Author Topic: rent v buy  (Read 17243 times)

hoping2retire35

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rent v buy
« on: July 28, 2015, 08:11:19 AM »
my comment is awaiting moderation and since i am impatient i am going to post this now. I keep reading that people somehow think renting is cheaper than buying, as in less money leaves your bank account every month when renting as opposed to paying the mortgage, like $1500 mortgage versus a $1200 rent for an identical place. I feel like I am in the twilight zone, am I missing something? why on earth would an investor buy a place that cannot even begin to pay its basic operating expenses, i believe if this would actually give the investor a negative cap rate, but i guess you do not count the principle mortgage payment for a cap rate however even then it would be extremely small. My ignorance of this situation may be due to never living in a large city, over 100,000, but I cannot figure out how someone with a calculator figures this to be a good investment. Is it a secure place to put capital if so why is this better than bonds? I have a townhome but my cap rate is like 12% and cash on cash return is phenomenal so I am confused.

forummm

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Re: rent v buy
« Reply #1 on: July 28, 2015, 08:43:40 AM »
why on earth would an investor buy a place that cannot even begin to pay its basic operating expenses,

The investor may have purchased the place many years ago when prices were lower. The investor gets tax advantages for renting. The investor may not be very savvy. Etc.

hoping2retire35

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Re: rent v buy
« Reply #2 on: July 28, 2015, 10:28:36 AM »
yeah i guess with depreciation I get why having low or negative margins could be a tax advantage. If an investor is in finance or some other high income job in a large city and wants to buy something that he can see at his leisure explains why purchase price versus rental price is overinflated only in large cities. Does this explanation fit anyone's experience?

ysette9

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Re: rent v buy
« Reply #3 on: July 28, 2015, 11:01:04 AM »
I cannot offer you a good "why" but I can say that where I live in a high cost of living area (Bay Area) in most cases it is cheaper to rent vs. buy. When we ran the numbers in our personal situation using the NYT rent/buy calculator it basically told us we would only break even if we bought and stayed there for at least ten years. I have always lived this reality so it boggles my mind there are places out there where it is cheaper to buy than rent!
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nereo

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Re: rent v buy
« Reply #4 on: July 28, 2015, 11:34:34 AM »
... I keep reading that people somehow think renting is cheaper than buying, ..., but I cannot figure out how someone with a calculator figures this to be a good investment.
1) Many people do not use (good) calculators, even when spending $100ks on a home
2) The real-estate industry is filled with bad advice about how your home is the best "investment" you'll ever make you should buy the biggest you can afford.
3) People look at the purchase price and the selling price and conclude owning a particular home was a phenominal deal, ignoring interest, maintenance, taxes, inflation and investment cost.  Example, my neighbor swears the house he bought in 1972 for $42k was the greatest deal ever because it's now worth over $700k.  He had a 30yr mortgage at 8.5%, redid the roof twice, spent tens of thousands renovating it several times, and paid god-knows how much in taxes.  A similar amount invested in the SP500 would be worth over $2.8MM today.
4) the media and reality shows hype profits that can be made with house-flipping and unusual markets where home appreciation has average 6% for many years.  Again, this almost always ignores things like maintenance, taxes etc.
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FI40

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Re: rent v buy
« Reply #5 on: July 28, 2015, 12:04:08 PM »
I live in downtown Toronto. I rent a place for $1730 (it just got raised from $1600, but it's still a good deal) that would sell for over $550k. It's not the best renting deal around, but it's pretty good.

I posted here with a similar question a couple years ago (basically, am I missing something, why is my landlord subsidizing me so much) and I think there were a few reasons but the main take-away is that the investor must assume a high rate of appreciation on the property. It's the only way the math remotely makes sense.

When you leverage up 95%, and the property value increases ~10% for a few years you start to look like a genius, you tell your friends, and they decide they will be geniuses too, etc. I hear options on tulip bulb CDO futures are the next big thing, get in now for the runaway profits!

That's my rationalization anyway, that landlords are kind of caught up in a bubble.

hoping2retire35

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Re: rent v buy
« Reply #6 on: July 28, 2015, 12:55:05 PM »
Ive thought about the bubble aspect but so many large cities seem to have had this "bubble" for so long it has to be another factor and i suspect the price stays high from an initial bubble but it never pops (but begins to grow slower?) and maintains the inflated price because of tax write off?? IDK.
I am just trying to understand this situation that seems to be so pervasive in large cities. for example; we bought our townhouse for $60,000 in 2011 and rent for $900 a month, usda loan 0% down 4.25% interest 30 years. we lived in it before so we did upgrades like hardwood floors, nice appliances etc, so i can sign a lease within a day of advertising which leads me to believe I can raise the price even more. My mortgage on this has fluctuated because of miscalculated escrow but think it will finally settle around $400 a month plus a $150-200 hoa fee, $65 for insurance and almost 0 maintenance for the foreseeable future(total bills fluctuate between $600-750). I could also hire a management company to do everything for about $100. The price of similar places has risen to about $69k. For now i will stay leveraged but once the retirement date nears I will pay this down or off in order to have more security. maybe everyone should place an * whenever they say it is cheaper to rent than buy stating the location.

forummm

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Re: rent v buy
« Reply #7 on: July 28, 2015, 01:14:24 PM »
I live in downtown Toronto. I rent a place for $1730 (it just got raised from $1600, but it's still a good deal) that would sell for over $550k. It's not the best renting deal around, but it's pretty good.

I posted here with a similar question a couple years ago (basically, am I missing something, why is my landlord subsidizing me so much) and I think there were a few reasons but the main take-away is that the investor must assume a high rate of appreciation on the property. It's the only way the math remotely makes sense.

When you leverage up 95%, and the property value increases ~10% for a few years you start to look like a genius, you tell your friends, and they decide they will be geniuses too, etc. I hear options on tulip bulb CDO futures are the next big thing, get in now for the runaway profits!

That's my rationalization anyway, that landlords are kind of caught up in a bubble.

Maybe the landlords would face a huge tax bill if they sold, and the rent money is better than the tax bill in their eyes?

nereo

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Re: rent v buy
« Reply #8 on: July 28, 2015, 02:18:49 PM »

Maybe the landlords would face a huge tax bill if they sold, and the rent money is better than the tax bill in their eyes?
or.... 
maybe the landlords simply haven't or do not wish to look at their property critically.  Never doubt the power of self-delusion.

In psychology it's called the endowment effect.  People value what they have more than they should.
« Last Edit: July 28, 2015, 02:21:55 PM by nereo »
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lostamonkey

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Re: rent v buy
« Reply #9 on: July 28, 2015, 06:29:06 PM »
I know a few reasons why people buy rental properties in negative cash flow situations:
1. They haven't actually done the math and just assume if rental income is greater than required mortgage payment then they will come out ahead
2. They assume that it is realitively risk free unlike the stock market which is gambling
3. They are not willing to make investments in stocks and bonds
4. They see it as a way of "getting rich" without really thinking too deeply about it
5. They assume price appreciation will make up for negative cash flow

GuitarStv

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Re: rent v buy
« Reply #10 on: July 29, 2015, 09:43:46 AM »
Kinda have to disagree with MMM on the thrust of his article.  Five years ago we were crunching the numbers on the rent vs buy decision, and for us it came up buy.

