Buying vs. Renting Principles

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Re: Buying vs. Renting Principles

Post by investnoob »

oldfort wrote: Mon Sep 07, 2020 4:51 pm Part of what's sometimes lost in these discussions is you can't always rent the same house you would want to buy. For example, in my metro area, there are approximately zero homes for rent, with a market value above $300k. If you want a home at the upper end of our market, you have to buy.
Yeah. Vacancy rate, in my city, was below 1% for years.
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Re: Buying vs. Renting Principles

Post by willthrill81 »

Admiral wrote: Thu Sep 10, 2020 7:29 am One of the main conclusions of the most recent report by the Harvard Joint Center for Housing Studies is that renting is/can often be more financially beneficial in terms of wealth building... BUT ONLY IF renters invest the difference, and the vast majority do not. So, they "save" money on rent, and then spend it on something else.

They conclude that homeowners build more wealth owing to the forced savings effect of a mortgage.

You may not agree with it, but this is the reality they have found. You can Google the study.
The problem with even that is one that you acknowledged: "renting ... can often be." Even that study acknowledged that their findings are not universal. Like a great many aspects of personal finance, there is nuance to the issue.

Further, there is more risk in renting than owning (e.g. greater exposure to inflation risk; the investments made with the difference in cost may not perform well). And in many areas of the country, there is no positive difference between renting and owning (i.e. your mortgage payment, including escrow, can be lower than the cost of renting the same property) to invest.
“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

Post by gblack »

ScubaHogg wrote: Thu Sep 10, 2020 8:25 am
gblack wrote: Wed Sep 09, 2020 11:32 pm
1) If you plan on staying in such a place for the foreseeable future (5+ years), the rents are only going up.
This isn’t true necessarily. We are seeing rents go down nationwide.

https://www.zumper.com/blog/rental-price-data/

And not long ago we saw massive home price drops all over the country. Your leveraged mortgages amplified losses as well as gains. It’s hard to sell if you are $50k underwater.
Of course you are correct, and I should have written rents usually go up in HCOL areas. But we are talking over time and one ought to budget for the likelihood rents will go up year to year. At the very least you should not count on them going down.

And sure, home costs can go down too. But you only realize those losses if you sell. I don't imagine many folks who put over 20% down ended up getting too underwater. Plus, in the circumstances when housing prices crash, the stock market would also probably be crashing.

The case for renting long term over buying long term strikes me as a pretty tight needle to thread to realize major benefits -- where portfolio outperforms leveraged real estate in such a way to compensate for increased rents, etc. At the very least, I imagine there are some diversification benefits to owning as well given the idea you want to live in the place you are living and not seeking an escape.
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Re: Buying vs. Renting Principles

Post by ScubaHogg »

gblack wrote: Thu Sep 10, 2020 10:57 am
And sure, home costs can go down too. But you only realize those losses if you sell. I don't imagine many folks who put over 20% down ended up getting too underwater. Plus, in the circumstances when housing prices crash, the stock market would also probably be crashing.
Unfortunately a crash (RE, Mkt, economy) is more likely exactly when someone might need to sell in order to take a new job or decrease their cost of living.

I’m not against owning at all, but I think the current presumption is *for* buying. I think people buy and sell too often and the advantages of renting are undervalued. Particularly for younger people and in HCOLA locations.
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Re: Buying vs. Renting Principles

Post by geerhardusvos »

willthrill81 wrote: Thu Sep 10, 2020 10:13 am
Admiral wrote: Thu Sep 10, 2020 7:29 am One of the main conclusions of the most recent report by the Harvard Joint Center for Housing Studies is that renting is/can often be more financially beneficial in terms of wealth building... BUT ONLY IF renters invest the difference, and the vast majority do not. So, they "save" money on rent, and then spend it on something else.

They conclude that homeowners build more wealth owing to the forced savings effect of a mortgage.

You may not agree with it, but this is the reality they have found. You can Google the study.
The problem with even that is one that you acknowledged: "renting ... can often be." Even that study acknowledged that their findings are not universal. Like a great many aspects of personal finance, there is nuance to the issue.

Further, there is more risk in renting than owning (e.g. greater exposure to inflation risk; the investments made with the difference in cost may not perform well). And in many areas of the country, there is no positive difference between renting and owning (i.e. your mortgage payment, including escrow, can be lower than the cost of renting the same property) to invest.
I have to respectfully push back on this point. I don’t think there can be a sweeping statement/generalization that renting has inherently more risk than owning. If you tweak that statement to say long-term or holding for more than 10 years, then yes inflation risk and some other risks can be muted by owning a home in some markets. If someone purchased a home in 1979, 1989, 2006, and other times, it took a decade or longer to break even on house price not even considering the taxes and the costs. And if the person moved, the cost to sell the home were often enough to slash any gains. Rents weren’t necessarily rising much during those times, so unless there is a long-term holding of the single-family home (sometimes 15 years) and there wasn’t an over extension in that purchase, then I think your statement could stand if modified. If we are talking about short term, under 10 years, renting has mitigated some shorter term risks associated with owning. I do agree that in many markets it’s a wash between owning and renting, and so being biased for long term owning in those markets is pretty sound.
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Re: Buying vs. Renting Principles

Post by willthrill81 »

geerhardusvos wrote: Thu Sep 10, 2020 2:05 pm
willthrill81 wrote: Thu Sep 10, 2020 10:13 am
Admiral wrote: Thu Sep 10, 2020 7:29 am One of the main conclusions of the most recent report by the Harvard Joint Center for Housing Studies is that renting is/can often be more financially beneficial in terms of wealth building... BUT ONLY IF renters invest the difference, and the vast majority do not. So, they "save" money on rent, and then spend it on something else.

They conclude that homeowners build more wealth owing to the forced savings effect of a mortgage.

You may not agree with it, but this is the reality they have found. You can Google the study.
The problem with even that is one that you acknowledged: "renting ... can often be." Even that study acknowledged that their findings are not universal. Like a great many aspects of personal finance, there is nuance to the issue.

Further, there is more risk in renting than owning (e.g. greater exposure to inflation risk; the investments made with the difference in cost may not perform well). And in many areas of the country, there is no positive difference between renting and owning (i.e. your mortgage payment, including escrow, can be lower than the cost of renting the same property) to invest.
I have to respectfully push back on this point. I don’t think there can be a sweeping statement/generalization that renting has inherently more risk than owning. If you tweak that statement to say long-term or holding for more than 10 years, then yes inflation risk and some other risks can be muted by owning a home in some markets. If someone purchased a home in 1979, 1989, 2006, and other times, it took a decade or longer to break even on house price not even considering the taxes and the costs. And if the person moved, the cost to sell the home were often enough to slash any gains. Rents weren’t necessarily rising much during those times, so unless there is a long-term holding of the single-family home (sometimes 15 years) and there wasn’t an over extension in that purchase, then I think your statement could stand if modified. If we are talking about short term, under 10 years, renting has mitigated some shorter term risks associated with owning. I do agree that in many markets it’s a wash between owning and renting, and so being biased for long term owning in those markets is pretty sound.
Yes, I should have qualified my statement to refer to the fact that renting increases certain risks relative to owning (e.g. inflation risk), and owning increases certain risks relative to renting (e.g. property losing its value).

The big protection in downside risk from owning is the fact that once you own your home outright, you only have to pay the property taxes in order to remain in it for the rest of your life. So even if the home loses value, you're still getting the value of living there.
“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

Post by geerhardusvos »

willthrill81 wrote: Thu Sep 10, 2020 4:04 pm
Yes, I should have qualified my statement to refer to the fact that renting increases certain risks relative to owning (e.g. inflation risk), and owning increases certain risks relative to renting (e.g. property losing its value).

The big protection in downside risk from owning is the fact that once you own your home outright, you only have to pay the property taxes in order to remain in it for the rest of your life. So even if the home loses value, you're still getting the value of living there.
It’s a great point, and I think in many retirement scenarios people should seek to be living in a paid off home. Getting to that place is pretty powerful, and getting their takes that much longer when over buying on a house. Geo arbitrage is a way to accomplish this as well. It will be interesting to see if Geo arbitrage will decrease in 10 to 20 years because many people can work from their house so they are able to currently live in their desired retirement location.
Last edited by geerhardusvos on Thu Sep 10, 2020 5:48 pm, edited 1 time in total.
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Re: Buying vs. Renting Principles

Post by KlangFool »

willthrill81 wrote: Thu Sep 10, 2020 4:04 pm

Yes, I should have qualified my statement to refer to the fact that renting increases certain risks relative to owning (e.g. inflation risk), and owning increases certain risks relative to renting (e.g. property losing its value).

