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Monday, February 1. 2016
Rent or buy?
Economics on Buying vs Renting a House
Good comments there. I think, for the average person, ownership is a forced saving and a mortgage tax deduction. However, home maintenance is a black hole. I guess it depends on your situation.
What's your opinion?
Economics on Buying vs Renting a House
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It makes no sense to me to rent when you can buy, and since there are apparently still no or low down payment mortgages, that means most renters. I think looking at owning a home as an investment is silly, even though it can work out that way. Instead, it should be viewed as buying a place to live.
When you rent, you are paying for the taxes, the upkeep, and the owners financing costs and profit. Owning a house can certainly be a hassle, and for some, that's a determining factor. However, at the end of the term of a mortgage, you will have no equity in something while if you bought a house, even if it declined in value, you'd still have a house and it would only cost you the taxes and upkeep to keep it.
To me, that's a high price to pay for not having the hassles of an owner.
We've owned for almost 30 years, but then we practically never relocate. If I were young and expected to relocate I might well stick to renting. You miss out on market upswings, but you're protected against crashes, and there are other things to invest in that don't involve risking the roof over your head.
My fairly standard example -- I bought at 187K in 1992, renovated for 225K in 2010 and have a home value of app 650K now, sans a very small remaining mortgage balance. As an avid DiYer, maintenance has not been a black hole though it has been fairly sweaty.
That does not sound like a good investment on its face and the carrying costs do make the investment a low performer. However there is one huge thing that makes it all worthwhile - I lived in my investment that entire time.
But it was more than just that. The house was mine. I could improve it if I wanted, and I could paint it hot pink and purple if I wanted. It was mine and not the landlord's and that made the biggest difference to me.
Rent if you have to, but buy if you can.
Let's do a financial analysis of your purchase. First, did you pay cash in 1992 and 2010 or did you borrow money for these "investments" and if so what were the terms of the loans and what is your total investment thus far (principal plus interest) and how much do you still owe on these loans?
The housing economists Schiller and Chase point out that home ownership is a lifestyle choice, not an investment. House prices in most places parallel inflation, so capital is merely conserved without increase. But that is only if you perform maintenance, and do regular remodels and upgrades. In actuality, a house is a consumable like a car.
Agreed, without the depreciation that a car suffers.
Unless you really just don't take care of it.
However, the real reason housing is a consumable is that most people who purchase no very little about real estate. Oh they know the basics "location, location, location" and stuff like that. But they don't know the nitty-gritty details.
My step-father sold real estate for a living. He knew it like the back of his hand, as did my grandfather. But my step-father was a terrible financial manager, whereas my grandfather was great at it. So all my step-father's real estate deals netted very little, but my grandfather did exceedingly well.
You can make money on a house, if you're smart. And you don't have to be in the 'flip it' mode. You just have to know what you want and how to manage it well.
You can't live in a stock, and stocks can decline in value. So can homes. But you can live in them.
Rentals? You can be tossed out, though some cities have tough laws about that. I've seen it done, though (and I've had to do it once). All told, having rented, owned a condo, and owned a house? I'd own. More control over yourself. Costs aren't that much higher.
A house is a hedge against inflation. If you buy out of town and town comes to you, or you buy in a ghetto and gentrification comes, there can be real capital gains. But most homes "capital gains" are inflation on a long held asset.
But the home is also an asset for old age. If you pay off the mortgage, and can cover paying off the government every year, you have a cheap place to live when you income declines. You can use up the asset by deferring maintenance that doesn't impact your usability. Even if you mortgage continues, it is fixed and not rising with inflation/shortages so as to eat up more of the fixed income.
In other manners:
You do not really control access to your home unless you own it. There are circumstances where a landlord can overturn your 4th amendment rights and let police into your home.
In a disaster, owning the home or more importantly land, can keep you out of the clutches of government. If rental property is damaged, you may be evicted with no where to go. If you home is destroyed, you can still live on your land, in tent, in a trailer, etc.
That said, dense suburbs and especially HOAs can be a threat of busybodies in a disaster and should be avoided. They can also be real problems when delaying maintenance in old age.
