What are the financial risks of not owning a house?

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Archimedes
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Re: What are the financial risks of not owning a house?

Post by Archimedes »

Inflation is the big unknown. If inflation is high, it is great to be a homeowner as the house will go up in value along with inflation. If inflation is modest, then homeownership and renting tend to be more similar in terms of financial outcomes.

In a higher inflation environment, the leverage gained with a mortgage will multiply your inflation gains in a significant fashion. You pay perhaps a 20% down payment, but your inflation gain on that downpayment is magnified 5 fold. Example: buy a house for 100k with 20k down, and the house goes up 20% in value to 120k in 5 years. Your gain is not 20% though, it is 100% because you gained 20k in equity on a downpayment of 20k for a home valued at 100k.
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Watty
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Re: What are the financial risks of not owning a house?

Post by Watty »

mbasherp wrote: Thu Oct 15, 2020 3:43 pm I’ll say it again: imputed rent is tax free.
+1

Not only that but a paid house may also allow you to be in a very low or zero percent tax bracket.

An over 65 couple can have $40K in Social Security and $20K in taxable income and owe no federal income taxes.

Where I live, along with a paid off house that is enough to maintain roughly the same lifestyle as if you were making well over $100K a year when you were working and had a house payment, income taxes, FICA taxes, and retirement savings.

With the way Social Security is taxed the amount of taxes you would need to pay goes up sharply if you had more taxable income because you need to pay rent.
Wannaretireearly
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Re: What are the financial risks of not owning a house?

Post by Wannaretireearly »

TomatoTomahto wrote: Thu Oct 15, 2020 7:58 am IMO, renting should be the default position. If you have kids or a compelling desire to modify a house, go for it, but I don’t think it’s a financial “necessity.”
Good thought when I get tempted by vacation homes
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rascott
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Re: What are the financial risks of not owning a house?

Post by rascott »

As has been mentioned..... the answer to this is going to vary significantly by locale.

In my area (and most) owning makes more financial sense over a lifetime. As a longtime landlord, I'm here to tell you that nobody does the work and capital commitment of operating rental housing for charity. So across the total market, you are paying all the costs of a home plus a profit to a landlord. Over a lifetime this is likely to end up being a huge amount of money.

There are many exceptions to this.... if you are someone that's likely to move often, the transaction costs can eat into this "profit ". Also there are certain markets where fundamentals are flipped on their head, and it is possibly cheaper to rent, long-term. These are typically VHCOL areas where landlords are speculating on appreciation, not renting for cash- flow. This isn't the norm in most of the country.

I know if I didn't start on the home ownership train some 17+ years ago (and now into my 5th personal home) I would be significantly poorer on paper and in lifestyle.
Trader Joe
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Re: What are the financial risks of not owning a house?

Post by Trader Joe »

"What are the financial risks of not owning a house?"

There are no (zero) financial risks to not owning a house.
anoop
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Re: What are the financial risks of not owning a house?

Post by anoop »

Trader Joe wrote: Thu Oct 15, 2020 8:08 pm "What are the financial risks of not owning a house?"

There are no (zero) financial risks to not owning a house.
Tell that to someone who has been renting in Palo Alto since the 80's. :)

The main risk is that if you're in a locale where prices and rents are moving up fast, you might get priced out. If you own, depending on what state you're in (I'm thinking prop 65 type stuff where your taxes are capped), you might be able to live there despite prices going up.

Overall, I think financial risks of renting are low, but not zero.
michaeljc70
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Re: What are the financial risks of not owning a house?

Post by michaeljc70 »

rascott wrote: Thu Oct 15, 2020 8:05 pm As has been mentioned..... the answer to this is going to vary significantly by locale.

In my area (and most) owning makes more financial sense over a lifetime. As a longtime landlord, I'm here to tell you that nobody does the work and capital commitment of operating rental housing for charity. So across the total market, you are paying all the costs of a home plus a profit to a landlord. Over a lifetime this is likely to end up being a huge amount of money.

There are many exceptions to this.... if you are someone that's likely to move often, the transaction costs can eat into this "profit ". Also there are certain markets where fundamentals are flipped on their head, and it is possibly cheaper to rent, long-term. These are typically VHCOL areas where landlords are speculating on appreciation, not renting for cash- flow. This isn't the norm in most of the country.

I know if I didn't start on the home ownership train some 17+ years ago (and now into my 5th personal home) I would be significantly poorer on paper and in lifestyle.
+100. And sometimes not just a landlord, but also a property management company.

There are always exceptions. If you don't think you will be in a place at least 5-10 years, it could make sense to rent. If you hate taking care of anything and accept the price of convenience, it might make sense to rent. Let's face it....most people are better off buying. It is like leasing a car. There are exceptions, but most people are better off buying. There are abnormalities that enter rental/buying markets over the short term, but over the long term they usually even out.

A lot of the studies that compare buying vs. renting use averages. I like to think I (and most Bogleheads) are above average in intelligence. If you avoid buying in the worst properties in the worst places it is not that hard to come out ahead buying. Obviously this is not entirely black and white.

I guess what I am saying is the smartest renter may come out ahead of the dumbest buyer. But most people buying investment property (putting up the capital) are not idiots doing it for charity. They will charge you for it.
harrychan
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Re: What are the financial risks of not owning a house?

