Take this example, suppose it cost 1500 a month to rent. To buy, you make monthly payment (mort, interest, taxes) and it comes to 1700.
Assume whatever paydown period you want.
What happens at the end of the day assuming housing prices stay flat?
for the buyer…he gets X amount in assets.
for renter, he has the amount he saved but zero assets. plus, he still has to pay rent going forward to you have to PV that amount back and net off your savings.
who is richer? it depends on the opportunity cost (savings he gets and how he invests it) and the change in housing prices during this time period.
key thing to remember here is, whatever you pay down in your mortgage, you get some of it back whereas you get squat from renting.
if renting is almost the same as buying, its pretty obvious what the decision should be. housing prices in the US won’t be down in the next 20 years so buying is pretty much the better deal.
But the conclusion depends on the rent/morgage payment ratio. If rents are more or less equal to mortgage payments + maintenance + taxes + additional costs, then yes, you should take the mortgage. However, how often is this the case? If instead of 1500/1700 in your example, the ratio is 900/1700, does it still make sense to buy the house? A conceptual conclusion (i.e. either rents or mortgages are better) is just a hypothesis. You need numbers to back this up.
I’ve done the breakeven calculation a few times, and it’s surprisingly tricky and very situation dependent.
I don’t think anyone here is advocating that it always makes sense to buy. That’s just nutty. But it is a good idea in many circumstances, even if housing prices stay flat for a long time. I don’t think anyone thinks that buying into a the late stages bubble is a good idea, assuming you can identify the late stages of a bubble.
You want a quote? Haven’t I written enough already???
Variables: opportunity cost of savings, end of period home value, interest rate on mortgage and amortization period, expected cost of rents…you can simplify the model to drive an intuitive result….
if the cost savings can be reinvested at such a rate that the ending value exceeds the value of your home in the future, it makes sense to rent. Does that sound right Bchad?
Fair enough. What I’m trying to get at is that people have a bias towards buying vs. renting. Once you break down the numbers, there’s no way that buying a house is invariably a great choice, as most people believe.
But you’re still not thinking about the money that you would save from renting instead of owning. You don’t end up with “squat”. You end up with a shit ton of money at the end! I don’t see what’s wrong with this insight, compared to something like “buying a house is always a good idea”, which 99% of US people seem to believe even though they don’t do any sort of cash flow analysis.
Respect. I rent cheap and invest the difference. I have a liquid asset base similiar to home equity.
When you rent and your plumbing goes out, you call the landlord. No skin of your hide.
When you own and your plumbing goes out, it’s all you baby!
I think the risk management associated with renting is undermined and overlooked.
If you can get a mortgage with a low interest (using good credit) and can get decent returns on your investments, then use your investment returns to pay your mortgage.
Plan B - If your investments go sour and you go under, then just walk away from the house.
I personally would rather rent (cheaply) and invest my disposable income in stocks, bonds, commodities, etc. rather than use it to pay cash for a house.
how much is renting versus buying where you guys are from.
I bought in June 09 in toronto so I guess i got a pretty sweet deal on my unit. But even with prices 10% higher here, i don’t know if that chnages the equation too much.
To rent a unit here is like 1400-1500 a month for something a classy babe would come back to…..housing payments are only slightly higher than that due to high property taxes.
Yes, i put 20% down. that opportunity cost is actually meaningful. however, the real estate market here also has gone up which takes some of the cost away.
the biggest cost i see is paying condo fees which are quite substantial when you add it up. but i took that into account.
i also feel like a real man owning real estate. but that is to make up for short falls elsewhere. if a hot classy babe ever asks, i can say “yeah i own some property here and there”.
Take this example, suppose it cost 1500 a month to rent. To buy, you make monthly payment (mort, interest, taxes) and it comes to 1700.
From what I’ve seen in comparable living areas and standards where I am, renting is not cheaper. Renting cost will basically equal a mortgage payment + taxes + some room for maintenance cost. It nets out basically to nothing.
The only argument one can make is the downpayment. Yes you need to put down 20% to own. So whatever opportunity cost you want to assign to that go ahead.
Of course, you can argue: well I’ll just rent a hole in the wall to save a ton of money. Well sure if you want go ahead. But if we’re comparing the 2, let’s go apples-to-apples right?
