I’m currently renting an apartment downtown in an overheated real estate market. My rent is quite cheap compared to what my total costs would be if I purchased a house/condo/etc. As such, I save quite a bit each month that I use to invest. Of course if I were to buy, it would be much farther away from where I want to live (downtown and close to work) and be much more expensive than renting. Now I’ve crunched the numbers and priced out what it would approximately cost to own a place versus what it costs me to rent currently. What I don’t understand is how many people say to me “you should buy, renting is a complete waste of money!” Keep in mind that I live in Canada and therefore mortgage interest is not tax deductible. Also people tend to make the claim that I’m not building any equity by renting. Aren’t I building equity by investing the money I would otherwise be paying towards interest? My question is what is so special about building equity and why do I “need” to own a house to increase my equity? What good is the equity in my house unless I want to borrow against it to start my own business or do something else? Is the equity I build in investments “worth” less than the equity people have in their homes and if so why? I understand that my investments are not technically secure assets and are subject to market fluctuations. Any thoughts on this would be appreciated, thanks.
There are two things at work here: 1. The mortgage interest deduction is a HUGE benefit, but most people forget that you then end up pay property taxes (in most states). 2. Most people have no clue what they’re talking about. They heard that owning was good so feel the need to jump on the bandwagon. If you tell them you invest the difference of rent vs. what you’d pay in mortgage they wouldn’t understand that you’re building equity. I would say the equity you have in your investments is more valuable than your home, dollar for dollar. Call me crazy, but I believe in a liquidity premium. Need cash by monday? good luck selling your house (or even tapping a home equity line at this point). Perhaps if you fire sale it you could get some cash, but at a haircut. All of those equities I hold, on the other hand…
Renting allows you to oursource a ton of responsibilities to the landlord. Renters insurance is cheap compared to buying. To complelment what FI said above, most people don’t know what they are talking about. Buying is not always better.
The other big advantage to buying, if you think your place is a good investment (which I hope you would) is that you can put substantially more leverage on RE than you can in your PA, so for equal ROA, you get a much higher ROE; however, that certainly isn’t a great way to look at things in this market (maybe next year though…).
these are my thoughts on rent v buy. rent offers greater flexibility if you think you’ll want to move. also, you can call someone else to fix your plumbing or other issues. owning the home takes more time to buy and more time to sell. you also have to either learn to fix it yourself or pay someone else to do it if that makes more sense. as far as throwing money away by renting, it isn’t always that easy. when my wife and i were renting, we were in a 2 bed apartment (in an atlanta suburb) paying $800/mo. when we bought our house, we were then paying $1300/mo after princ, int, taxes, etc. i can’t remember exactly, but i think that only around $200 of that is going to the princ (more now than before since we’ve been there for a couple yrs), so the monthly cash outflow, even before maint, is about $300 more per month. oh and we moved into a 3 bed home and now have 2 kids, so we’d moved into a bigger apart anyway and paid more in rent. and as far as equity, you’re building equity in a leveraged investment. but it isn’t without risk. do you think you can earn more on how you’re investing your money than how much you can earn on the equity you have in the home you could buy? that depends on your local housing market. not being able to deduct mortgage int makes it less of a slam dunk to buy a home. here, after your mortgage interest, property taxes, state taxes, some charitable contributions, you’re easily over the do i itemize or do i take the standard deduction threshhold. it is possible, though it doesn’t happen as often much now that home prices have gone up so much and people are putting a lot less as a down payment, for you to be married and own a house and not be able to use the mortgage interest deduction b/c your itemized deductions don’t exceed your standard deduction. because i don’t know canadian taxes at all, i can’t comment any further than that. but i’ve never been comfortable with the your throwing your money away argument. if all else is equal (ie you can buy a home the same size as your apartment in the same neighborhood for the same monthly cash flows and you’re planning on being there for 5-10 yrs), sure, i think you should buy. otherwise, you need to look at your circumstances and plan things out a little, like you’re doing. (i just looked at what some others have said while i was writing this. i agree with them. generally in life, i’ve found, there are very few things that are always right for everyone, especially with respect to your finances.)
Historically, real estate appreciation was your best bet for long term financial gain, not to mention its more stable than other investments(historically!) That’s the primary reason why people buy rather than rent. Second, fixed mortgage payment is a great natural hedge against inflation. This will become very important in the coming years. To make matter worse for renters, rent price sare expected to increase a lot after years of downward trend (caused by people buying housings and forgoing renting).
