Buying vs. Renting Principles

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Tingting1013
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by Tingting1013 »

oldfort wrote: Sun Sep 06, 2020 7:37 pm 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 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 at best.
Not to mention expense ratios on the investment portfolio (they weren’t this low in 1992!), tax cost in taxable accounts, and the homeowner capital gains exclusion.

All tipping the scales in favor of buying more house.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by ThatGuy »

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?
Not to mention that the 2-3X "rule" completely ignores the effect the interest rate plays in the total amount borrowed when compared against a static monthly payment. It's an asinine thought process.

The proper way to decide how much to buy is to make a budget and figure out how much in your very specific situation can go towards housing. There are no shortcuts for this.
Last edited by ThatGuy on Sun Sep 06, 2020 7:53 pm, edited 1 time in total.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by willthrill81 »

Tingting1013 wrote: Sun Sep 06, 2020 7:29 pm
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.
In our own situation, our home is worth about $320k at present. Renting an identical home would cost us $1,700/month, $20,400/year. Subtracting the cost of property taxes, homeowners insurance, and 1% for maintenance (though we don't actually spend more than half that much because I enjoy DIY), leaves us with about $13,400 of benefit from owning. Divided by the market value of the home, and we're getting about a 4.2% imputed return vs. renting. Inflation would increase the cost of ownership (i.e. the $7k spent each year) but would also increase the benefit from owning (i.e. the $13.4k). Considering that we're very aggressive with our investments, I'm very content with the stable, largely inflation-adjusted imputed return we get from owning, let alone the intangible benefits of owning.

It's important to realize that whether you own or rent, housing is something we consume and not an investment in the usual sense of the word. It's true that renting is not 'throwing money away', but it's also true that imputed rent can be significant.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by 000 »

Another thing missing is that an owner-occupied home may have favorable treatment in bankruptcy.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by FIREchief »

willthrill81 wrote: Sun Sep 06, 2020 7:52 pm Divided by the market value of the home, and we're getting about a 4.2% imputed return vs. renting. Inflation would increase the cost of ownership (i.e. the $7k spent each year) but would also increase the benefit from owning (i.e. the $13.4k). Considering that we're very aggressive with our investments, I'm very content with the stable, largely inflation-adjusted imputed return we get from owning, let alone the intangible benefits of owning.
Good analysis. :beer We owned our last home for 23 years, the last 9 of which were mortgage-free. It would have been financially beneficial to have just stayed put. That said, we decided to downsize and rent. I really like the freedom of renting, but it does come at a cost.
Last edited by FIREchief on Sun Sep 06, 2020 10:50 pm, edited 1 time in total.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by arcticpineapplecorp. »

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/
sure they can. they just need a 40 year loan:
https://www.google.com/search?client=fi ... r+mortgage

just like anyone can afford a car, just get an 84 month auto loan (or longer)!
https://www.google.com/search?client=fi ... t+car+loan
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by newyorker »

Whats better?


Renting for 30 years and putting excess money into VOO


Vs


Buying house?



Who is more likely to come out ahead? Assuming hcol area.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by newyorker »

My take on housing is pretty simple.

If for yourself, buy one rather than rent. Being a tenant sucks.

If you plan to rent it out, just invest into stocks. Being a landlord sucks more than being a tenant, esp in CA or NY.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (own vs. rent).
geerhardusvos wrote: Sun Sep 06, 2020 1:04 pm
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
I have added this thread to the wiki. See: Owning vs renting (external links)

Making a forum sticky for one topic will lead to stickies for many topics - we'd get deluged with stickies. Instead of a forum sticky, how about we put a brief summary in the wiki page which links to the first post in the thread? That would allow the discussion to continue here.

It also allows members to link to the wiki in a forum post so they can customize their post to address the member's individual situation.

Alternatively, we could overhaul the current wiki page with the revised information. We can work on a draft page to get a consensus on the content. Then, we can replace the current page with the draft. Which way would you like to go?
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by luckyducky99 »

Personal circumstances are so different for everyone that I think a set of general principals or rules of thumb or whatever you want to call them just don't work for this problem. By the time you've gone through them all to see if they apply to your or not, and then tried to tally up the results somehow, you're still unlikely to have a clear answer. Especially since it's more than a financial question; it's also a major lifestyle question.

I think the better tack is to agree on a methodology for making the decision based on key factors: wealth, income, PITI vs rental costs for the area, living expenses, etc.

I also think that a lot of the people making "should we buy" posts are actually knowledgeable of much of that. Humans just want affirmation, especially for big decisions. I think it's nice that the forum is here to provide that.

The wiki actually does a pretty good job of laying out the main factors to consider. Maybe we should plug the wiki more in response to "should we buy?" questions.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

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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/
The bottom line is that a household earning the median income simply cannot afford a median priced home without making major sacrifices in other areas.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by willthrill81 »

FIREchief wrote: Sun Sep 06, 2020 8:27 pm
willthrill81 wrote: Sun Sep 06, 2020 7:52 pm Divided by the market value of the home, and we're getting about a 4.2% imputed return vs. renting. Inflation would increase the cost of ownership (i.e. the $7k spent each year) but would also increase the benefit from owning (i.e. the $13.4k). Considering that we're very aggressive with our investments, I'm very content with the stable, largely inflation-adjusted imputed return we get from owning, let alone the intangible benefits of owning.
Good analysis. :beer We owned our last home for 23 years, the last 9 of which were mortgage-free. It would have been financially beneficial to have just stayed put. That said, we decided to downsize and rent. I really like the freedom or renting, but it does come at a cost.
Thanks.