The big protection in downside risk from owning is the fact that once you own your home outright, you only have to pay the property taxes in order to remain in it for the rest of your life. So even if the home loses value, you're still getting the value of living there.

willthrill81,

In a state/locality where the property tax is exorbitant and increasing, that is a significant issue.


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Re: Buying vs. Renting Principles

Post by 000 »

KlangFool wrote: Thu Sep 10, 2020 5:07 pm
willthrill81 wrote: Thu Sep 10, 2020 4:04 pm

Yes, I should have qualified my statement to refer to the fact that renting increases certain risks relative to owning (e.g. inflation risk), and owning increases certain risks relative to renting (e.g. property losing its value).

The big protection in downside risk from owning is the fact that once you own your home outright, you only have to pay the property taxes in order to remain in it for the rest of your life. So even if the home loses value, you're still getting the value of living there.

willthrill81,

In a state/locality where the property tax is exorbitant and increasing, that is a significant issue.


KlangFool
And landlords don't pay property tax? :oops:
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Re: Buying vs. Renting Principles

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KlangFool wrote: Thu Sep 10, 2020 5:07 pm
willthrill81 wrote: Thu Sep 10, 2020 4:04 pm

Yes, I should have qualified my statement to refer to the fact that renting increases certain risks relative to owning (e.g. inflation risk), and owning increases certain risks relative to renting (e.g. property losing its value).

The big protection in downside risk from owning is the fact that once you own your home outright, you only have to pay the property taxes in order to remain in it for the rest of your life. So even if the home loses value, you're still getting the value of living there.

willthrill81,

In a state/locality where the property tax is exorbitant and increasing, that is a significant issue.


KlangFool
That's true, though obviously renting doesn't allow you to escape property tax since it will be included in your rent.

My observations have led me to believe that property taxes generally only increase substantially in areas where there is significant property appreciation, so the homeowner can usually sell the property at a large gain and move elsewhere with tax-free gains in hand (or nearly tax-free). But there is the risk that one's local government will substantially increase property tax rates, and if this is done to overcome declining property values, homeowners may be left holding the bag.
“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

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000 wrote: Thu Sep 10, 2020 5:11 pm
KlangFool wrote: Thu Sep 10, 2020 5:07 pm
willthrill81 wrote: Thu Sep 10, 2020 4:04 pm

Yes, I should have qualified my statement to refer to the fact that renting increases certain risks relative to owning (e.g. inflation risk), and owning increases certain risks relative to renting (e.g. property losing its value).

The big protection in downside risk from owning is the fact that once you own your home outright, you only have to pay the property taxes in order to remain in it for the rest of your life. So even if the home loses value, you're still getting the value of living there.

willthrill81,

In a state/locality where the property tax is exorbitant and increasing, that is a significant issue.


KlangFool
And landlords don't pay property tax? :oops:
Why should the renter care? It is not true that all landlords make money. It takes skills and efforts to be a profitable landlord.


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Re: Buying vs. Renting Principles

Post by MathIsMyWayr »

KlangFool wrote: Thu Sep 10, 2020 5:07 pm
willthrill81 wrote: Thu Sep 10, 2020 4:04 pm

Yes, I should have qualified my statement to refer to the fact that renting increases certain risks relative to owning (e.g. inflation risk), and owning increases certain risks relative to renting (e.g. property losing its value).

The big protection in downside risk from owning is the fact that once you own your home outright, you only have to pay the property taxes in order to remain in it for the rest of your life. So even if the home loses value, you're still getting the value of living there.

willthrill81,

In a state/locality where the property tax is exorbitant and increasing, that is a significant issue.


KlangFool
Buying or renting a place of living is more than dollars and cents. It also involves the sense of life style. I wouldn't count the last digits.
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Re: Buying vs. Renting Principles

Post by 000 »

KlangFool wrote: Thu Sep 10, 2020 5:17 pm
000 wrote: Thu Sep 10, 2020 5:11 pm And landlords don't pay property tax? :oops:
Why should the renter care? It is not true that all landlords make money. It takes skills and efforts to be a profitable landlord.
I think as far as generic assumptions go it is more reasonable to assume that rent includes property tax than that it does not.
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Re: Buying vs. Renting Principles

Post by willthrill81 »

KlangFool wrote: Thu Sep 10, 2020 5:17 pm
000 wrote: Thu Sep 10, 2020 5:11 pm
KlangFool wrote: Thu Sep 10, 2020 5:07 pm
willthrill81 wrote: Thu Sep 10, 2020 4:04 pm

Yes, I should have qualified my statement to refer to the fact that renting increases certain risks relative to owning (e.g. inflation risk), and owning increases certain risks relative to renting (e.g. property losing its value).

The big protection in downside risk from owning is the fact that once you own your home outright, you only have to pay the property taxes in order to remain in it for the rest of your life. So even if the home loses value, you're still getting the value of living there.

willthrill81,

In a state/locality where the property tax is exorbitant and increasing, that is a significant issue.


KlangFool
And landlords don't pay property tax? :oops:
Why should the renter care? It is not true that all landlords make money. It takes skills and efforts to be a profitable landlord.


KlangFool
If property taxes are "exorbitant and increasing," it's very safe to assume that rents will go up accordingly.
“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

Post by KlangFool »

000 wrote: Thu Sep 10, 2020 5:20 pm
KlangFool wrote: Thu Sep 10, 2020 5:17 pm
000 wrote: Thu Sep 10, 2020 5:11 pm And landlords don't pay property tax? :oops:
Why should the renter care? It is not true that all landlords make money. It takes skills and efforts to be a profitable landlord.
I think as far as generic assumptions go it is more reasonable to assume that rent includes property tax than that it does not.

In my opinion, there is nothing generic about buying a house. It is location, location, location. And, the property tax rate versus the market rent is one of the consideration. It may or may not matter as per your specific location.


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Re: Buying vs. Renting Principles

Post by KlangFool »

willthrill81 wrote: Thu Sep 10, 2020 5:22 pm
KlangFool wrote: Thu Sep 10, 2020 5:17 pm
000 wrote: Thu Sep 10, 2020 5:11 pm
KlangFool wrote: Thu Sep 10, 2020 5:07 pm
willthrill81 wrote: Thu Sep 10, 2020 4:04 pm

Yes, I should have qualified my statement to refer to the fact that renting increases certain risks relative to owning (e.g. inflation risk), and owning increases certain risks relative to renting (e.g. property losing its value).

The big protection in downside risk from owning is the fact that once you own your home outright, you only have to pay the property taxes in order to remain in it for the rest of your life. So even if the home loses value, you're still getting the value of living there.

willthrill81,

In a state/locality where the property tax is exorbitant and increasing, that is a significant issue.


KlangFool
And landlords don't pay property tax? :oops:
Why should the renter care? It is not true that all landlords make money. It takes skills and efforts to be a profitable landlord.


KlangFool
If property taxes are "exorbitant and increasing," it's very safe to assume that rents will go up accordingly.

willthrill81,

Not necessary true when there are a bunch of landlords desperating to rent out their places. This happened in all recessions.

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Re: Buying vs. Renting Principles

Post by willthrill81 »

KlangFool wrote: Thu Sep 10, 2020 5:28 pm
willthrill81 wrote: Thu Sep 10, 2020 5:22 pm
KlangFool wrote: Thu Sep 10, 2020 5:17 pm
000 wrote: Thu Sep 10, 2020 5:11 pm
KlangFool wrote: Thu Sep 10, 2020 5:07 pm


willthrill81,

In a state/locality where the property tax is exorbitant and increasing, that is a significant issue.


KlangFool
And landlords don't pay property tax? :oops:
Why should the renter care? It is not true that all landlords make money. It takes skills and efforts to be a profitable landlord.


KlangFool
If property taxes are "exorbitant and increasing," it's very safe to assume that rents will go up accordingly.

willthrill81,

Not necessary true when there are a bunch of landlords desperating to rent out their places. This happened in all recessions.

KlangFool
All recessions? I really doubt that. Most recessions are nothing like 2008-2009, and rents were typically flat or rose during that period anyway.
“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

Post by 000 »

KlangFool wrote: Thu Sep 10, 2020 5:28 pm Not necessary true when there are a bunch of landlords desperating to rent out their places. This happened in all recessions.
If you really believe there are extended periods of time where large numbers of rentals are available under cost, why do you own a house?
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Re: Buying vs. Renting Principles

Post by Wrench »

geerhardusvos wrote: Thu Sep 10, 2020 4:59 pm
willthrill81 wrote: Thu Sep 10, 2020 4:04 pm
Yes, I should have qualified my statement to refer to the fact that renting increases certain risks relative to owning (e.g. inflation risk), and owning increases certain risks relative to renting (e.g. property losing its value).