So, if you can own and rent it out on a “net no-profit basis”, your renter basically is paying your mortgage+ownership costs. Your risk is that no one rents it, which in that case, you can live there yourself (you got to live somewhere right?). So after years of your renter paying your mortgage and you living there sometimes, you actually own something in the end. It’s really not a bad idea
Hope. It is the quintessential human delusion, simultaneously the source of your greatest strength, and greatest weakness.
Take this example, suppose it cost 1500 a month to rent. To buy, you make monthly payment (mort, interest, taxes) and it comes to 1700.
From what I’ve seen in comparable living areas and standards where I am, renting is not cheaper. Renting cost will basically equal a mortgage payment + taxes + some room for maintenance cost. It nets out basically to nothing.
The only argument one can make is the downpayment. Yes you need to put down 20% to own. So whatever opportunity cost you want to assign to that go ahead.
Of course, you can argue: well I’ll just rent a hole in the wall to save a ton of money. Well sure if you want go ahead. But if we’re comparing the 2, let’s go apples-to-apples right?
So, if you can own and rent it out on a “net no-profit basis”, your renter basically is paying your mortgage+ownership costs. Your risk is that no one rents it, which in that case, you can live there yourself (you got to live somewhere right?). So after years of your renter paying your mortgage and you living there sometimes, you actually own something in the end. It’s really not a bad idea
The thing that annoys me the most is hearing people say that “renting is a waste of money, buying a house is building equity”
Renting is almost (if not always) cheaper than owning a house. Put the difference in a savings account or build a portfolio and you will build equity even if you are a renter.
People don’t take into account the added cost of ownership (replacing windows, roof etc)
How did building equity work for many people that are underwater?
Real estate, inflation hedge (hardly for people that bought in the last 10 years in US)
Bottom line is that right now might be the time to purchase, but to say that real estate is always a smart investment and that renting is dumb, a waste of money, is hilarious.
The thing that annoys me the most is hearing people say that “renting is a waste of money, buying a house is building equity”
Renting is almost (if not always) cheaper than owning a house. Put the difference in a savings account or build a portfolio and you will build equity even if you are a renter.
People don’t take into account the added cost of ownership (replacing windows, roof etc)
How did building equity work for many people that are underwater?
Real estate, inflation hedge (hardly for people that bought in the last 10 years in US)
Bottom line is that right now might be the time to purchase, but to say that real estate is always a smart investment and that renting is dumb, a waste of money, is hilarious.
Agreed. When I hear people say “I’m tired of pissing away money in rent” it is clear they need to do more homework before taking the plunge.
please look at ‘Commercial Real Estate Analysis and Investments” by Geltner, Miller, Clayton, and EIchholtz
2nd edition
It’s the book they currently use for MIT’s Masters of Science in Real Estate Investment and Development.
I recently bought it. The first 120 pages should be useful, if you decide to involve yourself in real estate.
I believe that higher inflation than is being used in rate calculations (due to fed stuff) and current low rates are allowing for a very good real estate time. Now, I do think the market you buy in and the location will be very important in the long run return, but still it’s a good time. Every finance/economics guru should check out the above book. It applies urban and financial economics to real estate investment. I find the textbook interesting… but I like reading textbooks for some reason.
Prospectus quote: “I am not a real estate expert. I haven’t even passed level 1 yo”
^ Does it apply to the Canadian real estate market too?
I have not finished the text, it’s rather large. It’s like your usual economic text: the complex is simplified into a model that allows for a general understanding, and often is applicable in several locations and situations.
So far, yes, the principles are applicable to canada as well. There is a lot of room for cities to grow in both the US and Canada, thusly I’d venture to guess “space markets” probably operate similarly. The book also gives answers applicable to area where outward expansion is limited, such as Europe, which has a longer history and older cities (not looking to argue about indians or natives or shit)
How did building equity work for many people that are underwater?
Real estate, inflation hedge (hardly for people that bought in the last 10 years in US)
a. it didn’t work well but the market was artificially inflated and people bought in with a mob mentality. People were talking at dinner parties about the free money from just buying a house.. and that fed itself. Doesn’t really speak for a normal real estate market… especially one that begins at the current benchmark
b. again, you’re talking about a time of easy money that may never happen again, or at least not until people forget this last one….could be decades… I’m 24 and my generation wont forget.. if they see house prices soaring.. it’ll be interesting to see reactions of both financial and non-financial people.
