Author Topic: Throw away money on rent or buy at a high price?  (Read 1950 times)

Ives

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Throw away money on rent or buy at a high price?
« on: October 21, 2018, 04:52:12 AM »
Trying to decide if it really is better to keep renting ($750/mo) essentially throwing that money away, or buy now, knowing that in a few years or so there market will crash/go down.  Say I keep renting for 3 more years, that's $27,000.  So what if I buy a house now that is, say, $27,000 overpriced?  I guess we think house prices would drop further than that?

marty998

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Re: Throw away money on rent or buy at a high price?
« Reply #1 on: October 21, 2018, 05:15:30 AM »
I always stand on the side of buying if you are going to be there long term. At the end of the day, you've got control and no one can kick you out of home at a moment's notice.

Why do you think realestate will crash?

More broadly... why is this forum always so bearish on realestate, but with stocks.... it's always a fantastic time to buy (even at the "top")? Haven't your realestate markets (on average) always recovered and reached new highs too?

Ergo... isn't the best time to buy always yesterday?

I am trying not to lather this post in too much sarcasm @Ives, apologies for the derail and if it doesn't answer your question.

You may need to give a bit more background for a full answer. Are you looking to buy in a market where houses cost $100k, or $1m? Where there are a high proportion of owners, or if it is an area more friendly to renters? Whether your property you are living in is falling to bits and in need of repairs or if your place is brand new?


MayDay

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Re: Throw away money on rent or buy at a high price?
« Reply #2 on: October 21, 2018, 06:08:28 AM »
It is way more complicated than 750$/month rent times 3years.

When you pay the mortgage some goesto principal but a lot goes to taxes and interest. You also have to pay for maintenance. You also have significant transaction costs. You also tie up a lot of money in an asset that typically only returns ~3% (I don't have data in front of me but I'm pretty sure that's what I've read).

That said I'm a homeowner. But I did it because I want to be a homeowner, not necessarily because it was the better financial decision. If was single (I assume you are based on the the low rent) it almost definitely would be cheaper for me to live in a small rented apartment and save the difference.

Imma

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Re: Throw away money on rent or buy at a high price?
« Reply #3 on: October 21, 2018, 06:22:36 AM »


More broadly... why is this forum always so bearish on realestate, but with stocks.... it's always a fantastic time to buy (even at the "top")? Haven't your realestate markets (on average) always recovered and reached new highs too?



The major difference between stocks and real estate is that with stocks people on this forum try to buy and hold (forever) while the vast majority of people do not hold on to real estate forever. People buy real estate for a limited period (for example: a small apartment until you want to start a family, a large family home that you want to sell when the kids move out) and with a specific purpose in mind. The needs people have for housing tend to change throughout their life. Also, buying and selling and renting out real estate is a real hassle with lots of extra costs and (depending on where you live) also lots of taxes to be paid. My index funds are bought and sold with one click of my mouse and a set percentage of costs.

That said, I am a homeowner myself and I generally agree with you that if your plan is to stay somewhere forever then buying is the best option.

In my country, renting is extremely expensive compared to buying and there are many shitty landlords. The reason why we bought is because it was much cheaper than renting (our mortgage payment is around 300/month, similar homes are rented out for 1000/month) and because we were absolutely done with shitty landlords. If we could have found an affordable place to rent, with a decent landlord, that would have been fine for us, but these places are extremely hard to find. We've lived in more than one place where the heating didn't work in the winter when it was freezing or where the landlord didn't pay the bills for utilities.

TomTX

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Re: Throw away money on rent or buy at a high price?
« Reply #4 on: October 21, 2018, 06:39:15 AM »

More broadly... why is this forum always so bearish on realestate, but with stocks.... it's always a fantastic time to buy (even at the "top")? Haven't your realestate markets (on average) always recovered and reached new highs too?

To put it in mutual fund terms:

Residential real estate (single family houses) in the USA usually has a "front end load" of 1-2%, ongoing expenses, and a "back end load" of 6-8%.

Would you like paying that for a mutual fund? I would hope not.

If you are buying a $250k property (and planning for eventual sale) you are usually committed to giving away $18-$25k for the realtors, inspectors, title insurance, lawyers, filing fees, mortgage origination fees, etc. etc. Occasionally you can do better, sometimes it's even worse.

You put $250k on the table, a bunch of hands grab a piece and the person selling the house ends up with maybe $225k.

Sure, it's disguised as "sellers expenses" vs "buyer's expenses" - but that's the reality.

