Rent Versus Buying

[mariogreymist]

Perhaps. There are many other considerations however. Primary among them being the fact that opportunity cost, while real, is not an out of pocket expense as rent is. The lost opportunity to grow capital must be weighed against the modest and stable tax and upkeep costs of ownership. You also need to consider that the opportunity cost, if converted to income, will generate relatively modest returns over a long-term inflationary cycle.

Take your $300,000 house - now sell it and invest the $300k. We can assume 10% returns - I'll even throw in the taxes for nothing. You now have $30k income. Add that to another $300,000 in retirement savings. Now we have $60k income. You can rent and survive with a good lifestyle on that money today...I do it. Unfortunately, your income won't increase over time. Sure, there will be years of $70k, but there will also be years of $50k given market volatility.

If you intend to live for 30 years, do the math. If we assume a modest 2% increase in rents over that time, you've lost $1000 in disposable income if you started in a $1500 rental. And you have no extra income.

The bottom line is, opportunity cost is a reason to not pay off a mortgage. I don't find it a compelling reason to sell a home you own free and clear in favor of rental. In certain instances, (say projecting a short retirement-death cycle) it makes sense. I don't want to assume I'll die within ten years of retirement.

[mariogreymist]

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.

I don't disagree with any of that. You're talking about a short term phenomenon however.

[Millionaire Mommy Next Do]

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

I used 63 in my example because that's what LivingAlmostLarge asked me to do. Most people take a 30 year mortgage, so that would mean buying the home at age 33.

Rent is "gone" to the landlord, just as interest payments + property taxes + maintenance costs + homeowner insurance + ... is "gone". Renting or buying, you're paying for a roof over your head. You're paying for shelter.

The largest portion of the $3250 a month for ownership is lost opportunity costs. In this example, the mortgage-free house has $300,000 equity in it. $300,000 invested at 10% annual return equals $30,000 the first year if the owner were to sell, invest the equity and rent.

Whew. Hard to keep up with all the questions, misunderstandings and math. I never expected so much interest in this concept.

All I can say is this: I couldn't afford to retire right now if I was to buy a home. I can if I rent. So, I'll rent and continue to grow richer!

[mariogreymist]

Remember, you're talking about adopting a fixed income when your largest expense (rent) is inflationary. There are inherent risks in your idea. Remember also, that when income generating investments have a bad year (lose value) your income actually goes down. I wish you well, but I see significant financial instability in this approach.

[disneysteve]

My mom is 77. She and my dad (now deceased) bought their home in 1955 and paid it off a few years later. So she hasn't dealt with mortgage payments for over 40 years.

Last year, she put the house up for sale and moved to a senior apartment building, so she now pays rent, and plans to do so for the rest of her life.

How has that worked for her? It is fantastic. Why? Because she comes out about $800/month ahead compared to when she owned her home. We had figured out that she was spending about $700/month in the house between property taxes, insurance, utilities, maintenance and repairs. In the apartment, however, her expenses run closer to $500/month, so that immediately puts her $200/month ahead. However, she also invested the proceeds from selling the house and is earning nearly $600/month on that money. Can't beat that. Renting is way more lucrative for her, with fewer responsibilities and headaches too.

[LivingAlmostLarge]

Wait, but the $300k will not grow right MMND? What happens if you have a bad year and it's not 10%? Will you live on less? What happens if you only have a 15 year mortgage?

[mariogreymist]

Wait, but the $300k will not grow right MMND? What happens if you have a bad year and it's not 10%? Will you live on less? What happens if you only have a 15 year mortgage?

Not only will you have to live on less, but you will have to live on less for the rest of your life, unless you want to live on your principal.

[rooskers]

