Buying vs. Renting Principles

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geerhardusvos
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Buying vs. Renting Principles

Post by geerhardusvos »

Hi Bogleheads,

We get many posts from people asking about how much house they can afford, if they should keep renting or should they buy, and if they should rent out their current house or should they sell it. I've put together some resources and guiding principles with the goal of helping people asking something like, "We make $150k as a family of four and want a bigger house, can we afford a $850k house?" For my 1000th post, I wrote up the below as a place to start for our audience and an aggregation of things I’ve learned from reputable blogs and professionals. I have made multiple edits to clarify and add/remove content based on comments and feedback in this thread (thanks to all who had helpful comments). These guidelines have now been linked to in the Own vs. Rent wiki.

Keep Renting or Should I Buy? -- General Principles:
1. If you live on either of the coasts (HCOLA) in the USA, you should probably rent. If you live in the middle of the country in LCOLA, then you should consider buying. These are generalities that are often true, but not always true. Some may object and say that they bought a house in 2011 in an HCOLA and it’s working out really well for them. Owning can be great if you can afford it and if it makes sense for your area and income level and desired lifestyle. But just because house prices have gone up dramatically over the last 10 years, doesn’t mean that it will continue that way over the next 10 to 15 years. Its always fun to brag about how you bought a house in 2012, but we don’t hear as much from the people who bought a house in 2006 in a market that hasn’t recovered (Memphis, Youngstown, etc.). If there is another dip in housing prices (like 2009-2012), then buying a home might become very attractive again, even in coastal markets. There are some areas that are still attractive for buying, specifically in the middle of the United States. Ultimately, these are personal decisions; some people like owning, some like renting. But there is likely a more clear and ideal financial and personal choice for your situation if you dig into it and have an open mind. Make sure you take into account local costs of taxes, insurance, etc. (more on that in #4 below).

2. You should only buy if you plan to stay longer than 10 years. If you are a resident, new employee, new to an area, just starting out, etc... just rent, pay off debt, keep investing in your three fund portfolio, and if things are stable down the road and you find the place you want to stay a long time, then consider what buying looks like in your area. But don't spend too much (see next step). The break even point can be different depending on your area, but just know that some locations still haven’t recovered from 2008, so it really is good advice to buy for the long term.

3. You should seek to spend <3X your annual gross income on a house. This means that if you make $100k gross as a family, you can afford a $200-300k house. This is regardless of if you are paying for the house with cash, home equity, or borrowing. It's about your long term ability to sustain your standard of living. It's about not having too much of your net worth wrapped up in a house (I recommend targeting home equity being <25% of your long term net worth in your primary residence - so if you plan to retire with $2M, you have a ~$500k house paid off as an example). We want our assets to pay us, and minimize consumption items that don’t pay us, and if we are living in our house, it is just another consumption item. Another way to look at this is to try to spend less than 25% of your monthly after-tax income on housing. If this tips the scales either way, go with the one that is less expensive keeping all costs in mind (see #4 below). If you want to spend more than that, you're probably over extending yourself unless you got an inheritance or are getting help to buy the house. Even then, it's recommended to stick to 2-3X your gross income (you can use pre or post tax income, I use post-tax). If you plan to have kids or if you are married and one of you will stop working, then you should consider your gross income only the one that will be sustained in the long term. Don't account for short term income. If you make $500k/year, yes, you can probably afford the $1.5M house! If you really want to spend 3.5-4X on a house (many people do this), you may be overbuying and taking on more risk than necessary. Just be aware of the trade offs of plowing money into your house instead of the stock market (this can be a significant trade off over long periods of time). So in answer to the question proposed at the top of the OP, no, if you make $150,000 per year, you cannot afford a $850,000 house. Will you go bankrupt? Probably not. But unless the value to you significantly exceeds the trade-offs, then you are doing yourself a disservice. If you aren’t investing 20%+ of your income because you decided to buy a house, you are doing yourself a disservice. That early compounding is huge for an investor!

4. You should not underestimate the total cost of owning a house. Time, maintenance, risk (see natural disasters), taxes, etc. all add up very quickly and are a larger toll than most people account for. Even the transaction costs associated with buying and selling homes are very underestimated. The risk of fraud and legal issues during the transaction of a house transaction are real. When renting, specifically in tenant friendly states, the landlord carries most of the risk for damage and legal costs. Whether tenant risk or home ownership risk is greater is up to your own analysis and area. Renters insurance is very affordable in the states. Bigger house means more maintenance. More expensive area means higher maintenance cost for labor and higher property taxes. If you are doing the labor yourself, you are giving up your most valuable asset: your time. Be clear with yourself about the costs and opportunity costs. Opportunity costs which include the ability to invest more aggressively, especially while you are young, instead of saving for a down payment on a house or instead of the cost of owning and maintaining. These decisions can be worth hundreds of thousands of dollars if you are willing to see the opportunity costs. If we frame the question around which option, renting or owning, will allow us to build long-term wealth, I think it starts a healthy conversation and shifts the conversation more about long-term value and wealth accumulation. There are many cases renting smooths the monthly expenses and allows for more consistent investing into the stock market (where are you will get the biggest returns). I can’t stress enough, the earlier you can invest in the stock market, the better. Saving up for and buying a house has too often gotten in the way of investing early for young accumulators. Just be clear about the trade-offs and your goals![/b] be sure to take into account game changers like military or physician discounts on mortgage options that can make owning more attractive. Take into account all local costs of insurance, taxes, etc. to understand your area and inputs into your analysis. This can vary widely from state to state, and even county to county. Down payment options are interesting to consider. Conventional wisdom says 5 to 20% down payment. Interest only mortgage can be an option as well. Just make sure you understand the trade-offs of putting more money into your house versus investing, and having so much of your assets in one property. There are good cases for putting nothing down and good arguments for putting 20% down, so just familiarize with yourself with the options and what works for you. https://www.bogleheads.org/wiki/Paying_ ... _investing

5. Town-homes, condos, apartments, etc. are usually not as good of investments as single family homes (see HOAs, etc.). They tend not to appreciate as much and they are less desired. This depends on your area (see #1 above). Seek to spend only 1-2X annual income on non SFH properties. These can often need less maintenance however, so consider the trade-offs. Having a pool or a gym can be very attractive for certain lifestyles, so there are some benefits of this type of home, as well as downsides.

6. Renting is NOT throwing away money. Renting can be a better and more prudent financial option depending on your math and income. Don't let family or friends pressure you to buy just because "it's what grownups do." There are plenty of wealthy grownups (and people in every economic level) who rent for life . And just FYI, "making money in real estate" doesn't actually mean it was a good investment . The mortgage is supposed to be dramatically lower than rent. That’s because the landlord has to pay all those other expenses. A real estate investor expects about 45 percent of gross rent to go toward non-mortgage expenses. In order to compare apples to apples, multiply your prospective principal and interest payment on a 30-year mortgage by 1.8. If renting a comparable home is much less than that figure, there is a very good chance you will be better off renting unless you are in the home for a very long time. Given these and other economic realities, it generally does not make sense for a person who just started a career or just moved to a new location to purchase a home. If you think you are an exception, run the numbers using The New York Times’ “Is It Better to Rent or Buy?” calculator (linked below) and see just how much appreciation you will have to realize just to break even, much less come out ahead.

7. Location is the most important factor when considering buying. Only buy a house in a location that support your long-term needs, or someone else’s long-term desires. It usually makes sense to buy a house in a better ZIP Code early on for the appreciation as well as the potential of wanting nice school districts or wanting to sell it someday. If you could choose between having a nice big house in a worse ZIP Code or a small house in a nice ZIP Code, the better location usually always wins out. Renting usually allows you to access nicer ZIP Codes without the cost and risk, and this is especially applicable in HCOLAs. If your analysis supports buying, make sure you are buying in a great location and be a savvy homebuyer. Get a house that has good bones and good location, keeping in mind that someone 5 to 25 years from now might be buying that house from you. If you can’t afford to buy in a good location, it typically doesn’t make sense to buy.


