The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: monkeytree on October 14, 2015, 11:00:55 AM
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For a small family whose members are a combination of busy, lazy, and totally inept at house upkeep-related activities living in a HCOL region where a decent house in a good school district would start around 300-400k - would there be anything wrong with renting forever?? If you met a family like this, what would you think? Would you start judging? Because I think I would....
So to start with some background: I'm married with a 5-yo son, joint household income is about $130k, the only debt is student loans (about $25k that we'd like to pay off by the end of 2016, and about $150k of mostly grad school federal loans that should be forgiven in less than 10 yrs so just paying the minimum income-based amounts now).
We're renting a somewhat pricey (but not too crazy for this area) 2-br + den apt (~1300 sf) which is in a great location (northern VA), with great schools and community, easy access to public transportation, walkable to a lot of places (so we're hardly ever using our paid off car - we fill up maybe once or twice a month), the management company is awesome about maintenance/responsiveness, grocery store right across the street, gym in building, etc. So basically we've been here a few months but have really, really enjoyed being here. My son absolutely loves the school (and so do we).
Our mid to long term financial goals -
1) pay off $25k student loan in 1 year
2) start maxing out our 401ks (right now, we're putting in about 13% including agency matching)
3) save aggressively for a down payment on a house (not even sure how long it would take us to save up 20% plus be able to afford a decent place....we'd be starting from scratch as we have no real savings (~$1k in savings account, $60k in retirement)
4) Maybe retire early for me, but my husband wants to work as long as he can....so I guess semi-FI would be our ultimate goal
So we're right on track (and both on board) with #1 and 2.
However, a) we've loved living here so much, b) are daunted by the uber high housing prices and c) are kind of afraid of unexpected things that could break and we'd both be clueless as to how to fix them (ie: call a professional and spend more $$$) that we've started half-jokingly discussing the option of just renting forever and just invest our "down payment fund" to build up our savings. Added to the above is the fact that it would take us at least 3-4 yrs to save up 20%, which seems so long!
Based on my calculations, even assuming rent increased 1-2% a year, it would be more affordable compared to a mortgage on a $400k house which would be on the lower end of the spectrum here (and presumably more prone to expenses as opposed to a newer, more expensive house). Space-wise, we do want another child, but that prospect is looking dimmer and dimmer as I get older, so if nothing changes in our family situation, I don't see a huge problem with 3 people living in a 1300 sf space until our son leaves for college. I could also see us renting for 10 years or so and just outright buying a house with cash.
So those are all the pros....which, now that I've written it all out, seem even more attractive.
Now for the cons - the stigma of not owning your own home (even my boy has asked why most of the kids on his bus live in a "real" house and we don't! haha) - is this just something I'm being paranoid about or is it a real thing? Also, never really having our own outdoor space, garage, basement for kids, etc.; not enough room for guests; never having a paid-off house (and the financial flexibility/security that comes with that, especially when we're older/retired)...what else?
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Now for the cons - the stigma of not owning your own home (even my boy has asked why most of the kids on his bus live in a "real" house and we don't! haha) - is this just something I'm being paranoid about or is it a real thing? Also, never really having our own outdoor space, garage, basement for kids, etc.; not enough room for guests; never having a paid-off house (and the financial flexibility/security that comes with that, especially when we're older/retired)...what else?
Well, you may be asking the wrong group, because in general, I think Mustachians kinda don't give a crap about what people think of them. Honestly, you should probably try to care less about what other people think, in general. It will lead to more happiness and freedom. :)
Aside from that, I don't think there's anything wrong with renting, especially when you know it makes long-term financial sense. DH and I have been renting since we got married over 7 years ago, and if anyone gives us crap about not owning a place yet, we can start the litany of reasons why we don't--we're just prioritizing other stuff (travel, education, paying off debt), and renting affords us a lot of freedom (want to be away for the week? lock up and go), and it's kinda been risky to buy a place since we got married in 2008 (hey, remember that fun housing bubble?) and we're never sure that our jobs will be secure (hey, remember the recession after the housing bubble burst?). So maybe to some people, you'll look like those idiots who rented forever, but to those who know better, you may be the genius in the room. I think we're going to happily have someone else assume the risk of housing us for at least a few more years, and I suggested to my DH recently that, before we buy a place (if at all), we should take a sabbatical and just travel for a couple months (or as long as our employers would let us be gone). He LOVED the idea, and said, "hey, if we could do that every few years, I'd be fine never owning a house."
