mobility, less maintenance costs, ability to consume only as much space as you need on a year to year basis, no down payment requirement, etc.

Buying is a fine choice and has a lot of benefits: participate in market value changes, lock in the majority of housing costs with a fixed rate mortgage, ability to alter the property to your own tastes, building equity, insurance you won't be "priced out" of a rapidly rising local market, stability for your family where you won't be forced to move by factors outside your control, etc.


In the short term (less than 5 years) renting is usually better than buying unless your local market experiences significant real estate growth.
In the long term (measured in decades) buying is typically the better choice unless your local market experiences a significant economic decline.

If I was young, single, or had yet to commit to my city for the long haul, I would rent.
If I was older, married, maybe kids, and had committed to putting down roots in a city, I would buy as my finances allowed.

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Re: When does renting make sense

Post by thangngo » Tue Aug 08, 2017 5:56 pm

KlangFool wrote:Folks,

It is obvious from multiple and repeated discussion that

A) In general, people buy more house versus when they rent.

B) So, all those rent versus buy calculator does not make any sense when you are comparing Apple versus Orange.

Because of (A), my observation of people spends more on housing when they buy will held true most of the time. I was the few exception. I choose to buy the same townhouse versus renting.

KlangFool
^ I could not agree more!

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Re: When does renting make sense

Post by mcraepat9 » Tue Aug 08, 2017 6:05 pm

KlangFool wrote:Folks,

It is obvious from multiple and repeated discussion that

A) In general, people buy more house versus when they rent.

B) So, all those rent versus buy calculator does not make any sense when you are comparing Apple versus Orange.

Because of (A), my observation of people spends more on housing when they buy will held true most of the time. I was the few exception. I choose to buy the same townhouse versus renting.

KlangFool
This is fundamentally true and makes any true comparison impossible. This is why renting vs buying is (i) a lifestyle choice and (ii) more art than science.
Amateur investors are not cool-headed logicians.

davidsorensen32
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Re: When does renting make sense

Post by davidsorensen32 » Tue Aug 08, 2017 6:37 pm

If you have a rent controlled apartment then it makes sense to keep renting as long as possible. Rent control will stabilize the rent increases. Take your savings and make it work for you in the market.
wannabogle wrote:When does renting a home make more sense than buying?

TravelforFun
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Re: When does renting make sense

Post by TravelforFun » Tue Aug 08, 2017 7:17 pm

I look at it this way. If you rent, you pay rent each month for the rest of your life. If you buy, you pay a higher rent for the first 15-30 years, then you live rent free in a paid-for house and that paid-for house could be a significant part of your asset.

Which scenario is more financially advantageous. To me, if you know you will stay in a place for longer than 5 years, buy a house that you can afford.

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Re: When does renting make sense

Post by finite_difference » Tue Aug 08, 2017 8:58 pm

In our case the rental cost of a 3 bedroom apartment equaled the PITI on a 4 bedroom house after a 20% down payment. But the house has additional maintenance costs and a bit more utility costs (about 20-25% extra). Definitely a better lifestyle and more space, and the home is building equity, but at a cost of a 20% down payment and higher monthly costs after maintenance and higher utilities are included.

Here's a decent calculator: https://www.nytimes.com/interactive/201 ... lator.html

I think you'd probably be richer if you rented a small apartment and invested the difference in the stock market. But most people probably don't wisely invest the difference, and it seems like people who own homes tend to be richer than those that don't (probably doesn't apply to Bogleheads though): https://mobile.nytimes.com/2017/05/09/m ... ality.html
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Re: When does renting make sense

Post by flamesabers » Tue Aug 08, 2017 10:01 pm

TravelforFun wrote:I look at it this way. If you rent, you pay rent each month for the rest of your life. If you buy, you pay a higher rent for the first 15-30 years, then you live rent free in a paid-for house and that paid-for house could be a significant part of your asset.
Do you not consider property taxes, major maintenance/repairs and routine upkeep to be a permanent cost of owning a house? After all, all of these items are included in one's rent payments. While owning a house after the mortgage is paid off may be significantly cheaper then renting for a lifetime, I think it should be noted that homeownership will never be a free lunch.

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Re: When does renting make sense

Post by TravelforFun » Tue Aug 08, 2017 10:38 pm

flamesabers wrote:
TravelforFun wrote:I look at it this way. If you rent, you pay rent each month for the rest of your life. If you buy, you pay a higher rent for the first 15-30 years, then you live rent free in a paid-for house and that paid-for house could be a significant part of your asset.
Do you not consider property taxes, major maintenance/repairs and routine upkeep to be a permanent cost of owning a house? After all, all of these items are included in one's rent payments. While owning a house after the mortgage is paid off may be significantly cheaper then renting for a lifetime, I think it should be noted that homeownership will never be a free lunch.
Not a free lunch but home ownership is financially more advantageous than renting over the long run.