I just realized that I didn't include the fact that the property is likely to at least keep pace with inflation if it's maintained properly. Our home has appreciated in value nearly $100k since we bought it almost six years ago. I would never count on property appreciation being greater than inflation in any context, whether as a homeowner or a landlord, but it's a nice bonus if it happens.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by flaccidsteele »

Buy vs rent is not always based on math

1. Some people are tired of being periodically kicked out of their home by landlords who sell in hot RE markets

2. Some of the financially free, like myself, no longer work and aren’t interested in being rejected by landlords who require income verification
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by Croissant »

thanks for the post OP, i mostly agree with your conclusions. kudos for reminder that home is a consumable and not an investment; i think it's easy to have the misconception that b/c house prices on average rises, my house will also appreciate above inflation. I personally live in a HCOL area and am going through the dilemma; ultimately i'm choosing to rent for now despite seeing that i'll save a fair amount by buying because the property taxes here are high and my spouse might be on the job market in a year or so and need the flexibility in work location.

if you don't mind getting your hands dirty i highly recommend making your own calculator, as local taxes and prices vary too much to rely on a off the shelf calculator. few things worth noting
1. opportunity cost of buying = investment gains of down payment (need to be forward looking, not based on the past 10 glorious years) + property tax (which grows over time :oops: ) + cost of interest portion of mortgage (over a lifetime of mortgage payment interest could easily be 30%, that hurts).
2. cost of rent need to include annual increases
3. your home appreciation is based on the entire value of the home, not just your down payment. (i.e. you pay 50k down payment on a 500k house, when it appreciates by 3% the principal is 500k not 50k)
4. closing costs should be added into cost of ownership. assume 15 years of ownership and add 3% to the purchase price of home, and take out 3% when you sell.
Last edited by Croissant on Sun Sep 06, 2020 10:37 pm, edited 1 time in total.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

LadyGeek wrote: Sun Sep 06, 2020 8:54 pm This thread is now in the Personal Finance (Not Investing) forum (own vs. rent).
geerhardusvos wrote: Sun Sep 06, 2020 1:04 pm
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
I have added this thread to the wiki. See: Owning vs renting (external links)

Making a forum sticky for one topic will lead to stickies for many topics - we'd get deluged with stickies. Instead of a forum sticky, how about we put a brief summary in the wiki page which links to the first post in the thread? That would allow the discussion to continue here.

It also allows members to link to the wiki in a forum post so they can customize their post to address the member's individual situation.

Alternatively, we could overhaul the current wiki page with the revised information. We can work on a draft page to get a consensus on the content. Then, we can replace the current page with the draft. Which way would you like to go?
Appreciate that, LadyGeek. I think adding it as a linked discussion like you did is sufficient for now. The wiki has some great information on this, and will be pointing people to it on this topic. Seems like I’ll do a bit more work to clean this up to accommodate some of the feedback, and I will DM you with any questions or further developments. Thank you! And thanks to everyone who has had constructive feedback. :beer
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by oldfort »

willthrill81 wrote: Sun Sep 06, 2020 7:04 pm
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.).
As far as an arbitrary rule of thumb, it gets you in the right ball park. It doesn't take into account HOA fees. It doesn't take into account local property taxes. California is particularly weird with Prop 13. Most of all it doesn't take into account interest rates. Whether interest rates are 6% or 3% makes an enormous difference in what mortgage I can cash flow. It doesn't take into account whether you will be able to deduct the interest.
Last edited by oldfort on Sun Sep 06, 2020 10:40 pm, edited 1 time in total.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

willthrill81 wrote: Sun Sep 06, 2020 7:52 pm
Tingting1013 wrote: Sun Sep 06, 2020 7:29 pm
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.
In our own situation, our home is worth about $320k at present. Renting an identical home would cost us $1,700/month, $20,400/year. Subtracting the cost of property taxes, homeowners insurance, and 1% for maintenance (though we don't actually spend more than half that much because I enjoy DIY), leaves us with about $13,400 of benefit from owning. Divided by the market value of the home, and we're getting about a 4.2% imputed return vs. renting. Inflation would increase the cost of ownership (i.e. the $7k spent each year) but would also increase the benefit from owning (i.e. the $13.4k). Considering that we're very aggressive with our investments, I'm very content with the stable, largely inflation-adjusted imputed return we get from owning, let alone the intangible benefits of owning.

It's important to realize that whether you own or rent, housing is something we consume and not an investment in the usual sense of the word. It's true that renting is not 'throwing money away', but it's also true that imputed rent can be significant.
This is a good example of analysis for a given market and personal situation, and sounds like owning in this area, especially when you purchased, was/is a prudent choice. Very nice!

May I ask how many multiples of your annual income your house was when you purchased?
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by willthrill81 »

geerhardusvos wrote: Sun Sep 06, 2020 10:39 pm
willthrill81 wrote: Sun Sep 06, 2020 7:52 pm
Tingting1013 wrote: Sun Sep 06, 2020 7:29 pm
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.
In our own situation, our home is worth about $320k at present. Renting an identical home would cost us $1,700/month, $20,400/year. Subtracting the cost of property taxes, homeowners insurance, and 1% for maintenance (though we don't actually spend more than half that much because I enjoy DIY), leaves us with about $13,400 of benefit from owning. Divided by the market value of the home, and we're getting about a 4.2% imputed return vs. renting. Inflation would increase the cost of ownership (i.e. the $7k spent each year) but would also increase the benefit from owning (i.e. the $13.4k). Considering that we're very aggressive with our investments, I'm very content with the stable, largely inflation-adjusted imputed return we get from owning, let alone the intangible benefits of owning.