I bought a place in the suburbs in north east Toronto (Scarborough).  We paid 380 for it, and are about ten miles to work (close enough to bike commute in 40 minutes most days).  The area we live is awesome . . . there are huge green-spaces crisscrossed with lovely roads for long rides on the weekend.  We're about 5 miles from a beach.  Our fantastic public library is just about a mile down the street.  Traffic is pretty good around our home, so I'll be comfy with my son going out to the park and playing with friends on his own when he gets older.  The solar panels on our roof bring in several grand each year.  The basement that I've renovated is now an awesome combination workout area and music studio.  Property taxes in Toronto are some of the lowest in any city in Canada at 0.7 %.

Is everything perfect?  No.  It's a five or ten minute bike ride to the two nearest grocery stores, not a five minute walk.  There is public transit available nearby, but it takes forever to get places using it (to work is a 40 minute bike ride, 25-30 minute drive, or 70 minute multiple transfer transit ordeal) . . . so it would be difficult to go completely car-less.  The nearby schools are good, but not the highest rated in the country.

I honestly don't think we would have been any happier renting closer to where we work though.

brooklynguy

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Re: rent v buy
« Reply #11 on: July 29, 2015, 10:00:43 AM »
Kinda have to disagree with MMM on the thrust of his article.

I think Go Curry Cracker made a much more compelling case in his latest two articles (which had a similar "thrust" to MMM's).

http://www.gocurrycracker.com/renters-for-life/

http://www.gocurrycracker.com/how-i-made-102k-in-real-estate/

Cathy

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Re: rent v buy
« Reply #12 on: July 29, 2015, 10:05:31 AM »
The most compelling argument for purchasing title to a fee simple estate has nothing to do with finances. Rather, it's so that you can be a tenant under only a single level of landlord: government. As a sub-tenant or tenant of a leasehold estate, you have to deal with two levels of landlord: the tenant of the fee simple estate and her landlord, namely, government. There's no way I would want to deal with two levels of landlord for the rest of my life. I tolerate it during the accumulation phase, but it's certainly not suitable for a long term plan. If you want to be left alone, each new level of landlord makes that an increasingly unrealistic goal.
« Last Edit: July 29, 2015, 10:14:52 AM by Cathy »
This post contains only general information on the issues raised by this topic. This post does not provide help tailored to your specific situation. There are many facts that could be relevant to your specific situation and I am not in possession of those facts. If you need help tailored to your specific situation, you should retain an appropriate professional and not rely on this post.

forummm

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Re: rent v buy
« Reply #13 on: July 29, 2015, 10:33:54 AM »
The most compelling argument for purchasing title to a fee simple estate has nothing to do with finances. Rather, it's so that you can be a tenant under only a single level of landlord: government. As a sub-tenant or tenant of a leasehold estate, you have to deal with two levels of landlord: the tenant of the fee simple estate and her landlord, namely, government. There's no way I would want to deal with two levels of landlord for the rest of my life. I tolerate it during the accumulation phase, but it's certainly not suitable for a long term plan. If you want to be left alone, each new level of landlord makes that an increasingly unrealistic goal.

Sorry, I don't follow. Why is it a problem to rent from someone? What interaction do you have to have with the government if you rent from a landlord?

Mika M

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Re: rent v buy
« Reply #14 on: July 29, 2015, 05:19:38 PM »
I'm impatient, too, so my reaction was something like this:

My husband and I began to regret owning (and began to miss renting) not long after buying our current house. While owning offers the ability to recoup some of your costs through resale, it is a huge pain because of all the expensive maintenance required, it's not without risk and you could still lose a lot of money, it's locked-up money that you can't use anyway, and it just makes you feel all the more tied down... plus if you get a mortgage and just pay the bare minimum for 30 years, you've probably paid more in interest than the house is worth so it wouldn't necessarily count as a more worthwhile use of your money than renting.

I think conventional wisdom in our society overrates the value of home owning. Not only are there a lot of added expenses you don't hear much about to counterbalance ads from real estate companies (like maintenance, upgrades, etc.), but psychologically you feel super tied down to that one place (unless of course you're happy with that). Based on my experience and all the articles and blogs I've read on renting vs. owning, I'd have to disagree with the other conventional wisdom that renting is just "throwing your money away"... Either way you're paying a lot for a place to live and owning and/or landlording doesn't necessarily get you a great return on investment or in some cases even any return on investment...
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nereo

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Re: rent v buy
« Reply #15 on: July 29, 2015, 06:35:18 PM »
I'm impatient, too, so my reaction was something like this:

My husband and I began to regret owning (and began to miss renting) not long after buying our current house. While owning offers the ability to recoup some of your costs through resale, it is a huge pain because of all the expensive maintenance required, it's not without risk and you could still lose a lot of money, it's locked-up money that you can't use anyway, and it just makes you feel all the more tied down... plus if you get a mortgage and just pay the bare minimum for 30 years, you've probably paid more in interest than the house is worth so it wouldn't necessarily count as a more worthwhile use of your money than renting.

I think conventional wisdom in our society overrates the value of home owning. Not only are there a lot of added expenses you don't hear much about to counterbalance ads from real estate companies (like maintenance, upgrades, etc.), but psychologically you feel super tied down to that one place (unless of course you're happy with that). Based on my experience and all the articles and blogs I've read on renting vs. owning, I'd have to disagree with the other conventional wisdom that renting is just "throwing your money away"... Either way you're paying a lot for a place to live and owning and/or landlording doesn't necessarily get you a great return on investment or in some cases even any return on investment...
Hey, Springfield, VA!  Did you grow up there or move from someplace else?

Agree that the "convensional wisdom" (aka real-estate marketing) overrates the value of home owning and ignores/plays down the amount of money and time you will spend on maintenance and upgrades just to keep it in a similar condition.
FWIW, with today's ultra-low mortgage rates, even paying the monthly minimum on a 30y note you wind up paying about 50% extra in interest, not "more in interest" as is commonly believed (an echo from not-too-distant past when people had +5.4% mortgages).  Just sayin'.
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Re: rent v buy
« Reply #16 on: July 29, 2015, 08:36:02 PM »
The house we rent is probably a good example of how most big-city landlords think.  We're in the SF Bay Area paying (nearly) SF Bay Area prices .

Our landlord bought the house in 2006 for $630K.  Around 2010, they got jobs in Texas and decided to rent the place out.  Market rent at the time was $2,800.  We've been good low maintenance tenants, and have been paying $2,800/mo since 2010.  They could easily raise the rent in this market by $1,000 - $1,500 and it would still be a good deal for us, but I suspect they haven't precisely because we're low maintenance tenants.

But in the end, they're still WAY winning due to price appreciation.  A comparable home a block away just sold for $1.3M.  The home value has literally doubled in under a decade. 

I suspect a good reason they don't sell is that they might end up back in the bay area due to their careers at some point.  With this in mind, they're doing pretty friggin good without trying to maximize every dollar of value.