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Re: When does renting make sense

Post by avalpert » Tue Aug 08, 2017 10:49 pm

TravelforFun wrote:
flamesabers wrote:
TravelforFun wrote:I look at it this way. If you rent, you pay rent each month for the rest of your life. If you buy, you pay a higher rent for the first 15-30 years, then you live rent free in a paid-for house and that paid-for house could be a significant part of your asset.
Do you not consider property taxes, major maintenance/repairs and routine upkeep to be a permanent cost of owning a house? After all, all of these items are included in one's rent payments. While owning a house after the mortgage is paid off may be significantly cheaper then renting for a lifetime, I think it should be noted that homeownership will never be a free lunch.
Not a free lunch but home ownership is financially more advantageous than renting over the long run.
Not necessarily, no. It completely depends on local (and house-specific) economics - there is no rule that forces home ownership to be financially advantageous even over the long run (however defined).

TravelforFun
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Re: When does renting make sense

Post by TravelforFun » Tue Aug 08, 2017 11:07 pm

avalpert wrote:
TravelforFun wrote:
flamesabers wrote:
TravelforFun wrote:I look at it this way. If you rent, you pay rent each month for the rest of your life. If you buy, you pay a higher rent for the first 15-30 years, then you live rent free in a paid-for house and that paid-for house could be a significant part of your asset.
Do you not consider property taxes, major maintenance/repairs and routine upkeep to be a permanent cost of owning a house? After all, all of these items are included in one's rent payments. While owning a house after the mortgage is paid off may be significantly cheaper then renting for a lifetime, I think it should be noted that homeownership will never be a free lunch.
Not a free lunch but home ownership is financially more advantageous than renting over the long run.
Not necessarily, no. It completely depends on local (and house-specific) economics - there is no rule that forces home ownership to be financially advantageous even over the long run (however defined).
I don't know any rich person who rents.

avalpert
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Re: When does renting make sense

Post by avalpert » Wed Aug 09, 2017 12:07 am

TravelforFun wrote:
avalpert wrote:
TravelforFun wrote:
flamesabers wrote:
TravelforFun wrote:I look at it this way. If you rent, you pay rent each month for the rest of your life. If you buy, you pay a higher rent for the first 15-30 years, then you live rent free in a paid-for house and that paid-for house could be a significant part of your asset.
Do you not consider property taxes, major maintenance/repairs and routine upkeep to be a permanent cost of owning a house? After all, all of these items are included in one's rent payments. While owning a house after the mortgage is paid off may be significantly cheaper then renting for a lifetime, I think it should be noted that homeownership will never be a free lunch.
Not a free lunch but home ownership is financially more advantageous than renting over the long run.
Not necessarily, no. It completely depends on local (and house-specific) economics - there is no rule that forces home ownership to be financially advantageous even over the long run (however defined).
I don't know any rich person who rents.
You may have the cause/effect there reversed - I know plenty of poor people who own.

It also happens to be just false that rich people don't rent - in San Francisco for example, among those with income >$150k, the number of renters actually surpassed the number of homeowners.

THY4373
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Re: When does renting make sense

Post by THY4373 » Wed Aug 09, 2017 11:18 am

JGoneRiding wrote:
Actually its mostly because we are cheap! :) I mean seriously I am going to use the cheapest carpet that I think will wear ok because its going to get destroyed any way and I get zero enjoyment out of it, and I am going to use builder grade faucet and appliances (there is no plantinum in my places everything is white) and I buy the most on sale basic fridge etc etc. Where people spend a lot more money because the "own it"

Most people would be better off owning if they stay IF they bought apples to apples. But people will rent worse than they will buy. and then say they can't afford to buy because it costs so much but that is mostly because they want an orange.
I was so going to make both of these points. As an adult other than the first two years I was on my own I have been a life long owner of the property I lived in (condo/TH/SFH). My recent divorce has me renting not because I cannot afford to buy, I could easily, but because my life is in some flux and there is a good possibility I'll move once my son graduates from high school in five years. And given that and the relatively moderate appreciation in this area it doesn't make a lot of sense to buy at that time scale.

My observation as somebody who did most of my own house maintenance and improvements, that the landlord/property management company have taken about every shortcut in the book on house maintenance here (the other rentals I looked at seems similar). There is stuff here I would be ashamed if it was my work. It all mostly works fine but wow on a few things. I don't blame them at all but it would drive me nuts if I owned this place. Since I rent who cares I can just be amused.

Also I agree that I rent below what I would buy and I also care far less about what I put in it furniture wise and the like. This is where I am honestly saving money. If had bought I would have bought a more expensive place than I rent, I would have sunk more money and time into upgrades and making it a place that was mine and I loved and I would have spend more on furniture and the like.