Helpful Tools & Links:
Tools & Calculators on the Wiki includes mortgage, rent vs. buy, and other calculators that serve as a good starting point for home affordability. A google search will help you find other articles on this subject.
— Boglehead own versus buy https://www.bogleheads.org/wiki/Owning_vs_renting
FAU rent versus buy index - notice how because of where we are at in the economic cycle, most locations analyzed either highly favor renting or breakeven. This data is updated quarterly. 2012 was an example where across almost every city buying was very favorable.
— Helpful analysis by Early Retirement Now: https://earlyretirementnow.com/2017/11/ ... nvestment/ - https://earlyretirementnow.com/2019/10/ ... ownership/
— J L Collins Rent vs Buy: https://jlcollinsnh.com/2012/02/23/rent ... e-numbers/
Buying a home is a consumption item so do it the right way and do your math first
— Ben Felix rent versus buy: https://youtu.be/Uwl3-jBNEd4


Would My House Make a Good Rental?
1. Probably not, but it's possible. Especially if you live on the coasts and you purchased the house recently, your house is likely better to sell (even at a loss) than trying to rent. Depends on the area, what your costs are, what you paid for the property, what you can get for rent, your appetite for being landlord, etc.
2. If you can rent out your house for 1% of the purchase price, then you're in good shape. If you bought the house for $200k, you should rent it out for $2k/month. If you are less than this, it's very likely not a good investment to rent it out and you should sell your house instead of renting it out. You can find many real estate investment blogs (Bigger Pockets is a good place to start) if you want more information. For exploring pros and cons of being a landlord (be sure to read the nightmare stories and understand what you’re getting into):
https://www.moneyunder30.com/pros-cons- ... properties
Becoming a Landlord: My Experiences


Hope this helps as a good starting point as you do your own analysis! It’s not always about the math, and usually there are personal and lifestyle considerations and desires. But it’s good for us all to understand the financial implications and the serious complexities of making buy vs rent decisions.

Let me know if you have any feedback. Please share other resources, principles, and relevant links to this topic, I will edit this OP to include them if they are helpful. Thanks!
Last edited by geerhardusvos on Fri Sep 11, 2020 11:36 am, edited 53 times in total.
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chinchin
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by chinchin »

US median household income is $61,937. So median American should only buy a $124k home? Median US hone price is $320k. Only 12% of US homes were under $125k. US individual median income is $33,706, guess single people can't buy a home at all.

https://www.statista.com/statistics/505 ... rices-usa/
Last edited by chinchin on Sun Sep 06, 2020 12:07 pm, edited 3 times in total.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by runner3081 »

That income to purchase is highly, highly conservative. Granted, we are not one to talk. We spent 2.65x our salary on our current house.

The thing I always go back to about rent vs purchase is that the mortgage ends some day. Sure, property taxes and insurance will go up, but the bulk of the costs, at some point, go away.

Purchasing is a big way to protect against economic growth and inflation. Rent is likely to keep going up.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

chinchin wrote: Sun Sep 06, 2020 11:59 am US median household income is $61,937. So median American should only buy a $124k home? Median US hone price is $320k.
Right, many Americans probably aren’t in a position to buy a house. Many people who do buy a house are overextending themselves. This post helps share the principles about that.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by ScubaHogg »

runner3081 wrote: Sun Sep 06, 2020 12:05 pm
The thing I always go back to about rent vs purchase is that the mortgage ends some day. Sure, property taxes and insurance will go up, but the bulk of the costs, at some point, go away.
Conversely with renting you can follow better job opportunities more easily, you avoid a lot of transactions costs and on going maintenance. You can upsize and downsize more easily and find cheaper places if need be. You take less neighborhood and city risk with renting.

Additionally, you can have more of your net worth in likely higher returning equities if you don’t have a ton of cash tied up in a house.

Renting is underrated.
“Unexpected Returns dominate the Expected Returns” - Ken French
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by FIREchief »

chinchin wrote: Sun Sep 06, 2020 11:59 am US median household income is $61,937. So median American should only buy a $124k home? Median US hone price is $320k. Only 12% of US homes were under $125k. US individual median income is $33,706, guess single people can't buy a home at all.

https://www.statista.com/statistics/505 ... rices-usa/
+1. That 2 - 3 times annual gross seems really conservative. For people close to the median, with stable jobs/income, I think there is a legitimate argument to exceed that level depending upon the situation.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by FineOne »

geerhardusvos wrote: Sun Sep 06, 2020 11:50 am Hi Bogleheads,

We get many posts from people asking about how much house they can afford, if they should keep renting or should they buy, and if they should rent out their current house or should they sell it. I've put together some resources and guiding principles below. Can we make these guidelines sticky so that people have something to review before posting yet another thread like, "We make $180k as a family of four and want a bigger house, can we afford a $850k house?" For my 1000th post, I wrote up the below and I'd love for the below information to be readily available as a place to start and helpful to future posters on this topic.

Keep Renting or Should I Buy? -- General Principles:
1. If you live on either of the coasts (HCOLA) in the USA, you should probably rent. If you live in the middle of the country in LCOLA, then you should consider buying. These are generalities that are often true, but not always true.
2. You should only buy if you plan to stay longer than 10 years. If you are a resident, new employee, new to an area, just starting out, etc... just rent, pay off debt, keep investing in your three fund portfolio, and if things are stable down the road and you find the place you want to stay a long time, then consider buying. But don't spend too much (see next step).
3. You should only spend 2-3X your annual gross income on a house. This means that if you make $100k gross as a family, you can afford a $200-300k house. This is regardless of if you are paying for the house with cash, home equity, or borrowing. It's about your long term ability to sustain your standard of living. It's about not having too much of your net worth wrapped up in a house (I recommend keeping <20% of your net worth in your primary residence). If you want to spend more than that, you're probably over extending yourself unless you got an inheritance or are getting help to buy the house. Even then, it's recommended to stick to 2-3X your gross income (you can use pre or post tax income, I use post-tax). If you plan to have kids or if you are married and one of you will stop working, then you should consider your gross income only the one that will be sustained in the long term. Don't account for short term income. If you make $500k/year, yes, you can afford the $1.5M house! If you really really want to spend 3.5-4X on a house, many many people do this, but know that they are likely overbuying and taking on more risk than they need to.
4. You should not underestimate the total cost of owning a house. Time, maintenance, risk (see natural disasters), taxes, etc. all add up very quickly and are a larger toll than most people account for.
5. Town-homes, condos, apartments, etc. are usually not as good of investments as single family homes (see HOAs, etc.). They tend not to appreciate as much and they are less desired. This depends on your area (see #1 above). Seek to spend only 1-2X annual income on non SFM properties.
6. Renting is NOT throwing away money. It can be a better and more prudent financial option depending on your math and income. Don't let family or friends pressure you to buy just because "it's what grownups do." There are plenty of wealthy grownups who rent for life . And just FYI, "making money in real estate" doesn't actually mean it was a good investment .
I don't like rules of "thumb". They don't really apply universally and it misleads people into making sub-optimal decisions. The right answer is that everyone should run the numbers for their individual situation. For this reason it is "ok" for people to ask for help doing so.

1. Disagree with this rule of thumb. People should use the NYT rent-buy calculator first. https://www.nytimes.com/interactive/201 ... lator.html .

2. Thats far too conservative. This should be evaluated based on a proper evaluation using for instance (a NYT rent-buy calculator).

3. Also I don't agree. For instance, what if buying with a large downpayment increases the savings rate of an early accumulator by 25%? It's a question of what the opportunity cost with that downpayment is. See for instance Ben Felix: https://www.youtube.com/watch?v=Uwl3-jBNEd4 .

As part of this discussion, we should bring up mortgage only loans in HCOL areas as per HedgeFundie. viewtopic.php?f=2&t=304655

4. Good point. But again for HCOL you are paying for land not house maintenance. Adjust maintenance accordingly.

5. This argument feels like market timing. "Because historically townhomes have been less valued they will be less valued in the future". Again, I would run the numbers on if the purchase makes sense. If 3Br townhomes can be had for $500k and a 3Br SFA costs $1.5M, I would buy the townhome.

I think I agree with point 6.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by Kenkat »

There is already a page on rent vs. own in the Boglehead wiki:

https://www.bogleheads.org/wiki/Owning_vs_renting

Perhaps you could contribute to that page. Although I have seen sticky posts in other forums, it is not something that is supported here.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by MrDrinkingWater »

I like what you are trying to consolidate together in one spot, geerhardusvos.