Mika M

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Re: rent v buy
« Reply #17 on: July 30, 2015, 06:18:57 AM »

Hey, Springfield, VA!  Did you grow up there or move from someplace else?

Agree that the "convensional wisdom" (aka real-estate marketing) overrates the value of home owning and ignores/plays down the amount of money and time you will spend on maintenance and upgrades just to keep it in a similar condition.
FWIW, with today's ultra-low mortgage rates, even paying the monthly minimum on a 30y note you wind up paying about 50% extra in interest, not "more in interest" as is commonly believed (an echo from not-too-distant past when people had +5.4% mortgages).  Just sayin'.
[/quote]

Hi, I grew up in Arlington, actually. I spent some time moving around for the military then got out and settled in Springfield...

True, it does depend on you interest rate.
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Mika M

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Re: rent v buy
« Reply #18 on: July 30, 2015, 06:29:18 AM »
As for the pets issue... With the decreased commute you'd have more time to spend with children and/or pets... I'd say you can still look for a rental that allows them and just keep a beagle. Or a cat.
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brooklynguy

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Re: rent v buy
« Reply #19 on: July 30, 2015, 07:41:05 AM »
The most compelling argument for purchasing title to a fee simple estate has nothing to do with finances. Rather, it's so that you can be a tenant under only a single level of landlord: government. As a sub-tenant or tenant of a leasehold estate, you have to deal with two levels of landlord: the tenant of the fee simple estate and her landlord, namely, government. There's no way I would want to deal with two levels of landlord for the rest of my life. I tolerate it during the accumulation phase, but it's certainly not suitable for a long term plan. If you want to be left alone, each new level of landlord makes that an increasingly unrealistic goal.

Sorry, I don't follow. Why is it a problem to rent from someone? What interaction do you have to have with the government if you rent from a landlord?

I read Cathy's post to mean that although it is impossible to escape government interference with your property (i.e., restrictions on use (e.g., you can't operate a heliport in your backyard in most residential districts), potential for forced disposition of the property via exercise of eminent domain, etc.), as an owner, you can at least escape the drawbacks of having to deal with a private landlord.

Even the word "landlord" reflects this concern with renting.  It is an example of residual terminology from a bygone era that, for whatever reason, has not fallen out of usage or become an anachronism.  If we were not all so habituated the word (if, say, owners who rent out their property were instead commonly referred to simply as "lessors"), it would probably shock us to hear someone refer to him/herself as a "landlord."  Similarly, my tenants would probably take umbrage if I started to refer to myself not as "their landlord" but as "the lord of their land" (which I view as no different in substance).

Cathy

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Re: rent v buy
« Reply #20 on: July 30, 2015, 08:41:43 AM »
At common law, the landlord-tenant relationship refers specifically to the rights and obligations arising from the conveyance of an estate (whether a fee simple estate, a leasehold estate, or otherwise). A landlord-tenant relationship exists when and only when the parties are in "privity of estate". By contrast, the lessor-lessee relationship refers to all of the rights and obligations incident to a lease, including those rights in "privity of contract" (i.e. arising from the lease agreement). These archaic distinctions still matter for a variety of purposes in current law. See, e.g., Vallely Investments v. BancAmerica Commercial Corp. 88 CalApp4th 816 (2001); Syufy Enterprises v. City of Oakland, 104 CalApp4th 869 (2002); Spinks v. Equity Residential Briarwood Apartments, 171 CalApp4th 1004 (2009).

This is not meant to disagree with brooklynguy's post, but rather to supplement it. In fact, in my post above, I intentionally used overly complicated language to highlight the archaic nature of the system.
« Last Edit: July 30, 2015, 08:47:00 AM by Cathy »
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tvan

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Re: rent v buy
« Reply #21 on: July 30, 2015, 09:16:37 AM »
Toronto rent is cheap.  SoCal...not so much.

nereo

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Re: rent v buy
« Reply #22 on: July 30, 2015, 10:40:05 AM »
Toronto rent is cheap.  SoCal...not so much.
Toronto is one city - SoCal is ~80,000 mi2 and consists of 10 counties, about two dozen cities and hundreds of towns. SoCal has everything from dirt-cheap to wicked expensive rentals.
Not really comparable.
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tvan

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Re: rent v buy
« Reply #23 on: July 30, 2015, 10:43:09 AM »

Toronto rent is cheap.  SoCal...not so much.
Toronto is one city - SoCal is ~80,000 mi2 and consists of 10 counties, about two dozen cities and hundreds of towns. SoCal has everything from dirt-cheap to wicked expensive rentals.
Not really comparable.

Fine, lets play internet semantics - Orange County.

nereo

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Re: rent v buy
« Reply #24 on: July 30, 2015, 03:49:21 PM »

Toronto rent is cheap.  SoCal...not so much.
Toronto is one city - SoCal is ~80,000 mi2 and consists of 10 counties, about two dozen cities and hundreds of towns. SoCal has everything from dirt-cheap to wicked expensive rentals.
Not really comparable.

Fine, lets play internet semantics - Orange County.

Internet semantics??  SoCal is NOT just orange county! It's <2% the area of SoCal and ~14% of the total population.   Might as well say Ontario is just Toronto, or that the entirety of New York State is expensive...  This is not semantics.

Yes, Orange country is an expensive location to rent.
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Breaker

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Re: rent v buy
« Reply #25 on: July 30, 2015, 06:29:36 PM »
I'm coming down on the side of owning, unless you are planning a move within say 10 years. 

I have never liked to rent.  I definitely don't like to be in apartment buildings.  Way to close to other people.  A renter has no real control of how much rent they will be paying or even if you will be able to live in a rental as long as you planned.  Yes, you have a lease but leases can and are broken all of the time. 

Yes an owner has maintenance to pay for but they also have tax deductions that a renter does not.  In Ca. the interest paid on a home loan is tax deductible.  And if you keep the receipts for repairs you can take them off the Sell Price of the house when you sell. 

As for locking up your money, that is true but you can get a HELOC and/or 2nd mortgage if needed.  Not only that as an owner you are getting the use of your investment every day.  Stock investments are nice but I really don't get to make use of that money on a daily basis.  And at some finite time in the future you will pay off the mortgage and have no "rent" to pay anymore.  What a boost to your ability to FIRE. 

 

music lover

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Re: rent v buy
« Reply #26 on: August 02, 2015, 08:59:33 AM »
Renting vs. buying is not only about dollars and cents...it's also about lifestyle. Some people might be happy with shared walls, no yard, and no balcony, but I'm not one of them. I like my yard, the 500 sq ft of deck outside my door, the workshop in my garage, my sunroom, the fact that my band can rehearse at volume without neighbor's complaints, etc.

The benefits of home ownership to me outweigh the negatives...other people may find the opposite to be true.