Nice, a topic I actually know something about. I really think it helps to look at the whole macro trend. 20 years ago (when most of us were growing up) if you could have spotted the trend for the yuppification of urban areas post 1987 in certain cities then you could have made some serious bank. Late 80’s new york was a crack den, now its a petting zoo.
You also could have invested in areas that would experience massive housing booms in raw land. Arizona, Nevada, Silicon Valley etc.
Conversely, there were plenty of lousy real estate investments done in this time. One of the worst ones I can come up with was a city like Hartford, Connecticut where I grew up. No gentrification of the city, no hipsters, just more gangs, drugs, and immigrants.
I think the mcmansion era is over. I also think there will be a massive oversupply of suburban housing coming on the market as baby boomers begin to retire as they are just now doing. I really don’t see that many people our age trying to buy their homes from them. How many of us can afford them? Get the financing? Want them? Will there be jobs in these suburban areas that will enable us to afford them? All of this is questionable. Will fuel prices make it possible to commute from these areas to work everyday?
What we are looking at is high end housing for the 1 percent and damn near communal living for the rest of Americans. I’m talking dormitory living. You might have heard bloomberg talking about an iniative to create the smallest most efficient style apartments possible. Well, there you go.
Formerly ChickenTikka - Member of the Order of the Righteous Rusty Hacksaw
I have two things to add. I made sure to purchase and renew a home warranty, which covers certain things that break in your house. Also, if you are looking at a condo request the minutes and check how it’s managed. Some HOA fees are used very well by associations – they constantly redo the property, keeping it up and keeping it looking new. Some other HOAs charge the fee every month and then when a project comes up, votes on an extra assessment to impose on everyone. And you can back out the things you’d have to buy that may be included in your HOA, since some HOA fees include: electricity, garbage, water, and pest control.
The calculation is actually surprisingly complex, because there are a ton of assumptions you have to make, and the tax effects feed back in nonlinear ways. You think you have an answer, then you make one small change in your assumptions, and bam, you get a (sometimes very) different answer.
it always surprises me, because it does seem like it should be a simple calculation, but it isn’t.
You want a quote? Haven’t I written enough already???
I’m surprised that nobody has mentioned how market specific the rent/own debate can be. When I worked in Newport Beach, I never even considered buying. Rent was expensive, but my equivalent mortgage payment wouldn’t buy anything within 30 miles.
Here in central Austin, buying is VERY tempting. Housing prices didn’t really bubble and burst like other markets, but our rental rates have gone up more than 10% per year since 2009. There is a massive inflow of renters of all income levels. The high end stuff will have turnover, but the lower end stuff doesn’t - the hipsters and musicians can afford the rent payment, but sadly they can never save enough for the down payment. Combine that with 30,000 students looking for off campus housing and techies getting relocated from CA and you have a good market.
I can buy a 1960’s 2000sqft house for around 250-300k. Right now a 225k mortgage costs you a $1000/month payment, plus around $600 in escrows. Add $200 per month for repairs. So all in, you’re at 21k per year in cash outflows.
Then you rent out a room to a buddy or random craigslister for $600 per month easy. After your interest savings, your outflow is already down to 11k. If you assume that over the long term you will get your principal back and about half of your repair expenses go towards property value, your expense is down to $5,700, or around $475 per month.
Living in a house here with a roommate is probably $800 per person. Living by yourself somewhere is tough to find for under $1000.
If you’re liquid enough, you could potentially rent out the entire thing and make it cash flow. If you buy it as a partnership you might pay a little more in interest, but you can depreciate it $7k per year, and take a tax loss. I’m not in a bracket to fully take advantage of that, but houses are a good way to build wealth over time if you don’t overextend yourself.
houses are a good way to build wealth over time if you don’t overextend yourself.
In 2006 a few of my buddies wanted to go in on a house or two together. I knew something was wrong when the 3-4 of us were seriously considering it simply because everyone else was making easy money doing it. Ultimately we decided against it since none of us knew what we were doing. That would have really sucked.