As many threads on Bogleheads have detailed out, the decisions to buy or rent are complicated. As you point out, there are other resources and websites out there that have captured many aspects of the buy vs rent decision well.

The mix of expressive, emotional, and utilitarian benefits that will be satisfied by buying or renting are often substantially different for many folks considering whether to buy or rent. The cost of renting shelter versus the cost of renting money (having a mortgage) is just one aspect of the decision.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by Lars_2013 »

chinchin wrote: Sun Sep 06, 2020 11:59 am US median household income is $61,937. So median American should only buy a $124k home? Median US hone price is $320k. Only 12% of US homes were under $125k. US individual median income is $33,706, guess single people can't buy a home at all.

https://www.statista.com/statistics/505 ... rices-usa/
That link puts me through to a sign-in page, but $320k is approximately the median U.S. _new home_ price. (see, for example, https://www.census.gov/construction/nrs ... index.html , which is the source for https://fred.stlouisfed.org/series/MSPUS )

Median home value & price is a lot harder to accurately estimate. NAR says median price is 291k ( https://www.nar.realtor/research-and-st ... ordability ). Zillow says median value is 249k and median price is $282k (homes for sale may be a non-representative subset of all homes; https://www.zillow.com/home-values/ ).

$61,937*3=$186k. With interest rates low, 4x income is probably reasonable as long as people understand there's a chance they'll lose money on the house. $61,937*4=$248k, which is just about the median home value according to Zillow. I expect when interest rates rise, home prices will stagnate or fall since affordability (defined by NAR as ability to qualify for a mortgage) will become an issue again. https://www.nar.realtor/sites/default/f ... -08-12.pdf

When I bought my first house for 1.7x my income, I was the first person in my family to buy a house for more than 1x income, but lots of people I knew were spending 3x-4x income on a house. When I ended up selling for less than what I bought it for, but it wasn't a big deal because the loss was a small share of my income, and I was glad I hadn't stretched. When my partner bought a house, it was for ~3x his income, but only 1.6x our combined income. It's now paid off, which we couldn't have done by now if he had stretched more, no matter how low the interest rates fell.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

Kenkat wrote: Sun Sep 06, 2020 12:41 pm There is already a page on rent vs. own in the Boglehead wiki:

https://www.bogleheads.org/wiki/Owning_vs_renting

Perhaps you could contribute to that page. Although I have seen sticky posts in other forums, it is not something that is supported here.
Thank you; I added this to the links section of the OP
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by AerialWombat »

I completely disagree with 6 of your 8 points, so I'm not even going to try addressing them one by one. There are simply too many variables in the home purchase decision to boil it down to what you've done here. Sorry, but I just don't think this would be worthwhile to "sticky" even if BH supported such a feature.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by X528 »

Check out this book by Alex Avery: The Wealthy Renter.

https://www.amazon.com/Wealthy-Renter-C ... 064&sr=8-1
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by runner3081 »

ScubaHogg wrote: Sun Sep 06, 2020 12:12 pm
runner3081 wrote: Sun Sep 06, 2020 12:05 pm
The thing I always go back to about rent vs purchase is that the mortgage ends some day. Sure, property taxes and insurance will go up, but the bulk of the costs, at some point, go away.
Conversely with renting you can follow better job opportunities more easily, you avoid a lot of transactions costs and on going maintenance. You can upsize and downsize more easily and find cheaper places if need be. You take less neighborhood and city risk with renting.

Additionally, you can have more of your net worth in likely higher returning equities if you don’t have a ton of cash tied up in a house.

Renting is underrated.
The equation changes on pursuing job opportunities once kids are in school.

Sure, if I was single, I would rent.

Outside of a down payment, there isn’t more money to invest when renting.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by ScubaHogg »

runner3081 wrote: Sun Sep 06, 2020 2:11 pm
Outside of a down payment, there isn’t more money to invest when renting.
Sure there is. All else being equal, given two identical homes the one you can rent will typically cost you less per month than a house payment would cost you. Obviously not always, but to a rough approximation it's correct. Plus you won't have ongoing maintenance, taxes, and insurance.

Take the extreme example of San Francisco. This info is a little out of date, but here it is talking about a 50:1 price to rent ratio. You can absolutely spend less on renting than owning. Run the numbers yourself on how much the mortgage would be on a $1000/month rental.

https://smartasset.com/mortgage/price-t ... -us-cities

And the down payment is significant. 20% of a $500,000 house is a lot of money not invested in equities.

I'm not against owning (I own now, have rented a lot). But the default shouldn't be "own." It should probably be "rent", or at least neutral, unless you can prove the case to yourself that owning is better in one's particular situation.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by EnjoyIt »

FIREchief wrote: Sun Sep 06, 2020 12:29 pm
chinchin wrote: Sun Sep 06, 2020 11:59 am US median household income is $61,937. So median American should only buy a $124k home? Median US hone price is $320k. Only 12% of US homes were under $125k. US individual median income is $33,706, guess single people can't buy a home at all.

https://www.statista.com/statistics/505 ... rices-usa/
+1. That 2 - 3 times annual gross seems really conservative. For people close to the median, with stable jobs/income, I think there is a legitimate argument to exceed that level depending upon the situation.
Most American’s finances are in shambles. We should not be following the path of the average if building wealth is one’s goal. This becomes even more so when income is limited and mistakes add up.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

FIREchief wrote: Sun Sep 06, 2020 12:29 pm
chinchin wrote: Sun Sep 06, 2020 11:59 am US median household income is $61,937. So median American should only buy a $124k home? Median US hone price is $320k. Only 12% of US homes were under $125k. US individual median income is $33,706, guess single people can't buy a home at all.

https://www.statista.com/statistics/505 ... rices-usa/
+1. That 2 - 3 times annual gross seems really conservative. For people close to the median, with stable jobs/income, I think there is a legitimate argument to exceed that level depending upon the situation.
I don’t think 3X annual gross income is too conservative at all. People think they need more house than they actually do, and there are financial consequences. As long as people become educated about the trade-offs and they understand their own long-term desires, that’s what’s important.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by runner3081 »

ScubaHogg wrote: Sun Sep 06, 2020 2:53 pm
runner3081 wrote: Sun Sep 06, 2020 2:11 pm
Outside of a down payment, there isn’t more money to invest when renting.
Sure there is. All else being equal, given two identical homes the one you can rent will typically cost you less per month than a house payment would cost you. Obviously not always, but to a rough approximation it's correct. Plus you won't have ongoing maintenance, taxes, and insurance.

Take the extreme example of San Francisco. This info is a little out of date, but here it is talking about a 50:1 price to rent ratio. You can absolutely spend less on renting than owning. Run the numbers yourself on how much the mortgage would be on a $1000/month rental.

https://smartasset.com/mortgage/price-t ... -us-cities

And the down payment is significant. 20% of a $500,000 house is a lot of money not invested in equities.

I'm not against owning (I own now, have rented a lot). But the default shouldn't be "own." It should probably be "rent", or at least neutral, unless you can prove the case to yourself that owning is better in one's particular situation.
Fair points, though not valid in Arizona. Rent is insane here compared to mortgage costs.

In reality, 99% of people won’t save the difference anyways, haha
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

AerialWombat wrote: Sun Sep 06, 2020 1:38 pm I completely disagree with 6 of your 8 points, so I'm not even going to try addressing them one by one. There are simply too many variables in the home purchase decision to boil it down to what you've done here. Sorry, but I just don't think this would be worthwhile to "sticky" even if BH supported such a feature.
Just like a three fund portfolio, and the Boglehead philosophy and principles, we aren’t going to be able to please everyone with guidelines. They are just that. Guidelines. You can make a case for many other things, but with the influx of posts asking if they can afford houses, we should be diligent to provide information as a starting point.

If you are interested in sharing why you disagree with any of the principles, I’m open to feedback and discussion. What are these “many variables” that you speak of? Are they things like location, taxes, income levels, desires, etc. that are mentioned in the OP? If we give people information they can make an assessment for themselves based on their variables
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by denovo »

geerhardusvos wrote: Sun Sep 06, 2020 11:50 am Hi Bogleheads,

We get many posts from people asking about how much house they can afford, if they should keep renting or should they buy, and if they should rent out their current house or should they sell it. I've put together some resources and guiding principles below. Can we make these guidelines sticky so that people have something to review before posting yet another thread like, "We make $150k as a family of four and want a bigger house, can we afford a $850k house?" For my 1000th post, I wrote up the below and I'd love for the below information to be readily available as a place to start and helpful to future posters on this topic.