Rezdent

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Re: rent v buy
« Reply #27 on: August 02, 2015, 10:12:27 AM »
my comment is awaiting moderation and since i am impatient i am going to post this now. I keep reading that people somehow think renting is cheaper than buying, as in less money leaves your bank account every month when renting as opposed to paying the mortgage, like $1500 mortgage versus a $1200 rent for an identical place. I feel like I am in the twilight zone, am I missing something? why on earth would an investor buy a place that cannot even begin to pay its basic operating expenses, i believe if this would actually give the investor a negative cap rate, but i guess you do not count the principle mortgage payment for a cap rate however even then it would be extremely small. My ignorance of this situation may be due to never living in a large city, over 100,000, but I cannot figure out how someone with a calculator figures this to be a good investment. Is it a secure place to put capital if so why is this better than bonds? I have a townhome but my cap rate is like 12% and cash on cash return is phenomenal so I am confused.
TL;DR:
Your personal residence is an expense; owning rental property is (should be?) a business that generates profit.  They aren't identical comparisons.

Rent vs. buy is a personal analysis where one tries to optimize spending and benefits to your life.  Whether you rent or own, you are paying for housing.  With owning, you build equity, and there may be appreciation (not guaranteed), but either way, housing is an expense.  IMO, a primary home isn't an investment.

Owning rentals is a business, and smart landlords will have done a thorough analysis.  When you have rentals, you are receiving payments that carry the costs of the property plus a profit.  You might also gain appreciation (not guaranteed).

Few businessmen will be able to tolerate losing money for long, so yours probably isn't (or won't for long).  This doesn't mean that you would come out ahead by buying.

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Re: rent v buy
« Reply #28 on: August 03, 2015, 08:40:34 AM »
I keep reading that people somehow think renting is cheaper than buying, as in less money leaves your bank account every month when renting as opposed to paying the mortgage, like $1500 mortgage versus a $1200 rent for an identical place. I feel like I am in the twilight zone, am I missing something? why on earth would an investor buy a place that cannot even begin to pay its basic operating expenses

This question has been answered multiple times already, but I can give you a real-world example. About a year ago, we moved from a small town in Mississippi where we purchased an gorgeous, fully-updated bungalow in a decent neighborhood for $135,000. We put 0% down on the house when we bought it, and our total monthly payment (principal, interest, taxes, and insurance) is $950/mo. I'm currently renting the house out for $1200/mo, which comfortably covers the costs plus a little bit extra.

We now live on a small island in Florida. Housing prices here are absurd, so we chose to rent rather than buy. We are renting a comparably-sized house, not quite as attractive or updated, but a mere 5 blocks from the beach, for only $1300. If we were to buy this house it would cost us in the neighborhood of $370,000. Even if we put down 20% (thus tying up $74,000 of precious capital), our monthly payment would be about $2380/month(!!!!!). That's $1690 for principal & interest, $416/month for taxes (publicly available information - this is exactly what the owners pay), and approx. $275/month for insurance. So we are saving somewhere around $1000/month by renting instead of buying. And that doesn't even begin to count the cost of transaction fees (loan origination, appraisal, realtor fees, etc.).

Renting in this location is a no-brainer. Renting in our previous location would make no sense at all, unless you weren't planning to stay for a very long time. FWIW, our landlord has owned this property for a long time and does not want to sell, because she doesn't want to pay capital gains. However, that isn't the whole story: the rental price we pay is the going rate for similar properties on the island. It isn't as if we're getting a smoking deal, or something. Renting is just the better option here, period.
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Re: rent v buy
« Reply #29 on: August 03, 2015, 11:16:48 AM »
I know a few reasons why people buy rental properties in negative cash flow situations:
1. They haven't actually done the math and just assume if rental income is greater than required mortgage payment then they will come out ahead
2. They assume that it is realitively risk free unlike the stock market which is gambling
3. They are not willing to make investments in stocks and bonds
4. They see it as a way of "getting rich" without really thinking too deeply about it
5. They assume price appreciation will make up for negative cash flow

6. They are buying an asset for a small down payment and small monthly expense while someone else pays all of the interest and the majority of the principal.

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Re: rent v buy
« Reply #30 on: August 04, 2015, 05:51:31 AM »
The mistake I see in rent versus buy calculations is disregard for the fact of age, aging and lifespan.  Assuming you don't die young/suddenly, you will get old and you will decline towards the end of your life.  I've read that 60 % of us will spend some years of our lives with physical disability.  If you buy, this should be taken into consideration. 
We bought in our early 20s, paid it off quickly and can, if parents' lifespan is any guide, expect 5 decades with no rent or mortgage.  Taxes and maintenance are mere fractions of what rent would be.  Best of all, this modest house that was once all we could afford is an ideal place to grow old.  In 900 Sq feet, we're already downsized.  We can walk to visit family, church, shopping, dentists, restaurants and mass transit.   Since we plan to stay forever, the value on Zillow or the price some buyer is willing to pay is meaningless.  The worth we derive is the number of rent free years ahead of us.  My mother is able to live well on only Social Security because their house was paid off.  She'd otherwise require subsidized senior housing to live independently as rent on even the smallest place would consume her entire check.  My folks were also able to amass a large amount of money because they paid off their mortgage over 40 years ago.  Obviously if you need the flexibility to relocate, you should rent.  But you should also be thinking about the decades beyond whatever the calculations tell you is the break even point.  Time flies.

You've completely ignored the opportunity cost of owning a home.  "The equation" works out differently for every home in every market, but in may cases not paying a mortgage allows more money to be saved each month - money that went towards a down payment, taxes, HOA fees and maintenance.  Any additional money you put towards principle each month should be compared with market returns.  During the last 8 years that difference is considerable.
In many cases, the opportunity cost compounded over the term of a mortgage is several hundred thousand dollars - much, much more than enough to cover renting forever.

Most of us are thinking about the decades ahead.  For many, not having a mortgage leaves us better off in our 70s, 80s, 90s and beyond...
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Re: rent v buy
« Reply #31 on: August 04, 2015, 06:49:45 AM »
The mistake I see in rent versus buy calculations is disregard for the fact of age, aging and lifespan.  Assuming you don't die young/suddenly, you will get old and you will decline towards the end of your life.  I've read that 60 % of us will spend some years of our lives with physical disability.  If you buy, this should be taken into consideration. 
We bought in our early 20s, paid it off quickly and can, if parents' lifespan is any guide, expect 5 decades with no rent or mortgage.  Taxes and maintenance are mere fractions of what rent would be.  Best of all, this modest house that was once all we could afford is an ideal place to grow old.  In 900 Sq feet, we're already downsized.  We can walk to visit family, church, shopping, dentists, restaurants and mass transit.   Since we plan to stay forever, the value on Zillow or the price some buyer is willing to pay is meaningless.  The worth we derive is the number of rent free years ahead of us.  My mother is able to live well on only Social Security because their house was paid off.  She'd otherwise require subsidized senior housing to live independently as rent on even the smallest place would consume her entire check.  My folks were also able to amass a large amount of money because they paid off their mortgage over 40 years ago.  Obviously if you need the flexibility to relocate, you should rent.  But you should also be thinking about the decades beyond whatever the calculations tell you is the break even point.  Time flies.

You've completely ignored the opportunity cost of owning a home.  "The equation" works out differently for every home in every market, but in may cases not paying a mortgage allows more money to be saved each month - money that went towards a down payment, taxes, HOA fees and maintenance.  Any additional money you put towards principle each month should be compared with market returns.  During the last 8 years that difference is considerable.
In many cases, the opportunity cost compounded over the term of a mortgage is several hundred thousand dollars - much, much more than enough to cover renting forever.