It's important to realize that whether you own or rent, housing is something we consume and not an investment in the usual sense of the word. It's true that renting is not 'throwing money away', but it's also true that imputed rent can be significant.
This is a good example of analysis for a given market and personal situation, and sounds like owning in this area, especially when you purchased, was/is a prudent choice. Very nice!

May I ask how many multiples of your annual income your house was when you purchased?
Generally speaking, it seems that owning is the better long-term choice in LCOL and most MCOL areas, whereas the inverse is true in HCOL areas and especially VHCOL areas. But every situation is obviously distinct.

When we purchased the home, it was a little under twice our household income.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

willthrill81 wrote: Sun Sep 06, 2020 10:41 pm
Generally speaking, it seems that owning is the better long-term choice in LCOL and most MCOL areas, whereas the inverse is true in HCOL areas and especially VHCOL areas. But every situation is obviously distinct.

When we purchased the home, it was a little under twice our household income.
Totally agree, and that’s consistent with what I have in the OP.

I think the year/condition of the house also plays a part, like how old is the house and what maintenance will be needed and how much remodeling, etc... newer homes in M/LCOL were a real bargain and best of both worlds.

Sounds like you got a sweet deal!
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by geerhardusvos »

oldfort wrote: Sun Sep 06, 2020 7:37 pm
geerhardusvos wrote: Sun Sep 06, 2020 7:17 pm 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.
Assuming they rented instead of purchased, they wouldn’t pay HOA fees, no taxes, no maintenance, less insurance, less time spent, and you add that up to about $1k/month in today’s dollars conservatively. If that had been invested every month, a portfolio with an additional $1.5 million is fairly conservative.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by oldfort »

geerhardusvos wrote: Sun Sep 06, 2020 11:06 pm
oldfort wrote: Sun Sep 06, 2020 7:37 pm
geerhardusvos wrote: Sun Sep 06, 2020 7:17 pm 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.
Assuming they rented instead of purchased, they wouldn’t pay HOA fees, no taxes, no maintenance, less insurance, less time spent, and you add that up to about $1k/month in today’s dollars conservatively. If that had been invested every month, a portfolio with an additional $1.5 million is fairly conservative.

Your math doesn't add up. A 40 US/40 international/20 bond portfolio, which is very aggressive, with an initial $80k and $6k/year contributions(inflation adjusted this comes to roughly $1k/month in today's dollars), your portfolio would have grown an additional $1,299,113. However, if the house was worth $900k less, then they might have a total net worth $400k higher.

Edit: Your original scenario was buying a $40k house in a cheaper neighborhood. That's a different calculation than rent vs buy for an identical property.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by bogledogle »

geerhardusvos wrote: Sun Sep 06, 2020 11:50 am
1. If you live on either of the coasts (HCOLA) in the USA, you should probably rent.
2. You should only buy if you plan to stay longer than 10 years.
3. You should only spend 2-3X your annual gross income on a house
4. You should not underestimate the total cost of owning a house.
5. Town-homes, condos, apartments, etc. are usually not as good of investments as single family homes (see HOAs, etc.).
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


Would My House Make a Good Rental?
1. Probably not.
[ quote fixed by admin LadyGeek]

Sorry, but this post reads like a rant trying to enforce your beliefs on others.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by eigenperson »

I think a lot of these items are bad advice. Above, you asked for someone to explain their disagreements, so I will.
geerhardusvos wrote: Sun Sep 06, 2020 11:50 am1. 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.
As you pointed out, this is a generality, and because you didn't explain the reasoning, you're not giving the advisee the ability to make a decision more specific to their own situation. It is also not timeless advice. The areas where buying makes sense can change significantly over a decade.

I also think that probably at most 25% of people living on the "coast" actually live in areas where it is financially better for a long-term resident to rent. The Bay Area and urban New York City are possible examples. But when I lived in suburban New Jersey, it was definitely a "buy" kind of place, and looking at prices right now, I think it still is. There is a lot of coast outside the very expensive cities.

Better advice would look something like: You should probably buy if the price-to-rent ratio is lower than X. You should probably rent if the price-to-rent ratio is higher than Y. This is easier to apply in a variety of situations, but even this is dependent on mortgage rates and opportunity costs, so it has an expiration date.

Ultimately, I think people should just use the New York Times buy vs rent calculator.
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).
Again, this is poor advice because you didn't explain the reasoning.

I would argue that if buying is a good idea at all, 10 years is an excessively long period to require. By buying for the short term, you pay transaction costs to avoid a short position in housing. The transaction costs in urban and suburban areas are, let's say, 10% (though in most places, this is an overestimate). The costs of being short housing are probably at least 2%/year (otherwise it wouldn't really be a "buy" area at all). This would argue for a 5-year holding period (10% cost spread over 5 years) even in marginal "buy" areas.
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 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. 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.
There's so much wrong here.

First of all, once again no justification is provided, so this is poor advice. And why 3x and not 3.1x or 2.9x? There is no evidence that you did any kind of computation or analysis to come up with the "3x" number. Why, then, should I believe it? Why 25% of net worth rather than 26% or 30% or even 60%? What concrete bad thing would happen if my house was 60% of my net worth when I retired?

