Author Topic: I can't understand why "renting = throwing money away" is wrong  (Read 15725 times)

moustacheverte

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I can't understand why "renting = throwing money away" is wrong
« on: December 06, 2015, 03:57:57 PM »
I have been trying to wrap my head around it for a while but still can't explain it when someone asks.

Why is the following argument wrong when trying to argue for buying and against renting:

"if you're renting, you're throwing your money away by paying someone's mortgage while not getting anything in return. If you buy, you pay a mortgage but then have a house to sell"

What is wrong with that argument? Isn't it true? If you're renting, all you're getting for your money is not being evicted. If you're buying, you pay your mortgage monthly in return for not being evicted + eventually owning the place which you can sell and make (some/more) money back.

If you're renting, whatever you do, you're never going to make any money back.

Please enlighten me!

Orvell

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #1 on: December 06, 2015, 04:12:49 PM »
Others will explain this better than me, but the equation isn't as simple as all that, and that's where people start to argue the point being... a little more complicated.

In home ownership there are taxes, repairs, improvements when the 80s brass fixtures and acres of oak cabinets drive you bananas, and insurance against flood and fire, and making sure you mow the lawn and take care of the yard and put enough money into it so that it doesn't lose all that hard won value. And there is a price to sell it. 6% if you use a sellers agent and the buyer has an agent, too. There is also the cost of having your money tied up if you think you can beat the return, especially for a single family home which is not generating revenue on top of being money sunk.

In renting you aren't building equity, but you have a lot more freedom. You can leave. And when your oven breaks, you call the landlord. You may not get "your money back" but you then have a sizable chunk of change you can invest elsewhere, for hopefully a better return than a house would get you.

That said the decision can sometimes be mental not financial. Some people really want a home that is theirs, and there is some peace of mind knowing the rent won't go up next year (although it's likely your taxes and utilities will.)

lostamonkey

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #2 on: December 06, 2015, 04:16:45 PM »
If you are renting to are paying a monthly fee for a residence.

Owning homes have significant carrying costs that you will never get back. These include mortgage interest, repairs and maintenance, insurance, property taxes, and opportunities cost of equity. There are also significant transaction costs (real estate commissions, legal fees, land transfer taxes).

If certain places and for certain people owing comes out ahead, and in other places renting comes out ahead.

protostache

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #3 on: December 06, 2015, 04:18:49 PM »
There's a variety of factors that one might taken into account when making a rent vs buy decision:

  • opportunity cost of downpayment vs investing the cash
  • opportunity cost of owning an illiquid asset vs flexibility of 1 year leases
  • types of mortgage products you qualify for
  • maintenance costs that are your responsibility vs the landlord's

It's really not as simple as "rent = throwing away money," for the above and several other reasons. The New York Times calculator is a great tool to figure out what works best for you, and it's going to be different for everyone.

thepokercab

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #4 on: December 06, 2015, 04:19:56 PM »
As someone who continues to choose to rent, i might be indeed 'throwing my money away' but recently my washer stopped working and the next day I had a new one without having to do anything.  I don't need to repair my roof, buy new furnaces, or do any of the things that make home ownership a bit more complicated than renting. Some people might not mind that stuff, but its just not for me. 

So, sure, from a pure financial perspective, if the variables are right, the rent vs buy economics alone might lean towards buying. But my time is precious, and I enjoy not having to spend it on house related stuff.  But that's just me of course. 

serpentstooth

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #5 on: December 06, 2015, 04:21:39 PM »
Renting and owning a house are both a way to pay for shelter. When you pay rent, you aren't throwing money away, any more than you are throwing money away if you buy and consume food and have nothing to show for it beyond not starving.

Renting comes with significant costs: the rent, the cost of numerous moves during the time you're renting, security deposits, broker's fees, etc.

Owning also comes with significant costs: the interests on the mortgage, the opportunity cost in having capital tied up in the property, paying for repairs, paying for property taxes, flip taxes, mortgage origination fees, realtor's fees, the costs of any renovations you do, homeowner's insurance and the cost of being tied to a specific area.

We barely found a place in our city where it made more sense to rent than own.We ran a lot of scenarios through the NYT rent vs. buy calculator before pulling the trigger. So now we've owned for about a year. If we were to sell TODAY, we'd have to pay thousands of dollars in fees to get out of here: $12,000 to the board for a flip tax and money for the broker if we needed one. Our apartment is worth about $10,000 more than we paid for it, but the neighborhood has also dropped in safety: we've had numerous shootings, rapes and beatings within a few blocks of here and it's no longer advisable for me to go out late at night. Thankfully the police have increased their presence and property values are continuing to rise. But if things really do take a significant downward turn in safety, we could be out tens of thousands of dollars in property value in short order. I suspect things will be fine, but renting comes with far fewer headaches.

arebelspy

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #6 on: December 06, 2015, 04:33:30 PM »
In essence the answer is opportunity cost. If you can rent for cheap enough, and invest the difference, you come out ahead.  You "throw money" away on rent, but still end up with more by doing that.

Let me give you a simple example.

Let's say a house cost 1MM. You put 20% (200k down), 4% rate, pay 1.25% property tax, and 600/yr insurance.  Monthly payment of $4672.28.

You pay that for 30 years, the house (appreciating at the rate of inflation, say 3%) is now worth about 2.42MM (1MM real still).

On the other hand, it would cost you only 2500 to rent.  You "throw away" that rent money for 30 years, but instead invest the 200k down payment, plus the extra 2172.28/mo, at a 7% nominal return (4% real return after our 3% inflation) and at the end of 30 years have 4.28MM nominal (2.17MM real).

I tried not to skew my numbers--this scenario I mentioned, 1MM house and 2500 to rent is fairly realistic in many higher COL areas like the Bay Area, NYC, DC, etc. and the market has done more like 12% nominal, 7% real, rather than the 7%/4% I used (underestimating it).

So is renting in a place like that "throwing your money away?" Heck no! Cause when house prices are too inflated, you're throwing money away by not renting and investing the difference.

(Calculation doesn't change if you don't need to get a mortgage, but could buy the house outright--if you had 1MM, invested it at 7% nominal, took out 2500/mo. to pay the rent, you'd come out ahead of just buying the place--which would be worth 1MM real still after 30 years, but over 1.5MM invested at our low estimates).

One could argue those houses may appreciate more than inflation, but at some point that's unsustainable, and you're taking a big gamble on appreciation.

Anyways, does that make sense why renting isn't throwing your money away?  If the house costs too much, it's better to rent and save it elsewhere in a vehicle that returns more than the house does.