Most of us are thinking about the decades ahead.  For many, not having a mortgage leaves us better off in our 70s, 80s, 90s and beyond...

Yes, absolutely. Consider my example above. I'm renting a house for $1300/mo that would cost me $2380/mo PLUS a $74,000 down payment to buy. The opportunity cost of buying in my area is huge. Even if I paid with cash, I would still be on the hook for almost $700/mo in taxes and insurance. Granted, there are cheaper (and smaller/crappier) places that I could buy, but there are commensurately cheaper places that I could rent. Unless you're counting on strong price appreciation, it is inconceivable that buying a home on this island is cheaper than renting, by any measure.
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Re: rent v buy
« Reply #32 on: August 04, 2015, 08:57:16 AM »
The mistake I see in rent versus buy calculations is disregard for the fact of age, aging and lifespan.  Assuming you don't die young/suddenly, you will get old and you will decline towards the end of your life.  I've read that 60 % of us will spend some years of our lives with physical disability.  If you buy, this should be taken into consideration. 

It's odd that you would use this rationale in defense of buying.  When I read these sentences, I thought your post was going to be an argument for renting, because these statements really weigh in favor of that side of the debate.  Renting allows you to adapt to changes in life circumstances without the friction costs of homeownership.  And, as you said, over the decades of a person's lifetime, his or her circumstances will almost certainly change in a way that directly affects his or her home preferences.  Purchasing a home for the long-term requires you to compromise on its suitability either for the present or for the future, but renting affords you the flexibility to constantly match your home to your ever-shifting needs and desires.

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Re: rent v buy
« Reply #33 on: August 04, 2015, 10:25:20 AM »
The mistake I see in rent versus buy calculations is disregard for the fact of age, aging and lifespan.  Assuming you don't die young/suddenly, you will get old and you will decline towards the end of your life.  I've read that 60 % of us will spend some years of our lives with physical disability.  If you buy, this should be taken into consideration. 

It's odd that you would use this rationale in defense of buying.  When I read these sentences, I thought your post was going to be an argument for renting, because these statements really weigh in favor of that side of the debate.  Renting allows you to adapt to changes in life circumstances without the friction costs of homeownership.  And, as you said, over the decades of a person's lifetime, his or her circumstances will almost certainly change in a way that directly affects his or her home preferences.  Purchasing a home for the long-term requires you to compromise on its suitability either for the present or for the future, but renting affords you the flexibility to constantly match your home to your ever-shifting needs and desires.

I thought this as well.  I'm fairly certain my needs and wants now when I'm in my early 30s will be vastly different from what they will be in my late 60s and (good-fortune willing) in my 90s.  Planning ahead is good, but sometimes the best strategy is to change with the circumstances.
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Re: rent v buy
« Reply #34 on: August 05, 2015, 08:48:07 PM »
The mistake I see in rent versus buy calculations is disregard for the fact of age, aging and lifespan.  Assuming you don't die young/suddenly, you will get old and you will decline towards the end of your life.  I've read that 60 % of us will spend some years of our lives with physical disability.  If you buy, this should be taken into consideration. 
We bought in our early 20s, paid it off quickly and can, if parents' lifespan is any guide, expect 5 decades with no rent or mortgage.  Taxes and maintenance are mere fractions of what rent would be.  Best of all, this modest house that was once all we could afford is an ideal place to grow old.  In 900 Sq feet, we're already downsized.  We can walk to visit family, church, shopping, dentists, restaurants and mass transit.   Since we plan to stay forever, the value on Zillow or the price some buyer is willing to pay is meaningless.  The worth we derive is the number of rent free years ahead of us.  My mother is able to live well on only Social Security because their house was paid off.  She'd otherwise require subsidized senior housing to live independently as rent on even the smallest place would consume her entire check.  My folks were also able to amass a large amount of money because they paid off their mortgage over 40 years ago.  Obviously if you need the flexibility to relocate, you should rent.  But you should also be thinking about the decades beyond whatever the calculations tell you is the break even point.  Time flies.

You've completely ignored the opportunity cost of owning a home.  "The equation" works out differently for every home in every market, but in may cases not paying a mortgage allows more money to be saved each month - money that went towards a down payment, taxes, HOA fees and maintenance.  Any additional money you put towards principle each month should be compared with market returns.  During the last 8 years that difference is considerable.
In many cases, the opportunity cost compounded over the term of a mortgage is several hundred thousand dollars - much, much more than enough to cover renting forever.

Most of us are thinking about the decades ahead.  For many, not having a mortgage leaves us better off in our 70s, 80s, 90s and beyond...

Not having a mortgage late in life or never having owned?  I can't tell which you really mean. 

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Re: rent v buy
« Reply #35 on: August 05, 2015, 09:14:37 PM »
The mistake I see in rent versus buy calculations is disregard for the fact of age, aging and lifespan.  Assuming you don't die young/suddenly, you will get old and you will decline towards the end of your life.  I've read that 60 % of us will spend some years of our lives with physical disability.  If you buy, this should be taken into consideration. 
We bought in our early 20s, paid it off quickly and can, if parents' lifespan is any guide, expect 5 decades with no rent or mortgage.  Taxes and maintenance are mere fractions of what rent would be.  Best of all, this modest house that was once all we could afford is an ideal place to grow old.  In 900 Sq feet, we're already downsized.  We can walk to visit family, church, shopping, dentists, restaurants and mass transit.   Since we plan to stay forever, the value on Zillow or the price some buyer is willing to pay is meaningless.  The worth we derive is the number of rent free years ahead of us.  My mother is able to live well on only Social Security because their house was paid off.  She'd otherwise require subsidized senior housing to live independently as rent on even the smallest place would consume her entire check.  My folks were also able to amass a large amount of money because they paid off their mortgage over 40 years ago.  Obviously if you need the flexibility to relocate, you should rent.  But you should also be thinking about the decades beyond whatever the calculations tell you is the break even point.  Time flies.

You've completely ignored the opportunity cost of owning a home.  "The equation" works out differently for every home in every market, but in may cases not paying a mortgage allows more money to be saved each month - money that went towards a down payment, taxes, HOA fees and maintenance.  Any additional money you put towards principle each month should be compared with market returns.  During the last 8 years that difference is considerable.
In many cases, the opportunity cost compounded over the term of a mortgage is several hundred thousand dollars - much, much more than enough to cover renting forever.

Most of us are thinking about the decades ahead.  For many, not having a mortgage leaves us better off in our 70s, 80s, 90s and beyond...

Not having a mortgage late in life or never having owned?  I can't tell which you really mean.

Since this thread topic is 'rent v buy' I was specifically talking about renting for ones entire life.   

The math is pretty straightforward and there are numerous threads on this topic.  If rent is significantly cheaper than the total cost of owning a home (e.g. mortgage + maintenance + taxes + insurance) then a person can be in a much better financial situation by renting their entire lives and increasing the amount they save each month.  When the 'rent v. buy' calculation comes out in favor of renting the potential financial boost coupled with compounding means that the renter can be much better off than someone who took our a mortgage, even after the mortgage has been paid off.  The person with teh mortgage may never catch up (financially).

