Rent Versus Buying

[LivingAlmostLarge]

This lady who runs a blog posted a great article on why she rents. I personally feel that renting makes sense in some scenarios and understand why.

But I was also the reader who questioned what happens during retirement when you no longer have a mortgage? Also I just posted a question where my parents/in-laws bought for $27k and $34k respectively in 1975. And they have homes worth $300-400k.

They are retirees at 55 with pensions. However, they are not paying interest and paid for their homes in less than 15 years. So I think it made more sense to buy than rent these 30 years?

Help me cruch more numbers.

Millionaire Mommy Next Door: Renting beats owning, even in retirement; even if your mortgage is paid off. Here's why.

[MonkeyMama]

It would make no sense whatsoever to rent in the area I grew up in. Maybe a little more sense where I live now, but not much.

I am open to the idea that renting might benefit some, but I usually find the arguments way over-simplified.

On the flip side, Millionaire Mommy's argument makes some sense in the interim. I just don't know how realistic it is many people could really sell their home, cash out the equity, and rent much cheaper. How realistic is that? Not sure. In her case it just may work. BUT the flaw in this is she used home ownership to get ahead. Most of these articles are pro renting and never buying. IF this really works out for her I think a big key is all the equity in her home. It is obvious from her blog that they earned much from this house. So officially, home ownership was a big key to their wealth.

We have significant equity in our home but cashing out and renting really wouldn't get us very far in *this* area. Rents would be far bigger expense than all of our housing expenses currently, plus we'd probably have far less space. We might get ahead investing equity. But not sure in the long haul if that helps. In the interim we would stretch our budget and significantly downsize our lifestyle. Don't really see the appeal.

I am certainly a product of my region. My parents paid $100k for their home in the 80s and it is easily worth $ 1mil today. Are they happy to own a $1 mil asset at 60 or do they wish they were still paying $3500/month just to live in the area. (Average rents). I can assure you property taxes/repairs/insurance come to more like $3500/year for them, rather than $3500/month. I think people discount inflation WAY too much in these arguments. We also live in a state that controls property taxes (just has to orelse the elderly would all have to leave. It's just been like this for so long).

I don't expect to have a $3 mil asset when I hit 60 (10 times what we paid). But I expect our expenses to own will be very minimal compared to renting over the long haul. Housing market may be flattening, even falling, but rents are rising here. We will certainly have a significant asset (Already do & only owned a few years).

I also roll my eyes whenever I read these articles when it comes to costs to maintain a home. I have never heard of a renter who did not pay for repairs and such (product of the region again - I'll admit). Likewise, maybe if you don't have a frugal bone in your body and you buy a McMansion it costs $10k/year to maintain a home. (Just some figure I have seen thrown around in similar articles). I find that absolutely absurd personally.

My 2 cents. I expect very different opinions in different regions. & I totally get that. I think you are in a region much more like me though...

Many things to consider.

[DebbieL]

Renting is the ONLY thing that makes sense (at this time) in my area. The average household income is in the 60K's and the average house is selling for close to 600K. Things are stupidly bubbly here. I can rent a nice place for less than half the monthly output to own it (even at the current low interest rates). I would be throwing my money away on something that has to come down at some time in the not too distant future (unless you can think of a way that it will somehow become affordable for the average household to purchase at 9-10x income). I wish it were not like this here, but it is. I refuse to be house poor. I want a life.

I will consider buying only when it actually makes some financial sense to do so.

PS - I do enjoy the freedom that renting gives me. I could pick up and leave at pretty much any time I wanted to if I chose to. I don’t pay the repairs. I can build up my savings, take trips, etc. I couldn’t do anything but be a slave to a house that will depreciate soon if I bought at today’s silly prices.

[Gruntina]

Another thought I want to add. When renting, I did not have to pay home insurance (renter insurance is cheaper than home insurance), I did not have to pay for repairs on the house, No PMI, No property taxes, No yard maintenances or machinery such as lawn mowers, weed whacker and etc, purchased less junk and furniture’s since there are less room in an apartment, often my water and garbage bill was covered in the rent and in the bay area, most rentals comes with a gym, swimming pool and etc.
The utilities were also cheaper than of a house.