"Throwing money away on rent" is marketing that has been pushed heavily for decades... by realtors. They only make money when you buy/sell a house (except for a few markets like NYC where apartment brokers are a thing for rentals)

...and I'm saying this as a long-time homeowner. Sure, you can make the numbers work out - or choose to buy for "lifestyle" reasons. Just don't go into it blindly with "OMG, I am throwing money away on rent!"

Even before you get into maintenance, I'm paying 4% of the house value per year in property tax.
« Last Edit: October 21, 2018, 06:41:55 AM by TomTX »

RWD

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Re: Throw away money on rent or buy at a high price?
« Reply #5 on: October 21, 2018, 08:18:01 AM »
Here is a good rent vs. buy calculator:
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Renting is not "essentially throwing that money away". You are paying for shelter whether you rent or buy. Even if you buy a house in cash and ignore opportunity costs you still will be paying real estate tax, maintenance, and insurance to continue living there.

ixtap

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Re: Throw away money on rent or buy at a high price?
« Reply #6 on: October 21, 2018, 09:14:50 AM »
Option C: Understand that renting is not throwing money away, what with having a roof to live under and all. When you rent, you give money to the landlord who pays the bank and the government. When you own with a mortgage, you just pay the bank and the government directly, while also being responsible for maintenance.

We ran our own rent/buy calculations. We found a condo for sale and a condo for rent in the same complex. The layouts were identical, the one for sale had been updated, the one for rent was an end unit, right next to the greenway. Given a 20% downpayment, we would not start breaking even until year 4, and that was assuming no maintenance, no  assessments, no HOA increases. Just the average interest for the first three years was 70% of the rent, add in taxes and HOA and you were paying more to live in the place that you owned. Now add in @TomTX 's transaction costs. On top of all that, a large percentage of our taxable accounts would have been tied up in a single asset. In the end, we signed a two year lease, so we have even hedged against rent increases.

renata ricotta

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Re: Throw away money on rent or buy at a high price?
« Reply #7 on: October 21, 2018, 09:43:22 AM »
I always stand on the side of buying if you are going to be there long term. At the end of the day, you've got control and no one can kick you out of home at a moment's notice.

Why do you think realestate will crash?

More broadly... why is this forum always so bearish on realestate, but with stocks.... it's always a fantastic time to buy (even at the "top")? Haven't your realestate markets (on average) always recovered and reached new highs too?

Ergo... isn't the best time to buy always yesterday?

I am trying not to lather this post in too much sarcasm @Ives, apologies for the derail and if it doesn't answer your question.

You may need to give a bit more background for a full answer. Are you looking to buy in a market where houses cost $100k, or $1m? Where there are a high proportion of owners, or if it is an area more friendly to renters? Whether your property you are living in is falling to bits and in need of repairs or if your place is brand new?

The problem with this is when buying a house, you are not buying the "real estate market" - you are buying one very specific, undiversified asset in the real estate market.  The correct analogy is buying a particular company's stock, not buying an index fund.  Even accepting your premise that the real estate market, like the stock market, will always go up eventually, that doesn't mean that specific assets in those markets always go up.  It would be like putting your net worth into Enron or Worldcom or Takata, with no diversity, and when those crater to nothing (likely never to return), saying "wait, I thought the market always went up?!"  It did, but you didn't buy the market. 

There are tons of houses whose net worth craters.  If it returns, it returns in a very long time.  There are whole cities or parts of cities that are ghost towns where the houses are barely worth the paper the deed is on (Detroit, parts of Baltimore, places devastated by natural disasters).  Maybe EVENTUALLY those places will recover, but if it's your primary residence, "buy and hold, damn the volatility" has real practical implications.  Do you "buy and hold" while your block is no longer serviced with electricity or water by the City of Detroit, perhaps for months?  Do you "buy and hold" while the neighboring houses are abandoned and filled with squatters? 

Sure, all of the above are EXTREME examples.  The more mundane examples are just a real estate market that's drops 10-20% and stays there during a span of years when you'd really rather move.  Maybe you get a great job opportunity in another city, or a family member needs full-time care, or you want to sell your expensive house and FIRE in a lower-cost location.  People often can't just easily "buy and hold" their house, waiting out the market lows however long they will be, because their lifestyle and location is so intimately tied to it.  None of that is true of stocks, individual or market. 

Sometimes a house is an ok investment, occasionally it is a good investment, lots of the time it is just a luxury good and you can choose whether you want to buy it.  Do the math, don't just rely on trite phrases like you're "throwing away" rent money, which often do not pan out in dollars and cents. 