Second, there is a lot of space between 2x income and 3x income. (Having a lower limit is rather silly anyway. If you want to live in a house that's worth 50% of your income, there is nothing wrong with that.) Overly broad advice is not actionable.

Third, the advice is based mainly on income. It is therefore not helpful to people in many common situations, such as those who are retired or have received an inheritance. 25% of net worth is also not appropriate advice for many of these people. You should provide people with a framework for analyzing these decisions, rather than just throwing numbers at them.

Fourth, interest rates matter, because they affect the cost of capital and opportunity costs. Your rule ignores this, so it can't be right in general.

Fifth, the way you pay for the house (cash vs. mortgage) matters too. You present this as a risk management strategy ("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") so let's consider risk. Your risk is obviously greater when you have leverage. Therefore, if you care about risk management, the degree of leverage should be considered when purchasing. Your rule ignores this, so it can't be right in general.

Sixth, this makes no sense at all: "it's recommended to stick to 2-3X your gross income (you can use pre or post tax income, I use post-tax)" For one thing, gross income generally means pre-tax income. But let's suppose you have some other meaning in mind. You're saying it doesn't matter whether you use pre-tax or post-tax income. How can your rule possibly be correct if it doesn't matter whether you use pre-tax or post-tax income to calculate the number? Consider that family earning $150K. Suppose they are in Colorado (a state I picked at random) and contribute $20,000 to their 401(k)s. This couple will pay $30,000 in total income taxes. If you use post-tax income in the rule, they can afford no more than a $360,000 house. If you use pre-tax income, they can afford no more than a $450,000 house. These conclusions are incompatible.

Finally, if we must have a rule based on a flat multiple of income, I think 3x is unreasonably low. Here's how I would justify that:

* Mortgage interest and principal assuming no down payment: 6% of home value per year
* Property tax: 2% per year
* Maintenance and insurance: 2% per year

All of these are likely overestimates for most people. Even so, the total spending comes to 10% of home value per year. If the house is 3x your income, this spending amounts to 30% of your income. Even if this is a percentage of pre-tax income, it is by no means a risky level of spending. There is at least some room for people to spend more without seriously risking their financial future. It is counterproductive to tell people that anything above 3x is too risky when that's not true. If they figure that out, they will ignore your advice.
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. 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!
I agree with everything here. The only problem is it's not actionable advice. I think maintenance on my house is likely to be 1.5% of the home value per year. Am I right, or wrong? Knowing that most people underestimate maintenance does not help me know the answer to that question.

This section could be improved by helping people estimate their costs, rather than just telling them not to underestimate them.
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.
I'll skip commenting on this one because I have never considered buying a part of a building, and I honestly have no idea about the long-term value.
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 . Owning can be the right choice to depending on your analysis, and if it is, owning can be a great choice in many markets!
No disagreement here, though again I don't think it's really actionable advice.
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.
This stands out to me as the worst part of your post, because there is no rational basis for this advice. Except in California, where property taxes are tightly locked to the initial purchase price, there is no logical connection between the price paid for a house and the rental rate that makes it worth renting out a house rather than selling it. You rightly called attention to opportunity costs above, so I don't understand why you're suddenly ignoring them here. A house worth $800,000 that rents for $2,800/month should be sold. That is a gross rental yield of 4.2%, insufficient to be a good investment when you consider other opportunities for what to do with the $800,000. The fact that you paid $120,000 is irrelevant. This house should be sold (or 1031-exchanged for a better investment property, if taxes are prohibitive).

Indeed, taking your argument to a not-even-that-extreme level, if you paid $120,000 for a house in Portland that is now worth $800,000, you say that renting it out for 1% of purchase price is OK. So I should be willing to rent this house out for $1,200 per month. This is a gross rental yield of 1.8%. Property taxes alone are 1%. You are almost certainly making a negative rate of return on this investment.

The bottom line is that the purchase price should be ignored in these computations, except for tax purposes or in California (and even in those cases, use the appropriate figures: the basis or the assessment, respectively).
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Re: Buying vs. Renting Principles

Post by Lee_WSP »

As many posters have piled on, I just can't get past #3 and have to comment.

It no longer makes sense. Maybe it made sense when interest rates were 5%, but the limit should be based on PITI + maintenance / Income.

In other words, the cost of owning the house should represent a percentage of income. Just as rent should be a % of your income, home ownership should be a percentage of your income. In other words: "The cost of owning/renting the house should not exceed X% of one's income"

If someone wants to pay cash for a house 10x their income, so be it. Who knows how much wealth they have. It's a different picture for someone paying cash or able to put say 50% down.
Last edited by Lee_WSP on Mon Sep 07, 2020 11:24 am, edited 1 time in total.
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Re: Buying vs. Renting Principles

Post by KlangFool »

Lee_WSP wrote: Mon Sep 07, 2020 10:36 am As many posters have piled on, I just can't get past #3 and have to comment.

It no longer makes sense. Maybe it made sense when interest rates were 5%, but the limit should be based on PITI + maintenance / Income.

In other words, the cost of owning the house should represent a percentage of income. Just as rent should be a % of your income, home ownership should be a percentage of your income.

If someone wants to pay cash for a house 10x their income, so be it. Who knows how much wealth they have. It's a different picture for someone paying cash or able to put say 50% down.
Lee_WSP,

Just for clarification, what do you mean by this statement?

<<In other words, the cost of owning the house should represent a percentage of income. Just as rent should be a % of your income, home ownership should be a percentage of your income.>>


Do you mean

A) The cost of owning/renting the house should not exceed X% of the income?