With renting I had a lot more money to save and was even able to maximize my retirement yearly with left over’s to save for the future. If I remained renting in my area until retirement, I would have a much bigger retirement account and savings funds than remaining homeownership. Yes I could sell the house for more than what I bought it for but it will never make up the interest I put in over the years on my mortgage payments.

I bought a house on a very low end price of 425k (median housing price in my area is 900K) and with 6.5 interests on a fixed rate loan of 30 years come out to be over 1 million dollars in payments if I do not make prepayments. So if I sold my house for 300k more than what I purchased, I still come out behind. This price would not even begin to include what I paid on repairs, renovations, property taxes and home insurance.

But I think this is very different for low cost of living in other states as I am still seeing houses for fewer than 100k.

[sweeps]

Just be sure to factor in the inflationary effect of renting. For homeowners the monthly mortgage payment never goes up, and after no more than 30 years there is no more monthly payment... ever.

With renting, the monthly payment goes up year after year and never ceases. (The landlord has all the costs of home ownership you mentioned so he has to make it up somehow. )

[LivingAlmostLarge]

Renting is the ONLY thing that makes sense (at this time) in my area. The average household income is in the 60K's and the average house is selling for close to 600K. Things are stupidly bubbly here. I can rent a nice place for less than half the monthly output to own it (even at the current low interest rates). I would be throwing my money away on something that has to come down at some time in the not too distant future (unless you can think of a way that it will somehow become affordable for the average household to purchase at 9-10x income). I wish it were not like this here, but it is. I refuse to be house poor. I want a life.

I will consider buying only when it actually makes some financial sense to do so.

PS - I do enjoy the freedom that renting gives me. I could pick up and leave at pretty much any time I wanted to if I chose to. I don’t pay the repairs. I can build up my savings, take trips, etc. I couldn’t do anything but be a slave to a house that will depreciate soon if I bought at today’s silly prices.

Debbie, the point I was making is does it make sense to rent in retirement? I gave specific numbers looking at my parents purchasing a house in 1975 for $27k and it's worth $350k.

We're not talking right now where you are. We are talking where will you be at 55 or 65. Does that make any sense?

Will you be a life long renter?

[LivingAlmostLarge]

Gruntina, you get it exactly. But does renting come out ahead for 60 years? Say 15-30 years you pay a mortgage like my parents. Does a renter who stays a renter for 60 years until death really come out ahead?

Or will the homeowner win after they finish their mortgage?

[Millionaire Mommy Next Do]

But does renting come out ahead for 60 years? Say 15-30 years you pay a mortgage like my parents. Does a renter who stays a renter for 60 years until death really come out ahead?

Or will the homeowner win after they finish their mortgage?

This is the question I answered for you in detail already (on my blog). I compared a homeowner with a paid-off mortgage with a renter. As shown by the included rent vs buy calculator report, in my local real estate market, the renter comes out ahead. Forever.

Remember, if your house appreciation (equity) is tied up in the roof over your head, you lose the opportunity to invest it in stocks instead. Historically speaking, stocks appreciate faster and higher than house prices.

Besides, unless you sell your home in retirement, how are you planning to spend your equity anyway? (Yes, you can do a reverse mortgage, but they're costly.)

I think the answer you're seeking is already in my post. I wish I could figure out a way to explain it in such a way that this concept was better understood!

[mariogreymist]

Ahem....rents rise as real estate values rise. RE may not appreciate at the rate of broader financial markets, but is essentially the most stable investment one can make in a useable item. The problem with calculating the "Opportunity cost" is the failure to evaluate real estate appreciation.

To Whit: when I was 18, I moved into my first apartment. A modest suburban 1br for $370 per month. My parents' mortgage payment on the 4br rambler in a nicer neighborhood than my apartment? $340.

The mortgage payment you make today on a 4br house will likely keep you in a 1br apartment in 20 years. That's the moral of the story. If it were cheaper to rent than to own, you wouldn't be able to rent at all, because no-one could turn a profit at it.

[Gruntina]

Gruntina, you get it exactly. But does renting come out ahead for 60 years? Say 15-30 years you pay a mortgage like my parents. Does a renter who stays a renter for 60 years until death really come out ahead?

Or will the homeowner win after they finish their mortgage?

I guess I would not know...

