Author Topic: Not buying a home will make you richer?  (Read 4006 times)

chan0123

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Not buying a home will make you richer?
« on: January 05, 2017, 08:39:52 AM »
I recently view an article talking about not buying home will get them richer:

http://www.cbc.ca/news/business/house-investment-wealth-1.3716641

Then I found their original post, I did some comment and calculations to show author that buying a home in their case will make them richer, couple rounds of comments, but after that, have not get any comments. Would like to see if my calculation is correct or not.

You can see my comments at the bottom of the post.
http://www.millennial-revolution.com/rent/bought-house-back-2012/

Or you can see it here:
http://imgur.com/a/77I8b


doneby35

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Re: Not buying a home will make you richer?
« Reply #1 on: January 05, 2017, 08:54:09 AM »
Not buying a home will NOT make you richer, if your home is affordable.
http://michaelbluejay.com/house/rentvsbuy.html

boarder42

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Re: Not buying a home will make you richer?
« Reply #2 on: January 05, 2017, 09:11:13 AM »
its just math in some instances renting is better.

catccc

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Re: Not buying a home will make you richer?
« Reply #3 on: January 05, 2017, 10:02:37 AM »
You can make the math work either way, there are so many factors.  But yes, renting can definitely be better.  It has been for us so far.

boarder42

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Re: Not buying a home will make you richer?
« Reply #4 on: January 05, 2017, 10:36:05 AM »
You can make the math work either way, there are so many factors.  But yes, renting can definitely be better.  It has been for us so far.

i perosnally think its better in most instances b/c you will usually rent something smaller ... and peopple typically buy larger homes than they would if they were renting.  also moving more frequently keeps you from buying too much crap,.

catccc

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Re: Not buying a home will make you richer?
« Reply #5 on: January 05, 2017, 11:12:47 AM »
You can make the math work either way, there are so many factors.  But yes, renting can definitely be better.  It has been for us so far.

i perosnally think its better in most instances b/c you will usually rent something smaller ... and peopple typically buy larger homes than they would if they were renting.  also moving more frequently keeps you from buying too much crap,.

This is the case for us.  Back before kids I wanted a large family and we were looking at 4 BR SFHs.  But fast forward 8 years, we are happily set with 2 kids and renting a 3 BR twin.  And we don't even use one of the bedrooms, because our kids share a room.  Our rent happens to be below market for the area, and it's pretty much a wash when you do the math (via NYT rent v. buy).  So buying gets us nothing extra at this point except the headache of repairs and maintenance, which I'm happy to let the landlord do currently.  I might be richer if I bought a 2 BR house 30% smaller than our rental (not going to happen).  But we'd surely be poorer if I bought anything bigger than our rental.

Koogie

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Re: Not buying a home will make you richer?
« Reply #6 on: January 05, 2017, 11:23:14 AM »
You can make the math work either way, there are so many factors.  But yes, renting can definitely be better.  It has been for us so far.
i perosnally think its better in most instances b/c you will usually rent something smaller ... and peopple typically buy larger homes than they would if they were renting.  also moving more frequently keeps you from buying too much crap,.

Both buying crap and wasting it on "upgrades"     It is staggering how much average people spend every year to "modernize" their homes.  Beyond kitchens and bathrooms, most of it has been demonstrated as sheer waste.      You don't typically do that in a rental situation.

Disclosure: disgruntled home owner/former renter.  We're on our third owned house in 19 years of being together.  Have also lived in one rental apartment and one rented house.   She loves owning. I loathe it. 

dougules

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Re: Not buying a home will make you richer?
« Reply #7 on: January 05, 2017, 11:36:43 AM »
Everybody likes to think that buying is always the best idea, but there are so many factors.  After all, mortgage interest is just rent on money, and equity in a house means your losing out on a return somewhere else. 

This calculator has been thrown out a few times here, and it takes into account a lot of numbers people forget:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=1

One last big thing is that people tend to buy fancier than they rent.   Buying a $300k house after renting in a place worth $150k is not an investment.  You're missing out on somewhere in the neighborhood of $6k/year of returns. 

ketchup

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Re: Not buying a home will make you richer?
« Reply #8 on: January 05, 2017, 11:46:27 AM »
As others have said, it really depends on your situation, location, and timing.

And how you handle your money to begin with...

Both buying crap and wasting it on "upgrades"     It is staggering how much average people spend every year to "modernize" their homes.  Beyond kitchens and bathrooms, most of it has been demonstrated as sheer waste.      You don't typically do that in a rental situation.
Well, to be fair, I'm nearly done putting down new floors in about half my house to replace some not-awesome carpet from 1989.  I'd say that was worthwhile (and not terribly expensive).

havregryn

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Re: Not buying a home will make you richer?
« Reply #9 on: January 05, 2017, 11:51:54 AM »
You can make the math work either way, there are so many factors.  But yes, renting can definitely be better.  It has been for us so far.

i perosnally think its better in most instances b/c you will usually rent something smaller ... and peopple typically buy larger homes than they would if they were renting.  also moving more frequently keeps you from buying too much crap,.