The big protection in downside risk from owning is the fact that once you own your home outright, you only have to pay the property taxes in order to remain in it for the rest of your life. So even if the home loses value, you're still getting the value of living there.
It’s a great point, and I think in many retirement scenarios people should seek to be living in a paid off home. Getting to that place pretty powerful, and getting their takes that much longer when over buying on a house. Geo arbitrage is a way to accomplish this as well. It will be interesting to see if Geo arbitrage will decrease in 10 to 20 years because many people can work from their house so they are able to currently live in their desired retirement location.
I think a HUGE component in the own/rent decision is emotional. Owning the home where you live is NOT an investment, it is an expense. We've lived in our home for 33 years and it has doubled in value. That's a lousy return - probably lost money after inflation. But, even if I had known that, I would have bought. I just feel better knowing that I can make whatever changes I want where I live, and not have to ask somebody's permission (as long as no building permits are required at least). There is also a sense that I have put my roots down and am part of the community. (We know all our local state representatives, and both of our US senators. That feels good.) I never felt that way when we rented. And now that we own our home outright, as long as we can pay the property tax, which in our locality is pretty low, we will always have a roof over our heads. It can even be a "fund of last resort" through a reverse mortgage if times get really bad. None of these reasons to own are really financial, they are all emotional. As such, they are highly personal. There is no "right" answer - we should respect whatever choice someone makes as long as they do so with their eyes wide open.

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Re: Buying vs. Renting Principles

Post by KlangFool »

000 wrote: Thu Sep 10, 2020 5:33 pm
KlangFool wrote: Thu Sep 10, 2020 5:28 pm Not necessary true when there are a bunch of landlords desperating to rent out their places. This happened in all recessions.
If you really believe there are extended periods of time where large numbers of rentals are available under cost, why do you own a house?
000,


A) I do not consider my primary residence as an investment. I am fine even if my house's value is zero. My assumption for house appreciation is 0% or negative.

<<If you really believe there are extended periods of time where large numbers of rentals are available under cost, why do you own a house?>>

B) I only buy a house when the house price is so low that buying (PITI) is significantly (20% to 30%) cheaper than the rental. I am buying one house at the right price and at the right time.


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Re: Buying vs. Renting Principles

Post by WS1 »

willthrill81 wrote: Thu Sep 10, 2020 5:13 pm
KlangFool wrote: Thu Sep 10, 2020 5:07 pm
willthrill81 wrote: Thu Sep 10, 2020 4:04 pm

Yes, I should have qualified my statement to refer to the fact that renting increases certain risks relative to owning (e.g. inflation risk), and owning increases certain risks relative to renting (e.g. property losing its value).

The big protection in downside risk from owning is the fact that once you own your home outright, you only have to pay the property taxes in order to remain in it for the rest of your life. So even if the home loses value, you're still getting the value of living there.

willthrill81,

In a state/locality where the property tax is exorbitant and increasing, that is a significant issue.


KlangFool
That's true, though obviously renting doesn't allow you to escape property tax since it will be included in your rent.

My observations have led me to believe that property taxes generally only increase substantially in areas where there is significant property appreciation, so the homeowner can usually sell the property at a large gain and move elsewhere with tax-free gains in hand (or nearly tax-free). But there is the risk that one's local government will substantially increase property tax rates, and if this is done to overcome declining property values, homeowners may be left holding the bag.
This is probably a New York centric statement and I might just be quibbling over language but my property tax bill goes up because the government wants more money to pay for things. It could be a new pool or higher employee medical premiums or fixing hurricane damage or it could be higher salaries in a booming economy. None of that is dependent on appreciation. The property tax levied is set by the local budget and all property value determines is my share.
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Re: Buying vs. Renting Principles

Post by spdoublebass »

KlangFool wrote: Thu Sep 10, 2020 5:46 pm
000 wrote: Thu Sep 10, 2020 5:33 pm
KlangFool wrote: Thu Sep 10, 2020 5:28 pm Not necessary true when there are a bunch of landlords desperating to rent out their places. This happened in all recessions.
If you really believe there are extended periods of time where large numbers of rentals are available under cost, why do you own a house?
000,


A) I do not consider my primary residence as an investment. I am fine even if my house's value is zero. My assumption for house appreciation is 0% or negative.

<<If you really believe there are extended periods of time where large numbers of rentals are available under cost, why do you own a house?>>

B) I only buy a house when the house price is so low that buying (PITI) is significantly (20% to 30%) cheaper than the rental. I am buying one house at the right price and at the right time.


KlangFool
I really think the truth is somewhere in the middle.

I'm 37 and rented my whole life. DW and I do not and will not be having children. We both work in the Syracuse, NY area. I recently was tempted to look into buying a house. While there are a ton of nice affordable houses available, the property taxes are around $550 a month. This is not bad in some ways, but I grew up outside of Detroit where property taxes were typically less than $2000 a year. It was a real turn off to buying something at this time.

I found a 3 bedroom house for $1050 a month. Includes snow removal (big deal here in upstate NY) and lawn maintenance. I don't have to fix anything. This to me is a no brainer and we do invest the difference we are saving. (I should note that we also rent because It's not certain we will stay here for 10 years).

I know my landlord is paying at least $500 in property taxes. You add in the services and maintenance, they aren't making that much profit off of me. Also, I haven't looked into it lately but I think they can only raise your rent so much in the state of NY. Plus, you can always move.

If property taxes go up and they try to stick me with it they risk losing me as a tenant. When you go through all hoops you have to jump through to prove you can afford to rent the place, then you move in and pay on time every month, and you treat the place like your own, they do not want to lose you.

I can see us buying something later in life. I still would want to buy something not for the investment, but something that will out last me.

Thank you for this thread. I really enjoyed it and think it's very useful. Of course, everyone's situation is different. You really do need to think it through yourself and make the decision.
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Re: Buying vs. Renting Principles

Post by joetro29 »

Someone y’all don’t live in TX, with huge property tax valuation increases and lots of protesting that. Meanwhile my rent is up 19% over an 8.5 year period.
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Re: Buying vs. Renting Principles

Post by willthrill81 »

joetro29 wrote: Sat Sep 12, 2020 9:58 pm Someone y’all don’t live in TX, with huge property tax valuation increases and lots of protesting that. Meanwhile my rent is up 19% over an 8.5 year period.
That's a prime example of what I was talking about above. Renting does not insulate you from the effect of increasing property taxes. Only in weak markets will landlords just absorb that added cost.
“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

Post by joetro29 »

Actually I was making the point that owning doesn’t mean fixed costs.
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Re: Buying vs. Renting Principles (Sticky Thread Request)

Post by Dottie57 »

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.).
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Re: Buying vs. Renting Principles

Post by willthrill81 »

joetro29 wrote: Sat Sep 12, 2020 10:15 pm Actually I was making the point that owning doesn’t mean fixed costs.
No, the costs of owning aren't entirely fixed, but they are more fixed than with renting. Inflation of the property value does not directly impact owners, only indirectly through taxes, maintenance, and insurance. But inflated property values alone generally* lead to higher rents.

For instance, our combined taxes, maintenance, and insurance are about $550/month. Renting an equivalent home would cost $1,700/month. That means that we only have roughly one-third the exposure to inflation pertaining to our property that we would have if we were renting.

*This is not necessarily the case, particularly in VHCOL areas, but renting in such places is often financially superior by a significant margin in the first place.
“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

Post by JackoC »

EnjoyIt wrote: Tue Sep 08, 2020 2:45 pm
JackoC wrote: Tue Sep 08, 2020 9:30 am
EnjoyIt wrote: Mon Sep 07, 2020 7:55 pm
adamthesmythe wrote: Mon Sep 07, 2020 4:55 pm
geerhardusvos wrote: Mon Sep 07, 2020 3:46 pm
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).
I think you do not want to understand.
If you DO maintain a house it usually keeps or increases in value. Hundred-year-old houses sell for good prices in older cities.
Please allow me to jump in.
Having a roof under one’s head is a consumption of resources. Either you rent or you buy, one needs to spend money to keep that roof over their head. In the terms of rent that is called rent. In the terms of buying, that is called taxes and maintenance. Also, if one does not keep maintaining one’s house, eventually that house becomes worthless. Even the government gives you a tax break on the depreciation of a home or rental property. They do this because they understand that over time, that building gets used up or consumed.

Sure, it is possible that someone buys a house and gets lucky where the land value the home is built on increases this was seen in the Bay Area in the past. Or one can get very unlucky and buy a home in Phoenix where the land value decreased in the recent past. Either way, over time the house that sits on that land gets used and slowly disintegrates over time unless more money is spent. The house becomes consumed.
The assets of the companies whose stocks one invests in are also 'consumable' by the same extension of the definition beyond the normal meaning (where consumables would be items like fuel, food, etc; not houses or the hard fixed assets of companies). By this extended definition virtually all investments are in 'consumable assets'. And ironically the one at least partial exception to this, land, is more important in home than stock investment.