That's what you have to compare to--the alternate, renting. Compare the two scenarios and see which comes out ahead, because it very much depends on the inputs. Anyone who says always buy is as foolish as anyone who says always rent. There's a time and place for each.
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moustacheverte

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #7 on: December 06, 2015, 04:52:48 PM »
Yes, that helps, thank you arabelspy

v8rx7guy

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #8 on: December 06, 2015, 05:53:41 PM »
I think that under the renting scenario, there should be a 3% factor for increasing rent... but that is probably easily offset by the costs of maintaining a house.

Davids

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #9 on: December 06, 2015, 06:31:10 PM »
Basically the answer is it depends on the situation. For some it is better to rent, for others it is better to own. There is no one size fits all correct answer. In my situation it is better for me to own than rent. But that is my situation.

sonjak

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #10 on: December 06, 2015, 10:15:01 PM »
The other posts are great but if you want a couple more things to consider, read this from Afford Anything:

http://affordanything.com/2015/11/24/is-renting-better-than-buying-should-i-rent-or-buy/


tj

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Dicey

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #12 on: December 07, 2015, 12:20:06 AM »
I appreciate this conversation. I  read both of the articles cited above when they were originally published. I was a renter for 14 years and have owned 1 condo, 1 townhouse and 2 single family homes so far.

I LOVE owning my own house. I can put down any kind of flooring, paint any room any color, replace or upgrade any appliance I want to. I can put holes in the walls, hell, move the walls for that matter. I can re-landscape, I can move the furniture any time of day (or night), ditto for laundry. I can convert my electric stove and dryer to gas or vice versa. I can install solar panels, a tankless water heater, or even a water collection system on a whim. I can throw parties, play music, stomp around the house, invite as many friends over as I please. I can have overnight guests, I can park extra cars in my driveway. I can have as many cats or dogs or chickens as local ordinance and my patience allows. This list is by no means comprehensive. Sure I have to pay when things break, but I also have full control over the replacement process. No one ever seems to consider any of this when claiming that renting is the better option. Just my two cents.

albireo13

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #13 on: December 07, 2015, 04:49:45 AM »
One way to look at it ...
The biggest part of the monthly mortgage payment is interest.  That money is being thrown away.  You'll never see it again.  This is eased by the tax deduction.   The part that goes to principle I consider the investment. 
Now, if you rent and have a lower monthly payment, the difference you can invest. Hopefully you'd get a better return than the RE market..

You can play the numbers game but, in the end it most likely becomes an emotional decision.
I enjoy home ownership, never having to interact with a landlord.

snuggler

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #14 on: December 07, 2015, 06:23:24 AM »
Another article that should be required reading for anyone considering a home purchase:

http://www.nytimes.com/2006/03/05/magazine/305tulips_shorto.1.html?pagewanted=all&_r=0

Note the date of publication.

simplertimes

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #15 on: December 07, 2015, 06:48:16 AM »
We were told the whole "renting is throwing your money away" argument and it actually convinced us to buy our first home... in 2006 at what ended up being the peak of the housing market!  We paid $30,000 in down payment, and invested $20,000 in upgrades and repairs (new furnace and a/c, flooring, roof repairs, new garage door) over the 7 years we lived there. 

Then when we moved the house was worth about half of what we paid for it, and after a painful year involving real estate agents, banks, and lawyers, we ended up with a deed in lieu of foreclosure and lost the $50,000 we invested (not to mention 7 years of mortgage payments).  Renting the house out was not an option in our situation.

We moved to an area that gave us a 30% pay increase, which easily covered the extra $450/month in rent we were paying vs. our mortgage payment in our old town.  After several years of renting, however, we are preparing to buy a home again.

Our rent went up $75/month last year, so $900 per year.  But according to Zillow the property taxes for this house went up only $300.  The landlord HAS invested hundreds if not thousands in repairs on this home since we moved in, including removing several dead trees which can be very expensive.

Still, we have decided home ownership will be better for us in the long run.  If we were to buy this home we are living in now, our mortgage even with an FHA loan requiring MIP would be about $1450/1500 a month, while we are currently paying $1625/month in rent.  We realize now that the extra savings will simply end up in repairs on the home (and probably more), so I wouldn't consider it to be a savings of $125/month if we were to buy this home.

What is appealing is the idea of actually owning the home after 30 years instead of seeing annual rent increases eat away at our salary raises every year, and feeling uncertain about whether we'll be able to continue renting the same place year after year.  I want the consistency of location for my children to grow up in a stable environment.  We also want to do more landscaping and have chickens!

It would be wonderful if, when we go to sell the home once the kids are out of the house, we could downsize to something like a townhome and have money to spare.  But frankly we were so burned by the housing market that we are really hesitant to trust in the whole idea of appreciation.


La Bibliotecaria Feroz

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #16 on: December 07, 2015, 12:36:30 PM »
Another issue is home size. Many people buy a bigger house than what they would rent. That was definitely the case when Mr FP and I bought a house in 2006--we got one big enough for the kids we didn't have yet. Well, we moved before we had kids and lost all our money in a short sale.

We had been paying $1400 a month mortgage and had nothing to show for it except trashed credit and emptied savings. Compare that to the rent on the two-bedroom townhouse where we lived while we were looking--$600 a month.

Oops.

bacchi

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #17 on: December 07, 2015, 01:20:49 PM »
The plumber is not "free" in a rental; it's paid for in the rent. Renters pay insurance and taxes and maintenance.

Renting gives freedom. If the rental neighborhood becomes methville, renters can leave and the homeowner is stuck. Conversely, if the rental neighborhood becomes hipville, renters can stay and pay more (for the same unit!) or, again, leave. That sucks if the renter wants to stay because of location.

Landlords that are cash-flow positive aren't giving anything free to the renter.

galliver

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #18 on: December 07, 2015, 01:43:38 PM »
I feel like people are dancing around the idea of risk transfer but not quite saying it. Risk of something going wrong--burst pipe, dead furnace, etc. Risk of property value dropping and then needing to sell. Risk of losing your income before you pay off the mortgage and being on the hook (obviously, you can't pay your rent either then...but you can free yourself of that bill much easier than selling a house).

I'm 27 and still moving around too much to consider buying, and my parents have moved every couple years (7-10 yrs at most) for all my life, so I'm not super-drawn to the idea of buying. I do see the sense in it, when the numbers work out and you have stability, though I'd still be wary of buying in e.g. the SF Bay Area. The prices are already pushing people's capabilities and it seems unlikely they'll keep appreciating much longer...