Keep Renting or Should I Buy? -- General Principles:
1. If you live on either of the coasts (HCOLA) in the USA, you should probably rent. If you live in the middle of the country in LCOLA, then you should consider buying. These are generalities that are often true, but not always true. Owning can be great if you can afford it and if it makes sense for your area and income level and desired lifestyle. These are personal decisions; some people like owning some like renting. But there is likely a more clear ideal financial choice for your situation if you dig into it and have an open mind.
2. You should only buy if you plan to stay longer than 10 years. If you are a resident, new employee, new to an area, just starting out, etc... just rent, pay off debt, keep investing in your three fund portfolio, and if things are stable down the road and you find the place you want to stay a long time, then consider buying. But don't spend too much (see next step).
3. You should only spend 2-3X your annual gross income on a house. This means that if you make $100k gross as a family, you can afford a $200-300k house. This is regardless of if you are paying for the house with cash, home equity, or borrowing. It's about your long term ability to sustain your standard of living. It's about not having too much of your net worth wrapped up in a house (I recommend keeping <20% of your net worth in your primary residence). If you want to spend more than that, you're probably over extending yourself unless you got an inheritance or are getting help to buy the house. Even then, it's recommended to stick to 2-3X your gross income (you can use pre or post tax income, I use post-tax). If you plan to have kids or if you are married and one of you will stop working, then you should consider your gross income only the one that will be sustained in the long term. Don't account for short term income. If you make $500k/year, yes, you can probably afford the $1.5M house! If you really really want to spend 3.5-4X on a house, many many people do this, but know that they are likely overbuying and taking on more risk than they need to. Just be aware of the trade offs of plowing money into your house instead of the stock market (this can be a significant trade off over long periods of time). So in answer to the question proposed at the top of the OP, no, if you make $150,000 per year, you cannot afford a $850,000 house. Will you go bankrupt? Probably not. But unless the value to you significantly exceeds the trade-offs, then you are doing yourself a disservice.
4. You should not underestimate the total cost of owning a house. Time, maintenance, risk (see natural disasters), taxes, etc. all add up very quickly and are a larger toll than most people account for. Bigger house means more maintenance. More expensive area means higher maintenance cost for labor. If you are doing the labor yourself, you are giving up your most valuable asset, your time. Be clear with yourself about the costs and opportunity costs. Opportunity costs which include the ability to invest more aggressively, especially while you are young, instead of saving for a down payment on a house or instead of the cost of owning and maintaining. These decisions can be worth hundreds of thousands of dollars if you are willing to see the opportunity costs.
5. Town-homes, condos, apartments, etc. are usually not as good of investments as single family homes (see HOAs, etc.). They tend not to appreciate as much and they are less desired. This depends on your area (see #1 above). Seek to spend only 1-2X annual income on non SFH properties. These can often need less maintenance however, so consider the trade-offs. Having a pool or a gym can be very attractive for certain lifestyles, so there are some benefits of this type of home, as well as downsides.
6. Renting is NOT throwing away money. Renting can be a better and more prudent financial option depending on your math and income. Don't let family or friends pressure you to buy just because "it's what grownups do." There are plenty of wealthy grownups (and people every economic level)who rent for life . And just FYI, "making money in real estate" doesn't actually mean it was a good investment .

Tools & Links:
Tools & Calculators on the Wiki includes mortgage, rent vs. buy, and other calculators that serve as a good starting point for home affordability. A google search will help you find other articles on this subject.
https://www.bogleheads.org/wiki/Owning_vs_renting
Buying a home is a consumption item so do it the right way and do your math first


Would My House Make a Good Rental?
1. Probably not. Especially if you live on the coasts and you purchased the house recently, your house is likely better to sell (even at a loss) than trying to rent. Depends on the area.
2. If you can rent out your house for 1% of the purchase price, then you're in good shape. If you bought the house for $200k, you should rent it out for $2k/month. If you are less than this, it's very likely not a good investment to rent it out and you should sell your house instead of renting it out. This has nothing to do with appreciation, but everything to do with what you paid for the house. If you bought a house in 1992 for $120k in Portland and now it's worth $800k, you would still seek to rent it out for 1% of purchase price or more. In this scenario, you're in good shape since you can probably rent this house out for $2.8k/month in Portland. But if you don't want the headache, selling is a great (and usually the most ideal) option. Rental investments can be really good, but you have to do your math, know your areas, and it's a business. It's not truly passive income in almost all cases. You can find many real estate investment blogs (Bigger Pockets is a good place to start) if you want more information.

Hope this helps! Let me know if you have any feedback. Please share other resources, principles, and relevant links to this topic, I will edit this OP to include them if they are helpful. Thanks!
I appreciate you being try to be helpful, but I strongly disagree with about 90 percent of it, these rules of thumb you cite really have no basis in any logic.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

denovo wrote: Sun Sep 06, 2020 3:42 pm I appreciate you being try to be helpful, but I strongly disagree with about 90 percent of it, these rules of thumb you cite really have no basis in any logic.
These things can be very location dependent and personal, but guidelines can be very helpful and we need to help educate others seeking sound information about the opportunity costs. Care to elaborate on your points of disagreement?
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by EnjoyIt »

geerhardusvos wrote: Sun Sep 06, 2020 3:49 pm
denovo wrote: Sun Sep 06, 2020 3:42 pm I appreciate you being try to be helpful, but I strongly disagree with about 90 percent of it, these rules of thumb you cite really have no basis in any logic.
These things can be very location dependent and personal, but guidelines can be very helpful and we need to help educate others seeking sound information about the opportunity costs. Care to elaborate on your points of disagreement?
I agree with what you wrote in general but curious why 10 years is a minimum to live in an area? I always read it at 6-7 years.

Also, 3x income is really at the high end of the spectrum in a non VHCOL area. His is particularly true for the families earning less than maybe $250k. This is an arbitrary number I pulled out of my rear but at 3x income a family making $100k a year will fund them selves on the lower end of their ability to save for the future unless they make fo sessions elsewhere.

I would say if a family wants to get wealthy quickly stocking at 2x or less will allow them early financial independence if that is a goal. Since future health and employment is an uncertain variable I am a big proponent for early financial independence.
Last edited by EnjoyIt on Sun Sep 06, 2020 4:06 pm, edited 1 time in total.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by oldfort »

geerhardusvos wrote: Sun Sep 06, 2020 11:50 am Hi Bogleheads,
3. You should only spend 2-3X your annual gross income on a house. This means that if you make $100k gross as a family, you can afford a $200-300k house. This is regardless of if you are paying for the house with cash, home equity, or borrowing. It's about your long term ability to sustain your standard of living. It's about not having too much of your net worth wrapped up in a house (I recommend keeping <20% of your net worth in your primary residence).
These guidelines are ultra-conservative. So if I want a $150k house, I need to wait until I have a $750k net worth, so it falls under 20%. Under these rules, most people are going to be renters for life.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by EnjoyIt »

oldfort wrote: Sun Sep 06, 2020 4:06 pm
geerhardusvos wrote: Sun Sep 06, 2020 11:50 am Hi Bogleheads,
3. You should only spend 2-3X your annual gross income on a house. This means that if you make $100k gross as a family, you can afford a $200-300k house. This is regardless of if you are paying for the house with cash, home equity, or borrowing. It's about your long term ability to sustain your standard of living. It's about not having too much of your net worth wrapped up in a house (I recommend keeping <20% of your net worth in your primary residence).
These guidelines are ultra-conservative. So if I want a $150k house, I need to wait until I have a $750k net worth, so it falls under 20%. Under these rules, most people are going to be renters for life.
I think he was talking about home equity being 20%.