Likewise with depreciation for tax purposes, aside from the humorous suggestion that tax code provisions are because 'the government understands' rather than the particular outcome of the political sausage making factory. :happy But in any case the assets of companies whose stock we buy are covered by similar tax provisions.

A house is a capital (long lived*) asset, the more so combined with land which is often the majority of the investment. It has a 'gross payout' to the owner/occupier of the rent avoided by occupying it. From which are subtracted operating costs (property tax, utilities a landlord would typically pay like sewer/water, maintenance, etc), and the opportunity cost of the capital you tie up in the house. The prospective buyer quantifies these for their particular case, then considers the expected price return of the asset. You don't know the actual future return of any risk asset by definition, stocks either. But still we must choose among them based on some judgement of relative expected returns.

Alternatively you can not invest in housing and rent instead. As others have noted this means you lose out financially if values and rents where you want to live rise faster than expected, and/or other use of the capital ends up with less return than expected. You win out financially if the reverse is true. In addition the relative magnitude of imputed and explicit rents and operating costs varies, there is no 'guideline' for this. Also, investments in housing and stocks are partial diversifiers for one another. There are potential indirect financial considerations (you can more easily move to take a better job as renter, you might avoid private school cost owning in an area with good public schools and no suitable rental options), and of course there are various potentially highly important non-financial considerations. But, no 'eureka moment' in realizing a house is 'consumable'.

*In Japan it's common for single family houses to be demolished after only 20-30 yrs but the vast majority of non-mobile home structures in the US last longer. And it must also be considered with respect to owner's expected holding period. My house is 120 yrs old and it should last centuries more, like stone/brick structures elsewhere that old, unless destroyed in a disaster. It's an essentially permanent asset v. my life expectancy.
I think you are confusing a house that you live in for an investment. I think this is a huge mistake. Yes the land a house is situated on can go up in value and has gone up significantly in parts of the US. It can become a great investment but by and large real estate value just keeps up with inflation while the house that sits on it slowly falls apart and needs upkeep to maintain value.

At the end of the day, we need to consume a place to live unless we want to live under a bridge we will pay money to do so. We can rent or we can buy and there are advantages to both. By renting we can take what would be the equity we don’t buy with and invest it elsewhere. If we buy we put a large chunk of our assets into a home and avoid investing that cash elsewhere. That’s it. There is nothing more special to this and depending on what wants to do they can run the math and see what is best for them. Sure someone can get lucky and the land they bought can go up in value which has happened to many in California. But let us remember the old adage, past result do not guarantee future returns.

Again, at the end of the day we will consume the houses resources but gladly spend money to renew those resources to keep the home functional.

I think the biggest discrepancy is that some believe that the house they live in is an investment and the other group is saying that it is not an investment...
No confusion on my part. The simple confusion on your part and some others seems to be defining 'investment' as 'good investment' whereby if one can question whether an investment will be a good one, that calls into question whether it's an investment at all. Forget the invisible 'good' you keep putting in front of 'investment', then arguing against. :happy

A house you also live in *is* an investment. That's not a matter of 'belief' but a simple fact. The idea that a property would be in an 'investment' if you rented it to somebody else, but isn't if you implicitly rent it to yourself is silly. Rather than 'confusion' this is perhaps just clearer to me since some properties I own to rent to others are relatively similar in size and age to my own house (though configured as multi-family whereas my house was converted back to its original ca. 1900 configuration as single family back some decades ago). They are all investments.

You invest capital in some combination of a home, a rental property, financial assets (stocks etc) or other. The major financial twist in case of owner occupied home is that you consume the owner imputed rent. Though you don't 'consume the house'. Again maybe this is just easier to see if you live in a house with indefinite lifespan like mine. I'm not literally consuming the building, I'm consuming the rent I could get from the building. Simply correct for that and everything else falls into place comparing owner occupied to rental real estate investments, and those two *investments* compared to others like financial assets (stocks, bonds etc). Aside from non-financial considerations, which can also be important for owned houses.

Whether an owned homed or rental property is a *good* investment compared to other ones all depends. Back on owner imputed rent, the bigger the rental value, the more consumption of owner imputed rent. But I believe only very naive homeowners ignore that. But correcting for owner imputed rent it's neither possible nor necessary to say if real estate is a 'better' investment than say stocks. Not possible: risk assets with by definition unknown future returns. Not necessary: you don't have to invest in just one or the other and they tend to diversify one another, to some extent.

Lots of people (though clearly mistakenly) say 'my house is not an investment'. This is a relatively harmless error for people with low house values and big portfolio's otherwise. For people with significant house values relative to total worth it's a dangerous fallacy, because they are ignoring the *price risk* of their home investment. They can claim all they want to that 'I don't count that value in my NW' they will still be in a weaker financial position if it the house price drops, as they will be in their stock portfolio or other *investments* drop in value.
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Re: Buying vs. Renting Principles

Post by geerhardusvos »

JackoC wrote: Sun Sep 13, 2020 5:19 pm Lots of people (though clearly mistakenly) say 'my house is not an investment'. This is a relatively harmless error for people with low house values and big portfolio's otherwise. For people with significant house values relative to total worth it's a dangerous fallacy, because they are ignoring the *price risk* of their home investment. They can claim all they want to that 'I don't count that value in my NW' they will still be in a weaker financial position if it the house price drops, as they will be in their stock portfolio or other *investments* drop in value.
Most people disagree with you. Even when purchasing a home makes sense, it is critical to realize that a home purchase is mostly a consumption item, not an investment. Even if something has the potential to appreciate, does not mean that it is an investment.

https://www.whitecoatinvestor.com/buyin ... right-way/
https://www.moneyunder30.com/why-your-h ... investment
https://www.thesimpledollar.com/investi ... nvestment/
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Re: Buying vs. Renting Principles

Post by 000 »

geerhardusvos wrote: Sun Sep 13, 2020 5:41 pm
JackoC wrote: Sun Sep 13, 2020 5:19 pm Lots of people (though clearly mistakenly) say 'my house is not an investment'. This is a relatively harmless error for people with low house values and big portfolio's otherwise. For people with significant house values relative to total worth it's a dangerous fallacy, because they are ignoring the *price risk* of their home investment. They can claim all they want to that 'I don't count that value in my NW' they will still be in a weaker financial position if it the house price drops, as they will be in their stock portfolio or other *investments* drop in value.
Most people disagree with you. Even when purchasing a home makes sense, it is critical to realize that a home purchase is mostly a consumption item, not an investment. Even if something has the potential to appreciate, does not mean that it is an investment.

https://www.whitecoatinvestor.com/buyin ... right-way/
https://www.moneyunder30.com/why-your-h ... investment
https://www.thesimpledollar.com/investi ... nvestment/
Well land is absolutely an investment. Not sure how anyone could dispute that. In fact it's the oldest kind of investment.

And the structure itself, although it will depreciate due to wear and tear, provides imputed rent.
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Re: Buying vs. Renting Principles

Post by willthrill81 »

geerhardusvos wrote: Sun Sep 13, 2020 5:41 pm
JackoC wrote: Sun Sep 13, 2020 5:19 pm Lots of people (though clearly mistakenly) say 'my house is not an investment'. This is a relatively harmless error for people with low house values and big portfolio's otherwise. For people with significant house values relative to total worth it's a dangerous fallacy, because they are ignoring the *price risk* of their home investment. They can claim all they want to that 'I don't count that value in my NW' they will still be in a weaker financial position if it the house price drops, as they will be in their stock portfolio or other *investments* drop in value.
Most people disagree with you. Even when purchasing a home makes sense, it is critical to realize that a home purchase is mostly a consumption item, not an investment. Even if something has the potential to appreciate, does not mean that it is an investment.

https://www.whitecoatinvestor.com/buyin ... right-way/
https://www.moneyunder30.com/why-your-h ... investment
https://www.thesimpledollar.com/investi ... nvestment/
In general, I don't find labels to be very helpful in many spheres, especially personal finance. Whether a home is an investment or not seems irrelevant to me. As I see it, you have to live somewhere, and the ultimate financial question in the buy vs. rent topic is which will result in greater long-term wealth given the risks involved. Like most areas of life, the answer is nuanced and, in this case, it is also highly contextual.
“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

Post by geerhardusvos »

000 wrote: Sun Sep 13, 2020 5:45 pm
geerhardusvos wrote: Sun Sep 13, 2020 5:41 pm
JackoC wrote: Sun Sep 13, 2020 5:19 pm Lots of people (though clearly mistakenly) say 'my house is not an investment'. This is a relatively harmless error for people with low house values and big portfolio's otherwise. For people with significant house values relative to total worth it's a dangerous fallacy, because they are ignoring the *price risk* of their home investment. They can claim all they want to that 'I don't count that value in my NW' they will still be in a weaker financial position if it the house price drops, as they will be in their stock portfolio or other *investments* drop in value.
Most people disagree with you. Even when purchasing a home makes sense, it is critical to realize that a home purchase is mostly a consumption item, not an investment. Even if something has the potential to appreciate, does not mean that it is an investment.

https://www.whitecoatinvestor.com/buyin ... right-way/
https://www.moneyunder30.com/why-your-h ... investment
https://www.thesimpledollar.com/investi ... nvestment/
Well land is absolutely an investment. Not sure how anyone could dispute that. In fact it's the oldest kind of investment.