This is the case for us.  Back before kids I wanted a large family and we were looking at 4 BR SFHs.  But fast forward 8 years, we are happily set with 2 kids and renting a 3 BR twin.  And we don't even use one of the bedrooms, because our kids share a room.  Our rent happens to be below market for the area, and it's pretty much a wash when you do the math (via NYT rent v. buy).  So buying gets us nothing extra at this point except the headache of repairs and maintenance, which I'm happy to let the landlord do currently.  I might be richer if I bought a 2 BR house 30% smaller than our rental (not going to happen).  But we'd surely be poorer if I bought anything bigger than our rental.

We had the opposite problem. We are in a market where it is not possible to rent something relatively small if you're a family because the competition is too great and landlords too suspicious of the idea that someone with kids would want to live in an apartment or have kids share a room. So with multiple kids (and we have 2, want more) you're stuck renting large expensive houses that take a lot of maintenance that you are supposed to pay for (here the tenant pays for maintenance and mortgage interest rates are 1.5%, you don't even need a calculator to be painfully aware of how much money you are flushing down the drain while renting).
But it's of course a risk to be this leveraged, real estate is expensive like hell here (obviously, as that is the only way a rental market like this can be sustained - it is too difficult to buy in so you have to take all sorts of crap from those who inherited a few extra houses from their spinster aunts). I hate this situation and I actually wish we could have just left for an easier area but we have the kind of jobs here that you can't get elsewhere (again, sort of comes with the territory, the real estate market would not look like this were it not so).

Enigma

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Re: Not buying a home will make you richer?
« Reply #10 on: January 05, 2017, 12:28:31 PM »
I think it is an uneven case.  Their rent was $850/month and included utilities, cable and maintenance (below the 1bd & 2bd avg of 1.5k/month for Toronto).  They didn't explain the type of property they were living in....   Yet the area was a HCOL with houses averaging above 600k.  Both buying and renting were not equal cases.  They are essentially in a "Renter's" market.

In my opinion - it is a "Renter's Market" if the cost of renting is cheaper than 1% of the value of the property.  As a landlord that is the special number I am trying to make on my investment aka the "1 percent rule" (kind of reversed).

2012 was also a very special year...  After all the housing crisis hit around then.  That would have been the perfect time to get locked into a low cost rental.

Prairie Stash

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Re: Not buying a home will make you richer?
« Reply #11 on: January 05, 2017, 12:37:36 PM »
It was a silly editorial, its all based on market timing and being in Toronto. If you make enough assumptions anything can be right.

Perhaps it was the right thing for them in their situation, if you live in Toronto and want to leave in 3 years it looks like renting is better than buying. In no way should anyone infer anything beyond that though, its baked through with assumptions that the 3 year window is indicative of future gains/losses. You can argue about house prices and rents all day long. A few years my are was rife with local news talking about maximum annual rent price increases; did you know some places have laws limiting rent increases? Did you know some places actually need to enforce them over 3 year periods?

Every single number used had assumptions, its amazing how accurate hindsight is.

J_Stache

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Re: Not buying a home will make you richer?
« Reply #12 on: January 05, 2017, 01:17:08 PM »
When your whole brand is "We didn't buy a house", it's in your best interest to make renting look better. 

marty998

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Re: Not buying a home will make you richer?
« Reply #13 on: January 05, 2017, 01:45:54 PM »
Everybody likes to think that buying is always the best idea, but there are so many factors.  After all, mortgage interest is just rent on money, and equity in a house means your losing out on a return somewhere else. 

This calculator has been thrown out a few times here, and it takes into account a lot of numbers people forget:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=1

One last big thing is that people tend to buy fancier than they rent.   Buying a $300k house after renting in a place worth $150k is not an investment.  You're missing out on somewhere in the neighborhood of $6k/year of returns.

Yes but interest goes down over time and rent goes up.

At the end of it, an owner an owner owns a house. A renter keeps paying rent forever. Most people do not invest the theoretical difference you are talking about.

neil

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Re: Not buying a home will make you richer?
« Reply #14 on: January 05, 2017, 02:18:25 PM »
Landlords are making money or else they would not be renting apartments.  There are actual and opportunity costs across the board and the timing of returns is a big factor on whether or not the rental option is better than ownership for your net worth.  But the choice of owning a home usually goes beyond the numbers for most people.  It is technically lifestyle inflation if you are moving from a rental apartment to owning a single family home.  That is fine if it is in alignment with your life goals and not inherently a bad thing.