Mr. Green

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #19 on: December 07, 2015, 01:47:05 PM »
Additional info that lends itself to the idea of renting.

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

Dicey

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #20 on: December 07, 2015, 01:49:51 PM »
We were told the whole "renting is throwing your money away" argument and it actually convinced us to buy our first home... in 2006 at what ended up being the peak of the housing market!  We paid $30,000 in down payment, and invested $20,000 in upgrades and repairs (new furnace and a/c, flooring, roof repairs, new garage door) over the 7 years we lived there. 

Then when we moved the house was worth about half of what we paid for it, and after a painful year involving real estate agents, banks, and lawyers, we ended up with a deed in lieu of foreclosure and lost the $50,000 we invested (not to mention 7 years of mortgage payments).  Renting the house out was not an option in our situation.

We moved to an area that gave us a 30% pay increase, which easily covered the extra $450/month in rent we were paying vs. our mortgage payment in our old town.  After several years of renting, however, we are preparing to buy a home again.

Our rent went up $75/month last year, so $900 per year.  But according to Zillow the property taxes for this house went up only $300.  The landlord HAS invested hundreds if not thousands in repairs on this home since we moved in, including removing several dead trees which can be very expensive.

Still, we have decided home ownership will be better for us in the long run.  If we were to buy this home we are living in now, our mortgage even with an FHA loan requiring MIP would be about $1450/1500 a month, while we are currently paying $1625/month in rent.  We realize now that the extra savings will simply end up in repairs on the home (and probably more), so I wouldn't consider it to be a savings of $125/month if we were to buy this home.

What is appealing is the idea of actually owning the home after 30 years instead of seeing annual rent increases eat away at our salary raises every year, and feeling uncertain about whether we'll be able to continue renting the same place year after year.  I want the consistency of location for my children to grow up in a stable environment.  We also want to do more landscaping and have chickens!

It would be wonderful if, when we go to sell the home once the kids are out of the house, we could downsize to something like a townhome and have money to spare.  But frankly we were so burned by the housing market that we are really hesitant to trust in the whole idea of appreciation.
Have you done the calculation  based on what it would have cost you to rent for seven years? Your loss might not be as big as it feels. You didn't provide those numbers, so I can't do the math, but it might be eye-opening. And for the record, I have no desire to own chickens, lol! I inherited two dogs and a cat. That's plenty!

Edit: stupid typo.
« Last Edit: December 07, 2015, 02:03:25 PM by Diane C »

tj

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #21 on: December 07, 2015, 01:52:56 PM »
The plumber is not "free" in a rental; it's paid for in the rent. Renters pay insurance and taxes and maintenance.

Renting gives freedom. If the rental neighborhood becomes methville, renters can leave and the homeowner is stuck. Conversely, if the rental neighborhood becomes hipville, renters can stay and pay more (for the same unit!) or, again, leave. That sucks if the renter wants to stay because of location.

Landlords that are cash-flow positive aren't giving anything free to the renter.

You just have to run your own numbers locally. There are a lot of older units out there that have been owned for a long time, and thus they can be rented for less than if you would buy something similar on the market and the owner still makes a profit.

A few years ago, I rented a unit that was on Pacfiic Coast Highway. The air conditioner broke. The owner had to not only buy a new air conditioning unit, they also had to pay a crane to come out and put the new a/c on the roof. I suppose their monthly rents consider the cost of repairs, but a lot of small type landlords don't have the experience to predict things like that. I paid the same contractual rent regardless of if the A/C would have busted or not. Maybe the people who moved in afterwards subsidized my rent and got to pay for the a/c replacement in the form of higher rent.


In addition, a huge apartment complex can better scale the purchases of appliances and such vs. a homeowner or small time landlord.

Renting is not throwing $$ away if you are investing the surplus. If buying was cheaper for your specific situation in an equivalent unit, then yes renting woudl be throwing $$ away assuming you know that you don't wish to move in the next few years.

arebelspy

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #22 on: December 07, 2015, 01:57:21 PM »

Additional info that lends itself to the idea of renting.

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

One of the few things Jim's written that I strongly disagree with.

It's overly simplified to one side, much, much too much.

There are times where it absolutely makes sense to buy. 

My tenants paying me 1350/mo. when the PITI on the property is $340/mo.?  They should have bought (if they were able).

They've lived there three years, IIRC, and just renewed for a 4th.  Even counting in the repairs I've done, and transaction costs, they'd have come out way ahead buying.

It very much depends on the circumstances. There's times when buying is terrible, and renting is the no brainer. And vice-versa.

Arguments too strong to one side, like Jim's, just tend to mislead people into thinking that's always the case.
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Dicey

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #23 on: December 07, 2015, 02:02:38 PM »
A few years ago, I rented a unit that was on Pacfic Coast Highway. The air conditioner broke. The owner had to not only buy a new air conditioning unit, they also had to pay a crane to come out and put the new a/c on the roof.
Wait, you lived on PCH and had air conditioning? Seriously? What's wrong with ocean breezes? I lived a couple of miles inland, in West L.A. for eleven years w/o A/C. I didn't even own a fan and only wished I had one a handful of times. There must be more to this story...

ooeei

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #24 on: December 07, 2015, 02:13:52 PM »
Arguments too strong to one side, like Jim's, just tend to mislead people into thinking that's always the case.

I recall a few similar criticisms in the comments and discussions of MMM posts :P

arebelspy

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #25 on: December 07, 2015, 02:14:53 PM »

Arguments too strong to one side, like Jim's, just tend to mislead people into thinking that's always the case.

I recall a few similar criticisms in the comments and discussions of MMM posts :P

Oh yeah?  Which ones?
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Zikoris

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #26 on: December 07, 2015, 02:32:33 PM »
I can give a simple mini case study in Vancouver renting-vs-buying.

I pay $776 rent, including utilities.

If I bought a place I would have to pay for utilities, city sewage/garbage/water fees, property taxes, strata fees($300/month is the low end in Vancouver), maintenance, homeowner's insurance, and mortgage interest. Those things are going to be more than $776/month, and other than the mortgage interest, never go away. Add in the occasional special levy (one person I know just got stuck for 40K), and the opportunity cost of so much money tied up in the down payment, and I'd have to be smoking crack to even consider buying here.

So I rent and invest the HUGE difference. It works out very well.

ooeei

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #27 on: December 07, 2015, 02:48:49 PM »

Arguments too strong to one side, like Jim's, just tend to mislead people into thinking that's always the case.