And the structure itself, although it will depreciate due to wear and tear, provides imputed rent.
This is already been discussed further up in the thread. Land is technically not an investment. It neither generates income, nor capital gain.
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Re: Buying vs. Renting Principles

Post by 000 »

geerhardusvos wrote: Sun Sep 13, 2020 5:48 pm
000 wrote: Sun Sep 13, 2020 5:45 pm
geerhardusvos wrote: Sun Sep 13, 2020 5:41 pm
JackoC wrote: Sun Sep 13, 2020 5:19 pm Lots of people (though clearly mistakenly) say 'my house is not an investment'. This is a relatively harmless error for people with low house values and big portfolio's otherwise. For people with significant house values relative to total worth it's a dangerous fallacy, because they are ignoring the *price risk* of their home investment. They can claim all they want to that 'I don't count that value in my NW' they will still be in a weaker financial position if it the house price drops, as they will be in their stock portfolio or other *investments* drop in value.
Most people disagree with you. Even when purchasing a home makes sense, it is critical to realize that a home purchase is mostly a consumption item, not an investment. Even if something has the potential to appreciate, does not mean that it is an investment.

https://www.whitecoatinvestor.com/buyin ... right-way/
https://www.moneyunder30.com/why-your-h ... investment
https://www.thesimpledollar.com/investi ... nvestment/
Well land is absolutely an investment. Not sure how anyone could dispute that. In fact it's the oldest kind of investment.

And the structure itself, although it will depreciate due to wear and tear, provides imputed rent.
This is already been discussed further up in the thread. Land is technically not an investment. It neither generates income, nor capital gain.
Land can't appreciate in value?
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Re: Buying vs. Renting Principles

Post by geerhardusvos »

000 wrote: Sun Sep 13, 2020 5:50 pm
geerhardusvos wrote: Sun Sep 13, 2020 5:48 pm
000 wrote: Sun Sep 13, 2020 5:45 pm
geerhardusvos wrote: Sun Sep 13, 2020 5:41 pm
JackoC wrote: Sun Sep 13, 2020 5:19 pm Lots of people (though clearly mistakenly) say 'my house is not an investment'. This is a relatively harmless error for people with low house values and big portfolio's otherwise. For people with significant house values relative to total worth it's a dangerous fallacy, because they are ignoring the *price risk* of their home investment. They can claim all they want to that 'I don't count that value in my NW' they will still be in a weaker financial position if it the house price drops, as they will be in their stock portfolio or other *investments* drop in value.
Most people disagree with you. Even when purchasing a home makes sense, it is critical to realize that a home purchase is mostly a consumption item, not an investment. Even if something has the potential to appreciate, does not mean that it is an investment.

https://www.whitecoatinvestor.com/buyin ... right-way/
https://www.moneyunder30.com/why-your-h ... investment
https://www.thesimpledollar.com/investi ... nvestment/
Well land is absolutely an investment. Not sure how anyone could dispute that. In fact it's the oldest kind of investment.

And the structure itself, although it will depreciate due to wear and tear, provides imputed rent.
This is already been discussed further up in the thread. Land is technically not an investment. It neither generates income, nor capital gain.
Land can't appreciate in value?
Appreciation in price does not equate to investment. See beanie babies, 1960s Porsches, and bitcoin.
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Re: Buying vs. Renting Principles

Post by 000 »

geerhardusvos wrote: Sun Sep 13, 2020 5:48 pm Land is technically not an investment. It neither generates income, nor capital gain.
geerhardusvos wrote: Sun Sep 13, 2020 5:56 pm Appreciation in price does not equate to investment. See beanie babies, 1960s Porsches, and bitcoin.
Wow. Today I learned the most favored growth investment in human history is not an investment at all!

I assume you agree that a business generating cashflow from land is an investment, but the land itself is what? It's not consumed by the business unless the business chooses to "draw from principal" with unsustainable land practices. It has residual value even if the business ceases operation.

Do you think non-junk bonds are an investment? An investment in non-junk bonds today does not generate income in real terms and expecting capital gains from a bond is speculation (on interest rate movements), not investment.

Is stock the only thing defined as an investment in your worldview?
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Re: Buying vs. Renting Principles

Post by EnjoyIt »

JackoC wrote: Sun Sep 13, 2020 5:19 pm
EnjoyIt wrote: Tue Sep 08, 2020 2:45 pm
JackoC wrote: Tue Sep 08, 2020 9:30 am
EnjoyIt wrote: Mon Sep 07, 2020 7:55 pm
adamthesmythe wrote: Mon Sep 07, 2020 4:55 pm
I think you do not want to understand.
If you DO maintain a house it usually keeps or increases in value. Hundred-year-old houses sell for good prices in older cities.
Please allow me to jump in.
Having a roof under one’s head is a consumption of resources. Either you rent or you buy, one needs to spend money to keep that roof over their head. In the terms of rent that is called rent. In the terms of buying, that is called taxes and maintenance. Also, if one does not keep maintaining one’s house, eventually that house becomes worthless. Even the government gives you a tax break on the depreciation of a home or rental property. They do this because they understand that over time, that building gets used up or consumed.

Sure, it is possible that someone buys a house and gets lucky where the land value the home is built on increases this was seen in the Bay Area in the past. Or one can get very unlucky and buy a home in Phoenix where the land value decreased in the recent past. Either way, over time the house that sits on that land gets used and slowly disintegrates over time unless more money is spent. The house becomes consumed.
The assets of the companies whose stocks one invests in are also 'consumable' by the same extension of the definition beyond the normal meaning (where consumables would be items like fuel, food, etc; not houses or the hard fixed assets of companies). By this extended definition virtually all investments are in 'consumable assets'. And ironically the one at least partial exception to this, land, is more important in home than stock investment.

Likewise with depreciation for tax purposes, aside from the humorous suggestion that tax code provisions are because 'the government understands' rather than the particular outcome of the political sausage making factory. :happy But in any case the assets of companies whose stock we buy are covered by similar tax provisions.

A house is a capital (long lived*) asset, the more so combined with land which is often the majority of the investment. It has a 'gross payout' to the owner/occupier of the rent avoided by occupying it. From which are subtracted operating costs (property tax, utilities a landlord would typically pay like sewer/water, maintenance, etc), and the opportunity cost of the capital you tie up in the house. The prospective buyer quantifies these for their particular case, then considers the expected price return of the asset. You don't know the actual future return of any risk asset by definition, stocks either. But still we must choose among them based on some judgement of relative expected returns.

Alternatively you can not invest in housing and rent instead. As others have noted this means you lose out financially if values and rents where you want to live rise faster than expected, and/or other use of the capital ends up with less return than expected. You win out financially if the reverse is true. In addition the relative magnitude of imputed and explicit rents and operating costs varies, there is no 'guideline' for this. Also, investments in housing and stocks are partial diversifiers for one another. There are potential indirect financial considerations (you can more easily move to take a better job as renter, you might avoid private school cost owning in an area with good public schools and no suitable rental options), and of course there are various potentially highly important non-financial considerations. But, no 'eureka moment' in realizing a house is 'consumable'.

*In Japan it's common for single family houses to be demolished after only 20-30 yrs but the vast majority of non-mobile home structures in the US last longer. And it must also be considered with respect to owner's expected holding period. My house is 120 yrs old and it should last centuries more, like stone/brick structures elsewhere that old, unless destroyed in a disaster. It's an essentially permanent asset v. my life expectancy.
I think you are confusing a house that you live in for an investment. I think this is a huge mistake. Yes the land a house is situated on can go up in value and has gone up significantly in parts of the US. It can become a great investment but by and large real estate value just keeps up with inflation while the house that sits on it slowly falls apart and needs upkeep to maintain value.