B) Something else?


<<If someone wants to pay cash for a house 10x their income, so be it. Who knows how much wealth they have. It's a different picture for someone paying cash or able to put say 50% down.>>


Now, if you go this route, the net worth excluding the house should be part of the consideration of whether the person should buy the house.


In both cases (50% or 100%), if the person ended up with zero emergency fund and zero net worth excluding the house, it would not be a good idea.

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Re: Buying vs. Renting Principles

Post by geerhardusvos »

Lee_WSP wrote: Mon Sep 07, 2020 10:36 am In other words, the cost of owning the house should represent a percentage of income. Just as rent should be a % of your income, home ownership should be a percentage of your income.
I don’t think you read #3 very thoroughly:
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 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
Lee_WSP wrote: Mon Sep 07, 2020 10:36 am If someone wants to pay cash for a house 10x their income, so be it. Who knows how much wealth they have. It's a different picture for someone paying cash or able to put say 50% down.
As discussed in the OP, the trade-off and risk of putting that much into a single property instead of investing is a serious consideration. Most people do not want so much of their net worth wrapped up in an individual asset that doesn’t pay them.
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Re: Buying vs. Renting Principles

Post by KlangFool »

OP,


There is a fundamental difference between the two groups of people in terms of house ownership.

A) Those who do not consider their primary residence as an investment.


B) Those who consider their primary residence as an investment.


For group (B), they can justify buying a house at any price with a high enough appreciation rate. I had seen places (not in the USA) where the house's price double or triple in a few years. In those places, it is easy to justify buying as much house as the bank willing to loan you.

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Re: Buying vs. Renting Principles

Post by LadyGeek »

In the "Would My House Make a Good Rental?" section -

One thing that's not mentioned is the home owner's ability to deal with tenants.

If you've never been a landlord before, it's an eye opening experience. You need to interact with your tenants and deal with unplanned issues. Be prepared to deal with upset tenants and maintenance problems of every kind. Also, your tax return and finances just got more complicated.

Can you mention a few "pros" and "cons" on being a landlord? Those doing this for the first time need to understand what they're getting into.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by AZAttorney11 »

willthrill81 wrote: Sun Sep 06, 2020 7:04 pm
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.).
Many others have (correctly) dissected the OP's guidelines and provided criticism that I agree with, so I won't repeat that.

These threads inevitably have those in an ultra-conservative camp who want to justify their actions / reasons for not buying a home (like the OP). There's no logic or fact behind it - just a laundry list of things that don't make a lot of sense.

What's missing is a detailed analysis. Owning a home in Arizona is much different than owning a home in New Jersey or Florida. Property taxes, insurance, state income tax vs. no state income tax, SALT deduction caps, etc.

It also misses a very important feature of recourse vs. non-resource. Let me give you an example. When I bought my first home very early in my career (I had been practicing less than a year) the purchase price of the home plus my student loan debt was 4.44x my annual income. Talk about leverage! But I bought a home anyways. Why? Because a major bank had a special deal for certain professionals. 5% down, no PMI, no closing costs, and no payments for 3 months. I bet 75-80% of Bogleheads would've told me to wait, keep renting, etc. That would have been disastrous advice. The trade off was my initial mortgage was about 40-50 basis points higher than a conventional mortgage of similar duration (30 years). Big freaking deal. By the time that home was sold, it had increased in value more than 60%, the student loans were long gone, and the purchase price plus student loan debt ratio I mentioned above fell to .76x. I locked in a fixed monthly payment, benefited from cheap leverage, and if the stuff hit the fan, I could walk away from the home because I live in a non-recourse state. Property taxes in Arizona are very cheap. Home insurance is very cheap.

I was willing to bet on myself and my professional capabilities. That was a smart bet.

The OP's analysis also doesn't take into account how disciplined others may or may not be with other major expenses, such as vehicles and vacations. If you can pay cash for vehicles and drive them a long time, you can buy more house. If you hate traveling and want to be a homebody, you can spend more on the house. The OP's analysis also doesn't take into account that *some* people might be better off taking an interest only mortgage. HEDGEFUNDIE had some really good thoughts on that.
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Re: Buying vs. Renting Principles

Post by whereskyle »

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. This is mostly an aggregation of things I’ve learned from reputable blogs and professionals. I have also made multiple edits to clarify and add/remove content based on comments and feedback in this thread.

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.
I personally don't understand how living in a HCOLA makes renting preferable. Rent in the major urban centers of the US is cartoonish. I was renting at $2250 per month for a 2br apt in my HCOLA. I am now owning an $1841 per month 3br (plus one sitting room) house with big back yard. I put virtually nothing down for the house, I already have $10k in equity (yes, I put virtually nothing down), and I will receive a $10k+ yearly tax break for interest and taxes). That is, I'm saving $400/month, adding at least $600k/month in equity, and receiving a $1k tax deduction every month. That is, more than half of my monthly payments are now "doing something." That's at least $12k a year that I would need to incur in unnecessary/unproductive ownership costs in order for renting to equal out. Of course, in some years I may incur that much in extra costs. In some years, I may incur none. Why lock in $12k in extra costs to rent, a decision that has no potential upside, it just costs what it costs?
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: Buying vs. Renting Principles

Post by Lee_WSP »

geerhardusvos wrote: Mon Sep 07, 2020 10:52 am
Lee_WSP wrote: Mon Sep 07, 2020 10:36 am In other words, the cost of owning the house should represent a percentage of income. Just as rent should be a % of your income, home ownership should be a percentage of your income.
I don’t think you read #3 very thoroughly:
I have and you contradict yourself via math.