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Re: When does renting make sense

Post by THY4373 » Wed Aug 09, 2017 11:22 am

TravelforFun wrote:
I don't know any rich person who rents.
I am reminded of the old saying about the plural of anecdote is not data.

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Re: When does renting make sense

Post by Cheyenne » Wed Aug 09, 2017 11:42 am

I don't know any rich person who rents.
I know two personally and know of another one. A friend of mine is a physician and as has been the case with some in recent years, his practice of several decades suffered reversals, so he accepted a position at a hospital in another state for five years until he retired. He chose to rent rather than buy (in fact he lived at an extended-stay hotel). Another acquaintance of mine was a TV news anchor in New York (he is now in a different city) and he was renting, having been recently divorced. And a while back I was watching a morning TV show where one of the guests is a successful ad executive in New York. A well-known landlord called in to the show and the ad executive brought up the problem he was having getting his security deposit returned after vacating a $12k/mo. apartment in a tower owned by the caller.

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DaftInvestor
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Re: When does renting make sense

Post by DaftInvestor » Wed Aug 09, 2017 12:16 pm

OP: you have to do the math for your situation - the NYT calculator someone referenced is one good too.
In general - renting often makes sense when you aren't planning on establishing roots (e.g. may likely move within 5 years) and/or don't require a lot of space (far more apartments available for rent than houses in many locales - and sometimes these are rented at rates that beat ownership by a good margin). For long term living - and if you want or need the space - owning typically makes more sense - I'd say my case is typical for this latter case - When I ran the numbers for my second home purchase - my 15-year-mortgage-payment+HO-Insurance+Property-Taxes+Maintenance was roughly equal to what I would have paid for monthly rent for a similar sized home in my area (and with a growing family I needed the space). After a few years - I saw rents going up while my mortgage remained fixed (Property taxes increased for me by an equal percentage to rent payments in the area - but the $$ the percentage was based on was far less per year so my increases where far less than rent increases). Now that the mortgage is paid off - I'm living in my home for a small fraction of the cost it would take to rent the same size house - and actually cheaper than most small apartments with far less sq-footage. I also have the added benefit of now having significant home-equity (opportunity cost of original downpayment is negated as its now been converted by 10-fold into home equity - this contributes to my net worth versus the landlords). If I had to move within the first couple of years of buying my home - transaction costs would have eroded away any savings. Most landlords aren't going to rent at a loss over a long period of time (forcing ownership to be cheaper long term than renting in the majority of circumstances) and the economy-of-scale argument doesn't really work with a single-family-home in a small town (and oftentimes owners obtain their own economies of scale anyway through HOAs that include contracts with maintenance companies).

TravelforFun
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Re: When does renting make sense

Post by TravelforFun » Wed Aug 09, 2017 12:40 pm

Cheyenne wrote:
I don't know any rich person who rents.
I know two personally and know of another one. A friend of mine is a physician and as has been the case with some in recent years, his practice of several decades suffered reversals, so he accepted a position at a hospital in another state for five years until he retired. He chose to rent rather than buy (in fact he lived at an extended-stay hotel). Another acquaintance of mine was a TV news anchor in New York (he is now in a different city) and he was renting, having been recently divorced. And a while back I was watching a morning TV show where one of the guests is a successful ad executive in New York. A well-known landlord called in to the show and the ad executive brought up the problem he was having getting his security deposit returned after vacating a $12k/mo. apartment in a tower owned by the caller.
So the main reason they're renting is because their job/living arrangement is not settled. I would agree with that. Don't buy if you don't know where you are going to be 5 years or more from now.

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Re: When does renting make sense

Post by Elsebet » Wed Aug 09, 2017 2:55 pm

I love everything that goes with owning a house and property (the good and bad) so even if it costs more, renting just doesn't work for me. When I'm older and can't physically do the upkeep or garden anymore I'll probably move to some kind of rental though.

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Re: When does renting make sense

Post by rmelvey » Wed Aug 09, 2017 3:08 pm

I live in NYC and plentyyyy of rich people rent here. In fact, the rental market mostly caters to rich people. It's harder to find a modest apartment than a luxurious one.

Things I like about renting in NYC vs. buying...
  • I can max out my 401k which I couldn't do if saving up for a down payment. This is extra important in a high tax area
  • I was recently laid off, and luckily didn't have to move for my new job but if I did it would have been much tougher if I owned
  • Owners of co-ops here get hit with random assessments at the whims of the co-op board, this makes budgeting much more difficult
  • I can easily adjust my standard of living to my volatile income. Half of my income comes from RSUs which have thankfully tripled in the last 3 years. I can afford a nicer apartment now, but wouldn't quite be comfortable enough to lock into a 30 year mortgage on a nice place.

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