Post by harrychan »

The financial risk of not owning a home is that you are subject to the market and landlords on the quality of the residence and the cost. When you own a home you shift that control to yourself. I rented up to when I was in my 30s and I never lasted more than 18 months at the same place due to raise in rent or intrusive landlords who constantly requested access to inspect the property. It's nice to know my mortgage won't change for the next 10+ years.
This is not legal or certified financial advice but you know that already.
Tattarrattat
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Re: What are the financial risks of not owning a house?

Post by Tattarrattat »

Owned a house 21 years. Sold last year. Calculated the appreciation for the 21 years at 3.1% per year. Not too bad. Then subtracted 100s of thousands of dollars of taxes, repairs, maintenance, etc. Doing the math, would've come out far ahead renting the same house and investing the capital in sp500. Financially, renting vs owning comes down to which market does better, stocks or real estate. Renting now, it's a relief not having all the headaches and responsibilities. Lifestyle choice.
phxjcc
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Re: What are the financial risks of not owning a house?

Post by phxjcc »

The financial risk is rising rent vs. rising income.

Say rent goes up 5%/yr.

There doubles in 15 years and quadruples in 30 years.

Do the “age in bonds” arithmetic and determine the amount of portfolio depletion.
Rudy Tooty
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Re: What are the financial risks of not owning a house?

Post by Rudy Tooty »

I asked the same question when I bought a home in the late 90's. Do I really need one? Looking back, it was probably the best financial decision I've made. If I sold today the equity accumulated would cover all the mortgage payments, property taxes, upgrades and repairs 2 or 3 times over. The privacy of living in a home as opposed to renting an apartment is a consideration too. I've lived in apartments where the neighbor noise was unbearable. How much value is your quality of life worth? Granted, it is a big decision with many associated variables and a risk. So is life.
Monsterflockster
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Re: What are the financial risks of not owning a house?

Post by Monsterflockster »

anoop wrote: Thu Oct 15, 2020 8:19 pm
Trader Joe wrote: Thu Oct 15, 2020 8:08 pm "What are the financial risks of not owning a house?"

There are no (zero) financial risks to not owning a house.
Tell that to someone who has been renting in Palo Alto since the 80's. :)

The main risk is that if you're in a locale where prices and rents are moving up fast, you might get priced out. If you own, depending on what state you're in (I'm thinking prop 65 type stuff where your taxes are capped), you might be able to live there despite prices going up.

Overall, I think financial risks of renting are low, but not zero.
This.

We lived in Silicon Valley and for the last 8 years before we bought the landlord raised rent 10-20% a year. We had enough & purchased a home.

One thing you can count on in the Bay Area is rent going up.
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StevieG72
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Re: What are the financial risks of not owning a house?

Post by StevieG72 »

The confirmation bias with this topic is thick!
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FIREchief
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Re: What are the financial risks of not owning a house?

Post by FIREchief »

Coltrane75 wrote: Thu Oct 15, 2020 9:24 am Power/Control: One thing to consider though is buying a home can lead to the ultimate goal of owning the home outright. Then you'll never need to worry about a bank (debtor's prison) or landlord (tenant) effecting your living arrangements.
I once owned a home outright. Had it built new and stayed there for over 20 years. Of course, by that point, the house was paid for but it "required" remodels for three bathrooms and a kitchen. I just sold it instead. Now I rent a place that was built only a few years ago and doesn't need anything. If it does, I just "call the guy." 8-) (I don't have to worry about the forced moving because I rent in a complex)
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zeal
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Re: What are the financial risks of not owning a house?

Post by zeal »

It all depends on the price you get a house for, but renting isn't always cheaper as most of these other posts assume. As a landlord, you want to set your rent based on PITI + x% for maintenance costs + x% for vacancy. So as a tenant you're still paying for the home's maintenance, you're just not doing the work yourself or paying contractors directly.

When I moved from a 2/1 apt in a rough neighborhood to a 3/1 house in a nice neighborhood, my PITI (and PMI) was $200/mon cheaper than rent. $200/mon toward maintenance was a lot. Over the 5 years I spent there, I averaged $125/mon on all maintenance + renovations. Utilities difference was about $10/mon. So, buying a house (at a good price of course) saved me $65/mon and, on top of that, I made a nice chunk when I sold the place. Renting isn't always cheaper.
SovereignInvestor
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Re: What are the financial risks of not owning a house?

Post by SovereignInvestor »

There are risks especially if one doesn't save the money they are saving by not having to pay PITI and instead only rent.

Talk to someone with middle class income l in SF or NYC who rented for 30+ years and didn't save enough money and their rent has skyrocketed. They rent surges may price them out of being able to afford to stay but if they owned they would have somewhat locked in affordability. Yes of course if someone saved and invested the difference in rent vs owning years ago then they'd have enough wealth to pay the high rent so the real risk is what I mentioned in first paragraph.

High inflation in housing costs in desired area to live is the big risk. High overall inflation may lead to higher interest rates which may keep a lid on how high houses appreciated but since many purchase on leveraged fashion any inflation increase is helpful.
TropikThunder
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Re: What are the financial risks of not owning a house?

Post by TropikThunder »

SovereignInvestor wrote: Sat Oct 17, 2020 6:15 am There are risks especially if one doesn't save the money they are saving by not having to pay PITI and instead only rent.
I always laugh when I read comments like that. With my most recent refinance, the PITI on my 1,800 sq ft 3/2.5 townhouse in a Seattle suburb is $1,737. Compare that to the $1,750 rent for the 817 sq ft 2/2 apartment we moved to the house from. What was that again about investing the money you save by renting?
KarenC
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Re: What are the financial risks of not owning a house?