I recall a few similar criticisms in the comments and discussions of MMM posts :P

Oh yeah?  Which ones?

Off the top of my head I remember one in the "over-cleanliness" one where a woman had a skin disorder that required her to wash often, so she was irritated that the article was so cut and dry about what "over-cleaning" was and how it's wasteful.  There's plenty of comments by people who make lower wages than MMM and suggest he needs to not be so harsh when talking about savings rates or debt emergencies. People who can't bike for one reason or another being offended he doesn't offer disclaimers at the end of articles. etc etc.

Just poking some fun because your phrasing reminded me of those, there's always exceptions to every article/rule.  A fully fleshed out article with every exception laid out would be a long, probably boring read.  I suspect his article applies to more of his audience than not, even if it doesn't apply to everyone.  In any case, as a middle class 27 year old, there are far more people telling me not to throw away money on rent than the alternative.  The article really hit home for me, and I've had a few friends and family figure out the hard way buying isn't always better (well, most of them still haven't figured it out, even though they're paying the consequences).




KittyFooFoo

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #28 on: December 07, 2015, 04:29:50 PM »
I think jlcollinsnh's anti-home stuff is so strongly put because the idea that renting = lighting money on fire and homeownership = basic requirement not to be a dipshit is *so* prevalent and unquestioned.

It's probably more effective to challenge such widely accepted ideas by throwing a few punches than by making the more accurate statement "well, it's complicated, has to be calculated case by case..."

I liked ARS's concrete example, and I think this may be the best way to explain the tradeoffs of buy/rent.  In fact the numbers are quite close for, say, a cheaper 2BR in midtown Manhattan.  ($1mm on the low end for sale, $2900 on the low end for rent).  However, almost all Manhattan sales also come with enormous monthly maintenance costs--like, $1000+ for a 1BR and $1500+ for a 2BR, with some buildings charging much more!

http://streeteasy.com/for-sale/midtown-all/beds=2?page=1&sort_by=price_asc
http://streeteasy.com/for-rent/midtown-all/beds=2?page=1&sort_by=price_asc
« Last Edit: December 07, 2015, 04:37:49 PM by KittyFooFoo »

music lover

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #29 on: December 07, 2015, 05:13:13 PM »
I LOVE owning my own house. I can put down any kind of flooring, paint any room any color, replace or upgrade any appliance I want to. I can put holes in the walls, hell, move the walls for that matter. I can re-landscape, I can move the furniture any time of day (or night), ditto for laundry. I can convert my electric stove and dryer to gas or vice versa. I can install solar panels, a tankless water heater, or even a water collection system on a whim. I can throw parties, play music, stomp around the house, invite as many friends over as I please. I can have overnight guests, I can park extra cars in my driveway. I can have as many cats or dogs or chickens as local ordinance and my patience allows. This list is by no means comprehensive. Sure I have to pay when things break, but I also have full control over the replacement process. No one ever seems to consider any of this when claiming that renting is the better option. Just my two cents.

I agree 100%. Renting always seems temporary to me, compared to the feeling of permanence with ownership. Of course, some people like the ability to move on a whim. I'm just not one of them.

I bought my existing house for $80k, so the payments, taxes, and insurance were equal or less than renting. It was a no brainer for me...in addition to all the points you mentioned, I'm also in 2 rock bands that rehearse in my basement.

If the costs are similar, then people should choose the lifestyle that they want. If there is a huge difference between renting and owning, then you have to way all the pros and cons and choose what's best. I would pay a premium to own rather than rent, others would choose to pay a premium to rent.

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #30 on: December 07, 2015, 05:48:28 PM »

Additional info that lends itself to the idea of renting.

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

One of the few things Jim's written that I strongly disagree with.

It's overly simplified to one side, much, much too much.

There are times where it absolutely makes sense to buy. 

My tenants paying me 1350/mo. when the PITI on the property is $340/mo.?  They should have bought (if they were able).

They've lived there three years, IIRC, and just renewed for a 4th.  Even counting in the repairs I've done, and transaction costs, they'd have come out way ahead buying.

It very much depends on the circumstances. There's times when buying is terrible, and renting is the no brainer. And vice-versa.

Arguments too strong to one side, like Jim's, just tend to mislead people into thinking that's always the case.
I agree with you that there are certainly cases where buying is much better than renting from strictly a monetary standpoint. However, I thought his post did a good job of highlighting all the other "intangibles" besides the money that, cumulatively, may be a big deal to someone. Every single one of the points he makes is valid. Of course most folks don't look at their house strictly as a place to live in exchange for money.

Here's a good case in point, from the state where I'm looking to move to.
http://www.starnewsonline.com/article/20151206/ARTICLES/151209802/1177?Title=-I-don-8217-t-want-to-live-here-anymore-Bypass-puts-land-in-limbo-

My personal story is a townhouse I bought right out of college where my neighbor turned out to be a hoarder. Smell issues developed and it started coming into our house via the concrete basement wall we shared. I talked to everyone, EVERYONE, and because she owned the place the only remedy available to me was suing her for an abatement, which would have been iffy (smell is subjective) and cost me thousands of dollars, maybe five figures. Sure, I probably won the lottery for shitty townhouse neighbors but it can happen and there was no government body that could help me. We even tried to claim it was a health hazard because the ammonia smell was so strong you could smell her house from 30 feet away. Thankfully she sold the place and the people who bought it were wonderful enough to stay and straighten it out. It can happen in single families too. The town where I lived as a kid that had a house that was notorious for that. Some lady had cats and you could smell the place from the street. Since she owned it there was nothing that could be done (and they tried) and it stayed that way for years, maybe decades, until she died. You can't put a price on the ability to walk away from a situation like that.

Obviously your odds of encountering something like that are phenomenally small and I'm not saying don't buy. I have two houses myself. I just think the considerations besides money are very worthwhile.
« Last Edit: December 08, 2015, 06:02:21 AM by Mr. Green »

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #31 on: December 07, 2015, 07:01:33 PM »
A few years ago, I rented a unit that was on Pacfic Coast Highway. The air conditioner broke. The owner had to not only buy a new air conditioning unit, they also had to pay a crane to come out and put the new a/c on the roof.
Wait, you lived on PCH and had air conditioning? Seriously? What's wrong with ocean breezes? I lived a couple of miles inland, in West L.A. for eleven years w/o A/C. I didn't even own a fan and only wished I had one a handful of times. There must be more to this story...

*shrugs* The condo's in that complex had an a/c unit. It was definitely rare for the area.