As for your son, introduce him to a magical place where you can ride your bike outside, use all the play equipment of your dreams, and never once have to mow the lawn or shovel snow! I call it THE PARK.
P.S. Lots of older/retired people don't want to be taking care of a house when they're up there in years, they want the freedom from house maintenance, and so many of them end up downsizing into apartments or neighborhoods of houses where somebody else fusses when the roof needs replacing and the snow piles up.
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I don't see anything wrong with renting long term, especially in Northern Virginia where real estate prices are completely ridiculous. When Mr. Mandalay and I retire, we're selling our (paid-off) condo and becoming renters because neither of us are DIYers. I'd wish we'd done that in the beginning because it's NICE to have others put in the hard work.
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Now for the cons - the stigma of not owning your own home (even my boy has asked why most of the kids on his bus live in a "real" house and we don't! haha) - is this just something I'm being paranoid about or is it a real thing? Also, never really having our own outdoor space, garage, basement for kids, etc.; not enough room for guests; never having a paid-off house (and the financial flexibility/security that comes with that, especially when we're older/retired)...what else?
Well, you may be asking the wrong group, because in general, I think Mustachians kinda don't give a crap about what people think of them. Honestly, you should probably try to care less about what other people think, in general. It will lead to more happiness and freedom. :)
As I was writing my post, you put that there.... You beat me to it by a second! And honestly, I'm almost certain most people on the forum wouldn't really care, nor do I think you should. If it works for you, then rent. If you want to buy, buy. It's your life, live it as you think works.
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The only thing potentially "wrong" is that over time, the (seemingly?) small rental rate increases over time compound, possibly making home ownership more cost efficient in the long run.
If you take $1,000 with 3% increases, in 10 years your rent is $1343.
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Isn't it pretty common to rent as oppose to buy in a very HCOL area (NYC, etc)? I would think there would be little "stigma" in that environment. No one around on this forum would judge you, but I don't think you are being paranoid per se. Where I live housing is so inexpensive that I think there is an assumption that if you have a family and plan to stay in town indefinitely, you would buy a house unless you aren't doing well financially. I think that could be cleared up or explained away pretty quickly if you felt the need ("we don't want the responsibility of homeownership," "we want to be free to take a job offer in another area," etc).
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The only thing potentially "wrong" is that over time, the (seemingly?) small rental rate increases over time compound, possibly making home ownership more cost efficient in the long run.
If you take $1,000 with 3% increases, in 10 years your rent is $1343.
Right, but a calculator like Michael Bluejay's allows for you to factor in rental increases. For example, right now, my rent is low enough, that even with annual increases of 1-2%, I still come out ahead on renting vs. buying: http://michaelbluejay.com/house/rentvsbuy.html By like $500,000.
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One other thing: this same apartment may not suit your needs for your entire life, but with renting, you have the flexibility to move anytime you want. Want to be in a better school district? Change jobs and want to be closer to work? Son grows and you want more space? Son moves out and you want less space? Etc. etc. With renting, you have the option to reassess every time you go to re-sign the annual lease. You can run the rent vs. buy calculator every year, and keep saving/investing the difference until you have at least a 20% down payment. By the time you have $80,000 saved, you may reassess your dream of owning a home. I know if I had a spare $80,000, I would think long and hard about sinking it into a $400,000 house.
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I would bet you will come out ahead in the long run.
I've got a paid off house, but factor in that I put a new roof on it, roofed the garage, painted the exterior, etc. all this year. It certainly isn't free, and not really even cheap.
No real estate taxes if you rent either.
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There's nothing wrong with renting forever. It depends on a lot of factors, and I would not give a flying fig what anybody else may or may not think...do what works for you. I am living in a very LCOL area right now, in a pleasant little mortgage-free house. I love it here, but the incessant maintenance drives me crazy, and is in no way cheap. If I move back to my former HCOL area--and I'm in major-decision-mode about this...I will definitely rent. (NY state, approx. 2 hrs. from Manhattan.) If you love, love, love it where you are, doesn't that kind of say it all? Just live there...and enjoy. And it sounds (to me anyway) like you do have room for a second child if you want.
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I love that there's no stigma here! You all are making this look more and more appealing! Yes, once we actually have $80k saved up, I'm not sure I'd want to sink it into a house either.