Post by KarenC »

Kelrex wrote: Thu Oct 15, 2020 11:35 am
rgs92 wrote: Thu Oct 15, 2020 8:44 am Thanks for all the quick replies. I did mean just living your life all the way through retirement (and in retirement) without a house.
I always heard that owning a house was an important component of wealth (or just financial well-being), and inflation protection.
But I sold my house and I'm now renting, and it seems simpler with no maintenance headaches, so I'm thinking of just not buying a house.
[…]

When you are renting, you are much less likely to go bigger than you need, because you can always upsize and don't want to throw away money, so a guest bedroom for occasional guests feels much less compelling when you don't strictly need it and have to pay 30% more rent to get it.

You also don't tend to get sucked into caring about the materials that your countertops are made of, and might hesitate to "invest" in things like handcrafted artisan furniture, which might not work in the next place.
Renting gives you a bit of detachment from the powerful home-consumerism forces that make a home feel like an extension of self.

[…]
+1

IMHO, this is the biggest advantage of renting.
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tj
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Re: What are the financial risks of not owning a house?

Post by tj »

So, you need to live somewhere.

The financial risk of not owning real property is that the cost of renting is going to eventually increase more than the cost of owning.
The financial risk of owning real property is that the cost of owning is going to eventually increase higher than the cost of renting.

It's a crapshoot. You probably should be considering non-financial reasons.


As I find myself moving back to California I can

A.) Rent a nice 1bedroom apartment that is a few years old for around $2500/mo.
B.) Purchase a decent 1 bedroom condo that is 15 years old for around $400,000. My monthly cost would be around $2800/mo with a 5% down payment (to hedge against immediate crash in value) - but the government subsidizes it to some extent because the property taxes, interest and PMI added to state income taxes are going to be over the $12,0000 standard deduction. I also lose out on the dividends or interest that the down payment would have produced.

If there's a massive special assessment, it could take quite some time for owning to catch up with renting. If there's a low dollar special assessment, it's not really a factor.

Renting also gives the freedom to relocate to a different part of town, or different city entirely. Or even if you don't like your neighbor and want to try a different unit in the same building.

It's not an easy financial decision, but if you prefer renting, I don't see why you would stop.
CurlyDave
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Re: What are the financial risks of not owning a house?

Post by CurlyDave »

Ryzen wrote: Thu Oct 15, 2020 8:52 am The problem with this forum is we try to turn almost everything into a financial decision. This is a lifestyle and personal preference decision. Personally, I like having my own space and if I happen to get any financial gain from owning a house, that's just a bonus...
+1

I really enjoy the advantages of owning my home. If I want to nail my workbench to the garage walls no one can tell me not to. If I want to let the kids dig a hole in the back yard--go right ahead. If I want to rebuild and upgrade the diesel engine on my F 250 in the garage, it might take all winter, but no one can tell me it is not allowed.

The fact that ALMOST everyone who owns a home benefits financially is just icing on the cake. I also own investment properties, but this is a risk I chose to take and it paid off.

But I think many people can meet their financial goals without home ownership.
mr_brightside
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Re: What are the financial risks of not owning a house?

Post by mr_brightside »

like anything complicated in life : 'it depends'

house 1 : basically broke even when we sold / nominal gain

house 2 : made ridiculous 'profit' on the home sale (6 figures)

house 3 : home depreciated almost $50k in the decade + we lived there

currently renting and we are fine with it because it puts us in an outstanding school district that I would not feel comfortable buying in on a single income due to the crazy high home prices ($1Mil wouldn't get you much...)

as always -- you have to do your due diligence and make the best decision that fits your scenario
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Chelsea Swagger
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Re: What are the financial risks of not owning a house?

Post by Chelsea Swagger »

This thread made me sign up but my thoughts:

It's really a lifestyle choice as mentioned. A friend of mine once joked that he could do the things he wanted to do because he was single, childless, and rented. If you're someone who is planning on moving within the next year or two, nothing wrong with renting. It's also useful if you move around constantly or if you're single. But once you have someone in your life or you end up somewhere long term, it makes more sense to own.

I just bought my first home last year after several years of renting and quite frankly, I'm amazed I didn't do it sooner. I've had to remind myself that if I could do what I'd like to my own. Want to change the floor in a room? Go ahead. Change the faucet and the sink? Go for it. And most importantly, I don't have to worry about neighbors too much compared to an apartment.
tj
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Re: What are the financial risks of not owning a house?

Post by tj »

Chelsea Swagger wrote: Tue Oct 20, 2020 2:01 pm This thread made me sign up but my thoughts:

It's really a lifestyle choice as mentioned. A friend of mine once joked that he could do the things he wanted to do because he was single, childless, and rented. If you're someone who is planning on moving within the next year or two, nothing wrong with renting. It's also useful if you move around constantly or if you're single. But once you have someone in your life or you end up somewhere long term, it makes more sense to own.

I just bought my first home last year after several years of renting and quite frankly, I'm amazed I didn't do it sooner. I've had to remind myself that if I could do what I'd like to my own. Want to change the floor in a room? Go ahead. Change the faucet and the sink? Go for it. And most importantly, I don't have to worry about neighbors too much compared to an apartment.
It depends on the type of property you buys. Most condos will have neighbors at the same proximity as most apartments.
TallBoy29er
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Re: What are the financial risks of not owning a house?