It was well known a lot of senior citizen’s were forced to move out of their homes in San Francisco and had to rent apartments because they could not afford the property taxes since it really skyrocketed there. (Part of this problems may have been due to some people not saving for retirement soon enough)

I had to install a new septic tank and repair my foundation for my home which really added the cost to my home in one fell swoop and doesn’t even change or upgrade my house. If you don’t take care of your house along the way, it will fall apart so I guess it depends on what kind of a house you have and what climate zone you live in as that can impact housing materials. Some houses are major debt traps.

Out were we live, there are a lot of private roads where it’s up to the owners in the neighborhood to repair them as city won't. I often see them work on it because of our raining winter, the road collapse every once in awhile along with moles digging under the pavements. Things like this can not be fixed at one time... they have to be repaired repeatedly.

But if you bought a spanking brand new development home with HOA in the city... maybe that is the better way to go if you can afford the payments to begin with and not desire the country living and big lands.

I do believe if I rented in the Bay Area specifically, I would come out ahead and even knowing that, I opt for home ownership so I can live out in the country where 1/5 of the population still home school and my husband would be lost without our yard to plant a flower garden park. I also can not imagine how much higher homes can go for here?!?! It’s a scary thought as median price of homes are 900K still with the bad housing issues lately.

I grew up in Montana, knowing the cost of living situation I would come way ahead with home ownership and renting long term is a bad deal there.

I think it's pretty much a gamble... some win some while others don't.

[DebbieL]

At this time renting makes FAR more financial sense in my area. If it doesn't change (which it will - the market will have to come down), I have no problem renting forever and saving tons of cash. Having a life in other words. Lots of retired people do rent too.

Anybody who bought in the last 4-5 years in my area is definitely losing HUGE amounts of money each month if they are renting out their units. Rents are currently half or less than the cost of buying for the same accomodations (plus are controlled - can only go up 3.7% next year, etc.). They are speculating on future returns (greed from seeing all the house flipping shows and unrealistic gains of the last 5 or 6 years.) I think there’s going to be a lot of crying when all is said and done.

[simpleyme]

in the example given the home is not paid off till the person is 63
is that really when most homeowners pay off their home?
I think most people buy a few years before they learn about investing, , and of course money lost to rent is truly gone,gone to the land owner

the 3500 dollar a month cost of ownership(did I misunderstand that ?) on a paid off house ? does not ring true in any part of my state glad I do not live where that poster does

[Millionaire Mommy Next Do]

[QUOTE=mariogreymist;136780]The problem with calculating the "Opportunity cost" is the failure to evaluate real estate appreciation.
QUOTE]

I didn't fail to evaluate real estate appreciation. Please, people, if you want to know how I arrived at the results I have, please look carefully at my original blog post (this forum won't permit me to post the url, so look at the 1st post in this thread).

I, plus the rent versus buy calculator, evaluated ALL of the following, ALL together at the same time, to compare rent vs buy on the SAME house:

• mortgage terms
• home appreciation
• property taxes
• insurance
• maintenance and repairs allowance
• future sales commission
• homeowner tax deductions
• rent payments
• inflation
• cash on hand (or equity)
• return on investment
• capital gains taxes
• current market value of a home in my local market
• current market value for renting the same local home

Someday, the ratio between house prices and rent prices will perhaps make sense for buyers. But right now, in many real estate markets, they don't.

[Gruntina]

As a humorous aspect -

If someone was making good salary and opt to rent a low end cost apartment instead of buying a home and put most of their money in savings and retirement; they would have more than enough money just to buy a brand new home outright without any interest. That is far cheaper than getting a 30 year mortgage. They would have many choices with their money as long as they max out their retirements and saved a good portion outside retirement while renting.

But then again, I don't want to do home repairs in my golden years, I probably hire cleaning and yard services so I can go shopping and hang out with the grandkids.

[Millionaire Mommy Next Do]

If it were cheaper to rent than to own, you wouldn't be able to rent at all, because no-one could turn a profit at it.

There is a BIG difference between your personal residence and investment real estate. Primarily:

Your personal residence has a negative cash flow (no income, plenty of expenses).

Investment real estate (should have) a positive cash flow (income is higher than expenses, so you make a profit).

Unfortunately, many RE investors during the past few years bought properties with a negative cash flow because they were hopeful that home appreciation would continue to rise at crazy rates (irrational exhuberance). Many are NOT turning a profit right now. Moral of this story-- make sure you start with a positive cash flow as a real estate investor.