So if you have $250k in investments you may not want home equity too much higher than $50k
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by FIREchief »

EnjoyIt wrote: Sun Sep 06, 2020 3:19 pm
FIREchief wrote: Sun Sep 06, 2020 12:29 pm
chinchin wrote: Sun Sep 06, 2020 11:59 am US median household income is $61,937. So median American should only buy a $124k home? Median US hone price is $320k. Only 12% of US homes were under $125k. US individual median income is $33,706, guess single people can't buy a home at all.

https://www.statista.com/statistics/505 ... rices-usa/
+1. That 2 - 3 times annual gross seems really conservative. For people close to the median, with stable jobs/income, I think there is a legitimate argument to exceed that level depending upon the situation.
Most American’s finances are in shambles. We should not be following the path of the average if building wealth is one’s goal. This becomes even more so when income is limited and mistakes add up.
That's why I said "depending upon the situation." Ironically, the forced savings of a monthly house payment is the only thing that have allowed many of these Americans to accumulate any kind of net worth. 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.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by EnjoyIt »

FIREchief wrote: Sun Sep 06, 2020 4:11 pm
EnjoyIt wrote: Sun Sep 06, 2020 3:19 pm
FIREchief wrote: Sun Sep 06, 2020 12:29 pm
chinchin wrote: Sun Sep 06, 2020 11:59 am US median household income is $61,937. So median American should only buy a $124k home? Median US hone price is $320k. Only 12% of US homes were under $125k. US individual median income is $33,706, guess single people can't buy a home at all.

https://www.statista.com/statistics/505 ... rices-usa/
+1. That 2 - 3 times annual gross seems really conservative. For people close to the median, with stable jobs/income, I think there is a legitimate argument to exceed that level depending upon the situation.
Most American’s finances are in shambles. We should not be following the path of the average if building wealth is one’s goal. This becomes even more so when income is limited and mistakes add up.
That's why I said "depending upon the situation." Ironically, the forced savings of a monthly house payment is the only thing that have allowed many of these Americans to accumulate any kind of net worth. 8-)
Very solid point.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by FIREchief »

geerhardusvos wrote: Sun Sep 06, 2020 3:26 pm
FIREchief wrote: Sun Sep 06, 2020 12:29 pm
chinchin wrote: Sun Sep 06, 2020 11:59 am US median household income is $61,937. So median American should only buy a $124k home? Median US hone price is $320k. Only 12% of US homes were under $125k. US individual median income is $33,706, guess single people can't buy a home at all.

https://www.statista.com/statistics/505 ... rices-usa/
+1. That 2 - 3 times annual gross seems really conservative. For people close to the median, with stable jobs/income, I think there is a legitimate argument to exceed that level depending upon the situation.
I don’t think 3X annual gross income is too conservative at all. People think they need more house than they actually do, and there are financial consequences. As long as people become educated about the trade-offs and they understand their own long-term desires, that’s what’s important.
Are you now equating spending more than 3x annual gross income with buying more house than a person needs? That is a gross generalization, highly dependent upon geographical location and housing markets. Where I live, a family needing three bedrooms in a safe neighborhood can achieve it cheaper by buying instead of renting. I'm not sure what your particular backdrop is, but hopefully you'll acknowledge that there are so many variables that such a broad brush rule of thumb may be questionable at best.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

FIREchief wrote: Sun Sep 06, 2020 4:11 pm
EnjoyIt wrote: Sun Sep 06, 2020 3:19 pm
FIREchief wrote: Sun Sep 06, 2020 12:29 pm
chinchin wrote: Sun Sep 06, 2020 11:59 am US median household income is $61,937. So median American should only buy a $124k home? Median US hone price is $320k. Only 12% of US homes were under $125k. US individual median income is $33,706, guess single people can't buy a home at all.

https://www.statista.com/statistics/505 ... rices-usa/
+1. That 2 - 3 times annual gross seems really conservative. For people close to the median, with stable jobs/income, I think there is a legitimate argument to exceed that level depending upon the situation.
Most American’s finances are in shambles. We should not be following the path of the average if building wealth is one’s goal. This becomes even more so when income is limited and mistakes add up.
That's why I said "depending upon the situation." Ironically, the forced savings of a monthly house payment is the only thing that have allowed many of these Americans to accumulate any kind of net worth. 8-)
This is all the more reason why this type of education is crucial for Bogleheads audience and beyond!
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

EnjoyIt wrote: Sun Sep 06, 2020 4:07 pm
oldfort wrote: Sun Sep 06, 2020 4:06 pm
geerhardusvos wrote: Sun Sep 06, 2020 11:50 am Hi Bogleheads,
3. You should only spend 2-3X your annual gross income on a house. This means that if you make $100k gross as a family, you can afford a $200-300k house. This is regardless of if you are paying for the house with cash, home equity, or borrowing. It's about your long term ability to sustain your standard of living. It's about not having too much of your net worth wrapped up in a house (I recommend keeping <20% of your net worth in your primary residence).
These guidelines are ultra-conservative. So if I want a $150k house, I need to wait until I have a $750k net worth, so it falls under 20%. Under these rules, most people are going to be renters for life.
I think he was talking about home equity being 20%.

So if you have $250k in investments you may not want home equity too much higher than $50k
Exactly. Obviously if someone buys a house early in their life, they might have more home equity than they do investments. This might not actually be a good thing though. I updated the OP for some additional clarity:
I recommend targeting home equity being <25% of your long term net worth in your primary residence - so if you plan to retire with $2M, you have a ~$500k house paid off as an example
Last edited by geerhardusvos on Sun Sep 06, 2020 4:28 pm, edited 1 time in total.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by oldfort »

EnjoyIt wrote: Sun Sep 06, 2020 4:07 pm
oldfort wrote: Sun Sep 06, 2020 4:06 pm
geerhardusvos wrote: Sun Sep 06, 2020 11:50 am Hi Bogleheads,
3. You should only spend 2-3X your annual gross income on a house. This means that if you make $100k gross as a family, you can afford a $200-300k house. This is regardless of if you are paying for the house with cash, home equity, or borrowing. It's about your long term ability to sustain your standard of living. It's about not having too much of your net worth wrapped up in a house (I recommend keeping <20% of your net worth in your primary residence).
These guidelines are ultra-conservative. So if I want a $150k house, I need to wait until I have a $750k net worth, so it falls under 20%. Under these rules, most people are going to be renters for life.
I think he was talking about home equity being 20%.

So if you have $250k in investments you may not want home equity too much higher than $50k
Hopefully, the OP will clarify what they meant, but this is an equally weird rule. So if I have $250k in investments, I can buy a $250k house, but only if the downpayment is less than 20%. If I make a 30% downpayment, and have a smaller mortgage, the house becomes less affordable?
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

FIREchief wrote: Sun Sep 06, 2020 4:18 pm
geerhardusvos wrote: Sun Sep 06, 2020 3:26 pm
FIREchief wrote: Sun Sep 06, 2020 12:29 pm
chinchin wrote: Sun Sep 06, 2020 11:59 am US median household income is $61,937. So median American should only buy a $124k home? Median US hone price is $320k. Only 12% of US homes were under $125k. US individual median income is $33,706, guess single people can't buy a home at all.

https://www.statista.com/statistics/505 ... rices-usa/
+1. That 2 - 3 times annual gross seems really conservative. For people close to the median, with stable jobs/income, I think there is a legitimate argument to exceed that level depending upon the situation.
I don’t think 3X annual gross income is too conservative at all. People think they need more house than they actually do, and there are financial consequences. As long as people become educated about the trade-offs and they understand their own long-term desires, that’s what’s important.
Are you now equating spending more than 3x annual gross income with buying more house than a person needs? That is a gross generalization, highly dependent upon geographical location and housing markets. Where I live, a family needing three bedrooms in a safe neighborhood can achieve it cheaper by buying instead of renting. I'm not sure what your particular backdrop is, but hopefully you'll acknowledge that there are so many variables that such a broad brush rule of thumb may be questionable at best.
Right, buying in your location might be prudent. How does that change anything recommended in the OP? These type of guidelines that are very helpful for people trying to understand how much they should spend on a house or if they should buy at all. These guidelines are fairly location agnostic, meaning they stand true whether you live in Salt Lake City, Boston, Nashville, or San Francisco. They help people make a decision on whether they should buy or rent, as well as understanding the financial implications of either. Marrying those things with personal desires and goals is the sweet spot. Everyone needs to do their own calculation and there’s obviously personal elements to it.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by oldfort »