Now there are many reasons for why owning a home is both a good and a bad idea, but my point is that renting now isn't automatically putting you in a worse situation when you are 80 or even 90 years old.

full disclosure:  I currently have a mortgage, and I am glad that I have this mortgage.
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Re: rent v buy
« Reply #36 on: August 06, 2015, 08:01:22 AM »
The mistake I see in rent versus buy calculations is disregard for the fact of age, aging and lifespan.  Assuming you don't die young/suddenly, you will get old and you will decline towards the end of your life.  I've read that 60 % of us will spend some years of our lives with physical disability.  If you buy, this should be taken into consideration. 
We bought in our early 20s, paid it off quickly and can, if parents' lifespan is any guide, expect 5 decades with no rent or mortgage.  Taxes and maintenance are mere fractions of what rent would be.  Best of all, this modest house that was once all we could afford is an ideal place to grow old.  In 900 Sq feet, we're already downsized.  We can walk to visit family, church, shopping, dentists, restaurants and mass transit.   Since we plan to stay forever, the value on Zillow or the price some buyer is willing to pay is meaningless.  The worth we derive is the number of rent free years ahead of us.  My mother is able to live well on only Social Security because their house was paid off.  She'd otherwise require subsidized senior housing to live independently as rent on even the smallest place would consume her entire check.  My folks were also able to amass a large amount of money because they paid off their mortgage over 40 years ago.  Obviously if you need the flexibility to relocate, you should rent.  But you should also be thinking about the decades beyond whatever the calculations tell you is the break even point.  Time flies.

You've completely ignored the opportunity cost of owning a home.  "The equation" works out differently for every home in every market, but in may cases not paying a mortgage allows more money to be saved each month - money that went towards a down payment, taxes, HOA fees and maintenance.  Any additional money you put towards principle each month should be compared with market returns.  During the last 8 years that difference is considerable.
In many cases, the opportunity cost compounded over the term of a mortgage is several hundred thousand dollars - much, much more than enough to cover renting forever.

Most of us are thinking about the decades ahead.  For many, not having a mortgage leaves us better off in our 70s, 80s, 90s and beyond...

Not having a mortgage late in life or never having owned?  I can't tell which you really mean.

Since this thread topic is 'rent v buy' I was specifically talking about renting for ones entire life.   

The OP is about why landlords would continue to rent out their properties instead of selling them in situations like MMM's most recent article, where renting is so much more financially advantageous than buying.

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Re: rent v buy
« Reply #37 on: August 06, 2015, 08:33:55 AM »
I think about this a lot, because I rent an apartment in an old house in a neighborhood where there are a lot of condo conversions happening. My landlords inherited the property, and they are pretty old (not sure exactly but I would guess in their 80s). They are very laissez-faire - if we complain about something, they will come fix it, but they didn't even have anyone inspect the apartment in between when the last people moved out and when I moved in, and there is a lot of maintenance that has been deferred.

Every time I write a rent check I wish them long and happy lives, because I figure if the next person (or people) who inherits the house takes a good look at the numbers they'll realize that they can make a lot more money by selling (or even condo-converting on their own).

So God Bless Mr. & Mrs. Landlord, and should they be taken from us too soon may their affairs be tied up in probate until I am FI!

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Re: rent v buy
« Reply #38 on: August 06, 2015, 08:53:47 AM »

The OP is about why landlords would continue to rent out their properties instead of selling them in situations like MMM's most recent article, where renting is so much more financially advantageous than buying.
ok, fair point and my mistake.
to answer Kite though, I was talking about how (in many circumstances) a lifetime of renting can be fiscally better than owning a home, even when you consider the decades after the mortgage has been paid off.
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Re: rent v buy
« Reply #39 on: August 06, 2015, 08:58:42 AM »

The OP is about why landlords would continue to rent out their properties instead of selling them in situations like MMM's most recent article, where renting is so much more financially advantageous than buying.
ok, fair point and my mistake.
to answer Kite though, I was talking about how (in many circumstances) a lifetime of renting can be fiscally better than owning a home, even when you consider the decades after the mortgage has been paid off.

Just pointing it out as it might be part of the discussion/confusion. I mean, I personally have never participated in a thread going off topic...

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Re: rent v buy
« Reply #40 on: August 06, 2015, 02:05:29 PM »

The OP is about why landlords would continue to rent out their properties instead of selling them in situations like MMM's most recent article, where renting is so much more financially advantageous than buying.
ok, fair point and my mistake.
to answer Kite though, I was talking about how (in many circumstances) a lifetime of renting can be fiscally better than owning a home, even when you consider the decades after the mortgage has been paid off.

All connected.  Because on the one hand the question is "should I be an owner or a tenent, investing the presumed excess in the stock market."  For another, it seems to be "should I invest in rental property or leave my money in beanie babies or stock market."   I work on one of the equities trading venues.  I love it.  But I wouldn't have my entire portfolio tied up in equities, even if they were index funds.  Entire markets take plunges and when they're down, they're down.  Possibly I missed the memo that in Mustachioland, we must always optimize our wealth thru Index funds.  But the assumption those will continue to rise at a predictable rate are a wrong as the assumption real estate or bit coins or gold has to keep going up.  Past performance disclaimer on the bottom of every prospectus is there for a reason.
And disclosure:  I own rental property.  It was possible because my primary residence was nearly paid off. 
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Re: rent v buy
« Reply #41 on: August 06, 2015, 03:06:03 PM »
But the assumption those will continue to rise at a predictable rate are a wrong as the assumption real estate or bit coins or gold has to keep going up.  Past performance disclaimer on the bottom of every prospectus is there for a reason.
And disclosure:  I own rental property.  It was possible because my primary residence was nearly paid off. 

Most landlords could care less whether their investment goes up as long as rent increases with inflation (it should) and people will always need a place to live (they will).

OP: Logic doesn't always dictate the real world. Not everyone does their homework before making a decision. Humans are complex beings and you cant deduce everything to reasoning or we'd all be rich. Where I live, it seems to be cheaper to rent than buy. Just an hour away, it's arguably more expensive to rent than buy, which proves RE is very local.
« Last Edit: August 06, 2015, 03:08:00 PM by Ricky »

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Re: rent v buy
« Reply #42 on: August 06, 2015, 03:54:58 PM »

The OP is about why landlords would continue to rent out their properties instead of selling them in situations like MMM's most recent article, where renting is so much more financially advantageous than buying.
ok, fair point and my mistake.
to answer Kite though, I was talking about how (in many circumstances) a lifetime of renting can be fiscally better than owning a home, even when you consider the decades after the mortgage has been paid off.

All connected.  Because on the one hand the question is "should I be an owner or a tenent, investing the presumed excess in the stock market."  For another, it seems to be "should I invest in rental property or leave my money in beanie babies or stock market."   I work on one of the equities trading venues.  I love it.  But I wouldn't have my entire portfolio tied up in equities, even if they were index funds.  Entire markets take plunges and when they're down, they're down.  Possibly I missed the memo that in Mustachioland, we must always optimize our wealth thru Index funds.  But the assumption those will continue to rise at a predictable rate are a wrong as the assumption real estate or bit coins or gold has to keep going up.  Past performance disclaimer on the bottom of every prospectus is there for a reason.
And disclosure:  I own rental property.  It was possible because my primary residence was nearly paid off. 
If you want better returns than the herd, you need to be doing something different from the herd.