Post by TallBoy29er »

After 15 years of home ownership, we are full time renters (with kids). I've read more in the last year than I have in the last 5. No yard work. No painting. No fixing things. Etc etc etc. Point is, I have SO much more free time. I know that it is not for all, but right now, renting is GLORIOUS!
michaeljc70
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Re: What are the financial risks of not owning a house?

Post by michaeljc70 »

TallBoy29er wrote: Tue Oct 20, 2020 5:52 pm After 15 years of home ownership, we are full time renters (with kids). I've read more in the last year than I have in the last 5. No yard work. No painting. No fixing things. Etc etc etc. Point is, I have SO much more free time. I know that it is not for all, but right now, renting is GLORIOUS!
Had you considered hiring someone to do painting and yard work and fixing things which is essentially what you did when you started renting? Surely You don't think the landlord is doing that for free.
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FelixTheCat
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Re: What are the financial risks of not owning a house?

Post by FelixTheCat »

You reminded me of a financial class I took. Part of it was "The American Dream." The instructor mentioned the US has been indoctrinated in believing everyone should own a home. The reason was most people will buy a home but most people don't invest. The home was their way of saving.

You can rent. Just make sure you are investing for your future.
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willthrill81
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Re: What are the financial risks of not owning a house?

Post by willthrill81 »

mbasherp wrote: Thu Oct 15, 2020 3:43 pm I’ll say it again: imputed rent is tax free.
And it's adjusted for inflation. Not counting property appreciation, we're getting about a 4% real return on our home equity via imputed rent. That's very respectable these days.
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rich126
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Re: What are the financial risks of not owning a house?

Post by rich126 »

Owning a home can be a good/great investment but I think it is more of a psychological thing as well. Most people are nesters, homebodies and moving is a very stressful event. It is nice to have a place you know is yours especially as you get older. Not too many people in their 60s+ want to move around frequently which is a risk if you rent from a non-apartment dwelling.

For the first time since sometime in the 1990s I don't own a home. Back then I had sold my house and took my time looking for a new one while crashing at a coworker's place. A little over a year ago I owned 2 homes so it feels strange to own nothing.

Obviously not having any financial commitments for repairs, utilities, etc. is nice (I'm crashing at my GF's place while I look for a job out of state) I feel kind of "lost". I figured near retirement I would have my life figured out but little did I know.

I do think depending on the area the longer you wait to buy the more likely housing prices will rise faster than your savings. But as others said, if you buy and then need to sell in a few years unless the market is very strong, you'll likely lose some money especially if you have to pay commissions on selling it.

Prices can vary significantly depending on the location and economy. I've had places that doubled in 5 years and then fall nearly 50% in a couple of years. This year things have gone up around my prior house by 30%.

Some renters will forever stick to saying renting is best, owners will prefer owning. It might also be, as I mentioned in the beginning, a personality thing. Some never feel any kind of attachment to a house, it is just a house, others get attached to neighbors, neighborhoods, and to memories in the house.

I thought I would be sadder than I was in selling my last home since it was a great location in Scottsdale and I had great memories when I lived there previously (then rented it out for 8 years) but when I returned it just felt different. Maybe because I want to buy something that involves my GF so we can retire in "our" place and not just mine. She never said anything so maybe it didn't matter to her.
TallBoy29er
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Re: What are the financial risks of not owning a house?

Post by TallBoy29er »

michaeljc70 wrote: Tue Oct 20, 2020 5:54 pm
TallBoy29er wrote: Tue Oct 20, 2020 5:52 pm After 15 years of home ownership, we are full time renters (with kids). I've read more in the last year than I have in the last 5. No yard work. No painting. No fixing things. Etc etc etc. Point is, I have SO much more free time. I know that it is not for all, but right now, renting is GLORIOUS!
Had you considered hiring someone to do painting and yard work and fixing things which is essentially what you did when you started renting? Surely You don't think the landlord is doing that for free.
Yard work hiring is easy. Done! Continually keeping up with a 112 year old house (yes, built in 1908), not so much. If there was an "easy button" to hit that would have someone come and fix the continual problems without tracking down contractors, I missed it.

Not sure why you are getting contentious. I think I said that renting was not for all. And even a guy as dumb as me realizes that I am paying for these things in rent. It's just that someone else is dealing with the issues, not me. And I consider my "found time" to be AMAZING.

peace out-
michaeljc70
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Re: What are the financial risks of not owning a house?

Post by michaeljc70 »

TallBoy29er wrote: Tue Oct 20, 2020 7:39 pm
michaeljc70 wrote: Tue Oct 20, 2020 5:54 pm
TallBoy29er wrote: Tue Oct 20, 2020 5:52 pm After 15 years of home ownership, we are full time renters (with kids). I've read more in the last year than I have in the last 5. No yard work. No painting. No fixing things. Etc etc etc. Point is, I have SO much more free time. I know that it is not for all, but right now, renting is GLORIOUS!
Had you considered hiring someone to do painting and yard work and fixing things which is essentially what you did when you started renting? Surely You don't think the landlord is doing that for free.
Yard work hiring is easy. Done! Continually keeping up with a 112 year old house (yes, built in 1908), not so much. If there was an "easy button" to hit that would have someone come and fix the continual problems without tracking down contractors, I missed it.

Not sure why you are getting contentious. I think I said that renting was not for all. And even a guy as dumb as me realizes that I am paying for these things in rent. It's just that someone else is dealing with the issues, not me. And I consider my "found time" to be AMAZING.

peace out-
Contentious? :oops:
dziuniek
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Re: What are the financial risks of not owning a house?