ScubaHogg wrote: Sun Sep 06, 2020 2:53 pm
runner3081 wrote: Sun Sep 06, 2020 2:11 pm
Outside of a down payment, there isn’t more money to invest when renting.
Sure there is. All else being equal, given two identical homes the one you can rent will typically cost you less per month than a house payment would cost you.
This doesn't seem to be remotely true where I live, if you're only considering the mortgage. For example, to rent a $200k house, you would expect to pay about $1600-$2k/month in rent. With 20% down, so a $160k mortgage, P+I will be $684/month with a 3.01% interest rate on a 30 year fixed. Renting seems to be at least 2x the mortgage payment for an equivalent property. Obviously this gets a little fuzzy with single family homes, as you rarely have the opportunity to compare identical properties for sale and rent.
Last edited by oldfort on Sun Sep 06, 2020 5:02 pm, edited 2 times in total.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

oldfort wrote: Sun Sep 06, 2020 4:36 pm
ScubaHogg wrote: Sun Sep 06, 2020 2:53 pm
runner3081 wrote: Sun Sep 06, 2020 2:11 pm
Outside of a down payment, there isn’t more money to invest when renting.
Sure there is. All else being equal, given two identical homes the one you can rent will typically cost you less per month than a house payment would cost you.
This doesn't seem to be remotely true where I live, if you're only considering the mortgage. For example, to rent a $200k house, you would expect to pay about $1600-$2k/month in rent. With 20% down, so a $160k mortgage, P+I will be $684/month with a 3.01% interest rate on a 30 year fixed. Renting seems to be about 2.5-3x the mortgage payment for an equivalent property.
Exactly. Your location is likely in the south or middle of the country (LCOLA) and it is an advantageous place to own rental properties. Owning in your area is probably more financially prudent than renting in general. Good for you for doing the analysis of your area! It’s very different in some MCOLA and HCOLA areas
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by EnjoyIt »

oldfort wrote: Sun Sep 06, 2020 4:23 pm
EnjoyIt wrote: Sun Sep 06, 2020 4:07 pm
oldfort wrote: Sun Sep 06, 2020 4:06 pm
geerhardusvos wrote: Sun Sep 06, 2020 11:50 am Hi Bogleheads,
3. You should only spend 2-3X your annual gross income on a house. This means that if you make $100k gross as a family, you can afford a $200-300k house. This is regardless of if you are paying for the house with cash, home equity, or borrowing. It's about your long term ability to sustain your standard of living. It's about not having too much of your net worth wrapped up in a house (I recommend keeping <20% of your net worth in your primary residence).
These guidelines are ultra-conservative. So if I want a $150k house, I need to wait until I have a $750k net worth, so it falls under 20%. Under these rules, most people are going to be renters for life.
I think he was talking about home equity being 20%.

So if you have $250k in investments you may not want home equity too much higher than $50k
Hopefully, the OP will clarify what they meant, but this is an equally weird rule. So if I have $250k in investments, I can buy a $250k house, but only if the downpayment is less than 20%. If I make a 30% downpayment, and have a smaller mortgage, the house becomes less affordable?
I think he helped clarify a bit.

I do agree though in general that one should not have most of their wealth in one asset such as a home. For example I would not recommend someone making $200k a year with very little invested who bought a $600k home to pay off that debt aggressively in lieu of investing. The 20% maybe a bit low but the spirit of the recommendation I fully agree with. This also means that someone who is looking to retire in the future on $80k a year with $2million should probably not have a $1million home (baring some certain locations.) It’s is obviously possible to make it happen, but the math in general is against it happening easily.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

EnjoyIt wrote: Sun Sep 06, 2020 4:48 pm
oldfort wrote: Sun Sep 06, 2020 4:23 pm
EnjoyIt wrote: Sun Sep 06, 2020 4:07 pm
oldfort wrote: Sun Sep 06, 2020 4:06 pm
geerhardusvos wrote: Sun Sep 06, 2020 11:50 am Hi Bogleheads,
3. You should only spend 2-3X your annual gross income on a house. This means that if you make $100k gross as a family, you can afford a $200-300k house. This is regardless of if you are paying for the house with cash, home equity, or borrowing. It's about your long term ability to sustain your standard of living. It's about not having too much of your net worth wrapped up in a house (I recommend keeping <20% of your net worth in your primary residence).
These guidelines are ultra-conservative. So if I want a $150k house, I need to wait until I have a $750k net worth, so it falls under 20%. Under these rules, most people are going to be renters for life.
I think he was talking about home equity being 20%.

So if you have $250k in investments you may not want home equity too much higher than $50k
Hopefully, the OP will clarify what they meant, but this is an equally weird rule. So if I have $250k in investments, I can buy a $250k house, but only if the downpayment is less than 20%. If I make a 30% downpayment, and have a smaller mortgage, the house becomes less affordable?
I think he helped clarify a bit.

I do agree though in general that one should not have most of their wealth in one asset such as a home. For example I would not recommend someone making $200k a year with very little invested who bought a $600k home to pay off that debt aggressively in lieu of investing. The 20% maybe a bit low but the spirit of the recommendation I fully agree with. This also means that someone who is looking to retire in the future on $80k a year with $2million should probably not have a $1million home (baring some certain locations.) It’s is obviously possible to make it happen, but the math in general is against it happening easily.
That’s exactly right.

As an example, my parents purchased a home in one of the nicest ZIP Codes in the United States back in 1990s for $120k. It’s worth over $1.3 million today. It could possibly sell for more than that. There is zero inventory in their area. Their house is completely paid off. Sounds cool right? Well, their taxes are super high and they have a big house to maintain. Also, their investment portfolio has less than $1 million in it. Thankfully, with a paid off house and their lower standard of living, they live just on their Social Security, so their investments are for travel, long term care, and gifts to grandkids. Maybe they will sell the house or rent it out someday, but right now they are happy.

To most people this sounds like success. In many ways, it was and is, and they are very well off and happy. They don’t necessarily regret buying their house, but they didn’t invest early on and they did most of their investing in their 60s. My dad kind of regrets this. Obviously, they are fine and it’s no sweat. When doing conservative calculations, if they had just rented or purchased a home in a lower cost area (for $40k about 10 miles outside of town) and invested that money each month (let’s say $1k/month invested) in the S&P 500 instead of saving up for the home, buying the home, maintaining the home, etc. they would have ~$2M in their portfolio instead of their current $500,000 portfolio and $1.3 million paid off house. Not a ton different? Think again... a whopping $.5-1M difference! Was the value of living in a nice area worth a million? Maybe so, and I’m thankful for where I grew up, and I tell my dad to have no regrets. They’ve done well! And if they choose to stay there, I guess I won’t mind inheriting a $3-$4M house 25 years from now (assuming it continues to appreciate). :D Would’ve preferred the Roth IRA though :wink: :mrgreen:

There is no situation that is the same, each situation is different. Each of us have to do our calculations and understand what we want and what our options are. Having a $2 million net worth instead of a $3 million net worth is acceptable. Just know the trade-offs! I think that there are small ways to learn from my parents story, even if each situation plays out completely differently. It will be different for each of us, and these guidelines are a good starting place for navigating the variables.
Last edited by geerhardusvos on Sun Sep 06, 2020 10:55 pm, edited 2 times in total.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by rascott »

I agree with basically everything written here. Going beyond 3x income is going to put you with a relatively tight budget. Not going to bankrupt you.... but puts too much of your financial world tied up in one property.

Now this is obviously a very general rule of thumb, and totally ignores the biggest cost of home ownership.. property taxes. Which vary incredibly as % of cost depending upon the locale.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by EnjoyIt »

rascott wrote: Sun Sep 06, 2020 5:51 pm I agree with basically everything written here. Going beyond 3x income is going to put you with a relatively tight budget. Not going to bankrupt you.... but puts too much of your financial world tied up in one property.

Now this is obviously a very general rule of thumb, and totally ignores the biggest cost of home ownership.. property taxes. Which vary incredibly as % of cost depending upon the locale.
Property tax is a big deal. I have a buddy who just bought a house whose property tax is $55k a year. Imagine needing an extra $1 million in retirement just to pay for property tax compared to a more reasonable cost house.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

EnjoyIt wrote: Sun Sep 06, 2020 6:01 pm
rascott wrote: Sun Sep 06, 2020 5:51 pm I agree with basically everything written here. Going beyond 3x income is going to put you with a relatively tight budget. Not going to bankrupt you.... but puts too much of your financial world tied up in one property.