I think the main force at work here is a form of money illusion. That is, people that say “you MUST buy” are being deceived by two factors: - that real estate is a highly leveraged investment. Most people don’t understand that this can work both ways. - that we have just been through a huge global boom. I recommend the 2nd edition of Shiller’s Irrational Exuberance. Shiller published the first edition - the main thesis of which was that stocks are overvalued - in late 1999 / early 2000. The second edition was published in late 2005 / early 2006 - the guy is either lucky or good - centres on real estate. Basically, he says that property has not been a particularly good investment if you look at it in the context of the last 120 years or so (real return of 0.4%pa, I believe). He says - I’m simplifying the case - that this (small) positive real return is attributable to just two short periods in history. The first is the real estate boom that followed WWII. He says that this was justifiable b/c - inter alia - the population rose, household formation went up etc. The second period is obviously the one we’ve just lived through. He looks at all the arguments (e.g. immigration, divorce rates, whatever else) and comes to the conclusion that there is NO reason for the ramp-up in property prices and that real estate is too expensive. The reason that this all comes to mind is that he does some work on trying to gauge public perceptions of real estate investment (news searches, surveys, etc.) and basically concludes that we progressed into a bubble akin to excitement surrounding tech at the end of the 1990s. People think (or thought) that property was a bullet-proof money-spinner. I’ve crunched the numbers too… much cheaper to rent in London than buy. And I love being able to move to a new part of town every 6 months if I feel inclined.
If your all in rent is 1,500 and your all in mortgage is also 1,500 per month, then paying the mortgage means you will own the place in 25 years, while paying rent means you still get nothing in 25 years. That’s a typical argument you hear form people who think buying is great. But I don’t agree with the argument and I’m a renter as well
Its such a complex issue. I recently moved from Orange County where I saw my sisters home quadruple in value over ~ 6 years. As a school teacher, she would not be able to afford even the property tax if it were assessed at mkt value. A speculative buyer bought her neighbor’s home for 700k ~ 3 yrs ago, it spiked to ~1.2 and is prob now worth about ~1mm. Problem is- no one could afford to “get into” this market… all the sales were basically people already in the area w/ huge gains on their properties rotating around. So, this property has been rented out for the past 3 yrs for a whopping 2500$ a month (or 25% of what ownership costs of a similar property would be). It is like this in many parts of orange county… avg. home ~750k, but can rent it for ~2500/month. I know many people who have rents below 1k in these areas just because they have been there for years and there are caps on increases allowed. I assume rents will eventually rise and home px’s will lower, but in an area like this, where the job market is not like NYC or even LA, its going to be hard to sustain. If a property is not appreciating, and you can rent for SUBSTANTIALLY less why risk it? There are other ways to tax shelter $.
In today’s market, we’re seeing a lot of the shadow market competing with apartment rentals, which is more true in some markets vs. others as real estate is local to each market. That said, I’d agree with you that if you had to buy vs. renting, it might make sense to rent, because in some markets (FL, Vegas, Phoenix etc. the markets where there is excessive oversupply of homes) you can rent a home really cheap. Take Florida for example…I know of someone who rents a 3000 square foot home for $1800/month.
negativefcf Wrote: ------------------------------------------------------- > Historically, real estate appreciation was your > best bet for long term financial gain Historically, RE has performed better than equity markets? You’re historically wrong.
Fairfield County, CT is way over priced in my opinion…
Historically, residential real estate has appreciated approximately 6% annually, while inflation has nearly kept pace at just above 3%. Not exactly stellar returns, but at least you have a valuable asset that is essential for living: shelter. The vast majority of Americans have most of their net worth tied up in their illiquid homes, leaving themselves overexposed to real estate as an asset class, in addition to localized risks associated with such a singular asset. I rent: partly because it is much more economical to do so in the Chicago market, but mainly because I can’t afford to buy anytime soon, either.
joemontana Wrote: ------------------------------------------------------- > negativefcf Wrote: > -------------------------------------------------- > ----- > > Historically, real estate appreciation was your > > best bet for long term financial gain > > Historically, RE has performed better than equity > markets? You’re historically wrong. Care to shed some light? Historical Real estate appreciation is 3%-4% without leverage. Since 99.9% of people seek some form of leverage on their mortgage, their returns are 4x (very rough math) that amount. What’s equity long term return? 8%?- 9%?
negativefcf Wrote: ------------------------------------------------------- > joemontana Wrote: > -------------------------------------------------- > ----- > > negativefcf Wrote: > > > -------------------------------------------------- > > > ----- > > > Historically, real estate appreciation was > your > > > best bet for long term financial gain > > > > Historically, RE has performed better than > equity > > markets? You’re historically wrong. > > > Care to shed some light? > > Historical Real estate appreciation is 3%-4% > without leverage. Since 99.9% of people seek some > form of leverage on their mortgage, their returns > are 4x (very rough math) that amount. > > What’s equity long term return? 8%?- 9%? Funny, what does that leverage cost per year? What about taxes? Maintenance? Insurance? Closing costs? Broker fees? Ohh yes, you’re one of those people who think that housing is a good “investment”. Sorry, but housing is a bad “investment”. I have asked dozens of people, from my parents, all of the way to CFOs of major lending organizations, what they thought about when they bought their first house. Here is the normal response. 1. Steady place to live. 2. It’s mine. 3. Investment. Then, I have asked people the same question who bought their first house in the last 5 years. 1. Investment. 2. Tax shield. 3. Steady place/it’s mine tied. It’s sad that easy credit has made people flip their outlook on housing.