At the end of the day, we need to consume a place to live unless we want to live under a bridge we will pay money to do so. We can rent or we can buy and there are advantages to both. By renting we can take what would be the equity we don’t buy with and invest it elsewhere. If we buy we put a large chunk of our assets into a home and avoid investing that cash elsewhere. That’s it. There is nothing more special to this and depending on what wants to do they can run the math and see what is best for them. Sure someone can get lucky and the land they bought can go up in value which has happened to many in California. But let us remember the old adage, past result do not guarantee future returns.

Again, at the end of the day we will consume the houses resources but gladly spend money to renew those resources to keep the home functional.

I think the biggest discrepancy is that some believe that the house they live in is an investment and the other group is saying that it is not an investment...
No confusion on my part. The simple confusion on your part and some others seems to be defining 'investment' as 'good investment' whereby if one can question whether an investment will be a good one, that calls into question whether it's an investment at all. Forget the invisible 'good' you keep putting in front of 'investment', then arguing against. :happy

A house you also live in *is* an investment. That's not a matter of 'belief' but a simple fact. The idea that a property would be in an 'investment' if you rented it to somebody else, but isn't if you implicitly rent it to yourself is silly. Rather than 'confusion' this is perhaps just clearer to me since some properties I own to rent to others are relatively similar in size and age to my own house (though configured as multi-family whereas my house was converted back to its original ca. 1900 configuration as single family back some decades ago). They are all investments.

You invest capital in some combination of a home, a rental property, financial assets (stocks etc) or other. The major financial twist in case of owner occupied home is that you consume the owner imputed rent. Though you don't 'consume the house'. Again maybe this is just easier to see if you live in a house with indefinite lifespan like mine. I'm not literally consuming the building, I'm consuming the rent I could get from the building. Simply correct for that and everything else falls into place comparing owner occupied to rental real estate investments, and those two *investments* compared to others like financial assets (stocks, bonds etc). Aside from non-financial considerations, which can also be important for owned houses.

Whether an owned homed or rental property is a *good* investment compared to other ones all depends. Back on owner imputed rent, the bigger the rental value, the more consumption of owner imputed rent. But I believe only very naive homeowners ignore that. But correcting for owner imputed rent it's neither possible nor necessary to say if real estate is a 'better' investment than say stocks. Not possible: risk assets with by definition unknown future returns. Not necessary: you don't have to invest in just one or the other and they tend to diversify one another, to some extent.

Lots of people (though clearly mistakenly) say 'my house is not an investment'. This is a relatively harmless error for people with low house values and big portfolio's otherwise. For people with significant house values relative to total worth it's a dangerous fallacy, because they are ignoring the *price risk* of their home investment. They can claim all they want to that 'I don't count that value in my NW' they will still be in a weaker financial position if it the house price drops, as they will be in their stock portfolio or other *investments* drop in value.
Your discussion is sound. I will concede that I am wrong. Buying a house is an investment which you can rent out for revenue. Living with a roof over one’s head is a consumption. By living in your house that you choose not to rent you are consuming your investment. This means a house you live in is an investment and a consumption item.

If that is where you stand as well, I now agree with that statement.
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Re: Buying vs. Renting Principles

Post by JackoC »

geerhardusvos wrote: Sun Sep 13, 2020 5:41 pm
JackoC wrote: Sun Sep 13, 2020 5:19 pm Lots of people (though clearly mistakenly) say 'my house is not an investment'. This is a relatively harmless error for people with low house values and big portfolio's otherwise. For people with significant house values relative to total worth it's a dangerous fallacy, because they are ignoring the *price risk* of their home investment. They can claim all they want to that 'I don't count that value in my NW' they will still be in a weaker financial position if it the house price drops, as they will be in their stock portfolio or other *investments* drop in value.
Most people disagree with you. Even when purchasing a home makes sense, it is critical to realize that a home purchase is mostly a consumption item, not an investment. Even if something has the potential to appreciate, does not mean that it is an investment.

https://www.whitecoatinvestor.com/buyin ... right-way/
https://www.moneyunder30.com/why-your-h ... investment
https://www.thesimpledollar.com/investi ... nvestment/
Many misconceptions are widely held. Plus one of your links again conflates 'is an investment' with 'is a good investment'. Buying a home to live in is definitely an investment, whether it's a good one is a more complicated question that depends on the situation. I think the origin of this misconception is often the belief potential homeowners can't understand the concept of an investment where part of the return is imputed rent consumed by the homeowner. IOW there is an element of consumption related to the investment, nobody denies this. But they decide 'let's just keep it simple for them and tell them it's a consumption item, period'. But this isn't correct, no matter who says it.

Again, where the 'house in not an investment' fallacy becomes dangerous is where the *investment* (which it absolutely is) is large. Then there is significant price risk after making the investment. This isn't true of actual consumption items like groceries, or even cars really. Only in exceptional cases, which tend to prove the rule, are people assuming a car's value will be stable relative to inflation rather than steadily declining even over a relatively few years. But people make the assumption of at least stable real value about home investments many times larger. And it's a reasonable *expectation*, but subject to variation because...it's a large additional *risk asset investment*, buying a home. Or again, if it's not really a big investment relatively for a particular person, they needn't worry as much if they are thinking of it correctly.
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Re: Buying vs. Renting Principles

Post by Keith43 »

People also never seem to take leveraging into account in these discussions. If you borrow 80% of the value for a house, you are making a massive amount of money on capital gain on borrowed money. The bank is much less likely to lend you hundreds of thousands of dollars to invest into Index funds.

In Auckland New Zealand, house prices have doubled every 10 years. The housing market is out of whack from normal economy. Renters have been completely left behind.
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Re: Buying vs. Renting Principles

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JackoC wrote: Sun Sep 13, 2020 5:19 pm
EnjoyIt wrote: Tue Sep 08, 2020 2:45 pm
JackoC wrote: Tue Sep 08, 2020 9:30 am
EnjoyIt wrote: Mon Sep 07, 2020 7:55 pm
adamthesmythe wrote: Mon Sep 07, 2020 4:55 pm
I think you do not want to understand.
If you DO maintain a house it usually keeps or increases in value. Hundred-year-old houses sell for good prices in older cities.
Please allow me to jump in.
Having a roof under one’s head is a consumption of resources. Either you rent or you buy, one needs to spend money to keep that roof over their head. In the terms of rent that is called rent. In the terms of buying, that is called taxes and maintenance. Also, if one does not keep maintaining one’s house, eventually that house becomes worthless. Even the government gives you a tax break on the depreciation of a home or rental property. They do this because they understand that over time, that building gets used up or consumed.

Sure, it is possible that someone buys a house and gets lucky where the land value the home is built on increases this was seen in the Bay Area in the past. Or one can get very unlucky and buy a home in Phoenix where the land value decreased in the recent past. Either way, over time the house that sits on that land gets used and slowly disintegrates over time unless more money is spent. The house becomes consumed.
The assets of the companies whose stocks one invests in are also 'consumable' by the same extension of the definition beyond the normal meaning (where consumables would be items like fuel, food, etc; not houses or the hard fixed assets of companies). By this extended definition virtually all investments are in 'consumable assets'. And ironically the one at least partial exception to this, land, is more important in home than stock investment.

Likewise with depreciation for tax purposes, aside from the humorous suggestion that tax code provisions are because 'the government understands' rather than the particular outcome of the political sausage making factory. :happy But in any case the assets of companies whose stock we buy are covered by similar tax provisions.

A house is a capital (long lived*) asset, the more so combined with land which is often the majority of the investment. It has a 'gross payout' to the owner/occupier of the rent avoided by occupying it. From which are subtracted operating costs (property tax, utilities a landlord would typically pay like sewer/water, maintenance, etc), and the opportunity cost of the capital you tie up in the house. The prospective buyer quantifies these for their particular case, then considers the expected price return of the asset. You don't know the actual future return of any risk asset by definition, stocks either. But still we must choose among them based on some judgement of relative expected returns.

Alternatively you can not invest in housing and rent instead. As others have noted this means you lose out financially if values and rents where you want to live rise faster than expected, and/or other use of the capital ends up with less return than expected. You win out financially if the reverse is true. In addition the relative magnitude of imputed and explicit rents and operating costs varies, there is no 'guideline' for this. Also, investments in housing and stocks are partial diversifiers for one another. There are potential indirect financial considerations (you can more easily move to take a better job as renter, you might avoid private school cost owning in an area with good public schools and no suitable rental options), and of course there are various potentially highly important non-financial considerations. But, no 'eureka moment' in realizing a house is 'consumable'.