Renting does offer flexibility for jobs, of especial value when young, and the ability to walk away from a place damaged in a disaster. You can also often afford to live in a closer in, urban, place compared to what can be bought.
Hedge against inflation- sometimes, not if your market is declining. (Happens even in nice suburbs).
Of course rent can outpace ownership.
Maintenance- Be smart. Be content and judicious with maintenance. DIY when it makes sense. Make it a hobby so you enjoy it (better than watching TV). Upgrade instead of replace when maintenance is necessary.
The "Hedge Against Inflation" is compared to rents.
Rents rarely go down on a given property, and never while you're actually living there.
My rent is going up by 200 this month (but it's the first time in 3 years).
Germany is a wealthy country and a majority of Germans get by just fine by renting. See Most Germans don’t buy their homes, they rent. Here’s why. -
Well, that explains the recent stories of Germans being force out of the homes, deemed to nice for a single individual, to make room for Islamic colonists.
I'm 44 and I've always rented. Right now my wife and I are living in Melbourne, but it just so happens that we've both been offered excellent jobs in Sydney. For us to move is not much of an issue.
Also, the house we are renting is in a very prestigious suburb close to the city center. The landlord is getting less than 1% return on the property for the rental price we're paying. We would never be able to afford to live in this property if we had to purchase it, but with renting at that margin our landlord is effectively subsidizing us to live here.
For those home owners saying that it's "your house", that's fine but recognize that it's an emotive decision. I prefer cold hard logic when it comes to financial matters. We're paying rent but we're saving lots and enjoying a superb home with no maintenance costs, no rates or taxes, and no insurance.
There's also the issue of being a "top renter". Landlords love couples like us since we not only pay the rent but we improve the property in little ways while we're here, (I like gardening and always make an effort to fix up the garden where we live). This means that we are just about free to do any improvement we want to the house to make it more "our home".
As for being cast out at the mercy of the landlord, it's only happened once to me in over 25 years, and that was a very unique situation. Renting, in the immortal words of Mr N. Taleb, is anti-fragile.
Long ago, before the housing market bubbled, I ran the numbers and it's a wash. A slight favor for renting - but it depends on how long you want to stay somewhere. If your time frame was between 10 and 35 years, then renting makes sense. But based on deductions, the average gain of real estate, and/or the potential to stop making a payment after 15 or 30 years (depending on your mortgage), owning has considerable benefit.
This is especially true if you, as I did, first purchased a condo and then rented it out after you bought a house. The condo basically more than pays for itself (subsidizes my house a bit), and you can take depreciation. My goal is to eventually sell my house, move into the condo for 3-5 more years (which will be after its paid off), fix it up, sell it and retire somewhere nice.
But it's important to run the numbers. There is no "right" answer. It's all time frame dependent (as well as income dependent - I know too many people who overpaid for homes with the expectation that "housing never declines"....boy were they surprised!).
More Germans rent than own with ownership around 45% (depending on when the statistics were done) We also tend to buy homes later in life when we can afford the down payment and generally pay it off well before we retire. Generally speaking, we don't look at a house as an investment we intend to sell since we have historically owned our homes near where we work and live, then raise our families and eventually die in the same house.
Part of the renting issue has to do with the price of rents, which compared to the rest of Europe, are pretty low especially against places like the UK or Switzerland. Of course Munich, Frankfurt and Cologne have very high rents as would be expected in any major city.
Keep in mind that after WWII, a huge number of homes (think multi-family units in cities) were obliterated so the government replaced the buildings and rented them out. Over time, these buildings were privatized, but the idea of renting worked for most of us.
The government limits the amount rent can go up (typically about 5% per year) but does not limit property tax increases in the same way. Having said that, property taxes are very low here. A €200k unit would see around €100-€200 per year in property taxes.
I have to ask: If owning a home is not economical for an individual why is it economical for another to own it and rent it out?
It's usually not which is why I like to take advantage of their poor economic decision. See my comment above.
I have no mortgage, but the ad valorem taxes are eye-popping. I often think of myself as renting from the local taxing authorities.