I rented for 7 years and while I was there my rent never went up at all. Granted every new person that moved in to the apartments paid a higher rent just as I paid a higher rent than the grandmother that lived next to me. My moms property taxes have increased from 300 dollars a year to well over 2000 dollars a year. Guess that nice flat 30 year rate you guys talk about on the house compared to the rising cost of renting each year isn't always correct. My take on it is this. Average income in my area $40,000. Average house price $450,000. Average rent $700. Recommendation rent. Now back in the late 80's and early 90's average house price was $60,000 and average income was $35,000. Recommendation buy a house. People are always looking for one perfect answer when it comes to life and there isn't. Stocks return an average of somewhere near 8 - 10% however if you bought all tech stocks at the peak of the bubble you might be at a loss still. The problem with the arguement over whether stocks are better, buying a house is better, renting is better is that facts proving which one is better can be made for all of them. Just a side note is I bought a house finally last year. Currently is has lost value of around $20,000. Am I bummed about this, not really. I love to work out in the yard it is a hobby, are 2 year old loves the extra room, I don't worry about the neighbor in the apartment below us when we have one of those 2 year old fit throwing, I have a garage I can tinker in and lots more storage space, we have room for company, my wife loves the kitchen with more room, etc... Financially speaking I can settle the rent vs buy for us neither are best financial move would have been to move into my parents house for free for the rest of our lives and invest all money the money that we would have had to pay in rent or mortgage payments but who wants to do that.

[Millionaire Mommy Next Do]

Wait, but the $300k will not grow right MMND? What happens if you have a bad year and it's not 10%? Will you live on less?

Over the long term, yes, my investment portfolio continues to grow. I used 10% as this is most commonly used by most financial planners as a long-term historical AVERAGE. This means that some years you might make much more, others much less. But the long-term trend in the stock market has always been UP.

No, I won't have to live on less in some years. For instance, this year to date (through October), my investment portfolio has gained $259,000. But I will never withdraw more than 6% of my total portfolio in any given year (to account for inflation). I have about 1.6 million, so I can spend $96,000 this year. That leaves me ahead $163,000 so far this year. If next year shows a loss, I'll still take no more than 6% of my total portfolio. Can you see how it all averages out? I'm too tired to explain this more tonight, but it is a basic personal finance concept, so you can learn more about it in most PF books.

[Millionaire Mommy Next Do]

Just a side note is I bought a house finally last year. Currently is has lost value of around $20,000. Am I bummed about this, not really. I love to work out in the yard it is a hobby, are 2 year old loves the extra room, I don't worry about the neighbor in the apartment below us when we have one of those 2 year old fit throwing, I have a garage I can tinker in and lots more storage space, we have room for company, my wife loves the kitchen with more room, etc... Financially speaking I can settle the rent vs buy for us neither are best financial move would have been to move into my parents house for free for the rest of our lives and invest all money the money that we would have had to pay in rent or mortgage payments but who wants to do that.

Do you realize that you can enjoy all of the same things about a home- whether you pay rent or pay a mortgage?

Our home (rented) has a big gorgeous yard; we've been raking leaves into big piles for our daughter to jump in lately. We can grow our own garden, play on our own covered patio. When we get bored with our yard, we walk across the street to the HUGE park, playground and fishing lake. Our nearest neighbor is plenty far away from us (they never hear our 2 yr old, either) because we live in a normal, single family residence in a normal, family neighborhood. We have a huge garage if we want to tinker, 2 extra guest bedrooms, 3 bathrooms with jetted tub and luxury showers, about 2000 square feet of living space... All this, and when something breaks, all we have to do is pick up the phone.

No one would know that we rent our house by looking at it. It is our home, whether we pay rent or pay a mortgage.

Remember, home is where the heart is. It doesn't need to be any different whether you pay rent or pay a mortgage. Unless YOU choose to make it matter.

[Gruntina]

Do you realize that you can enjoy all of the same things about a home- whether you pay rent or pay a mortgage?

Our home (rented) has a big gorgeous yard; we've been raking leaves into big piles for our daughter to jump in lately. We can grow our own garden, play on our own covered patio. When we get bored with our yard, we walk across the street to the HUGE park, playground and fishing lake. Our nearest neighbor is plenty far away from us (they never hear our 2 yr old, either) because we live in a normal, single family residence in a normal, family neighborhood. We have a huge garage if we want to tinker, 2 extra guest bedrooms, 3 bathrooms with jetted tub and luxury showers, about 2000 square feet of living space... All this, and when something breaks, all we have to do is pick up the phone.

No one would know that we rent our house by looking at it. It is our home, whether we pay rent or pay a mortgage.

Remember, home is where the heart is. It doesn't need to be any different whether you pay rent or pay a mortgage. Unless YOU choose to make it matter.