*In Japan it's common for single family houses to be demolished after only 20-30 yrs but the vast majority of non-mobile home structures in the US last longer. And it must also be considered with respect to owner's expected holding period. My house is 120 yrs old and it should last centuries more, like stone/brick structures elsewhere that old, unless destroyed in a disaster. It's an essentially permanent asset v. my life expectancy.
I think you are confusing a house that you live in for an investment. I think this is a huge mistake. Yes the land a house is situated on can go up in value and has gone up significantly in parts of the US. It can become a great investment but by and large real estate value just keeps up with inflation while the house that sits on it slowly falls apart and needs upkeep to maintain value.

At the end of the day, we need to consume a place to live unless we want to live under a bridge we will pay money to do so. We can rent or we can buy and there are advantages to both. By renting we can take what would be the equity we don’t buy with and invest it elsewhere. If we buy we put a large chunk of our assets into a home and avoid investing that cash elsewhere. That’s it. There is nothing more special to this and depending on what wants to do they can run the math and see what is best for them. Sure someone can get lucky and the land they bought can go up in value which has happened to many in California. But let us remember the old adage, past result do not guarantee future returns.

Again, at the end of the day we will consume the houses resources but gladly spend money to renew those resources to keep the home functional.

I think the biggest discrepancy is that some believe that the house they live in is an investment and the other group is saying that it is not an investment...
No confusion on my part. The simple confusion on your part and some others seems to be defining 'investment' as 'good investment' whereby if one can question whether an investment will be a good one, that calls into question whether it's an investment at all. Forget the invisible 'good' you keep putting in front of 'investment', then arguing against. :happy

A house you also live in *is* an investment. That's not a matter of 'belief' but a simple fact. The idea that a property would be in an 'investment' if you rented it to somebody else, but isn't if you implicitly rent it to yourself is silly. Rather than 'confusion' this is perhaps just clearer to me since some properties I own to rent to others are relatively similar in size and age to my own house (though configured as multi-family whereas my house was converted back to its original ca. 1900 configuration as single family back some decades ago). They are all investments.

You invest capital in some combination of a home, a rental property, financial assets (stocks etc) or other. The major financial twist in case of owner occupied home is that you consume the owner imputed rent. Though you don't 'consume the house'. Again maybe this is just easier to see if you live in a house with indefinite lifespan like mine. I'm not literally consuming the building, I'm consuming the rent I could get from the building. Simply correct for that and everything else falls into place comparing owner occupied to rental real estate investments, and those two *investments* compared to others like financial assets (stocks, bonds etc). Aside from non-financial considerations, which can also be important for owned houses.

Whether an owned homed or rental property is a *good* investment compared to other ones all depends. Back on owner imputed rent, the bigger the rental value, the more consumption of owner imputed rent. But I believe only very naive homeowners ignore that. But correcting for owner imputed rent it's neither possible nor necessary to say if real estate is a 'better' investment than say stocks. Not possible: risk assets with by definition unknown future returns. Not necessary: you don't have to invest in just one or the other and they tend to diversify one another, to some extent.

Lots of people (though clearly mistakenly) say 'my house is not an investment'. This is a relatively harmless error for people with low house values and big portfolio's otherwise. For people with significant house values relative to total worth it's a dangerous fallacy, because they are ignoring the *price risk* of their home investment. They can claim all they want to that 'I don't count that value in my NW' they will still be in a weaker financial position if it the house price drops, as they will be in their stock portfolio or other *investments* drop in value.
While, as I noted above, I don't think that labels (i.e. is a house an investment or not) often matter much in personal finance, I think that this is one of the best posts in the buy vs. rent topic I've seen on this forum. Well done!

I have often scratched my head when, at least in other threads, posters have claimed that a property is an investment if they're renting it out but the house they live in is not an investment. Imputed rent is very real, and we're very much benefiting from it right now.
Last edited by willthrill81 on Sun Sep 13, 2020 8:25 pm, edited 1 time in total.
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Re: Buying vs. Renting Principles

Post by geerhardusvos »

000 wrote: Sun Sep 13, 2020 6:26 pm
geerhardusvos wrote: Sun Sep 13, 2020 5:48 pm Land is technically not an investment. It neither generates income, nor capital gain.
geerhardusvos wrote: Sun Sep 13, 2020 5:56 pm Appreciation in price does not equate to investment. See beanie babies, 1960s Porsches, and bitcoin.
Wow. Today I learned the most favored growth investment in human history is not an investment at all!

I assume you agree that a business generating cashflow from land is an investment, but the land itself is what? It's not consumed by the business unless the business chooses to "draw from principal" with unsustainable land practices. It has residual value even if the business ceases operation.

Do you think non-junk bonds are an investment? An investment in non-junk bonds today does not generate income in real terms and expecting capital gains from a bond is speculation (on interest rate movements), not investment.

Is stock the only thing defined as an investment in your worldview?
People will call anything that makes them money an investment, which is fine. Having studied economics in higher education, I was taught to see investments in terms of income and capital creation. Classically, businesses are in scope for investments as they are the only main vehicle for the creation of product and services (think GDP). If these companies grow and provide value, they are able to pay more to their shareholders in growth or in distributions/dividends. Bonds, Debt, REITs, etc. are all widely accepted types of investment alternatives since they pay you something in the form of interest or dividends.

Is owning a barrel of oil an investment? Is owning an ounce of gold an investment? Fine art, collectibles, etc.? These can be traded and owned for price speculation, but these do not create income or capital creation. Land is an interesting one, and the wealthy historically owned land because they would use it for business, like farming. Or for territory and military purposes. If you didn’t have land, you couldn’t conduct business. Land requires carrying or investment costs to make it valuable (other than its price speculation based on scarcity). One must create something on the land or use the land to generate income. This is just an economic perspective. Even historically, land that isn’t used for anything has no value, it’s value is because it has or has the potential for business or capital creation. If you build a house on the land to live there, it has value. It depreciates and requires maintenance. If you want to consider your house an investment, I understand that.

If you want to call land or commodities an investment, that’s fine, it’s just price speculation and hoping that it will be in greater demand someday so that you can sell it. Land can be transformed into something that generates cashflow unlike gold. But that takes investment and business. Holding such assets can work for some strategies, so I’m not against these things. They are just not technically investments in an economic sense. In a personal sense, they might make you money, like my neighbors 1960s Porsche that he bought for less than $20,000 which is now worth over $250,000. Is a Porsche a consumption good? Yes. Is it an investment? No. Not in the strict sense. Can it make you money? Yes. But it took a lot of maintenance and work to get it ready to sell, almost like a business :wink:
Last edited by geerhardusvos on Mon Sep 14, 2020 11:03 am, edited 3 times in total.
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Re: Buying vs. Renting Principles

Post by 000 »

geerhardusvos wrote: Sun Sep 13, 2020 8:24 pm People will call anything that makes the money in an investment, which is fine. Having studied economics in higher education, I was taught to see investments in terms of income and capital creation. Classically, businesses are in scope for investments as they are the only main vehicle for the creation of product and services (think GDP). If these companies grow and provide value, they are able to pay more to their shareholders in growth or in distributions/dividends. Debt, REITs, etc. are all widely accepted types of investment alternatives since they pay you something in the form of interest or dividends.

Is owning a bucket of barrel investment? Is owning an ounce of gold an investment? Fine art, collectibles, etc.? These can be traded and owned for price speculation, but these do not create income or capital creation. Land is an interesting one, and the wealthy historically owned land because they would use it for business, like farming. Or for territory and military purposes. If you didn’t have land, you couldn’t conduct business. Land requires carrying or investment costs to make it valuable (other than its price speculation based on scarcity). One must create something on the land or use the land to generate income. This is just an economic perspective. Even historically, land that isn’t used for anything has no value, it’s value is because it has or has the potential for business or capital creation. If you build a house on the land to live there, it has value. It depreciates and requires maintenance. If you want to consider your house an investment, I understand that.

If you want to call land or commodities an investment, that’s fine, it’s just price speculation and hoping that it will be in greater demand someday so that you can sell it. Land can be transformed into something that generates cashflow unlike gold. But that takes investment and business. Holding such assets can work for some strategies, so I’m not against these things. They are just not technically investments in an economic sense. In a personal sense, they might make you money, like my neighbors 1960s Porsche that he bought for less than $20,000 which is now worth over $250,000. Is a Porsche a consumption good? Yes. Is it an investment? No. Nothing the strict sense. Can it make you money? Yes. But it took a lot of maintenance and work to get it ready to sell, almost like a business :wink:
I think you are trying to win debates by inducing us to accept your redefinition of words, an all too common trend.

If I buy land for the purpose of farming it in 5 years, is that an investment? Or does it only become an investment when I start plowing?

If I start a business that generates negative cashflow and has a very high chance of achieving no capital gains, is that an investment?