I call myself a homeowner, but in truth I am a mortgage-owner.
So the bank really owns my house.
So am I technically a renter?
Your home is in the bank's asset column; you're a renter. The good news is that, say, on a 30 year mortgage after paying rent for 359 months, you can become a homeowner for an amount equal to a month's rent. That's a pretty good deal in some situations.
Family size plays a role too. Several places we lived had restrictions on the number of people who could live in an (e.g. 3 bedroom) apartment.
Buying makes sense if you live in a growing area and plan to stay put for a long while. I live near Sacramento, CA, I bought my house in 1984, and I'm still here. Buying made a LOT of sense for me.
If you're young and not yet established in a career, renting makes more sense. If you buy a house, there's not much chance that you'd be able to sell the house and break even if you needed to move to a new job in 2-3 years. If you're single and mobile, buying a house is foolish. Even if you rent it out, you'll be paying for somebody to manage the place for you, and you're paying both a mortgage AND rent. Very few places in the country where rentals are enough higher than a mortgage to afford a management fee too.
A big problem with renting is that you have to do it the rest of your life. If you buy a house, then eventually you own it. That will cut a huge cost of living from your budget when you retire.
We bought our first and current home for $59K and put another $10K in it to get it up to par. Our total cost is still below the resale value even in a bad market. A $434 house payment is no problem. It allowed us to save enough to pay $39K cash for our first rental. It rents for $750 a month, so it paid for itself in five years. I'd rather be the owner than the tenant paying for it.
We could upgrade from our home to a bigger house and rent this sardine can for $900 easy. We'd have it occupied before the paint dried.
The problem with some (many) home buyers is they buy more than they can afford. A $200K mortgage buys a lot of house in Oklahoma, but it doesn't leave much money at the end of the month. Many people I know can't even afford an emergency.
I like owning and seem to collect homes. I just bought a fixer-upper and today is my 34th consecutive day of working on it. Pretty much done, it's been fun and it's been a pain in the butt. But I get satisfaction from the process and the results so I'll probably do it again if I get a great deal.
Home ownership is merely purchasing the right to pay taxes, insurance and upkeep on a property. Fail to cover any of these can have disastrous financial consequences.
Catastrophe without insurance isn't your friend. Fail to pay taxes and a government takes it. If you don't repair/replace the roof you lose. Don't paint and repair and the value.......
Rent and keep your principle invested elsewhere. Move if the landlord doesn't do his job (all of the above).....
But...I am a mortal homeowner. I just paid the tax billS and the insurance is due next week.
Some things it is better to rent, costs amortize and it's only stuff.
One thing is better to own, better than a shoebox full of rent receipts.
Own the home and own the land.
All other things being equal, and that's what I get from the comments, owning land has one advantage that should not be dismissed: when I own a piece of land I have someplace to go. All else fails and the economy crashes or my personal budget dries up and blows away, there is one place where I won't be turned away - my land.
Most interesting that this item appears immediately after a David Stockman interview about the financial meltdown...
It may take awhile, but buyers paying off a mortgage are SPENDING THE SAME AMOUNT AS RENTERS EVERY MONTH yet that money works towards asset ownership, instead of disappearing.
It's the difference between the Starbucks morning coffee - gone! - and the money paid into your IRA.
First, if you have a mortgage, you don't "own." You simply rent from a bank, and on their terms, too. You're a sucker if you don't grok that by now!
Second, the politics of property taxes, increased building codes and contractor licensing are buttressed by growth in the cohort of renters. Only owners of homes care about property tax increases, or about the cost of licensed plumber. Renters don't see the increases directly, and can be lured into voting for regulatory loads because they think they are immune from the costs.
Your first point is inaccurate. I hold ownership of my mortgaged house in the sense that I can sell it and I can rent it. The bank isn't interested in owning the house. They would much rather prefer I pay off the loan than default on it.
I certainly don't rent from the bank because in another 9 years my loan is paid off. It's just cheaper for me to borrow the money from a bank than to pay cash for it.
I paid for my first house in 3 years, my second house in five so I have lived debt free for most of the last 40 years