If the location of your home is a big function of the "success" of your retirement, you are likely much better off buying if the numbers work for your FIRE budget.  Real estate and rental prices will roughly track inflation nationally, but local markets can have vastly different characteristics.  I don't think you can really guess where the hot markets will be over a 50 year retirement, but when you choose to rent you might find yourself priced out of the market eventually.

I rent because I am not attached to the area I live, and I don't want to be.  I've been here 15 years.  Math has never factored in the decision.  It ended working out really well because the market here is somewhat unusual with a growing demand for single family homes and low demand for apartment rentals.  I mostly consider that a coincidence. 

I think most people do not fully realize the cost of home ownership and should consider more math in their decision to buy a specific house.  But if you use a mathematical argument that spending money on anything is bad for your net worth, there's really no end to that argument.  A house might have a few more zeros than a typical purchase, but a savvy owner ends up in a place that improves their quality of life, which is pretty much the whole point. 

As a renter, I find the typical bad arguments for ownership irritating.  I don't like being told that I'm throwing my money away when I know it is not true.  But I also don't try to educate people with comparably weak arguments and claim I'm better because I used math in the process.

dougules

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Re: Not buying a home will make you richer?
« Reply #15 on: January 05, 2017, 02:57:45 PM »
Everybody likes to think that buying is always the best idea, but there are so many factors.  After all, mortgage interest is just rent on money, and equity in a house means your losing out on a return somewhere else. 

This calculator has been thrown out a few times here, and it takes into account a lot of numbers people forget:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=1

One last big thing is that people tend to buy fancier than they rent.   Buying a $300k house after renting in a place worth $150k is not an investment.  You're missing out on somewhere in the neighborhood of $6k/year of returns.

Yes but interest goes down over time and rent goes up.

At the end of it, an owner an owner owns a house. A renter keeps paying rent forever. Most people do not invest the theoretical difference you are talking about.

Interest, inflation (rent going up), and length of stay are in that calculator.  Math is math, and occasionally it makes more financial sense to keep paying rent forever.  People have an emotional attachment to owning a place.  There's nothing wrong with that, but you can't assume you're always coming out ahead financially, even if you're staying for decades.  Owning isn't cheap, and it can be a ball and chain. 

You're right that the equity part of a mortgage payment can be a good forced savings plan, but most people also tend to buy a lot fancier than they rent.  That can completely cancel out the forced savings plan. 

khangaroo

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Re: Not buying a home will make you richer?
« Reply #16 on: January 05, 2017, 03:02:29 PM »
My current strategy is to live with my parents as long as I can!!

Currently the pros outweigh the cons and it's pretty awesome living on 20% of my income and investing the rest and having not a dime of debt.

I'm also an only child and the will states everything goes to me so I'm a "future" home-owner??

I guess I'm not in the market so I don't see what the fuss is all about with being a home-owner. I would like to eventually pay cash for a rental property but I don't ever plan on getting a mortgage. 100% down or no-house/rent.

frugaliknowit

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Re: Not buying a home will make you richer?
« Reply #17 on: January 05, 2017, 03:20:28 PM »
The couple in the example in Toronto were renting for $850 per month.  That's hardly the square footage of a house...so we're not talking "apples to apples"...

There are many moving parts:

1.  How much square footage you need.  In most markets, the more square footage you need, the more buying makes sense.

2.  How long you are committed to staying.  If less than 10 years, renting tends to make more sense.

3.  Rent to own ratios in your particular market.

4.  Career plans.  If you and or spouse/partner are pretty established and not looking to change industries/career paths, the pendulum swings more towards owning.

I think you "do the numbers" according to your moving parts.  In my case I own a small/lower cost condo in a market where buying often makes sense.

Altons Bobs

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Re: Not buying a home will make you richer?
« Reply #18 on: January 06, 2017, 12:58:51 AM »
I didn't look at your math, but for us, it was way cheaper buying. We bought a new house, lived in it for almost 20 years, after counting out all the expenses and then the profit for selling the house, we averaged about $166/month.  There was no way we could have found rent that cheap.  So we got richer by not renting.  :-D

dougules

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Re: Not buying a home will make you richer?
« Reply #19 on: January 10, 2017, 11:25:07 AM »
I didn't look at your math, but for us, it was way cheaper buying. We bought a new house, lived in it for almost 20 years, after counting out all the expenses and then the profit for selling the house, we averaged about $166/month.  There was no way we could have found rent that cheap.  So we got richer by not renting.  :-D

Buying generally is the better way to go if you're staying somewhere for decades.  I'm just saying that people should still run the numbers because in some situations you do come out ahead by renting, even if you're staying long term.   The folks in California that did that in 2006 came out way ahead.