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #32 on: December 07, 2015, 08:04:22 PM »
Is it right or wrong? 
It depends. 

Age is an overlooked factor in this equation.  Age when you buy and age versus life expectancy when you'll be mortgage free.
I married at 20, bought a house soon after and owned it free & clear by my early 40s without struggling to accelerate payments.  If parents lifespan is a good indicator, I'll be here another 50. 

Many of my peers who settled down later (30s & 40s) and then decided to buy have thrown money away renting while they waited to grow up, and then they went a bit crazy buying what they shouldn't have, losing money spent renting and then following a bit of conventional wisdom that didn't apply to them.  Thirty & Forty somethings have way more people to impress with a home purchase.  They have more refined taste and standards.  They qualify for bigger mortgages.  Based on the other things in their life, I'm not sure owning even makes sense for them.  But builders love them, so whaddoiknow?!  All I know is I wouldn't sign a mortgage for something without a positive cash flow at this age. 

The other overlooked factor in the rent versus buy calculations is race.  In my neighborhood (my grandparents settled here 90 years ago) the homes had deed restrictions indicating who could purchase.  The community was integrated back then.  My black neighbor  (she is 88) sat next to my white father in Kindergarten.  But the black families rented whereas white families could, and tended to, own.  It was a shock to me that this red-lining happened in central NJ.  But just like everywhere else it happened, preventing African American people from ownership prevented them from amassing the same levels of wealth as white families.  This went on for decades and the wealth gap persists for generations.  Whitesplaining that they've been better off as tenants than as owners because index funds is ignorant. 

MrSal

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #33 on: December 08, 2015, 05:41:54 AM »
In essence the answer is opportunity cost. If you can rent for cheap enough, and invest the difference, you come out ahead.  You "throw money" away on rent, but still end up with more by doing that.

Let me give you a simple example.

Let's say a house cost 1MM. You put 20% (200k down), 4% rate, pay 1.25% property tax, and 600/yr insurance.  Monthly payment of $4672.28.

You pay that for 30 years, the house (appreciating at the rate of inflation, say 3%) is now worth about 2.42MM (1MM real still).

On the other hand, it would cost you only 2500 to rent.  You "throw away" that rent money for 30 years, but instead invest the 200k down payment, plus the extra 2172.28/mo, at a 7% nominal return (4% real return after our 3% inflation) and at the end of 30 years have 4.28MM nominal (2.17MM real).

I tried not to skew my numbers--this scenario I mentioned, 1MM house and 2500 to rent is fairly realistic in many higher COL areas like the Bay Area, NYC, DC, etc. and the market has done more like 12% nominal, 7% real, rather than the 7%/4% I used (underestimating it).

So is renting in a place like that "throwing your money away?" Heck no! Cause when house prices are too inflated, you're throwing money away by not renting and investing the difference.

(Calculation doesn't change if you don't need to get a mortgage, but could buy the house outright--if you had 1MM, invested it at 7% nominal, took out 2500/mo. to pay the rent, you'd come out ahead of just buying the place--which would be worth 1MM real still after 30 years, but over 1.5MM invested at our low estimates).

One could argue those houses may appreciate more than inflation, but at some point that's unsustainable, and you're taking a big gamble on appreciation.

Anyways, does that make sense why renting isn't throwing your money away?  If the house costs too much, it's better to rent and save it elsewhere in a vehicle that returns more than the house does.

That's what you have to compare to--the alternate, renting. Compare the two scenarios and see which comes out ahead, because it very much depends on the inputs. Anyone who says always buy is as foolish as anyone who says always rent. There's a time and place for each.

youre assuming the rent stays 2500 for 30 years?

if theres inflation on the house so will the rent be affected as well.

mrteacher

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #34 on: December 08, 2015, 06:04:49 AM »
In essence the answer is opportunity cost. If you can rent for cheap enough, and invest the difference, you come out ahead.  You "throw money" away on rent, but still end up with more by doing that.

Let me give you a simple example.

Let's say a house cost 1MM. You put 20% (200k down), 4% rate, pay 1.25% property tax, and 600/yr insurance.  Monthly payment of $4672.28.

You pay that for 30 years, the house (appreciating at the rate of inflation, say 3%) is now worth about 2.42MM (1MM real still).

On the other hand, it would cost you only 2500 to rent.  You "throw away" that rent money for 30 years, but instead invest the 200k down payment, plus the extra 2172.28/mo, at a 7% nominal return (4% real return after our 3% inflation) and at the end of 30 years have 4.28MM nominal (2.17MM real).

I tried not to skew my numbers--this scenario I mentioned, 1MM house and 2500 to rent is fairly realistic in many higher COL areas like the Bay Area, NYC, DC, etc. and the market has done more like 12% nominal, 7% real, rather than the 7%/4% I used (underestimating it).

So is renting in a place like that "throwing your money away?" Heck no! Cause when house prices are too inflated, you're throwing money away by not renting and investing the difference.

(Calculation doesn't change if you don't need to get a mortgage, but could buy the house outright--if you had 1MM, invested it at 7% nominal, took out 2500/mo. to pay the rent, you'd come out ahead of just buying the place--which would be worth 1MM real still after 30 years, but over 1.5MM invested at our low estimates).

One could argue those houses may appreciate more than inflation, but at some point that's unsustainable, and you're taking a big gamble on appreciation.

Anyways, does that make sense why renting isn't throwing your money away?  If the house costs too much, it's better to rent and save it elsewhere in a vehicle that returns more than the house does.

That's what you have to compare to--the alternate, renting. Compare the two scenarios and see which comes out ahead, because it very much depends on the inputs. Anyone who says always buy is as foolish as anyone who says always rent. There's a time and place for each.

youre assuming the rent stays 2500 for 30 years?

if theres inflation on the house so will the rent be affected as well.

I noticed this, too, and was wondering if it was intentionally left out, for there was no mention of home upkeep costs, which I imagine could balance out rent increase.

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #35 on: December 08, 2015, 07:10:13 AM »
There was a lot of simplified assumptions, on both sides of the comparison.

My point I was trying to get across was that it might make more sense to rent at times due to being able to invest extra money, rather than a lot going to a mortgage on a house that was overpriced.

If that wasn't clear, and there are quibbles about minor things, raise the price of the house to 10MM instead of 1MM. Or 100MM. Assuming it rents for the same (which it wouldn't, but the point is to compare the rent costs to a house payment), the numbers get stupid in favor of renting.