Post by dziuniek »

I mean you could own a rental without owning a primary residence. - that would mitigate some 'risk' if you believe such exists.

I agree that it's mostly a lifestyle decision.
stoptothink
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Re: What are the financial risks of not owning a house?

Post by stoptothink »

dziuniek wrote: Wed Oct 21, 2020 8:38 am I mean you could own a rental without owning a primary residence. - that would mitigate some 'risk' if you believe such exists.

I agree that it's mostly a lifestyle decision.
My brother has owned a rental without owning a primary residence for about a decade. Not that his anecdote has anything to do with anything but him, but what a (financial) disaster that has been.
dziuniek
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Re: What are the financial risks of not owning a house?

Post by dziuniek »

stoptothink wrote: Wed Oct 21, 2020 8:39 am
dziuniek wrote: Wed Oct 21, 2020 8:38 am I mean you could own a rental without owning a primary residence. - that would mitigate some 'risk' if you believe such exists.

I agree that it's mostly a lifestyle decision.
My brother has owned a rental without owning a primary residence for about a decade. Not that his anecdote has anything to do with anything but him, but what a (financial) disaster that has been.
Oh, I've heard my share of stories too :)

Another anecdotal experience is my neighbor drinking buddy.

He's been making $400-500 per month from each of his 2 rentals in the area up until this year. He sold both after holding them for around 5 years.

The price has shot up that he couldn't ignore it :)

Also needed cash to buy a factory building / warehouse for his company.

So success stories exist also :)

Personally though, if you want some exposure to residential real estate - primary residence is probably the easiest way to do it.
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SmileyFace
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Re: What are the financial risks of not owning a house?

Post by SmileyFace »

Someone up-thread already mentioned inflation - that is likely your biggest risk. When you retire, inflation + Housing-Cost increases due to your chosen Locale can really take a toll on fixed income. Nicely - Inflation doesn't increase the size/payment of your mortgage (just increases Taxes which are usually a fraction of Rent). Some folks get priced out and are forced to move. Since inflation has been so low for so many years folks no longer seem in tune with how bad inflation can be. Of course if your financial plan includes renting forever (with said increases in costs) and you have plenty of money to accommodate ever-increasing rental-costs you have negated these risks.
A paid off house certainly frees up cash-flow to use towards other expenses. With my home - a 15 year mortgage + taxes (PITA) was roughly equal to rental costs of the same home when we bought. Now that the mortgage is paid off it is thousands cheaper (still have to account for maintenance and taxes) than had I been renting all along. Someone else upthread mentioned they like to rent because their landlord pays for all their maintenance - with a paid-off home and zero rental costs I can certainly afford to hire out all maintenance myself at this point. With as much equity as we have in our home now we could also retire early very comfortably by selling our home and moving to a LCOL area. (in another thread I labeled this RE-FIRE - Relocation-Enabled FIRE).
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Re: What are the financial risks of not owning a house?

Post by dziuniek »

Like the poster above mentioned.... local inflation + RE appreciation.

LA / sunny California is probably a good case study of an area where houses used to be somewhat affordable to crazy expensive now. :)
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Re: What are the financial risks of not owning a house?

Post by michaeljc70 »

TropikThunder wrote: Sun Oct 18, 2020 1:40 am
SovereignInvestor wrote: Sat Oct 17, 2020 6:15 am There are risks especially if one doesn't save the money they are saving by not having to pay PITI and instead only rent.
I always laugh when I read comments like that. With my most recent refinance, the PITI on my 1,800 sq ft 3/2.5 townhouse in a Seattle suburb is $1,737. Compare that to the $1,750 rent for the 817 sq ft 2/2 apartment we moved to the house from. What was that again about investing the money you save by renting?
But were both properties worth roughly the same amount? There can be a ton of reasons why you are paying roughly the same owning vs. renting even though the owned property is much bigger. Was the rental in the same suburb and neighborhood? Was the quality of the place the same? Did you account for the opportunity cost of your down payment (which could be invested if you rent)? Often when comparing renting vs buying we aren't comparing apples to apples. I think it is generally beneficial to buy for the long term but there are regional and/or cyclical exceptions.
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Re: What are the financial risks of not owning a house?

Post by Traveller »

TallBoy29er wrote: Tue Oct 20, 2020 7:39 pm
Yard work hiring is easy. Done! Continually keeping up with a 112 year old house (yes, built in 1908), not so much. If there was an "easy button" to hit that would have someone come and fix the continual problems without tracking down contractors, I missed it.
I discovered the "easy button" a few years ago when a friend referred me to a home services company that does exactly what you were looking for. The owner of the company is a licensed builder who has a handful of handyman-types who work for him. Plus he has developed a network of contractors in the area. Any home related issue that comes up, I call him and he makes sure it gets resolved. For example, I decided I no longer wanted to take care of the yard, so I call Phil. Done. We had a drainage problem in part of our property that I didn't know where to even start, so I call Phil. Done. We needed some paint work done so I call Phil. We had an appliance die, so I call Phil. Carpets need cleaning? Call Phil. You get the gist. Plus his teams hourly rate for work they do is very competitive, and I pay cost when he outsources to a contractor (I'm sure he gets a percentage back from his preferred contractors). He consolidates invoices so I only have to pay him when the job is done.

I've always enjoyed home ownership, but this has removed most all of the negatives for me!
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Re: What are the financial risks of not owning a house?