There will come a time when it would be a good move though. In some markets buying a rental, or even flipping, may be a good strategy. I’m not sold yet, but maybe in the next couple years.
Bchad….well, you do it assuming a margin of safety right? so yes you’re right ,its extremely complex when you put it into a math form (not quantum physics type math but hard enough).
lots of the assumptions you have you assume away….take conservative measures like min housing price increases and reasonable rates inflation and you should have a rough idea…..
to me when i found out it cost me the same to rent and buy, it was a no brainer …..(maybe i’m wrong here)….
Take this example, suppose it cost 1500 a month to rent. To buy, you make monthly payment (mort, interest, taxes) and it comes to 1700.
Assume whatever paydown period you want.
What happens at the end of the day assuming housing prices stay flat?
for the buyer…he gets X amount in assets.
for renter, he has the amount he saved but zero assets. plus, he still has to pay rent going forward to you have to PV that amount back and net off your savings.
who is richer? it depends on the opportunity cost (savings he gets and how he invests it) and the change in housing prices during this time period.
key thing to remember here is, whatever you pay down in your mortgage, you get some of it back whereas you get squat from renting.
if renting is almost the same as buying, its pretty obvious what the decision should be. housing prices in the US won’t be down in the next 20 years so buying is pretty much the better deal.
But the conclusion depends on the rent/morgage payment ratio. If rents are more or less equal to mortgage payments + maintenance + taxes + additional costs, then yes, you should take the mortgage. However, how often is this the case? If instead of 1500/1700 in your example, the ratio is 900/1700, does it still make sense to buy the house? A conceptual conclusion (i.e. either rents or mortgages are better) is just a hypothesis. You need numbers to back this up.
“I’m a CPA! I got money b***h!”
I’ve done the breakeven calculation a few times, and it’s surprisingly tricky and very situation dependent.
I don’t think anyone here is advocating that it always makes sense to buy. That’s just nutty. But it is a good idea in many circumstances, even if housing prices stay flat for a long time. I don’t think anyone thinks that buying into a the late stages bubble is a good idea, assuming you can identify the late stages of a bubble.
You want a quote? Haven’t I written enough already???
Variables: opportunity cost of savings, end of period home value, interest rate on mortgage and amortization period, expected cost of rents…you can simplify the model to drive an intuitive result….
if the cost savings can be reinvested at such a rate that the ending value exceeds the value of your home in the future, it makes sense to rent. Does that sound right Bchad?
Fair enough. What I’m trying to get at is that people have a bias towards buying vs. renting. Once you break down the numbers, there’s no way that buying a house is invariably a great choice, as most people believe.
“I’m a CPA! I got money b***h!”
Studying With
Respect. I rent cheap and invest the difference. I have a liquid asset base similiar to home equity.
When you rent and your plumbing goes out, you call the landlord. No skin of your hide.
When you own and your plumbing goes out, it’s all you baby!
I think the risk management associated with renting is undermined and overlooked.
If you can get a mortgage with a low interest (using good credit) and can get decent returns on your investments, then use your investment returns to pay your mortgage.
Plan B - If your investments go sour and you go under, then just walk away from the house.
I personally would rather rent (cheaply) and invest my disposable income in stocks, bonds, commodities, etc. rather than use it to pay cash for a house.
how much is renting versus buying where you guys are from.
I bought in June 09 in toronto so I guess i got a pretty sweet deal on my unit. But even with prices 10% higher here, i don’t know if that chnages the equation too much.
To rent a unit here is like 1400-1500 a month for something a classy babe would come back to…..housing payments are only slightly higher than that due to high property taxes.
What about your downpayment? People always forget that the downpayment has opportunity cost.
“I’m a CPA! I got money b***h!”
Yes, i put 20% down. that opportunity cost is actually meaningful. however, the real estate market here also has gone up which takes some of the cost away.
the biggest cost i see is paying condo fees which are quite substantial when you add it up. but i took that into account.
i also feel like a real man owning real estate. but that is to make up for short falls elsewhere. if a hot classy babe ever asks, i can say “yeah i own some property here and there”.
Studying With
I pay about 50% of what a mortgage payment would cost. If I paid parity to a mortgage payment, then I’d be a little more indifferent.