If I open up a little shop buying and selling gold, is that an investment? All I am doing is trading commodities.
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Re: Buying vs. Renting Principles

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willthrill81 wrote: Sun Sep 13, 2020 8:23 pm

While, as I noted above, I don't think that labels (i.e. is a house an investment or not) often matter much in personal finance, I think that this is one of the best posts in the buy vs. rent topic I've seen on this forum. Well done!

I have often scratched my head when, at least in other threads, posters have claimed that a property is an investment if they're renting it out but the house they live in is not an investment. Imputed rent is very real, and we're very much benefiting from it right now.

willthrill81,


<<I don't think that labels (i.e. is a house an investment or not) often matter much in personal finance,>>


I disagreed. Folks that treat the house as an investment tend to assume some level of price appreciation and they tend to buy more houses. This label (investment) matters because it influences the price of the houses that someone buys.

I am not saying which point of view is correct. But, I am saying that it does influence someone's decision on the price of the house that they are willing to buy.

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Re: Buying vs. Renting Principles

Post by geerhardusvos »

willthrill81 wrote: Sun Sep 13, 2020 8:23 pm I have often scratched my head when, at least in other threads, posters have claimed that a property is an investment if they're renting it out but the house they live in is not an investment. Imputed rent is very real, and we're very much benefiting from it right now.
Owning a house can be a great long-term asset in many areas. Imputation in economics and personal finance is a very real thing. Imputed rent and income should not be overlooked in rent vs. buy calculations. If you have an ability to maintain your home without needing contractor help, this can be a form of imputed income. If I do the maintenance on the house that I rent, my landlord gives me a discount on rent. Same idea.
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Re: Buying vs. Renting Principles

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KlangFool wrote: Sun Sep 13, 2020 8:58 pm willthrill81,

<<I don't think that labels (i.e. is a house an investment or not) often matter much in personal finance,>>

I disagreed. Folks that treat the house as an investment tend to assume some level of price appreciation and they tend to buy more houses. This label (investment) matters because it influences the price of the houses that someone buys.
That's an example of a faulty assumption (i.e. assuming property appreciation will occur), not a result of placing the incorrect label on something.
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Re: Buying vs. Renting Principles

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geerhardusvos wrote: Sun Sep 13, 2020 9:30 pm
willthrill81 wrote: Sun Sep 13, 2020 8:23 pm I have often scratched my head when, at least in other threads, posters have claimed that a property is an investment if they're renting it out but the house they live in is not an investment. Imputed rent is very real, and we're very much benefiting from it right now.
Owning a house can be a great long-term asset in many areas. Imputation in economics and personal finance is a very real thing. Imputed rent and income should not be overlooked in rent vs. buy calculations. If you have an ability to maintain your home without needing contractor help, this can be a form of imputed income. If I do the maintenance on the house that I rent, my landlord gives me a discount on rent. Same idea.
Indeed. By doing all of the maintenance on our property except lawn mowing (my allergies prevent it), we save significant money and effectively earn a higher return from home ownership that we would otherwise. And I generally enjoy the work as well. It helps to keep me out of trouble. 8-)
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Re: Buying vs. Renting Principles

Post by geerhardusvos »

willthrill81 wrote: Sun Sep 13, 2020 9:54 pm
geerhardusvos wrote: Sun Sep 13, 2020 9:30 pm
willthrill81 wrote: Sun Sep 13, 2020 8:23 pm I have often scratched my head when, at least in other threads, posters have claimed that a property is an investment if they're renting it out but the house they live in is not an investment. Imputed rent is very real, and we're very much benefiting from it right now.
Owning a house can be a great long-term asset in many areas. Imputation in economics and personal finance is a very real thing. Imputed rent and income should not be overlooked in rent vs. buy calculations. If you have an ability to maintain your home without needing contractor help, this can be a form of imputed income. If I do the maintenance on the house that I rent, my landlord gives me a discount on rent. Same idea.
Indeed. By doing all of the maintenance on our property except lawn mowing (my allergies prevent it), we save significant money and effectively earn a higher return from home ownership that we would otherwise. And I generally enjoy the work as well. It helps to keep me out of trouble. 8-)
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Re: Buying vs. Renting Principles

Post by EnjoyIt »

KlangFool wrote: Sun Sep 13, 2020 8:58 pm
willthrill81 wrote: Sun Sep 13, 2020 8:23 pm

While, as I noted above, I don't think that labels (i.e. is a house an investment or not) often matter much in personal finance, I think that this is one of the best posts in the buy vs. rent topic I've seen on this forum. Well done!

I have often scratched my head when, at least in other threads, posters have claimed that a property is an investment if they're renting it out but the house they live in is not an investment. Imputed rent is very real, and we're very much benefiting from it right now.

willthrill81,


<<I don't think that labels (i.e. is a house an investment or not) often matter much in personal finance,>>


I disagreed. Folks that treat the house as an investment tend to assume some level of price appreciation and they tend to buy more houses. This label (investment) matters because it influences the price of the houses that someone buys.

I am not saying which point of view is correct. But, I am saying that it does influence someone's decision on the price of the house that they are willing to buy.

KlangFool
Personal finance has a very strong behavioral component. People do very well with the Snowball debt payment recommended by Dave Ramsey even though mathematically it is not the most ideal path to getting rid of debt.

Here, if one thinks of their house as solely a consumption they may buy a home that fulfills a need keeping costs down. On the contrary one may be buying too much house assuming a home is some great investment opportunity. This is why I have always in my mind considered my come a consumption item and ignored the imputes rent. The mind games worked for us even if my thinking was flawed.
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Re: Buying vs. Renting Principles

Post by hnd »

here in the midwest in a very modest cost of living area, renting a idential home to one you might buy is more expensive than buying buy a smidge.

property taxes, home maintenance, etc is all built into the renting price and you can easily fetch it in our market.

in a vaccum if at 25 i buy a house that will take care of me for the rest of my life and I pay no money down (1st time homebuyer) and 1500 a year for 30 years for that home. and after those 30 years, you live another 25 years to 80 paying property taxes which lets say are $3500 a year (the avg). Lets also say avg maintenance per year is around 4000 (also the Avg).

for the owner its - a total of 757,500 poured into that home and owns the investment.

If a renter finds the same home and the owner of that home is willing to rent that home to them for $1500 in perpetuity for the same 55 years with no increase in price the renter will have paid $990,000 in rent and doesn't have the home to leave at the end.

That is the baseline I use when talking about this. There are a million factors that sway each position to make more sense than the other. availability, family size, location, etc etc etc. clearly nobody typically lives in their first home. all that stuff . like i said in a vaccum that is likely very much tilted towards my area.

as a note: i owned a home that at retail would cost a person with good credit $900 a month, mortgage/taxes/insurance with a maintenance cost of around $1500 a year. I was able to rent that home out for $1300 a month.
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Re: Buying vs. Renting Principles

Post by oldfort »

VictoriaF wrote: Mon Sep 07, 2020 2:16 pm OP,
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
Renting is not insurance against black swans. One of the black swans to be concerned about is high inflation. Owning a home provides insurance against the black swan of high inflation and rising rents. Having a fixed rate mortgage provides greater protection against the black swan of high inflation because you can pay back the lender with devalued currency.
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Re: Buying vs. Renting Principles

Post by adamthesmythe »

EnjoyIt wrote: Mon Sep 14, 2020 12:06 am
KlangFool wrote: Sun Sep 13, 2020 8:58 pm
willthrill81 wrote: Sun Sep 13, 2020 8:23 pm

While, as I noted above, I don't think that labels (i.e. is a house an investment or not) often matter much in personal finance, I think that this is one of the best posts in the buy vs. rent topic I've seen on this forum. Well done!

I have often scratched my head when, at least in other threads, posters have claimed that a property is an investment if they're renting it out but the house they live in is not an investment. Imputed rent is very real, and we're very much benefiting from it right now.

willthrill81,


<<I don't think that labels (i.e. is a house an investment or not) often matter much in personal finance,>>


I disagreed. Folks that treat the house as an investment tend to assume some level of price appreciation and they tend to buy more houses. This label (investment) matters because it influences the price of the houses that someone buys.

I am not saying which point of view is correct. But, I am saying that it does influence someone's decision on the price of the house that they are willing to buy.

KlangFool
Personal finance has a very strong behavioral component. People do very well with the Snowball debt payment recommended by Dave Ramsey even though mathematically it is not the most ideal path to getting rid of debt.

Here, if one thinks of their house as solely a consumption they may buy a home that fulfills a need keeping costs down. On the contrary one may be buying too much house assuming a home is some great investment opportunity. This is why I have always in my mind considered my come a consumption item and ignored the imputes rent. The mind games worked for us even if my thinking was flawed.
I agree with EnjoyIt that thinking about a house as a consumption item can be a useful Jedi mind trick that helps some avoid buying too much house.
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