Clearly there's some point where paying a TON for a house you can rent for much cheaper is bad financially, and owning is throwing your money away.

The particular numbers don't matter, it was to illustrate a point. :)
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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #36 on: December 08, 2015, 07:31:47 AM »
Usually the market is quite balanced in terms of which is more attractive due to everyone making the same calculation of renting vs buying. I would take the point of flexibility as a tie breaker in your case. If you expect to move in the near term (5-10 years) because of work or family expansion, go for rent. If you plan to settle down somewhere, consider buying.

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #37 on: December 08, 2015, 08:34:43 AM »
In essence the answer is opportunity cost. If you can rent for cheap enough, and invest the difference, you come out ahead.  You "throw money" away on rent, but still end up with more by doing that.

Let me give you a simple example.

Let's say a house cost 1MM. You put 20% (200k down), 4% rate, pay 1.25% property tax, and 600/yr insurance.  Monthly payment of $4672.28.

You pay that for 30 years, the house (appreciating at the rate of inflation, say 3%) is now worth about 2.42MM (1MM real still).

On the other hand, it would cost you only 2500 to rent.  You "throw away" that rent money for 30 years, but instead invest the 200k down payment, plus the extra 2172.28/mo, at a 7% nominal return (4% real return after our 3% inflation) and at the end of 30 years have 4.28MM nominal (2.17MM real).

Although it brings the point across nicely, I don't think the comparison is entirely fair. This is often my complaint with these rent v buy calculations; they're not apples to apples. The buyer in this scenario gets to live in a $1 MM house. The $2,500/month rent would not live in the same conditions. What is that, a large townhouse? To make it equal you'd have to use the cost of renting a $1 MM house too, which I suspect would be a lot more than $2,500. (This of course assumes that living in a giant house has any value at all and isn't just a waste of money, but that's a different discussion. )

Yes, between renting a 2 bdrm apartment and buying a $1 MM house it's often cheaper to rent. well duh. Now buying an apartment, or renting a mansion? 

In my neighborhood (fairly HCOL) we pay $2,000/ month for mortgage incl everything, but renting the same house would be at least $2,500-3000 from what I've seen around. Just checked zillow; bunch of townhouses in the $2k+ range, but no SFH. So likely even more. ps; these houses are in the $200-400k range
« Last Edit: December 08, 2015, 08:39:57 AM by Scandium »

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #38 on: December 08, 2015, 08:53:34 AM »
I try to look at it as a price for a roof.

We pay a nice sum of $800 plus utils.  We share our internet, our landlords pay the water/trash and maintain things that go wrong.  Average rent around us is double that.

We have no lease, no deposit (though I would replace the carpet that our pets have done in on our dime), and we live in a great neighborhood close to transit to both our jobs.

Buying would require moving farther away, owning 2 reliable cars, maintaining them, and paying a minimum of 250k for a house that likely still needs a good bit of work.

I would like to own someday but only if we can be sure we'll stay there for a while, and it's someplace I actually want to live.  It would raise our cost of living quite a bit to do that, and at the moment it just isn't worth that.   

Someplace I made a spreadsheet, but really unless our rent is $1200, it doesn't make sense for us to buy.

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #39 on: December 08, 2015, 09:16:18 AM »
I seem to think that when we ran the numbers a few years back our rent would have to basically double to $1400-$1500 before we would break even on buying a very cheap condo. So for people who are paying that much rent here in Vancouver, it might make sense.

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #40 on: December 08, 2015, 09:22:48 AM »

In essence the answer is opportunity cost. If you can rent for cheap enough, and invest the difference, you come out ahead.  You "throw money" away on rent, but still end up with more by doing that.

Let me give you a simple example.

Let's say a house cost 1MM. You put 20% (200k down), 4% rate, pay 1.25% property tax, and 600/yr insurance.  Monthly payment of $4672.28.

You pay that for 30 years, the house (appreciating at the rate of inflation, say 3%) is now worth about 2.42MM (1MM real still).

On the other hand, it would cost you only 2500 to rent.  You "throw away" that rent money for 30 years, but instead invest the 200k down payment, plus the extra 2172.28/mo, at a 7% nominal return (4% real return after our 3% inflation) and at the end of 30 years have 4.28MM nominal (2.17MM real).

Although it brings the point across nicely, I don't think the comparison is entirely fair. This is often my complaint with these rent v buy calculations; they're not apples to apples. The buyer in this scenario gets to live in a $1 MM house. The $2,500/month rent would not live in the same conditions. What is that, a large townhouse? To make it equal you'd have to use the cost of renting a $1 MM house too, which I suspect would be a lot more than $2,500. (This of course assumes that living in a giant house has any value at all and isn't just a waste of money, but that's a different discussion. )

Yes, between renting a 2 bdrm apartment and buying a $1 MM house it's often cheaper to rent. well duh. Now buying an apartment, or renting a mansion? 

In my neighborhood (fairly HCOL) we pay $2,000/ month for mortgage incl everything, but renting the same house would be at least $2,500-3000 from what I've seen around. Just checked zillow; bunch of townhouses in the $2k+ range, but no SFH. So likely even more. ps; these houses are in the $200-400k range

No, I tried to pick as close of a comparison as possible. 1MM is a small apartment in many high COL areas.

Your area is not a very high COL, if houses are in the 200k range.

See comment above by KittyFooFoo for example.

If you're in a place where 1MM buys you a mansion, and not just a meh town home or much worse, it may skew the numbers more towards buying.

The point remains to run your own nunbers, but there are certainly places where 2500 rent gets you a 1MM equivalent place.
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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #41 on: December 08, 2015, 09:23:02 AM »

In essence the answer is opportunity cost. If you can rent for cheap enough, and invest the difference, you come out ahead.  You "throw money" away on rent, but still end up with more by doing that.

Let me give you a simple example.

Let's say a house cost 1MM. You put 20% (200k down), 4% rate, pay 1.25% property tax, and 600/yr insurance.  Monthly payment of $4672.28.

You pay that for 30 years, the house (appreciating at the rate of inflation, say 3%) is now worth about 2.42MM (1MM real still).

On the other hand, it would cost you only 2500 to rent.  You "throw away" that rent money for 30 years, but instead invest the 200k down payment, plus the extra 2172.28/mo, at a 7% nominal return (4% real return after our 3% inflation) and at the end of 30 years have 4.28MM nominal (2.17MM real).