It just makes me wonder then, with all the baggage/headache that comes with homeownership, why do so many (most?) people buy? I agree that being in a HCOL makes renting a bit more understandable to rent, but it seems like most, if not all, of our married friends (and a good chunk of single friends) own around here. And it also seems most MMM families here own their homes too as evidenced by the numerous posts on this forum about down payments, mortgages, financing, etc.
Also, I did forget to mention that we DO have a park, literally 2 min from our building, with a trail, a playground, and basketball and tennis courts. So I guess the outdoor space issue really isn't an issue.
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Greetings from the Maryland side! Similar HCOL... when my husband and I discussed getting a house, the main drivers were 1) wanting our own walls/yard and 2) concern that with lots of people (supposedly) piling into the region's military bases, that housing prices would shoot up. Well, we were half right; the value of our home hasn't shot up, but rents sure have. Friends of ours rented a tiny (650 sqft?) 1 bedroom apartment at around $1250/month. Within a couple of years it shot up to $1600/month and the property management really stunk. That was around what our monthly payments were for our 3 bedroom single-family cost after tax write-offs. On the other hand, we replaced our HVAC system and the major appliances. The maintenance stinks at times, but I spent a lot of time in Rental Hell and am on the whole glad to be out of it.
If you like your neighborhood and your neighbors actually let you sleep at night, renting's a reasonable thing to do. Even better if there is a significant cash flow savings to renting. Not everyone wants to have a garden. If you really want/need more tax breaks, throw extra money into your 401k (assuming you aren't maxing it out already).
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For a small family whose members are a combination of busy, lazy, and totally inept at house upkeep-related activities living in a HCOL region where a decent house in a good school district would start around 300-400k - would there be anything wrong with renting forever?? If you met a family like this, what would you think? Would you start judging? Because I think I would....
No, there's absolutely nothing wrong with renting forever. There are some advantages to owning your own home, but from a purely economic perspective renting is usually better. You need to sit down and run the numbers: How much will it really cost you to own a $400K home? Mortgage payments? Maintenance? Insurance? Time? Stress? If you take the difference between what it would cost you to own your own home and what you're paying in rent and invest that money in index funds, most likely you will be richer at the end of the typical 15-30 year mortgage period than families that bought homes.
Jim Collins has a good post on why a house is a lousy investment (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/) and how to evaluate whether buying or renting would be best in your situation.
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Here's another post (http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/) from Jim Collins' blog that gives more detail on how to run the numbers to see whether buying or renting would be best in your situation.
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If you haven't read it yet, you could also check out this recent MMM post (http://www.mrmoneymustache.com/2015/07/27/rent-vs-buy/) which might help you to decide whether renting or owning a home would be more appropriate in your situation.
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My kids are 4 & 7 and our NW is just north of 600K. And DH nor I have ever owned a home. I do feel like there is a stigma around it with the general public, but I can rattle off a lot of advantages to renting if anyone asked why we haven't bought a house. And I know a lot of homeowners that are in less desirable financial shape than we are. A good friend of mine bought a TH, bought a SFH, landlorded the TH, kicked in some serious bucks to sell TH, only to get divorced and sell the SFH to liquidate and divide the equity, to be a renter again. I'm not saying it's bad that she's renting again, I guess I'm saying "what did buying get her?" People mistakenly think it's some holy grail of success. Heck, even I want it sometimes in that way, but it's not always the best choice.
I am a little tired of our place, which is causing me to want to buy, but the rent is a good deal compared to buying and other rentals, so we'll just stick with it for now.
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Nothing at all wrong with renting if the housing prices are that expensive. In fact, lots of pros. Lawn upkeep. Cost certainty. You often get amenities like a pool/spa without the hassle.
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As many have said, very few here will think renting forever is dumb. There are many reasons for renting or owning, it is a very personal decision. While renting could make more financial sense, do not forget, as many seem to, the cost of moving and putting down a deposit. The bigger a household, the more expensive and full of hassle it is to move. Each decision has its pros and cons and though it may seem that renting is overall the cheaper option, make sure to take into account all costs.