Post by ginmqi »

fyre4ce wrote: Thu Oct 15, 2020 2:15 pm Financial risks of renting:
  • Rents can increase, sometimes quickly. This could be partially mitigated by laws and/or long-term leases.
  • You could be outright evicted and need to move, possibly on short notice, with attendant financial impacts.
  • The money you would otherwise have tied up in home equity could be invested in risky assets (eg. stocks), and thus could have risk attached to it indirectly.
  • You lose out on the tax advantages of owning, the most significant of which is the $250,000/$500,000 homeowner's exclusion on capital gains.
  • You lose out in the inflation protection of a long-term fixed-rate mortgage.
  • You have no equity you can borrow against (eg. HELOC) at a decent interest rate, if you need cash quickly. If you otherwise have investments you can borrow against, this risk could be partly mitigated.
  • There could be risks associated with a landlord - damaging your property, sticking you with repair charges, not returning deposits, etc.
Financial risks of owning:
  • You will have an expensive un-diversified investment that is heavily tied to the local, state, national, and global economy and government. If you have a mortgage, this investment is leveraged, which amplifies both the upside and downside. Some of this risk (eg. fire, flood) can be mitigated a great deal with insurance. Other parts (eg. declining values) are unmitigated, although in a non-recourse state, the downside loss is limited mostly to your equity.
  • Transaction costs are high, so if you have to move (especially after not having lived in the home a while) then you can possibly lose money.
  • If you have a variable rate mortgage, rates could increase.
  • Property taxes could increase. Some areas have laws limiting the rate of increase.
  • You could be faced with expensive repairs on the home: structural, roof, HVAC, plumbing, electric, etc etc. I recall a horror story here on BH where a forum member progressively discovered structural and code issues in their home that ended up costing over $1M to fix. It's difficult or impossible to borrow money against a home that's not in good shape. If I recall, he was finally able to find a lender of last resort, and was narrowly able to avoid emptying retirement accounts or walking away from the home, both of which could have amplified the loss. Fortunately, problems of that scale are rare. More common expensive repairs are in the 4 or low-5 figure range.
  • You could face compliance issues with building codes that could be expensive to fix.
  • Someone could get hurt on your property, resulting in a liability claim. Someone can get hurt and sue you in your rental too, but it seems less likely. This risk can be mitigated by insurance.
That's all I can think of. Overall, the risks of owning seem higher to me, although it is situational. And undoubtedly, the upsides of owning are far higher than renting.
Great post!

Another risk of owning a home I would say is this:

- The temptation to buy/do things more than you can truly afford because you have "equity" in your home. People always talk about how owning a home usually means building equity/wealth...well it's not like if your house steadily gains market value that you suddenly have additional extra cash each month equal to your home value gains in your bank account...you need to pay someone else to access that equity with a HELOC. And if you sell the home and make money...you still need to buy another home or find another housing option which can incur lot of transactional cost and headaches. And when do you sell your home to realize your wealth gains? You'll have to "time" the real estate market.

IMO, home ownership is LARGELY a lifestyle and luxury spending item and should not be viewed as a major investment item. This is why to me personally I do not really see the rationale in including your home as part of your net worth....but this may be another thread topic....
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Re: What are the financial risks of not owning a house?

Post by NearlyRetired »

ginmqi wrote: Thu Oct 22, 2020 9:26 am Great post!

Another risk of owning a home I would say is this:

- The temptation to buy/do things more than you can truly afford because you have "equity" in your home. People always talk about how owning a home usually means building equity/wealth...well it's not like if your house steadily gains market value that you suddenly have additional extra cash each month equal to your home value gains in your bank account...you need to pay someone else to access that equity with a HELOC. And if you sell the home and make money...you still need to buy another home or find another housing option which can incur lot of transactional cost and headaches. And when do you sell your home to realize your wealth gains? You'll have to "time" the real estate market.

IMO, home ownership is LARGELY a lifestyle and luxury spending item and should not be viewed as a major investment item. This is why to me personally I do not really see the value in including your home as part of your net worth....but this may be another thread topic....
So very true. I remember in the 80's when house prices here were going through the roof and everyone was saying how much more their house was worth, but never stopped to realise that if their property had risen by 20% the next move "up" would also have risen by a similar percentage and was now even more expensive with a larger gap to fund.

The only time you can truly realise your gains is when you sell down, and as you point out that could be "timing" the market!
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Re: What are the financial risks of not owning a house?

Post by hightower »

TomatoTomahto wrote: Thu Oct 15, 2020 7:58 am IMO, renting should be the default position. If you have kids or a compelling desire to modify a house, go for it, but I don’t think it’s a financial “necessity.”
Agreed. And, in fact, I would say most people end up losing quite a bit more money to the pursuit of home ownership than they would if they had just rented their whole lives. For me, owning a home is a burden. It's nice to come home to a place that I have full control over, but it also means I'm a slave to whatever the house needs. We have 2 aging HVAC systems right now and an aging water heater for instance. That's easily 25k or more of liability hanging over my head at the moment. We also have a very complex, expensive to replace septic system that could easily cause expensive headache if it wants to. This is all in addition to my PITI.
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Re: What are the financial risks of not owning a house?

Post by hightower »

tibbitts wrote: Thu Oct 15, 2020 8:30 am [quote=BrooklynInvest post_id=5548333 time=1602767633 user_id=46423
BEHAVIORAL: I don't want to be paying rent in my 70s, but that's just me.
Unfortunately you will be paying rent, in the form of real estate taxes, city/town fees, home insurance, repairs, etc.
[/quote]

Exactly. There's no escaping it unless you live off grid, illegally and homestead/live off the land.
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Re: What are the financial risks of not owning a house?