Although it brings the point across nicely, I don't think the comparison is entirely fair. This is often my complaint with these rent v buy calculations; they're not apples to apples. The buyer in this scenario gets to live in a $1 MM house. The $2,500/month rent would not live in the same conditions. What is that, a large townhouse? To make it equal you'd have to use the cost of renting a $1 MM house too, which I suspect would be a lot more than $2,500. (This of course assumes that living in a giant house has any value at all and isn't just a waste of money, but that's a different discussion. )

Yes, between renting a 2 bdrm apartment and buying a $1 MM house it's often cheaper to rent. well duh. Now buying an apartment, or renting a mansion? 

In my neighborhood (fairly HCOL) we pay $2,000/ month for mortgage incl everything, but renting the same house would be at least $2,500-3000 from what I've seen around. Just checked zillow; bunch of townhouses in the $2k+ range, but no SFH. So likely even more. ps; these houses are in the $200-400k range

No, I tried to pick as close of a comparison as possible. 1MM is a small apartment in many high COL areas.

Your area is not a very high COL, if houses are in the 200k range.

See comment above by KittyFooFoo for example.

If you're in a place where 1MM buys you a mansion, and not just a meh town home or much worse, it may skew the numbers more towards buying.

The point remains to run your own nunbers, but there are certainly places where 2500 rent gets you a 1MM equivalent place.
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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #42 on: December 08, 2015, 09:40:21 AM »
I appreciate this conversation. I  read both of the articles cited above when they were originally published. I was a renter for 14 years and have owned 1 condo, 1 townhouse and 2 single family homes so far.

I LOVE owning my own house. I can put down any kind of flooring, paint any room any color, replace or upgrade any appliance I want to. I can put holes in the walls, hell, move the walls for that matter. I can re-landscape, I can move the furniture any time of day (or night), ditto for laundry. I can convert my electric stove and dryer to gas or vice versa. I can install solar panels, a tankless water heater, or even a water collection system on a whim. I can throw parties, play music, stomp around the house, invite as many friends over as I please. I can have overnight guests, I can park extra cars in my driveway. I can have as many cats or dogs or chickens as local ordinance and my patience allows. This list is by no means comprehensive. Sure I have to pay when things break, but I also have full control over the replacement process. No one ever seems to consider any of this when claiming that renting is the better option. Just my two cents.




1+

Also, the last few times I rented (while waiting for a house to sell) many of the places for rent seemed to be on the market: there would be people parading through the house at all hours of the day and night. I put a sign on the door that if they knocked on it without having set an appointment to show it 24 hours previously, I would shoot them.

I tacked a silhouette target I'd shot already, beneath the note. It cut down on traffic but didn't really eliminate it: there'd still be people peering in windows and walking up and down on the deck talking loudly, "I wonder if she's home? Couldn't we just peek in quickly?"

I worked graveyard at the time. They are damn lucky I didn't shoot them.

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #43 on: December 08, 2015, 10:29:20 AM »

In essence the answer is opportunity cost. If you can rent for cheap enough, and invest the difference, you come out ahead.  You "throw money" away on rent, but still end up with more by doing that.

Let me give you a simple example.

Let's say a house cost 1MM. You put 20% (200k down), 4% rate, pay 1.25% property tax, and 600/yr insurance.  Monthly payment of $4672.28.

You pay that for 30 years, the house (appreciating at the rate of inflation, say 3%) is now worth about 2.42MM (1MM real still).

On the other hand, it would cost you only 2500 to rent.  You "throw away" that rent money for 30 years, but instead invest the 200k down payment, plus the extra 2172.28/mo, at a 7% nominal return (4% real return after our 3% inflation) and at the end of 30 years have 4.28MM nominal (2.17MM real).

Although it brings the point across nicely, I don't think the comparison is entirely fair. This is often my complaint with these rent v buy calculations; they're not apples to apples. The buyer in this scenario gets to live in a $1 MM house. The $2,500/month rent would not live in the same conditions. What is that, a large townhouse? To make it equal you'd have to use the cost of renting a $1 MM house too, which I suspect would be a lot more than $2,500. (This of course assumes that living in a giant house has any value at all and isn't just a waste of money, but that's a different discussion. )

Yes, between renting a 2 bdrm apartment and buying a $1 MM house it's often cheaper to rent. well duh. Now buying an apartment, or renting a mansion? 

In my neighborhood (fairly HCOL) we pay $2,000/ month for mortgage incl everything, but renting the same house would be at least $2,500-3000 from what I've seen around. Just checked zillow; bunch of townhouses in the $2k+ range, but no SFH. So likely even more. ps; these houses are in the $200-400k range

No, I tried to pick as close of a comparison as possible. 1MM is a small apartment in many high COL areas.

Your area is not a very high COL, if houses are in the 200k range.

See comment above by KittyFooFoo for example.

If you're in a place where 1MM buys you a mansion, and not just a meh town home or much worse, it may skew the numbers more towards buying.

The point remains to run your own nunbers, but there are certainly places where 2500 rent gets you a 1MM equivalent place.

I'm not familiar with  Manhattan/SF markets so won't argue further (although I thought SF rent was average of $3,300+ now?). The NY data was certainly an interesting rent/price ratio, very different from what I'm used to. Just observing that here a $1 MM home is a giant McMansion, and $2,500 rents you a townhouse. I'm sure that's the case many other suburbs too. The apartment market in big cities is a whole other story. Guess that's to your point: it depends ;) From my limited observation buying an apartment certainly seem to be a worse deal more often, compared to a house.

To clarify a townhouse here is $200-300k+, with the low end being rather shabby. SFH is $400-600k, and up. I think that's somewhat high. Partly because I can never make the RE investment math work out (expensive to purchase and low rent).

mm1970

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #44 on: December 08, 2015, 10:32:51 AM »
I haven't read all of the responses, but for me, it comes down to "monthly outlay".

Depending on where you live, of course.

Where I live, it costs much more to buy than to rent. 

Rent may be $3000 a month on a 3BR house.  But to buy that house, requires $850,000.  So that's a downpayment of $170,000, and a mortgage payment of... a lot of money.  And then it costs $9000 a year in property taxes.

So when you factor in all of that, plus the tax savings due to interest payments, you are STILL paying more annually to own than to rent.

Of course, the mortgage doesn't go up over time, and rent does.  So there's the crossover point.

We have owned our home for 11 years.  This year, rent matched mortgage+prop taxes+ insurance.  But that's 11 years of losing money, plus putting money into improvements, that's gone.

Over the long term, it will probably be better to own.  When we are 65, and our kids are out of college, and our only expenses are prop taxes, insurance, and upkeep, then that's a bonus.