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To answer OP's question about why owners own: For me, from an early age, I just wanted to own a house and land.It seemed to spell security and success. Like Lucy in Peanuts, I would half-joke, "I want real estate." I had visions of "moving up" from my working-class background...having a big place with fields and flocks, with husband and kids, with lots of friends and family in and out...liked the idea of landscaping and growing a few vegetables, putting in some fruit trees, painting the house purple if I so desired...and to some extent, I did achieve that and live like that. (Two horses on seven acres, in-ground pool, two kids, 1,000 relatives, three cats.) I guess over the years, especially following the tragic disability of one DD, I've come to realize that big properties are a lot of work and a lot of expense...I've paid sky high taxes for deer thickets and crabgrass...with horses (which I love) I've paid huge vet and feed bills...I've become much more minimalist over the years, and believe that it's not the kind of house you have...it's the kind of home you have. Personally, I'd work on creating a warm, loving rental apartment filled with light and laughter...with the relaxation and freedom that comes from being totally financially comfortable...a welcoming place for friends and family (without having to have a guest room--use a motel)...and if you want the color purple in your apartment...have it in your couch pillows...not painted onto the walls.Maybe you can put some pretty plants on a terrace or outside the front door for a mini green space. I do get it that neighbors can be noisy, landlords can be poor managers, and that not all apartments are well-maintained. But you can always move. You have more freedom and flexibility. In terms of pets, a cat or small dog seems to be fairly easy to have in an apartment. And living near an outdoor recreational space can give so much pleasure without actually having to own it and maintain it. And as someone said above, it is easier to shut the door and leave if you want to take a trip. These are just some of my thoughts...there is really no one-size-fits-all answer. But if you stay in a rental and save for a house down payment, you will be in a good position to make the switch if you do decide to buy. Sounds like you are in a good life situation all the way around.
DD is in a beautiful Section 8 apartment, and while she will never "move up" or have a house, her apartment is a happy, homey place. She is a good advertisement for apartment life.
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Another couple of renters here. We have absolutely no desire to assume the responsibility and the inflexibility of buying a home, nor do I want my net worth tied up in such an illiquid form. Maybe someday we will find ourselves in a position where we want to buy, but it won't be anytime soon. As far as what other people think...it's a complete non-issue, I couldn't care less.
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I vastly prefer owning to renting (8 years). In my area, our full monthly payment, including escrow, is less than it would cost to rent a similar house. We bought it at the end of 2009 and have a good amount equity built up at this point. I have no interest in dealing with landlords and the possibility of having to move when the lease ends. I like having a HELOC in case of an emergency. It adds stability to my life that I didn't feel while renting and we have pets. And most importantly, my H is very knowledgeable handy around the house.
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I, too, had always dreamed of owning a home (even up until a few years ago), it was always an unspoken goal - and yes, as lizzzi mentioned, it represented security and success. But over the past few years, my mindset has been changing. I think the realities of work, childcare, and even discovering MMM, has convinced us that while we may want some of the enjoyable aspects of owning, the maintenance (and possibly financial issues) would stress us out a lot. And I'm not sure if the benefits would outweigh that stress. I guess my DH and I are pretty convinced, and it makes sense for us, but it's still hard to break from the idea that part of the "American dream" means owning your own home.
I appreciate all the feedback - it's definitely encouraging to see that we're not the only ones thinking this way. We aren't going anywhere for at least the next 3 or 4 years, but will definitely think long and hard before we make any big moves. It also helps that our apt building was originally built as a condo so the walls are concrete - so we barely hear a thing. And I guess the lack of space means more of a reason not to invite my in-laws over! (don't tell dh I said that!) But seriously, I know someone who wanted to go back to renting to prevent the in-laws from moving in with them!
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Everyone's different. I think it can make a lot of financial sense to rent. I will say that if you have kids or a family, owning might make more sense (I'm not a parent) as having a permanent base will help provide some stability.
Also, rents tend to go up over time, and by buying your mortgage is locked in place, which is nice.
Also, as a new home owner, I am starting to understand how great it can feel to own a home. Thankfully, I don't believe my place requires a significant amount of work (townhouse), but owning anything does come with a certain amount of stress.
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The hubs and I were renters for the first 15ish years of our marriage. Five years ago we moved to a different state and decided to buy a house. I thought home ownership was the be-all, end-all. I was wrong. It was a LOT of work. When stuff broke, if we didn't fix it it didn't get fixed. And it seemed like stuff was ALWAYS breaking. Even just the upkeep, yard maintenance, etc, became too much effort.
We sold the house this summer when we up and moved to another state again, and we decided to rent. In the overall scheme of things, buying that house worked out really well because it was in a great location and market, and we made an excellent amount of money off the sale considering we only owned it for 4 years. But we've decided to continue renting for now since we don't know whether we'll stay where we are long-term (we tend to get antsy and move every 4-6 years), and because it's nice to not have the hassle. Maybe someday we'll buy again, but in the meantime we'll rent for as long as it makes sense.