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

Ives

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Re: Throw away money on rent or buy at a high price?
« Reply #8 on: October 21, 2018, 01:04:59 PM »
I'll give some info on the situation.  We are a family of four, living in a single wide rented trailer.  We can buy a house and the mortgage would be the same (really cheap house which is hard to find) or twice the monthly rent payment (these are easier to find it liveable condition).  I'd like to go for one and a half times what we pay now in rent. (we can more than afford that) because that puts us at a property of around $200,000 including our downpayment, which we've been saving up for years and years.  We live in Florida and the market seems to always be a seller's market.  We tried to buy 2.5 years ago and our limit was so low ($135,000) that even when we'd find a decent house in the mix of mostly unlivable or bad areas, it would be bought by a cash buyer over us.  Now we make more money and can borrow more, plus have saved up more.

 It's cheaper or about the same to buy as rent.  My idea is that we would pay off some of the mortgage on a house and make it be to the same $750 payment we pay to rent this trailer, but we'll be living in a house. We want to stay in FL forever, we've been here 4 years and love it.  We tried to move to another state but through that process, realized we love it here and want to stay.  We'd be looking for a smallish house (or buying one and building) on about an acre.of about 1200-1500sq ft.

We did own a property when we lived in the UK, but it was a flat (an apartment), as it's extremely expensive there and almost impossible to own an actual house.  It's been my dream to have my own house!  Nothing fancy, just our own and on land with privacy and outside space, as our whole family loves being outside.  I hope this is enough but not too much info!

Ives

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Re: Throw away money on rent or buy at a high price?
« Reply #9 on: October 22, 2018, 05:42:17 AM »
I always stand on the side of buying if you are going to be there long term. At the end of the day, you've got control and no one can kick you out of home at a moment's notice.

Why do you think realestate will crash?

More broadly... why is this forum always so bearish on realestate, but with stocks.... it's always a fantastic time to buy (even at the "top")? Haven't your realestate markets (on average) always recovered and reached new highs too?

Ergo... isn't the best time to buy always yesterday?

Do my details help?

I am trying not to lather this post in too much sarcasm @Ives, apologies for the derail and if it doesn't answer your question.

You may need to give a bit more background for a full answer. Are you looking to buy in a market where houses cost $100k, or $1m? Where there are a high proportion of owners, or if it is an area more friendly to renters? Whether your property you are living in is falling to bits and in need of repairs or if your place is brand new?

saguaro

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Re: Throw away money on rent or buy at a high price?
« Reply #10 on: October 22, 2018, 01:06:40 PM »
You are going to have to look at a rent vs buy calculator to see what makes sense for your area.

Rent is not necessarily "throwing away money" and buying isn't necessarily a good investment or even a savings over renting. You have to look at the numbers in addition to the non-financial factors and account for how much they matter to you.

In my old neighborhood, renting was by far the best choice for me. Only students rented there and only high income professionals bought there, so the rentals were reasonable and the houses were astronomical. The houses were all very old, so likely to require major costly renovations over time, and the property taxes were enormous as it's a desirable neighborhood.

In my current neighborhood, very few people rent, there are no university students, and it's mostly working class. The houses are the cheapest in the city although nice and well maintained, they're only 30-60 years old, not over 100 years old like my old 'hood. So here, renting is significantly more expensive than owning and the property taxes are very low. Extra bonus is that it's rapidly gentrifying, so anyone who bought here in the past little while is in for a major value boost in the next decade.

These neighborhoods are biking distance apart and in one buying would be a terrible financial move, while in the other, renting would be a huge waste. You have to look at the big picture.

ETA: I'm now a homeowner, but unlike PP I did it just for the financial benefit in this area, I had no desire to own, and I hate owning. I would go back to renting in a second if I could.

This was us exactly, we rented for 12 years, amongst much hand wringing from relatives how we were throwing away our money, but we ran the numbers rather then listen to them so we rented when it was the better option over buying and only bought when we moved to an area where it was better to own.  For 6 of those years we rented in an older neighborhood because the houses were old victorian homes that were crazy expensive to own and maintain but the rents were cheap. Later, we moved for DH's job to a place that was still pretty reasonable for a HCOL area but knew we should start looking for a home to own because the rents were escalating and we would be soon at that point where ownership made better sense.  We started looking then and we bought our current home where 22 years later, ownership is the still the better option.   We are considering moving and the question of renting versus owning will depend on where we decide to go.   But I really don't like owning, and would go back to renting if possible.