Now this is obviously a very general rule of thumb, and totally ignores the biggest cost of home ownership.. property taxes. Which vary incredibly as % of cost depending upon the locale.
Property tax is a big deal. I have a buddy who just bought a house whose property tax is $55k a year. Imagine needing an extra $1 million in retirement just to pay for property tax compared to a more reasonable cost house.
My parents (mentioned above) have property taxes around $20K per year and rising steadily. It accounts for a decent chunk of their Social Security checks every month.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by 000 »

The OP reads like landlord propaganda. I don't think it's suitable for a sticky.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

000 wrote: Sun Sep 06, 2020 6:43 pm The OP reads like landlord propaganda. I don't think it's suitable for a sticky.
What feedback do you have that would make this more helpful to others? What areas do you disagree with?
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by AZAttorney11 »

Not a fan of this idea or the contents of the initial post at all.

The OP is extremely conservative, even by Boglehead standards, when it comes to purchasing a house.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by willthrill81 »

AZAttorney11 wrote: Sun Sep 06, 2020 6:45 pmThe OP is extremely conservative, even by Boglehead standards, when it comes to purchasing a house.
Could you be more specific?

The 2-3x annual income is a very widely espoused standard that is very reasonable in most areas of the U.S. outside of a handful of VHCOL areas (e.g. Bay area, Seattle, Manhattan, D.C.).
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by rascott »

EnjoyIt wrote: Sun Sep 06, 2020 6:01 pm
rascott wrote: Sun Sep 06, 2020 5:51 pm I agree with basically everything written here. Going beyond 3x income is going to put you with a relatively tight budget. Not going to bankrupt you.... but puts too much of your financial world tied up in one property.

Now this is obviously a very general rule of thumb, and totally ignores the biggest cost of home ownership.. property taxes. Which vary incredibly as % of cost depending upon the locale.
Property tax is a big deal. I have a buddy who just bought a house whose property tax is $55k a year. Imagine needing an extra $1 million in retirement just to pay for property tax compared to a more reasonable cost house.
Yep. I have roughly the same valued home as some family that live in the Chicago burbs. But their property taxes are over 3x what mine are. They actually now pay more than my P+I payment in taxes. Quite depressing... and they are looking to exit asap
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by oldfort »

geerhardusvos wrote: Sun Sep 06, 2020 5:30 pm
EnjoyIt wrote: Sun Sep 06, 2020 4:48 pm
oldfort wrote: Sun Sep 06, 2020 4:23 pm
EnjoyIt wrote: Sun Sep 06, 2020 4:07 pm
oldfort wrote: Sun Sep 06, 2020 4:06 pm

These guidelines are ultra-conservative. So if I want a $150k house, I need to wait until I have a $750k net worth, so it falls under 20%. Under these rules, most people are going to be renters for life.
I think he was talking about home equity being 20%.

So if you have $250k in investments you may not want home equity too much higher than $50k
Hopefully, the OP will clarify what they meant, but this is an equally weird rule. So if I have $250k in investments, I can buy a $250k house, but only if the downpayment is less than 20%. If I make a 30% downpayment, and have a smaller mortgage, the house becomes less affordable?
I think he helped clarify a bit.

I do agree though in general that one should not have most of their wealth in one asset such as a home. For example I would not recommend someone making $200k a year with very little invested who bought a $600k home to pay off that debt aggressively in lieu of investing. The 20% maybe a bit low but the spirit of the recommendation I fully agree with. This also means that someone who is looking to retire in the future on $80k a year with $2million should probably not have a $1million home (baring some certain locations.) It’s is obviously possible to make it happen, but the math in general is against it happening easily.
That’s exactly right.

As an example, my parents purchased a home in one of the nicest ZIP Codes in the United States back in 1990s for $120k. It’s worth over $1.3 million today. It could possibly sell for more than that. There is zero inventory in their area. Their house is completely paid off. Sounds cool right? Well, their taxes are super high and they have a big house to maintain. Also, their investment portfolio has less than $1 million in it. Thankfully, with a paid off house and their lower standard of living, they live just on their Social Security, so their investments are for travel, long term care, and gifts to grandkids. Maybe they will sell the house or rent it out someday, but right now they are happy.

To most people this sounds like success. In many ways, it was and is, and they are very well off and happy. They don’t necessarily regret buying their house, but they didn’t invest early on and they did most of their investing in their 60s. My dad kind of regrets this. Obviously, they are fine and it’s no sweat. When doing conservative calculations, if they had just rented or purchased a home in a lower cost area (for $40k about 10 miles outside of town) and invested that money each month in the S&P 500 instead of saving up for the home, buying the home, maintaining the home, etc. they would have $3.5-$4.5 million in their portfolio instead of their current $800,000 portfolio and $1.3 million paid off house. Not a ton different? Think again... a whopping $2 million difference! Was the value of living in a nice area worth $2 million? Maybe so, and I’m thankful for where I grew up, and I tell my dad to have no regrets. They’ve done well! And if they choose to stay there, I guess I won’t mind inheriting a $3-$5M house 25 years from now. :D Would’ve preferred the Roth IRA though :wink: :mrgreen:

There is no situation that is the same, each situation is different. Each of us have to do our calculations and understand what we want and what our options are. Having a $2 million net worth instead of a $4 million net worth is acceptable. Just know the trade-offs! I think that there are small ways to learn from my parents story, even if each situation plays out completely differently. It will be different for each of us, and these guidelines are a good starting place for navigating the variables.
I'm not buying your parents would obviously be any richer buying a cheaper house and investing in a balanced portfolio. Looking at Portfolio Visualizer, an initial investment of $120k in 1992, invested 25% US, 25% international, and 50% bonds would have grown to $814k, 62% of your parent's current home value. The growth rate on housing prices in your parent's particular case exceeded the growth rate of a balanced portfolio. The housing CAGR was ~8.88%, while the investment CAGR was 6.91%. Subtract 2% from the housing CAGR for property taxes and insurance, and you might get something close to a tie. The situation looks different if you're going to be 100% stocks, but most people can't stomach a portfolio with that much risk.
Last edited by oldfort on Sun Sep 06, 2020 7:18 pm, edited 1 time in total.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

oldfort wrote: Sun Sep 06, 2020 7:10 pm
geerhardusvos wrote: Sun Sep 06, 2020 5:30 pm
EnjoyIt wrote: Sun Sep 06, 2020 4:48 pm
oldfort wrote: Sun Sep 06, 2020 4:23 pm
EnjoyIt wrote: Sun Sep 06, 2020 4:07 pm

I think he was talking about home equity being 20%.

So if you have $250k in investments you may not want home equity too much higher than $50k
Hopefully, the OP will clarify what they meant, but this is an equally weird rule. So if I have $250k in investments, I can buy a $250k house, but only if the downpayment is less than 20%. If I make a 30% downpayment, and have a smaller mortgage, the house becomes less affordable?
I think he helped clarify a bit.

I do agree though in general that one should not have most of their wealth in one asset such as a home. For example I would not recommend someone making $200k a year with very little invested who bought a $600k home to pay off that debt aggressively in lieu of investing. The 20% maybe a bit low but the spirit of the recommendation I fully agree with. This also means that someone who is looking to retire in the future on $80k a year with $2million should probably not have a $1million home (baring some certain locations.) It’s is obviously possible to make it happen, but the math in general is against it happening easily.
That’s exactly right.

As an example, my parents purchased a home in one of the nicest ZIP Codes in the United States back in 1990s for $120k. It’s worth over $1.3 million today. It could possibly sell for more than that. There is zero inventory in their area. Their house is completely paid off. Sounds cool right? Well, their taxes are super high and they have a big house to maintain. Also, their investment portfolio has less than $1 million in it. Thankfully, with a paid off house and their lower standard of living, they live just on their Social Security, so their investments are for travel, long term care, and gifts to grandkids. Maybe they will sell the house or rent it out someday, but right now they are happy.