FIAnalyst Wrote: ------------------------------------------------------- > There are two things at work here: > > 1. The mortgage interest deduction is a HUGE > benefit, but most people forget that you then end > up pay property taxes (in most states). > > 2. Most people have no clue what they’re talking > about. They heard that owning was good so feel the > need to jump on the bandwagon. If you tell them > you invest the difference of rent vs. what you’d > pay in mortgage they wouldn’t understand that > you’re building equity. > > I would say the equity you have in your > investments is more valuable than your home, > dollar for dollar. Call me crazy, but I believe > in a liquidity premium. Need cash by monday? good > luck selling your house (or even tapping a home > equity line at this point). Perhaps if you fire > sale it you could get some cash, but at a haircut. > All of those equities I hold, on the other > hand… I could not agree with you more on any of these statements
> > Funny, what does that leverage cost per year? > What about taxes? Maintenance? Insurance? > Closing costs? Broker fees? > > > Ohh yes, you’re one of those people who think that > housing is a good “investment”. Sorry, but > housing is a bad “investment”. > Yes, I do think its a good investment; BTW: I am short just about any housing (and housing-related) stocks out there. Housing market will absolutely stink in the near term. Forget about the short term picture, In the long run, you can’t get a better deal/steal than in the housing market. Just don’t buy anything that is outrageously overpriced. I buy things that are 17x-20x rent (Boston). I am one of the most bearest guy out there but I am not dumb enough to ignore the long term fundamentals and benefit of an investment in house. Leverage cost per year? Absolutely Tiny. Unless you’re been in a cave for the last four years, mortgage rates are stunning low. Factoring maintenance cost, taxes… it’s very rare to have all-in cost that is less than rent cost. It’s no secret that all-in cost will be great than rent, as of right now. But that is terribly short-sighted since rent cost are surely to rise in the coming years and your fixed mortgage will NOT (assuming conventional 30 yr). If you need any further proof, ask your parents or anyone who had a mortgage for 10+ years, ask them how much they pay in mortgage + other cost, and how much it cost to rent out the place right now. It’s a no brainer. EDIT: It’s not like renting doesn’t have its own hidden cost. Again, one of the most ignored risk is the risk of rental increase. The average renter is likely to move multiple time over 10+ year, you have to factor in moving cost, brokerage fee / finder fee, etc.
People have really short memories and get really excited to get in on a “good thing” when they see others successful at something. So now when the average joe analyzes the pros and cons of buying, they think of the fact that their buddy bought and sold 3x in the past 7 years, moving up and cashing out tax free gains each time. Yeah, from 2001-2006 RE was a great investment, but you need to look at the big picture. I’m still in the position where if I can rent for less than that tax-benefit adjusted cost of buying, I’ll rent. Previously, some of the liquidity issues weren’t as severe as today- if you HAD to get out and couldn’t you might have even covered a respectable portion of your costs by renting it. Now there is so much unsold inventory that one of the greater costs of ownership is illiquidity.
There have been studies done in SoCal specifically because of Proposition 13 which caps tax at 1~ of purchase value. This archaic act has severely limited social mobility in light of the boom and exacerbated already horrible traffic conditions. Eg… you bought your home in townX 6 years ago for 250k and are therefore paying ~2500 per year in RE taxes. Now your offered a job 50 miles away in townY where post-boom a similar home will run you 1m (which you can afford bc your home also appreciated, but now you’ll be paying 10k a year in RE tax). Do you move or drive?? I personally know people who inherited their homes in so-cal and pay literally ~750$ a year in property taxes on homes worth more than a million… thats .08% NICE (for them)
I would be careful about buying in this market, especially with so much foreign money chasing real estate in NYC. Also, the “buy” decision really locks you in in terms of moving to another place etc… I have an .xls spreadsheet I once put together to help me analyze the decision. I can send it to you, it’s pretty simple, but the gist of it is this: the higher your income the more sense it makes to buy b/c: - the interest deduction provides a nice tax shield and is of more of a benefit - NYC apartments are actually less overpriced the larger and more expensive you go b/c you’re likely to be getting some really nice areas and good buildings. - In a real estate bear market in NYC studios are hardest hit b/c those are often the people who are losing jobs, moving out of the city, or not coming into the city. That said, buying an apt. in the city is basically like taking an equity position in the city’s growth over the future. Personally, if you also work in finance that’s just a lot of correlated risk in my opinion. Oh, and as others have pointed out, the money you put up for downpayment is not growing at market rates but at real-estate rates – and you should be able to do better than 6% a year in the markets anyway.