However, what if you don't stay in a place long term?  Your options are to sell, or to rent it out.  If we sold our house now, it might sell for what we paid for it 11 years ago, but probably would not.
If we rented it out, it would match our mortgage payment, so we would be net zero, or lose a little on upkeep, etc.

Travis

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #45 on: December 08, 2015, 11:59:37 AM »
I have a very mobile and unpredictable career right now.  I move every 2-4 years and the one time I bought a house I took a pretty big loss on the sale. The market hadn't recovered enough to make renting it out a profitable venture and I had put a few thousand into repainting, a couple appliances, and landscaping.  Some of my coworkers have built small empires of rentals based on buy, move, rent, repeat, but they're much better at that game. The house I'm renting now for $1450 I could theoretically buy for $1100, but that doesn't include the other ownership costs mentioned earlier and the hassle of renting it out or selling it just a couple years later.  When I get to the point where we've settled down and costs of ownership are more concrete we'll definitely buy, but I'm just not comfortable taking the risks that some other folks do with the regular flipping. 

It's not just a simple math problem, but also your risk tolerance.  I'm sure there are plenty of people out there who don't have the geographic stability to buy and even if the math works for buying, the other risks aren't worth it.

BigRed

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #46 on: December 08, 2015, 12:34:13 PM »
I get very frustrated since everyone in my wife's family, including my brother-in-law whose family invests in a lot of real-estate, seems to start and end this discussion with the "rent is throwing money away" line.  We're in Los Angeles, so not only are prices very high, but they've moved up and down over a rather large range in the last decade, and rents are increasing rapidly and unpredictably also, so the analysis is, in actuality, quite complicated.

The struggle I have in doing the analysis is two fold, and I'm interested in what people on this forum have to say about it:

(1) The pro-rent side of the equation sits almost entirely on the investment gains of having your down-payment in the market.  However, if you're considering buying at some point, then putting those funds in the market is quite risky and generally discouraged.  How can you rent, but stay nimble so that if the comparison reverses you can be confident of being able to buy?

(2) The pro-buy side is pretty much a bet on appreciation, which basically means the whole comparison rests on the ability to predict how housing prices will go.  That seems like something I, as an individual, am not well positioned to estimate.  So the uncertainty on the whole comparison is massive.  These calculators give a very overconfident sense of precision, when the housing appreciation is really introducing massive uncertainty into the whole thing.

Or, I could be completely wrong in having these two thoughts, and ending up in decision paralysis...

Travis

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #47 on: December 08, 2015, 12:41:46 PM »
I get very frustrated since everyone in my wife's family, including my brother-in-law whose family invests in a lot of real-estate, seems to start and end this discussion with the "rent is throwing money away" line.  We're in Los Angeles, so not only are prices very high, but they've moved up and down over a rather large range in the last decade, and rents are increasing rapidly and unpredictably also, so the analysis is, in actuality, quite complicated.

The struggle I have in doing the analysis is two fold, and I'm interested in what people on this forum have to say about it:

(1) The pro-rent side of the equation sits almost entirely on the investment gains of having your down-payment in the market.  However, if you're considering buying at some point, then putting those funds in the market is quite risky and generally discouraged.  How can you rent, but stay nimble so that if the comparison reverses you can be confident of being able to buy?

(2) The pro-buy side is pretty much a bet on appreciation, which basically means the whole comparison rests on the ability to predict how housing prices will go.  That seems like something I, as an individual, am not well positioned to estimate.  So the uncertainty on the whole comparison is massive.  These calculators give a very overconfident sense of precision, when the housing appreciation is really introducing massive uncertainty into the whole thing.

Or, I could be completely wrong in having these two thoughts, and ending up in decision paralysis...

Here's a couple more thought processes to consider:

3) Pro-Rent because you're not comfortable with the risks and costs of home ownership and you know you're not touching that investment money for a long time
4) Pro-Buy because you're settling down and don't give a damn about appreciation - you simply want the best bang for the buck.

tj

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #48 on: December 08, 2015, 01:02:37 PM »
Is it right or wrong? 
It depends. 

Age is an overlooked factor in this equation.  Age when you buy and age versus life expectancy when you'll be mortgage free.
I married at 20, bought a house soon after and owned it free & clear by my early 40s without struggling to accelerate payments.  If parents lifespan is a good indicator, I'll be here another 50. 

Many of my peers who settled down later (30s & 40s) and then decided to buy have thrown money away renting while they waited to grow up, and then they went a bit crazy buying what they shouldn't have, losing money spent renting and then following a bit of conventional wisdom that didn't apply to them.  Thirty & Forty somethings have way more people to impress with a home purchase.  They have more refined taste and standards.  They qualify for bigger mortgages.  Based on the other things in their life, I'm not sure owning even makes sense for them.  But builders love them, so whaddoiknow?!  All I know is I wouldn't sign a mortgage for something without a positive cash flow at this age. 

The other overlooked factor in the rent versus buy calculations is race.  In my neighborhood (my grandparents settled here 90 years ago) the homes had deed restrictions indicating who could purchase.  The community was integrated back then.  My black neighbor  (she is 88) sat next to my white father in Kindergarten.  But the black families rented whereas white families could, and tended to, own.  It was a shock to me that this red-lining happened in central NJ.  But just like everywhere else it happened, preventing African American people from ownership prevented them from amassing the same levels of wealth as white families.  This went on for decades and the wealth gap persists for generations.  Whitesplaining that they've been better off as tenants than as owners because index funds is ignorant.

i'm not sure what racial discrimination from generations ago has to do with today's buy vs rent analysis. it was not as easy to invest in equities 90 years ago either.

FLBiker

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Re: I can't understand why "renting = throwing money away" is wrong
« Reply #49 on: December 08, 2015, 02:42:43 PM »
It's funny -- personally, I'd rather be a renter.  I don't love the timesuck nor the mental responsibility of homeownership.  When I say mental responsibility, I mean low-level anxiety.  I never worried my apartment.  I sometimes worry about my house.

That said, we got way too good a deal on our house.  We bought in Dec 2011.  I was looking at various calculators / comparisons, thinking if I could make a compelling argument to move, and I just can't.  We've got a 4/3 in a great neighborhood with a mortgage under 800 bucks.  We were paying more than that for our 1 bedroom apartment (in this same city) 5 years ago.  Now that we have a kid, we'd want at least a 2 bedroom (maybe 3) and that would put us easily in the 1000-1200 range for rent.  To rent a house like ours would be more like 1400.  I guess I just have to suck it up. :)