To most people this sounds like success. In many ways, it was and is, and they are very well off and happy. They don’t necessarily regret buying their house, but they didn’t invest early on and they did most of their investing in their 60s. My dad kind of regrets this. Obviously, they are fine and it’s no sweat. When doing conservative calculations, if they had just rented or purchased a home in a lower cost area (for $40k about 10 miles outside of town) and invested that money each month in the S&P 500 instead of saving up for the home, buying the home, maintaining the home, etc. they would have $3.5-$4.5 million in their portfolio instead of their current $800,000 portfolio and $1.3 million paid off house. Not a ton different? Think again... a whopping $2 million difference! Was the value of living in a nice area worth $2 million? Maybe so, and I’m thankful for where I grew up, and I tell my dad to have no regrets. They’ve done well! And if they choose to stay there, I guess I won’t mind inheriting a $3-$5M house 25 years from now. :D Would’ve preferred the Roth IRA though :wink: :mrgreen:

There is no situation that is the same, each situation is different. Each of us have to do our calculations and understand what we want and what our options are. Having a $2 million net worth instead of a $4 million net worth is acceptable. Just know the trade-offs! I think that there are small ways to learn from my parents story, even if each situation plays out completely differently. It will be different for each of us, and these guidelines are a good starting place for navigating the variables.
I'm not buying your parents would obviously be any richer buying a cheaper house and investing in a balanced portfolio. Looking at Portfolio Visualizer, an initial investment of $120k in 1992, invested 25% US, 25% international, and 50% bonds would have grown to $814k, 62% of your parent's current home value. The growth rate on housing prices in your parent's particular case exceeded the growth rate of a balanced portfolio. The housing CAGR was ~8.88%, while the investment CAGR was 6.91%. Subtract 2% from the housing CAGR for property taxes and insurance, and you might get something close to a tie. The situation looks different if you're going to be 100% stocks, but most people can't stomach a portfolio with that much risk.
It does assume a higher equity portfolio. which up until a couple years ago they were an 80/20. It’s pretty clear when you take a look at the down payment, continued contributions that they would have been able to do if they had not stretched on the house, maintenance costs that they wouldn’t have had to deal with, etc. that they would have come out far ahead financially. Thankfully they made it work well with the path they took. But they did have to work until their late 60s, and they still have a massive asset that doesn’t pay them anything, in fact it costs them a lot with maintenance and taxes every year. And guess what, it would cost over $100,000 to sell their house with taxes, fees, etc.! Ouch!
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by 000 »

geerhardusvos wrote: Sun Sep 06, 2020 6:45 pm
000 wrote: Sun Sep 06, 2020 6:43 pm The OP reads like landlord propaganda. I don't think it's suitable for a sticky.
What feedback do you have that would make this more helpful to others? What areas do you disagree with?
A discussion of the vulnerability of renters to arbitrary landlord fiat is missing.

The inflation risk of not owning one's own residence is also missing.

As is the fact that a home mortgage may be the best kind of leverage a person can get.

Also, the generalizations about coastal states don't seem applicable to rural parts of such states.

I agree many overextend when buying a home, but that doesn't mean renting is better, i.e. buying a smaller home may be better than either.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by Tingting1013 »

geerhardusvos wrote: Sun Sep 06, 2020 11:50 am We want our assets to pay us, and minimize consumption items that don’t pay us, and if we are living in our house, it is just another consumption item.
geerhardusvos wrote: Sun Sep 06, 2020 7:17 pmBut they did have to work until their late 60s, and they still have a massive asset that doesn’t pay them anything, in fact it costs them a lot with maintenance and taxes every year.
These comments totally ignore the imputed rent that an owner-occupied home pays the owner.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by HornedToad »

The solution to disagreement is not brow beating people into agreeing with you but understanding and reflecting on the disagreement.

If you don't like reading the housing question posts then just don't read them....
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by adamthesmythe »

The ideal outcome at the onset of retirement is to end up with a paid-off house and a comfortable amount of retirement savings. The proposed principles push too strongly in the direction of renting until it's too late.

And a final thought- the ability to take on a heavy debt load is greatest when young because (1) fewer expenses associated with children (2) better prospects of increasing salary (3) less to lose if it goes wrong.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by oldfort »

geerhardusvos wrote: Sun Sep 06, 2020 7:17 pm
oldfort wrote: Sun Sep 06, 2020 7:10 pm
geerhardusvos wrote: Sun Sep 06, 2020 5:30 pm
EnjoyIt wrote: Sun Sep 06, 2020 4:48 pm
oldfort wrote: Sun Sep 06, 2020 4:23 pm

Hopefully, the OP will clarify what they meant, but this is an equally weird rule. So if I have $250k in investments, I can buy a $250k house, but only if the downpayment is less than 20%. If I make a 30% downpayment, and have a smaller mortgage, the house becomes less affordable?
I think he helped clarify a bit.

I do agree though in general that one should not have most of their wealth in one asset such as a home. For example I would not recommend someone making $200k a year with very little invested who bought a $600k home to pay off that debt aggressively in lieu of investing. The 20% maybe a bit low but the spirit of the recommendation I fully agree with. This also means that someone who is looking to retire in the future on $80k a year with $2million should probably not have a $1million home (baring some certain locations.) It’s is obviously possible to make it happen, but the math in general is against it happening easily.
That’s exactly right.

As an example, my parents purchased a home in one of the nicest ZIP Codes in the United States back in 1990s for $120k. It’s worth over $1.3 million today. It could possibly sell for more than that. There is zero inventory in their area. Their house is completely paid off. Sounds cool right? Well, their taxes are super high and they have a big house to maintain. Also, their investment portfolio has less than $1 million in it. Thankfully, with a paid off house and their lower standard of living, they live just on their Social Security, so their investments are for travel, long term care, and gifts to grandkids. Maybe they will sell the house or rent it out someday, but right now they are happy.

To most people this sounds like success. In many ways, it was and is, and they are very well off and happy. They don’t necessarily regret buying their house, but they didn’t invest early on and they did most of their investing in their 60s. My dad kind of regrets this. Obviously, they are fine and it’s no sweat. When doing conservative calculations, if they had just rented or purchased a home in a lower cost area (for $40k about 10 miles outside of town) and invested that money each month in the S&P 500 instead of saving up for the home, buying the home, maintaining the home, etc. they would have $3.5-$4.5 million in their portfolio instead of their current $800,000 portfolio and $1.3 million paid off house. Not a ton different? Think again... a whopping $2 million difference! Was the value of living in a nice area worth $2 million? Maybe so, and I’m thankful for where I grew up, and I tell my dad to have no regrets. They’ve done well! And if they choose to stay there, I guess I won’t mind inheriting a $3-$5M house 25 years from now. :D Would’ve preferred the Roth IRA though :wink: :mrgreen:

There is no situation that is the same, each situation is different. Each of us have to do our calculations and understand what we want and what our options are. Having a $2 million net worth instead of a $4 million net worth is acceptable. Just know the trade-offs! I think that there are small ways to learn from my parents story, even if each situation plays out completely differently. It will be different for each of us, and these guidelines are a good starting place for navigating the variables.
I'm not buying your parents would obviously be any richer buying a cheaper house and investing in a balanced portfolio. Looking at Portfolio Visualizer, an initial investment of $120k in 1992, invested 25% US, 25% international, and 50% bonds would have grown to $814k, 62% of your parent's current home value. The growth rate on housing prices in your parent's particular case exceeded the growth rate of a balanced portfolio. The housing CAGR was ~8.88%, while the investment CAGR was 6.91%. Subtract 2% from the housing CAGR for property taxes and insurance, and you might get something close to a tie. The situation looks different if you're going to be 100% stocks, but most people can't stomach a portfolio with that much risk.
It does assume a higher equity portfolio. which up until a couple years ago they were an 80/20. It’s pretty clear when you take a look at the down payment, continued contributions that they would have been able to do if they had not stretched on the house, maintenance costs that they wouldn’t have had to deal with, etc. that they would have come out far ahead financially. Thankfully they made it work well with the path they took. But they did have to work until their late 60s, and they still have a massive asset that doesn’t pay them anything, in fact it costs them a lot with maintenance and taxes every year. And guess what, it would cost over $100,000 to sell their house with taxes, fees, etc.! Ouch!
Even with 80/20, I'm not buying an extra $2M. A 40 US/40 international/20 bonds portfolio had a CAGR of 7.41%. If you round the effective CAGR up to 10% to account for the additional contributions from saved insurance and property taxes, you might get an additional $1153k in the portfolio, but with a house worth $900k less, and they would have come out a few hundred thousand ahead.
Last edited by oldfort on Sun Sep 06, 2020 7:40 pm, edited 1 time in total.
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