Renting a house is a bit more risky than an apartment complex. There is always a chance the owners want to move back in or sell the house and then the renters are out of that home. Nice houses near parks or nice cities are bound to cost way more than average rentals that you probably come out even if you bought a house. You don't have the luxury to change and remodel a rental as well. Granted home is what you make of it regardless where you live but as Americans we like choices.

(This is pretty much going off the center of the conversation... sorry!)
I also think we can not go by our parent's example of their houses since we are in a different economic situation. We have different and longer loans and credits that were probably not available back then.

Jobs prospects have changed as well. More of our jobs in the US are being outsourced compared to 10 years ago. This will make an impact whether housing cost booms like it did in the last 10 years prior to the housing fall (especially in the technology an engineering industry like Silicon Valley) This made the house value skyrocketed for home owners (In this specific case, it was better than stocks for a time) This was not a normal steady rate of houses increasing their value so much over time as it was more of a freak thing. Who knows if we go through that again for the new home owners? I also see that technology and engineering are grouping up with other big companies as it is more successful to work together instead of competing since we are a multitask country where we like to have phone, computer, text, TV and etc all in one device.

I am not trying to say that only engineers impact our home value but it was merely an example. We do have more of our work in the US being outsourced compared to 10 years ago. I think just so many things factor in home ownerships vs rentals so there is no clear cut answer as it works differently for everyone.

[simpleyme]

in todays market i think the renting over buying may make sense but when we bought our first home I was 18 and it cost about the same as one years income
I would like to point out we elected to buy an affordable home, there were homes available out of our range that we could have bought

we do not allow our renters to have pets ,smoke in the house ,make changes such as painting ,have extended guests, have non-running or cars
they cannot move someone in without them being approved and put on the lease

when i was a kid we had to move twice because the rentals sold out from underneath us

I do not really care if people choose not to buy actually as a landlord this current realesate mess is great more quality people needing affordable housing

[LivingAlmostLarge]

MMND, what about the taxes on your income from your portfolio? Is that calculated in the 10% returns?

Also where I live people who rent usually pay 2-3x more utilities than I do because their rentals are not maintained. How do you account for that? I mean I pay $200 to heat last year and someone down the street that I work with paid $600-800/month.

Mainly these are old houses, and they have never been renovated. I have a natural gas new furnance, new double paned storm windows, I don't have cracks around the doors/windows, and I have insulation and siding. This is not a single example either.

Since I'm in school most people rent. And EVERYONE I talk to rents an older brownstone, townhouse, condo. They are responsible for heating in MA, these are older homes like my 1880s victorian. So you can literally stand outside and watch the heat escaping. Plus many place heat with oil which is expensive and inefficient.

So how do you account for renting a place which costs a lot to heat? Does that weigh into the decision? And I know in CA where we lived it wasn't a big deal, homes were newer and A/C or heat wasn't a necessity. But out east it is.

[mariogreymist]

Over the long term, yes, my investment portfolio continues to grow. I used 10% as this is most commonly used by most financial planners as a long-term historical AVERAGE. This means that some years you might make much more, others much less. But the long-term trend in the stock market has always been UP.

No, I won't have to live on less in some years. For instance, this year to date (through October), my investment portfolio has gained $259,000. But I will never withdraw more than 6% of my total portfolio in any given year (to account for inflation). I have about 1.6 million, so I can spend $96,000 this year. That leaves me ahead $163,000 so far this year. If next year shows a loss, I'll still take no more than 6% of my total portfolio. Can you see how it all averages out? I'm too tired to explain this more tonight, but it is a basic personal finance concept, so you can learn more about it in most PF books.

And this is all worth considering if you have 1.6m. If your nestegg is small, you need to value stability over wealth.

[DebbieL]

I've been renting the same place for almost 7 years. For the first 4 years my rent stayed the same. The most it has ever gone up since then is 4%/year (the province I live in has strict rules on this). Next year the maximum increase will be 3.7%. In the last year I've had a new fridge (good one too) and stove put in all at the landlord’s expense. Anything that goes wrong is their problem, not mine. I love it. Would I buy something if the prices made sense here? Possibly. Right now buying would be foolish for me. I live nicely and have money to save, travel, etc. I couldn’t do anything with a huge monthly payment (which a $600K mortgage would be). I am also going back to school this January to finish my degree and get my designation as an accountant. I will continue to work, but also have the money to pay for my college without loans. I couldn’t possibly do it if I had bought into these ridiculous prices here.