From what I’ve seen in comparable living areas and standards where I am, renting is not cheaper. Renting cost will basically equal a mortgage payment + taxes + some room for maintenance cost. It nets out basically to nothing.
The only argument one can make is the downpayment. Yes you need to put down 20% to own. So whatever opportunity cost you want to assign to that go ahead.
Of course, you can argue: well I’ll just rent a hole in the wall to save a ton of money. Well sure if you want go ahead. But if we’re comparing the 2, let’s go apples-to-apples right?
So, if you can own and rent it out on a “net no-profit basis”, your renter basically is paying your mortgage+ownership costs. Your risk is that no one rents it, which in that case, you can live there yourself (you got to live somewhere right?). So after years of your renter paying your mortgage and you living there sometimes, you actually own something in the end. It’s really not a bad idea
Hope. It is the quintessential human delusion, simultaneously the source of your greatest strength, and greatest weakness.
agreed.
on this issue there will be no debate.
Condo fees = negative NPV
It’s as much as $2500 a year for some, and that doesn’t even include maintenance costs.
The thing that annoys me the most is hearing people say that “renting is a waste of money, buying a house is building equity”
Renting is almost (if not always) cheaper than owning a house. Put the difference in a savings account or build a portfolio and you will build equity even if you are a renter.
People don’t take into account the added cost of ownership (replacing windows, roof etc)
How did building equity work for many people that are underwater?
Real estate, inflation hedge (hardly for people that bought in the last 10 years in US)
Bottom line is that right now might be the time to purchase, but to say that real estate is always a smart investment and that renting is dumb, a waste of money, is hilarious.
I like this florinpop guy.
“I’m a CPA! I got money b***h!”
nobody is saying buying real estate under any circumstances is economical or intelligent….certain classy babes are just not worth the effort….
Studying With
Agreed. When I hear people say “I’m tired of pissing away money in rent” it is clear they need to do more homework before taking the plunge.
Studying With
bump. as my lease is coming to renew, I’m now eating crow and thinking of buying.
Hello CFAvsMBA
please look at ‘Commercial Real Estate Analysis and Investments” by Geltner, Miller, Clayton, and EIchholtz
2nd edition
It’s the book they currently use for MIT’s Masters of Science in Real Estate Investment and Development.
I recently bought it. The first 120 pages should be useful, if you decide to involve yourself in real estate.
I believe that higher inflation than is being used in rate calculations (due to fed stuff) and current low rates are allowing for a very good real estate time. Now, I do think the market you buy in and the location will be very important in the long run return, but still it’s a good time. Every finance/economics guru should check out the above book. It applies urban and financial economics to real estate investment. I find the textbook interesting… but I like reading textbooks for some reason.
Prospectus quote: “I am not a real estate expert. I haven’t even passed level 1 yo”
^ Does it apply to the Canadian real estate market too?
I have not finished the text, it’s rather large. It’s like your usual economic text: the complex is simplified into a model that allows for a general understanding, and often is applicable in several locations and situations.
So far, yes, the principles are applicable to canada as well. There is a lot of room for cities to grow in both the US and Canada, thusly I’d venture to guess “space markets” probably operate similarly. The book also gives answers applicable to area where outward expansion is limited, such as Europe, which has a longer history and older cities (not looking to argue about indians or natives or shit)
a. it didn’t work well but the market was artificially inflated and people bought in with a mob mentality. People were talking at dinner parties about the free money from just buying a house.. and that fed itself. Doesn’t really speak for a normal real estate market… especially one that begins at the current benchmark
b. again, you’re talking about a time of easy money that may never happen again, or at least not until people forget this last one….could be decades… I’m 24 and my generation wont forget.. if they see house prices soaring.. it’ll be interesting to see reactions of both financial and non-financial people.
Studying With
Nice, a topic I actually know something about. I really think it helps to look at the whole macro trend. 20 years ago (when most of us were growing up) if you could have spotted the trend for the yuppification of urban areas post 1987 in certain cities then you could have made some serious bank. Late 80’s new york was a crack den, now its a petting zoo.
You also could have invested in areas that would experience massive housing booms in raw land. Arizona, Nevada, Silicon Valley etc.