Post by hightower »

adamthesmythe wrote: Thu Oct 15, 2020 10:55 am I perceive the major financial risk as high inflation rate in rents.

The main annoyance risk is finding yourself required to move involuntarily.

The main psychological risk is lack of control over your personal environment.

Especially in retirement, a perceived financial benefit of renting is lower cost which may not prevail long-term.
If you stop paying your mortgage or your taxes you'll learn very quickly that you actually don't have as much control of your personal environment as you may think;)
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Re: What are the financial risks of not owning a house?

Post by ginmqi »

NearlyRetired wrote: Thu Oct 22, 2020 9:35 am
ginmqi wrote: Thu Oct 22, 2020 9:26 am Great post!

Another risk of owning a home I would say is this:

- The temptation to buy/do things more than you can truly afford because you have "equity" in your home. People always talk about how owning a home usually means building equity/wealth...well it's not like if your house steadily gains market value that you suddenly have additional extra cash each month equal to your home value gains in your bank account...you need to pay someone else to access that equity with a HELOC. And if you sell the home and make money...you still need to buy another home or find another housing option which can incur lot of transactional cost and headaches. And when do you sell your home to realize your wealth gains? You'll have to "time" the real estate market.

IMO, home ownership is LARGELY a lifestyle and luxury spending item and should not be viewed as a major investment item. This is why to me personally I do not really see the value in including your home as part of your net worth....but this may be another thread topic....
So very true. I remember in the 80's when house prices here were going through the roof and everyone was saying how much more their house was worth, but never stopped to realise that if their property had risen by 20% the next move "up" would also have risen by a similar percentage and was now even more expensive with a larger gap to fund.

The only time you can truly realise your gains is when you sell down, and as you point out that could be "timing" the market!
Another great point. If your home value is up...then likely your neighborhood homes also value went up. And unless you are willing to "step down" to another locale or to a smaller home, you won't truly realize the "gains" since the tide lifts many boats in this scenario.

And if you do "step down" to a locale or a smaller home...then where does it end? Your gains would be smaller with each home sell and purchase until maybe you have to start an instagram and start that #VanLife? :wink:
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Re: What are the financial risks of not owning a house?

Post by michaeljc70 »

Some of the comments are interesting. You should expect more maintenance costs and issues if you buy a 100+ year old home, a home with a complex septic system, a home in a flood plain, a home with asbestos, a home with a swimming pool, etc.

Most major systems and appliances should last 10-20 years or longer. By finding out the age of the roof, windows, appliances, HVAC, water heater, etc. on a potential home you should be able to get an idea of maintenance costs. Of course things can randomly pop up that you didn't expect. I had to replace a not so old large French door with side lights and a transom window because it wasn't installed properly originally and leaked.

The three places I've owned were newer places (<20 years old) and maintenance and maintenance costs were very low. If you have no DIY skills and have to hire someone for every little thing that can increase costs a lot.

Buying a townhouse/condo can eliminate pretty much all of the exterior maintenance. Of course, you pay for it in assessments.
Last edited by michaeljc70 on Thu Oct 22, 2020 10:22 am, edited 1 time in total.
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Re: What are the financial risks of not owning a house?

Post by aj76er »

People will say that housing is an inflation hedge, but only the debt (via mortgage) stays fixed against future inflation. Other home ownership costs such as property taxes, maintenance, HOA fees, and insurance all go up with inflation. Have a look at how property tax rates and independent contractors rates have increased in your area; in many areas of the country these are rising much faster than CPI-U.
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Re: What are the financial risks of not owning a house?

Post by Super Hans »

Eight years ago, I asked in one of my first Bogleheads posts if I had to buy a house:

viewtopic.php?f=2&t=99933

I never did. After having a kid, we upgraded to renting a 2-bedroom. School zoning changes make the flexibility of renting feel especially comfortable. Covid disruption also makes it possible we'll make major changes. Housing prices in our HCOL area have continued to outpace inflation, though, so we have missed out. We save prodigiously but aren't in the market nearly as much as forum orthodoxy dictates (i.e., much more than our age in bonds).

At this point, diversifying with residential real estate would be nice, but in metro Washington we're probably looking at at least $1.5 million now. As others aptly pointed out in this thread, we rent the bare minimum but look out for the dream house when we think about buying. I don't know if that disconnect is one to get over or is a healthy way to keep under-consuming. While spending some time with in-laws in another HCOL area, I got to see how much a modest and paid-off suburban house costs: huge bills for utilities, property taxes, landscapers, handymen, plumbers &c.

Hedging for inflation with a nice house in some fantastically scenic but inexpensive locale (we saw some on summer road trips) might be more enjoyable than storing a gold bar in our bank vault. We'll see if telework becomes permanent.
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Re: What are the financial risks of not owning a house?

Post by bobcat2 »

There is a large financial advantage to owning a house over renting in retirement. With a paid off mortgage in retirement you don't pay monthly rent or mortgage. This is a big expense advantage over many years of retirement.

Not paying rent also introduces a substantial tax advantage to the home owner. To pay the rent you need to come up with additional income, which in most cases is taxable. In other words, the house in retirement is an asset that yields a special form of income, housing services, that is in-kind and thereby tax free. For most home owners this, and not the mortgage interest deduction, is the chief tax advantage of owning the house vs. renting.

Additionally, the paid off house in retirement becomes a financial asset that can be used to increase income by either by taking out a reverse mortgage or downsizing.