Fascinating.  You've packed quite a bit into just one paragraph, from landlording to index funds and gold and then ends with a statement about beating the heard. So for clarity I'm going to attempt to break these down and respond to them one by one.

Regarding equities:  I think it's pretty well established and understood that markets take plunges, and when they're down, they're down.  That's a big reason why historicla simulators like FireCalc are so popular here - because it allows someone to test how a hypothetical portfolio would have survived  a variety of economic circumstances.  Equities are highly unpredictable month-to-month, but have been quite predictable over multi-decade time scales. 

Regarding index funds: I'm surprised that you think people here push having your entire net worth in index funds.  There's an entire sub-forum on landlording, one on investing (with lengthy discussions on picking individual stocks).  MMM has been a landlord until recently, and its virtues in helping individuals achieve FI and increase their portfolio diversity are frequent topics here.  Index funds are popular because they allow just about anyone to amass large amounts of wealth over several decades while doing very little and without having to be particularly skilled in any one area. Ironically, someone can 'beat the heard' by purchasing low-cost index funds or ETFs and holding them for decades - largely because everyone else looses out with fees and cash drag.

I'm not sure where bitcoins, gold or beanie babies came into the equation.  All three are fundamentally different from both equities and real estate.

On returns "better than the herd":  Again, I'm not sure how this entered into the discussion.  Certainly we'd all like to earn higher returns, but that's easier said than done.  In your earlier post, you argued that rent vs. buy calculations often "ignored...age, aging and lifespan" and that we should "be thinking about the decades beyond whatever the calculations tell you is the break even point."  As examples you cited your parents ability to amass savings for 40 years after paying off the mortgage and how you hope to be mortgage free for five decades.  Not having a mortgage is great, but it often cannot overcome the decades of savings one can amass by paying less through renting.  If you are able to "beat the herd" and earn superior returns, the effect only becomes more pronounced. 
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Re: rent v buy
« Reply #43 on: August 06, 2015, 05:44:18 PM »

I don't think you pay less for decades by renting. Absent strict rent control, it will inevitably become more costly per month than owning.

I would say this is completely and utterly not true.  There are locations where it absolutely makes sense to purchase a home, and places where it absolutely makes more sense to rent.  Just read back earlier in this tread - there are some markets where rent is half what the mortgage is even at today's ridiculously low rates.  That's what got this thread started in the first place (see Forummm... I learn!) To be fair there are locations where it absolutely makes more sense to buy than to rent... places where mortgage + insurance + fees + maintenance - opportunity costs are still less than paying rent.

Quote
The Index fund reference  (along with beanie babies, bitcoins or whatever) is because anyone throwing up a calculation showing renting is better must have some assumptions that there's an alternative place to stash the money you save by not buying.  I don't think whatever that investment vehicle is that it provides a guaranteed return (by way of savings) each month the way a paid off principal residence does.  I could be wrong, all real estate is local after all, but I'm just not seeing it when you contrast buying X against renting X over a lifetime. 

First, other investments do not need to have a guaranteed return each month.  What matters is that over many years on average they provide a decent return.  Look at the SP500 circa 2007 - it doesn't matter that it dropped like a stone at the end of the year - as long as the time line is reasonably long.  For a renter who's adding to his/her investments every month, these drops actually benefit them by allowing them to buy stocks on sale.

Second - by saying that there is no alternative investment vehicle which gives a guaranteed return each month (or at least is very low risk) you are implying that owning a home is somehow extremely low risk.  Homes occasionally require large maintenance bills, home values (and corresponding rental prices) can go down, and then there is always taxes and insurance.
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Re: rent v buy
« Reply #44 on: August 06, 2015, 07:13:38 PM »

I don't think you pay less for decades by renting. Absent strict rent control, it will inevitably become more costly per month than owning.
...
  I could be wrong, all real estate is local after all, but I'm just not seeing it when you contrast buying X against renting X over a lifetime. 

Perhaps a realistic example will help this discussion.

Imagine there are three brothers (triplets) named Bob, Mike and Alex.  All three work similar jobs and live in the same area.  After taxes, they bring home $45,000/year and by age 25 they each have saved an impressive $50,000.  Each lives in a similar 3 bedroom, 2 bathroom home valued at $250,000.  Home ownership includes 1.25% property tax, 0.35% insurance and 0.75% maintenance costs.  Renting a similar home costs $1,100/mo and renters insurance is $300/year.  Each brother can retire once they have enough money to support $21,800/year spending plus any additional housing costs.
 To keep things simple we'll keep everything real-adjusted and assume that housing prices and job raises just keep up with inflation.
Money invested earns the historical inflation-adjusted 7%.

Mike goes the traditional 30yr mortgage route with a 4% mortgage rate.  He puts 20% down (-$50,000) but his monthly mortgage is just $954/mo, or $146 less than a rental payment.  He's pleased because his mortgage payment is less than renting, but he pays an additional $2,664/year for insurance and taxes, and on average $1,875 for maintenance (just 0.75% of the property value).  On the very first year he notices that he's paid off $3,894 in principle.  "Equity in my home!" he says with a grin.
He can retire once he can safely withdraw $27,671/year from his investments ($21,800 spending + continued insurance, taxes and maintenance of $5871).  Using the 4% WR, that's just shy of $700k.
With Mike's mortgage he's able to save $10,000 every year.

Bob really wants a paid off house, and figures he'll do great once the mortgage is gone.  He opts for a 15yr mortgage, and his rate at 3.5% is even lower than Mike's, and uses the same 20% down payment.  His monthly mortgage is $1430, just 50% more than Mike's payment.  He has the same property tax and insurance fees.  At the end of the year, Mike has an extra $268, and he puts that towards the mortgage too.  He kills his mortgage in 14 years, 9 months and then starts saving every available penny - an impressive $21,465 per year.  like Mike, Bob can retire when he has $700k in income-producing assets.

Alex decides not to rent.  He keeps his $50k in savings and finds a nice home for $1,100/month.  He takes out renters insurance for $25/month ($300/year) and lets the landlords worry about maintenance, taxes and homeowners insurance.  He's able to save $9,700 each month.  His brothers laugh at him, saying he's throwing away his money each month in rent.  Worse, he has to plan on spending $13,200 every year for his rent even after retiring, bringing his FI number up to $875,000. That's $175,000 more than his brothers.

So.... how did each brother do?

Mike took the full 30 years to pay off his mortgage, but because he kept saving he his his FI number at age 52... with enough to spare to pay off his remaining mortgage.  If Mike had decided to keep working until age 62, he would have $1.6MM

Bob axed his mortgage in just under 14 years and paid far less in interest... but because his savings was so delayed, he couldn't retire until six months after his 55th birthday.  Working until age 62 Mike would have just $1.25MM

Alex never used the $50k his brothers put down as downpayments in their homes.  Even though he needed nearly $900k to retire and continue renting, he managed to retire a month before his 47th birthday, all because he was able to save an additional $319 more per month and never used up his original $50k.  Working until age 62, Alex amassed an astonishing $2.82MM - more than double his brother Bob.