Conversely, there were plenty of lousy real estate investments done in this time. One of the worst ones I can come up with was a city like Hartford, Connecticut where I grew up. No gentrification of the city, no hipsters, just more gangs, drugs, and immigrants.
I think the mcmansion era is over. I also think there will be a massive oversupply of suburban housing coming on the market as baby boomers begin to retire as they are just now doing. I really don’t see that many people our age trying to buy their homes from them. How many of us can afford them? Get the financing? Want them? Will there be jobs in these suburban areas that will enable us to afford them? All of this is questionable. Will fuel prices make it possible to commute from these areas to work everyday?
What we are looking at is high end housing for the 1 percent and damn near communal living for the rest of Americans. I’m talking dormitory living. You might have heard bloomberg talking about an iniative to create the smallest most efficient style apartments possible. Well, there you go.
Formerly ChickenTikka - Member of the Order of the Righteous Rusty Hacksaw
Studying With
I have two things to add. I made sure to purchase and renew a home warranty, which covers certain things that break in your house. Also, if you are looking at a condo request the minutes and check how it’s managed. Some HOA fees are used very well by associations – they constantly redo the property, keeping it up and keeping it looking new. Some other HOAs charge the fee every month and then when a project comes up, votes on an extra assessment to impose on everyone. And you can back out the things you’d have to buy that may be included in your HOA, since some HOA fees include: electricity, garbage, water, and pest control.
its a simple calculation if you deciding between buying or renting……..i don’t know what all the fuss is about…..
The calculation is actually surprisingly complex, because there are a ton of assumptions you have to make, and the tax effects feed back in nonlinear ways. You think you have an answer, then you make one small change in your assumptions, and bam, you get a (sometimes very) different answer.
it always surprises me, because it does seem like it should be a simple calculation, but it isn’t.
You want a quote? Haven’t I written enough already???
I’m surprised that nobody has mentioned how market specific the rent/own debate can be. When I worked in Newport Beach, I never even considered buying. Rent was expensive, but my equivalent mortgage payment wouldn’t buy anything within 30 miles.
Here in central Austin, buying is VERY tempting. Housing prices didn’t really bubble and burst like other markets, but our rental rates have gone up more than 10% per year since 2009. There is a massive inflow of renters of all income levels. The high end stuff will have turnover, but the lower end stuff doesn’t - the hipsters and musicians can afford the rent payment, but sadly they can never save enough for the down payment. Combine that with 30,000 students looking for off campus housing and techies getting relocated from CA and you have a good market.
I can buy a 1960’s 2000sqft house for around 250-300k. Right now a 225k mortgage costs you a $1000/month payment, plus around $600 in escrows. Add $200 per month for repairs. So all in, you’re at 21k per year in cash outflows.
Then you rent out a room to a buddy or random craigslister for $600 per month easy. After your interest savings, your outflow is already down to 11k. If you assume that over the long term you will get your principal back and about half of your repair expenses go towards property value, your expense is down to $5,700, or around $475 per month.
Living in a house here with a roommate is probably $800 per person. Living by yourself somewhere is tough to find for under $1000.
If you’re liquid enough, you could potentially rent out the entire thing and make it cash flow. If you buy it as a partnership you might pay a little more in interest, but you can depreciate it $7k per year, and take a tax loss. I’m not in a bracket to fully take advantage of that, but houses are a good way to build wealth over time if you don’t overextend yourself.
In 2006 a few of my buddies wanted to go in on a house or two together. I knew something was wrong when the 3-4 of us were seriously considering it simply because everyone else was making easy money doing it. Ultimately we decided against it since none of us knew what we were doing. That would have really sucked.
There will come a time when it would be a good move though. In some markets buying a rental, or even flipping, may be a good strategy. I’m not sold yet, but maybe in the next couple years.
Bchad….well, you do it assuming a margin of safety right? so yes you’re right ,its extremely complex when you put it into a math form (not quantum physics type math but hard enough).
lots of the assumptions you have you assume away….take conservative measures like min housing price increases and reasonable rates inflation and you should have a rough idea…..
to me when i found out it cost me the same to rent and buy, it was a no brainer …..(maybe i’m wrong here)….
Pages