A person/family with $100k income has $78k after taxes in AZ. That leaves $1,800 for housing. Doing a reverse loan calculation with $1500 as the payment amount (link to calculator used) and you end up with a $445 k home with a 20% down payment.

That's close to 4.5 x the annual income and I was very conservative with the monthly as I took off $300/mo for insurance, taxes & maintenance.
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Re: Buying vs. Renting Principles

Post by Lee_WSP »

KlangFool wrote: Mon Sep 07, 2020 10:50 am
Do you mean

A) The cost of owning/renting the house should not exceed X% of the income?

Yes, A. Edited it to add that clarification.
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Re: Buying vs. Renting Principles

Post by lostdog »

A good video from Ben Felix:

https://www.youtube.com/watch?v=Uwl3-jBNEd4

Renting vs. Buying a Home
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Re: Buying vs. Renting Principles

Post by geerhardusvos »

LadyGeek wrote: Mon Sep 07, 2020 10:57 am In the "Would My House Make a Good Rental?" section -

One thing that's not mentioned is the home owner's ability to deal with tenants.

If you've never been a landlord before, it's an eye opening experience. You need to interact with your tenants and deal with unplanned issues. Be prepared to deal with upset tenants and maintenance problems of every kind. Also, your tax return and finances just got more complicated.

Can you mention a few "pros" and "cons" on being a landlord? Those doing this for the first time need to understand what they're getting into.
Good feedback, I have now updated the OP with some links about this.

If anyone has some good threads on landlord experiences or information, please share the links and I will add them to the OP
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Re: Buying vs. Renting Principles

Post by adamthesmythe »

> home is a consumable

I've seen this multiple times, and I don't buy it. Unless "consumable" means something different than what I think.

A consumable (like a steak, or an ordinary car) is something that loses value with time and is eventually used up. That is most definitely not the case for houses (although it may be so for a double-wide). In most cases regular maintenance (with a cost, when added to the other costs of owning, that is often less than the cost of renting something similar) will cause the house to remain usable. In many places maintained houses increase in value, and it is quite rare for them to decline in value. So- not a consumable.

> not an investment

Now here I generally agree. It is highly inadvisable to buy a house counting on its success as an investment. In some cases it may turn out to be sold for more than its cost (accounting for inflation) but overbuying because of an expectation of increase in value is a bad idea.
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Re: Buying vs. Renting Principles

Post by lostdog »

We are in a LCOL area. When we both worked, we both had mid-range salaries.

In 2003, we bought our house for $139,000. In December of 2019, we sold our house for $215,000. The real estate fees at closing cost a whopping $18,000. This was only a $58,000 gain in 18 years.

We could have rented and done better with equities.

Our networth at the moment is $860,000. Equities, bonds and cash.

Had we rented, we would be in the two comma club. She is 42 and I'm 44.

We are now renting and enjoying the simplicity of it.
Last edited by lostdog on Mon Sep 07, 2020 12:24 pm, edited 1 time in total.
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Re: Buying vs. Renting Principles

Post by LadyGeek »

lostdog wrote: Mon Sep 07, 2020 11:26 am A good video from Ben Felix:

https://www.youtube.com/watch?v=Uwl3-jBNEd4

Renting vs. Buying a Home
Thanks! I have added the link and a detailed description to the wiki. See: Owning vs renting (External links)

Pay attention to his assumptions about expected returns near the end of the video. It can actually lower the cost to own.

The video and website are Canadian. A few acronyms:

- RRSP - Registered Retirement Savings Plan - finiki, the Canadian financial wiki
- TFSA - Tax-Free Savings Account - finiki, the Canadian financial wiki

(The video is not part of his Rational Reminder podcast series.)
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Re: Buying vs. Renting Principles

Post by DH0 »

I don't agree with any of the "principles" put forward by the topic author. Real estate is complex, local and personal, and therefore has more in common with owning individual stocks than indexing. The only meaningful way to analyze a purchase is by building a model of financial outcomes with and without the purchase, and then layering 'qualitative factors/intangibles' on top of the financial picture.

IMO Bogleheads should focus on what it is good at i.e. low cost approaches to index investing rather than venturing into making generalized, unsupported and consequently poor quality recommendations about real estate.
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Re: Buying vs. Renting Principles

Post by LadyGeek »

geerhardusvos wrote: Sun Sep 06, 2020 11:50 am 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. 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
viewtopic.php?t=226980

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!
On an administrative note, a description for the thread link is needed. Use your own wording, but consider something like:
- If you've never been a landlord before, read this: Becoming a Landlord: My Experiences
The link looks like this:

Code: Select all

- [url=https://www.bogleheads.org/forum/viewtopic.php?f=2&t=226980]Becoming a Landlord: My Experiences[/url]
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Re: Buying vs. Renting Principles

Post by geerhardusvos »

LadyGeek wrote: Mon Sep 07, 2020 12:44 pm
geerhardusvos wrote: Sun Sep 06, 2020 11:50 am 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. 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
viewtopic.php?t=226980

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!
On an administrative note, a description for the thread link is needed. Use your own wording, but consider something like:
- If you've never been a landlord before, read this: Becoming a Landlord: My Experiences
The link looks like this:

Code: Select all

- [url=https://www.bogleheads.org/forum/viewtopic.php?f=2&t=226980]Becoming a Landlord: My Experiences[/url]
Done, thank you! I have added a number of links to the OP
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Re: Buying vs. Renting Principles

Post by LeftCoast »

I'm glad I didn't follow OP's advice. We stretched to buy a house for $500K in a HCOL area. That house is now worth $2.5M. We have enjoyed total security in that no landlord can kick us out. We got big deductions from our income taxes. We avoided $250K in private school tuition because we bought in a good school district. We are now mortgage free. Excuse me while I go tend to my garden.
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geerhardusvos
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Re: Buying vs. Renting Principles

Post by geerhardusvos »

LeftCoast wrote: Mon Sep 07, 2020 1:02 pm I'm glad I didn't follow OP's advice. We stretched to buy a house for $500K in a HCOL area. That house is now worth $2.5M. We have enjoyed total security in that no landlord can kick us out. We got big deductions from our income taxes. We avoided $250K in private school tuition because we bought in a good school district. We are now mortgage free. Excuse me while I go tend to my garden.
Would you buy your house for its current price today?

There are real situations on either side of the bell curve that make guidelines what they are. Merely guidelines. Those who bought Tesla stock instead of VTSAX are rejoicing. Will this last? These are considered outliers and while they are reality (we made a juicy 3x on our house btw), they don’t help future buyers. Future and current buyers should not expect 3-5X appreciation over the next 10 to 20 years. But there will always be outliers!
Last edited by geerhardusvos on Mon Sep 07, 2020 1:51 pm, edited 1 time in total.
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JackoC
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by JackoC »

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
Right rental yield is the measure OP is looking for rather than a 'guideline' not to buy in certain geographic areas. Although high price area and low rental yield will tend to go together, but not usually uniformly across properties. Condo's around here, less than an air mile from Manhattan are very expensive per sq ft by national average but the price to annual rent ratio is more like 18 for 'moderate' price (eg. $500-$800k) ones. The ratio for our *house* might actually be 50, Zillow thinks it's 76, though the rent they give for our house is probably just wrong. Their prices for both condo's and this house are approximately correct from my knowledge of the market as are the condo rents they assume. But it's hard to say what the market rent is for our house because there's really not a rental market for houses like ours. If you really want to rent it out, you've got to give somebody a deal. Conversely at any given time if you're looking to rent the specific style of 1880's-'1900's stone row houses of which there are a few dozen in town fairly similar to ours, there may be zero owners looking to rent theirs out. There can be a serious apples/oranges problem with buy v rent analysis for some types of house, and in general rental yield isn't necessarily constant in a given area.

A lot of these discussions also start with the implicit idea that 'everyone' is told renting is stupid etc so a little exaggeration in the other direction is necessary. But let's assume nobody was indoctrinated to prefer buying. Should they necessarily rent rather than buy in this area because it's 'VHCOL'? Not clear IMO, it would still vary significantly depending on the property and person's situation. I reject a 'guideline' not to buy in the whole NY area (along with many or most of the other specifics in OP).
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Re: Buying vs. Renting Principles

Post by Lee_WSP »

adamthesmythe wrote: Mon Sep 07, 2020 11:51 am > home is a consumable

I've seen this multiple times, and I don't buy it. Unless "consumable" means something different than what I think.

A consumable (like a steak, or an ordinary car) is something that loses value with time and is eventually used up. That is most definitely not the case for houses (although it may be so for a double-wide). In most cases regular maintenance (with a cost, when added to the other costs of owning, that is often less than the cost of renting something similar) will cause the house to remain usable. In many places maintained houses increase in value, and it is quite rare for them to decline in value. So- not a consumable.

> not an investment

Now here I generally agree. It is highly inadvisable to buy a house counting on its success as an investment. In some cases it may turn out to be sold for more than its cost (accounting for inflation) but overbuying because of an expectation of increase in value is a bad idea.
The maintenance, taxes, and insurance is consumed. The rest is kind of like holding cash in a mattress. How else would you describe it in a sentence?
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Re: Buying vs. Renting Principles

Post by VictoriaF »

OP,

I have been renting all my life and I agree with most points in your post. Here are additional inputs to reinforce your arguments:

1. I rent apartments in large multi-unit buildings. I don't rent houses or condominiums from individual owners. Therefore, I don't get evicted because the owner wants to sell their property or has arbitrary whims.
2. I rent as much as I need. If I were buying my home, I'd buy with an eye on selling. Some posters wrote that renting an apartment and buying a house are not comparable. But from my point of view, these are two types of choices I'd consider, and for me they are comparable.
3. When I am renting, I am not interested in redecorating, buying new furniture, and other home improvements that home owners always seem to be engaged in. I am using my money, time, and energy on more interesting things.
4. Renting is an insurance against real-estate Black Swans. Different parts of the United States have been hit with different types of calamities in the recent years. Not all of them are covered by insurance, and not all insurance is affordable. And we don't know which area would suffer next. This also justifies your guidance about the house value not exceeding 2-3x annual income. The owner must cap potential loss.

Thank you for your post and best wishes for defending it from home-owners' criticism,
Victoria
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Re: Buying vs. Renting Principles

Post by drk »

adamthesmythe wrote: Mon Sep 07, 2020 11:51 am > home is a consumable

I've seen this multiple times, and I don't buy it. Unless "consumable" means something different than what I think.