This of course is just a simulation, but the numbers I chose (mortgage rates, taxes, insurance (both homeowners and renters) and maintenance) are fairly average.

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kite

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Re: rent v buy
« Reply #45 on: August 07, 2015, 12:14:21 PM »
^
I see what you are saying.
But would like to know where Alex scored a lifetime lease with no rent increases.  In most places, rent goes up, pushing his FI number even higher. 

Mississippi Mudstache

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Re: rent v buy
« Reply #46 on: August 07, 2015, 12:40:51 PM »
^
I see what you are saying.
But would like to know where Alex scored a lifetime lease with no rent increases.  In most places, rent goes up, pushing his FI number even higher.

No, on average, rent goes up more or less in tandem with inflation, which is already built into any robust FI plan. Taxes, insurance, and maintenance go up with inflation as well.
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kite

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Re: rent v buy
« Reply #47 on: August 07, 2015, 03:32:05 PM »
^
I see what you are saying.
But would like to know where Alex scored a lifetime lease with no rent increases.  In most places, rent goes up, pushing his FI number even higher.

No, on average, rent goes up more or less in tandem with inflation, which is already built into any robust FI plan. Taxes, insurance, and maintenance go up with inflation as well.

We'll have to agree to disagree.  Every report I've seen says otherwise.

nereo

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Re: rent v buy
« Reply #48 on: August 08, 2015, 07:09:42 AM »
^
I see what you are saying.
But would like to know where Alex scored a lifetime lease with no rent increases.  In most places, rent goes up, pushing his FI number even higher.

No, on average, rent goes up more or less in tandem with inflation, which is already built into any robust FI plan. Taxes, insurance, and maintenance go up with inflation as well.

We'll have to agree to disagree.  Every report I've seen says otherwise.
The example I gave used real-adjusted numbers.  That's why I used 7% returns (just below the real-adjusted rate of return of the SP500 over the last 30,5 50, 75 and 100 year averages).  As MIssissippi Mudstache said, broadly speaking rent goes up in tandem with inflation.  Sure there's a lot of variability between markets and on smaller time-frames.  To use one metric that evens out wage increases and inflation, the average median amount people have spent on their rentals has averaged ~24% of total income over the past 4 decades.   Likewise, looking at long-term data (50yr+) home prices have increased just slightly above inflation rates (with some notable housing bubbles here nad there).  This really shouldn't be very surprising, as new homes can be built to satisfy demand, and if home prices outstripped inflation and wage increases, eventually almost no one could afford any housing at all.  Here's a graph from the Dept. of Labor Statistics comparing mortgage rates with rental rates - notice how they follow the exact same trend, with some statistical wobbling through time.
Let's also not forget that 'Alex' has the option of moving whenever a better location opens up. This means he can get newly refurbished rentals without having to pay for it himself, move when his needs change (job, family, etc) or leave if the neighborhood starts to go south. This gives him a position of strength his brothers did not have.

I'm not arguing against home-ownership.  I myself am a home owner, and in some markets it makes a lot of sense to own a home instead of rent. There are reasons besides economics to own a home, many of which I greatly enjoy. My earlier post was designed to highlight how a lifetime of renting can often be financially better than owning. To me, the math makes it an indisputable fact.  If you don't agree, that's fine - we can agree to disagree, but there are many real-world scenarios I can run where my calculations put renting vastly in front of owning. YMMV
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hoping2retire35

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Re: rent v buy
« Reply #49 on: December 01, 2015, 02:55:53 PM »
I keep reading that people somehow think renting is cheaper than buying, as in less money leaves your bank account every month when renting as opposed to paying the mortgage, like $1500 mortgage versus a $1200 rent for an identical place. I feel like I am in the twilight zone, am I missing something? why on earth would an investor buy a place that cannot even begin to pay its basic operating expenses

This question has been answered multiple times already, but I can give you a real-world example. About a year ago, we moved from a small town in Mississippi where we purchased an gorgeous, fully-updated bungalow in a decent neighborhood for $135,000. We put 0% down on the house when we bought it, and our total monthly payment (principal, interest, taxes, and insurance) is $950/mo. I'm currently renting the house out for $1200/mo, which comfortably covers the costs plus a little bit extra.

We now live on a small island in Florida. Housing prices here are absurd, so we chose to rent rather than buy. We are renting a comparably-sized house, not quite as attractive or updated, but a mere 5 blocks from the beach, for only $1300. If we were to buy this house it would cost us in the neighborhood of $370,000. Even if we put down 20% (thus tying up $74,000 of precious capital), our monthly payment would be about $2380/month(!!!!!). That's $1690 for principal & interest, $416/month for taxes (publicly available information - this is exactly what the owners pay), and approx. $275/month for insurance. So we are saving somewhere around $1000/month by renting instead of buying. And that doesn't even begin to count the cost of transaction fees (loan origination, appraisal, realtor fees, etc.).

Renting in this location is a no-brainer. Renting in our previous location would make no sense at all, unless you weren't planning to stay for a very long time. FWIW, our landlord has owned this property for a long time and does not want to sell, because she doesn't want to pay capital gains. However, that isn't the whole story: the rental price we pay is the going rate for similar properties on the island. It isn't as if we're getting a smoking deal, or something. Renting is just the better option here, period.

I totally understand someone who chooses to rent instead of buy because it is cheaper, it makes sense. What I do not understand, and was more of my point, is when someone (an investor ) buys a place, even with 0% down, low interest rate and a long term, how they justify more money out than in? Even if the rent covers all expenses and some principal, it is still worse than a gov bond at 1%, which is much more solid than a downtown condo.

At some point an investor of rental properties would say "WWWhhhaaaaat? I'm losing money. I better sell this place and buy something with a good return like a business, index funds, or even low yield gov't bond!" Hence the over priced places would go down in purchase price, due to the lack of demand(the self realized investors dumping their rental property) until there was a better equilibrium to rent.
The other part of my first post was the realization that this only seems to happen in big cities, I have never lived or spent much time in a big city, and wanted some insight as to why this happens.

Kinda the opposite happens where i live. Regional college, and some other smaller ones, combined with limited thru roads, several lakes that limit how/where people develop. Houses on the lakes are comparable to Malibu or whatever, while there are old falling in homes a short distance away. Lots of student housing is really expensive, due to; increased attendance, trust funds that are no longer necessary due to massive lottery scholarships, some sort of right of passage/entitlement that college has become(by this I mean the parties and good times not just class attendance). So my home is ~$150k (3 bd, 2.5 br & garage) and is ~3 miles away from new student develoment which has construction cost of ~$125-150k with 4-6 bedrooms renting at 650-850 PER ROOM. Yes there is granite and stainless and you can easily see the cops coming from 1/2 mile away to bust the underage drinking but $650-850 PER ROOM. On campus living is 5-7k per year plus meals, so its not any more expensive. So with this I wondering why the parents(renters) are so dumb.
« Last Edit: December 01, 2015, 03:21:53 PM by hoping2retire35 »