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Re: What are the financial risks of not owning a house?

Post by rgs92 »

Thanks again for the incredible variety of perspectives on this (way more than I would have thought of myself).
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Re: What are the financial risks of not owning a house?

Post by fyre4ce »

ginmqi wrote: Thu Oct 22, 2020 9:26 am
fyre4ce wrote: Thu Oct 15, 2020 2:15 pm Financial risks of renting:
  • Rents can increase, sometimes quickly. This could be partially mitigated by laws and/or long-term leases.
  • You could be outright evicted and need to move, possibly on short notice, with attendant financial impacts.
  • The money you would otherwise have tied up in home equity could be invested in risky assets (eg. stocks), and thus could have risk attached to it indirectly.
  • You lose out on the tax advantages of owning, the most significant of which is the $250,000/$500,000 homeowner's exclusion on capital gains.
  • You lose out in the inflation protection of a long-term fixed-rate mortgage.
  • You have no equity you can borrow against (eg. HELOC) at a decent interest rate, if you need cash quickly. If you otherwise have investments you can borrow against, this risk could be partly mitigated.
  • There could be risks associated with a landlord - damaging your property, sticking you with repair charges, not returning deposits, etc.
Financial risks of owning:
  • You will have an expensive un-diversified investment that is heavily tied to the local, state, national, and global economy and government. If you have a mortgage, this investment is leveraged, which amplifies both the upside and downside. Some of this risk (eg. fire, flood) can be mitigated a great deal with insurance. Other parts (eg. declining values) are unmitigated, although in a non-recourse state, the downside loss is limited mostly to your equity.
  • Transaction costs are high, so if you have to move (especially after not having lived in the home a while) then you can possibly lose money.
  • If you have a variable rate mortgage, rates could increase.
  • Property taxes could increase. Some areas have laws limiting the rate of increase.
  • You could be faced with expensive repairs on the home: structural, roof, HVAC, plumbing, electric, etc etc. I recall a horror story here on BH where a forum member progressively discovered structural and code issues in their home that ended up costing over $1M to fix. It's difficult or impossible to borrow money against a home that's not in good shape. If I recall, he was finally able to find a lender of last resort, and was narrowly able to avoid emptying retirement accounts or walking away from the home, both of which could have amplified the loss. Fortunately, problems of that scale are rare. More common expensive repairs are in the 4 or low-5 figure range.
  • You could face compliance issues with building codes that could be expensive to fix.
  • Someone could get hurt on your property, resulting in a liability claim. Someone can get hurt and sue you in your rental too, but it seems less likely. This risk can be mitigated by insurance.
That's all I can think of. Overall, the risks of owning seem higher to me, although it is situational. And undoubtedly, the upsides of owning are far higher than renting.
Great post!

Another risk of owning a home I would say is this:

- The temptation to buy/do things more than you can truly afford because you have "equity" in your home. People always talk about how owning a home usually means building equity/wealth...well it's not like if your house steadily gains market value that you suddenly have additional extra cash each month equal to your home value gains in your bank account...you need to pay someone else to access that equity with a HELOC. And if you sell the home and make money...you still need to buy another home or find another housing option which can incur lot of transactional cost and headaches. And when do you sell your home to realize your wealth gains? You'll have to "time" the real estate market.

IMO, home ownership is LARGELY a lifestyle and luxury spending item and should not be viewed as a major investment item. This is why to me personally I do not really see the rationale in including your home as part of your net worth....but this may be another thread topic....
Thanks for the compliment. I partly agree with what you said. It's true that lots of people made the mistake of treating their home like an ATM and withdrawing equity every time the value went up. Then, when prices drop, they're under-water. To the extent that a home is an investment, it should be treated like a long-term investment, with the goal of steadily paying down the mortgage. That equity shouldn't be accessed for consumption spending, although leveraging it in a true emergency can make sense.

It's not a good idea to sell your home to cash in on the gains. Although, if you're moving for other reasons, then you do end up cashing in the equity.

It is a mistake to think of a home solely as an investment. There are carrying costs (taxes, maintenance, etc) that make it a net cost in the long run (except if the price appreciates extremely fast, but you won't know that ahead of time). It is definitely a lifestyle choice. That said, the investment component shouldn't be ignored. The way I prefer to approach it is, what kind of housing do I need/want, and what is the cheapest way to obtain it? If you're only living in a city for a couple years, renting makes a lot of sense. But if you're living in an area for a long time, it's reasonable to expect house prices to keep pace with or slightly beat inflation. This absolutely should be factored into the cost of living. That's where the 5-year break-even rule of thumb comes from.

Definitely disagree that home value should be excluded from net worth. Anything that can be reasonably sold should be included in your net worth, at its after-tax after-expense value. Yes, you still need a place to live, but that value can still be accessed by moving into a rental, or to a lower cost of living area (as many retirees in coastal cities do, liberating six- and seven-figure sums of equity in the process). It's also part of your estate. If you own a $2M home in a VHCOL area, you can feel a lot less bad about spending down most of your liquid assets knowing your heirs will get a seven-figure inheritance, tax-free. And how do you handle the fact that you may have a mortgage against your equity? Exclude the equity but include the mortgage? That would make owning look like a colossally bad idea on paper. Excluding the mortgage too? Excluding your likely largest debt isn't an accurate net worth. When I calculate mine, I do derate the equity by 6% to factor in transaction costs, and more if I'd have to pay capital gains tax.
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