A consumable (like a steak, or an ordinary car) is something that loses value with time and is eventually used up. That is most definitely not the case for houses (although it may be so for a double-wide). In most cases regular maintenance (with a cost, when added to the other costs of owning, that is often less than the cost of renting something similar) will cause the house to remain usable. In many places maintained houses increase in value, and it is quite rare for them to decline in value. So- not a consumable.
You described exactly what it means for a house to be a consumable. One can either accept the depreciation by foregoing maintenance, pay to remedy the depreciation to maintain quality (typical of owners), or pay to remedy the depreciation to maintain usability (typical of landlords).
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Re: Buying vs. Renting Principles

Post by adamthesmythe »

drk wrote: Mon Sep 07, 2020 2:56 pm
adamthesmythe wrote: Mon Sep 07, 2020 11:51 am > home is a consumable

I've seen this multiple times, and I don't buy it. Unless "consumable" means something different than what I think.

A consumable (like a steak, or an ordinary car) is something that loses value with time and is eventually used up. That is most definitely not the case for houses (although it may be so for a double-wide). In most cases regular maintenance (with a cost, when added to the other costs of owning, that is often less than the cost of renting something similar) will cause the house to remain usable. In many places maintained houses increase in value, and it is quite rare for them to decline in value. So- not a consumable.
You described exactly what it means for a house to be a consumable. One can either accept the depreciation by foregoing maintenance, pay to remedy the depreciation to maintain quality (typical of owners), or pay to remedy the depreciation to maintain usability (typical of landlords).
You're confusing yourself.

If you rented you would be spending some amount of money. If you own, and spend the same amount for mortgage+taxes+maintenance you end up eventually owning a non-consumed asset. And buying so that mortgage+taxes+maintenance is close to the cost of renting...that is where the intelligent analysis needs to be done.
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Re: Buying vs. Renting Principles

Post by geerhardusvos »

adamthesmythe wrote: Mon Sep 07, 2020 3:30 pm
drk wrote: Mon Sep 07, 2020 2:56 pm
adamthesmythe wrote: Mon Sep 07, 2020 11:51 am > home is a consumable

I've seen this multiple times, and I don't buy it. Unless "consumable" means something different than what I think.

A consumable (like a steak, or an ordinary car) is something that loses value with time and is eventually used up. That is most definitely not the case for houses (although it may be so for a double-wide). In most cases regular maintenance (with a cost, when added to the other costs of owning, that is often less than the cost of renting something similar) will cause the house to remain usable. In many places maintained houses increase in value, and it is quite rare for them to decline in value. So- not a consumable.
You described exactly what it means for a house to be a consumable. One can either accept the depreciation by foregoing maintenance, pay to remedy the depreciation to maintain quality (typical of owners), or pay to remedy the depreciation to maintain usability (typical of landlords).
You're confusing yourself.

If you rented you would be spending some amount of money. If you own, and spend the same amount for mortgage+taxes+maintenance you end up eventually owning a non-consumed asset. And buying so that mortgage+taxes+maintenance is close to the cost of renting...that is where the intelligent analysis needs to be done.
Did you know that the same thing can be said about a car? A car can have a loan, taxes, maintenance, and at the end of the day you still own the car and whatever value it has in the marketplace. But cars are depreciating consumable items. Lease versus buy isn’t totally dissimilar here. Most cars depreciate, but my neighbor with a 1960s Porsche will tell you that his car has appreciated quite a bit (it’s worth $250k and he paid $14k).

The only slight difference is that land value typically doesn’t go away, but there have been many times where it has with mudslides, natural disasters, climate change, etc. The land and location is sometimes what’s most valuable about a property (see VHCOLA areas).

Ultimately, houses are a consumable item. They can be leveraged and used for business purposes, they can be used for living in, but they have no or little value if they are not maintained. In fact, the government recognizes them as such as they allow for writing off depreciation and related costs if your business owns a property.
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Re: Buying vs. Renting Principles

Post by XacTactX »

I'd like to offer a resource that I really like, the FAU Rent vs. Buy index. Every three months they update the data and they are trying to ask: if someone buys a home or rents and invests the difference, which person comes out ahead at the end of the holding period. In most parts of the U.S. renting is cheaper than buying, but it really depends on where you live. Some places like Chicago are more favorable to buying a home, while other places like Denver strongly favor renting.

Just as a note, you can read the paper they published in 2009 where they describe the methodology of the index. The holding period for owning a home is 8 years, so the transaction costs are being spread over a relatively short period of time. If you sell your home after 8 years this makes buying a home more attractive than the index suggests, and if you sell before 8 years it makes renting more attractive.

FAU Rent vs. Buy Index
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Re: Buying vs. Renting Principles

Post by geerhardusvos »

XacTactX wrote: Mon Sep 07, 2020 4:05 pm I'd like to offer a resource that I really like, the FAU Rent vs. Buy index. Every three months they update the data and they are trying to ask: if someone buys a home or rents and invests the difference, which person comes out ahead at the end of the holding period. In most parts of the U.S. renting is cheaper than buying, but it really depends on where you live. Some places like Chicago are more favorable to buying a home, while other places like Denver strongly favor renting.

Just as a note, you can read the paper they published in 2009 where they describe the methodology of the index. The holding period for owning a home is 8 years, so the transaction costs are being spread over a relatively short period of time. If you sell your home after 8 years this makes buying a home more attractive than the index suggests, and if you sell before 8 years it makes renting more attractive.

FAU Rent vs. Buy Index
Thank you, this analysis and the below graphs are very helpful and interesting. I will add this to the OP.
https://business.fau.edu/departments/fi ... phs/#SE-WA
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