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But seriously, I know someone who wanted to go back to renting to prevent the in-laws from moving in with them!
That may have just convinced me to never buy a house.
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Also, rents tend to go up over time, and by buying your mortgage is locked in place, which is nice.
I had a friend tell me that her mortgage got passed around like a hot potato, something they didn't really have control over, and the payment did fluctuate because of the changes. I've never had a mortgage, and IDK how common this is, but it was a surprise to me!
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I plan on renting for life, unless some drastic housing market crash happens and I have amassed a small fortune by then.
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Also, rents tend to go up over time, and by buying your mortgage is locked in place, which is nice.
I had a friend tell me that her mortgage got passed around like a hot potato, something they didn't really have control over, and the payment did fluctuate because of the changes. I've never had a mortgage, and IDK how common this is, but it was a surprise to me!
It depends on the country. In Canada at least, this seems like a common occurrence from what I've heard.
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There's nothing wrong with renting, especially in HCOL NoVa. I lived in the NoVa area for ten years, sold after the housing crash and still made $120k on the SFH we lived in. We got lucky, home prices now are very high and probably will not support any additional run up. We rented for a year prior to buying to figure out where we wanted to be, bought on the way up in 2000, and got out in 2010 after the crash. If we had sold at the peak, we would have made 400k, but I feel lucky to have gotten any profit at all.
Our daughter just went to college, we sold our home here in NY and are happy to rent for now. We have gone back and forth on whether we want to own again. Primarily this centers around risk: property taxes in NY are the worst in the nation and the property tax cap expires this year. With a FIRE date in 2022, we probably won't be here forever. So, we are waiting to see what happens and how we feel. Good news is that as renters, we can change our minds if we want without it costing us thousands of dollars.
Renting again after owning for 20 years gives me a bit of a different perspective.
Advantages of owning:
* You decide how to manage the property. Although you will be subject to HOA's in NoVa, and some of them are awful to deal with.
* it's OK to invest in nice appliances, or do improvements like granite or energy-efficient upgrades (solar). Paint a room fuschia, if you want.
* Much easier to have pets.
* Interest rates at historic lows.
Advantages of renting:
* Much lower risk. Bad neighbor? Move at the end of your lease. If a bad neighbor moves next door to your house, you'll never sell it.
* Lower exposure to price volatility (you still pay it in the rents, eventually, so it's not zero). So much is outside your control as a homeowner, property taxes, special assessments, someone suing your county, etc. not to mention leaky roofs and such.
* Change your living area as your family needs change, with low transaction costs
* No maintenance hassles or expense.
* More free time: no yard maintenance, home maintenance
* Job change? No problem.
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We're renting a somewhat pricey (but not too crazy for this area) 2-br + den apt (~1300 sf) which is in a great location (northern VA), with great schools and community, easy access to public transportation, walkable to a lot of places (so we're hardly ever using our paid off car - we fill up maybe once or twice a month), the management company is awesome about maintenance/responsiveness, grocery store right across the street, gym in building, etc. So basically we've been here a few months but have really, really enjoyed being here. My son absolutely loves the school (and so do we).
Now for the cons - the stigma of not owning your own home (even my boy has asked why most of the kids on his bus live in a "real" house and we don't! haha) - is this just something I'm being paranoid about or is it a real thing? Also, never really having our own outdoor space, garage, basement for kids, etc.; not enough room for guests; never having a paid-off house (and the financial flexibility/security that comes with that, especially when we're older/retired)...what else?
I moved to a new HCOL area and wanted to rent, but couldn't find anything suitable [cat, needed garage and an office to work from home, didn't want top share a house with other renters or landlord] so I ended up buying.
~$420K house with $40K down. My mortgage payments were ~$1.5K/month including property taxes [bumped them up to $1.75K/month to reduce term of mortgage]. $250/month for utilities, insurance and maintenance. So I end up spending ~$24K/yr to own the house. I get ~$9K/yr equity [will be more now that I have bumped payments up]. So my cost per year is ~$15K/yr assuming house prices track inflation.
It would cost ~$2K/month to rent the same space.
So although I was a reluctant house buyer once I had a few years of data to look at the cost to own is not bad.
Ultimately I would build yourself a spreadsheet and work the number for your own situation.
As a long term renter my annual increases were a lot more than 1% to 2% so confirm that those estimates are realistic when you work out your numbers.
To your second point about social stigmas you have to decide if you are going to be bothered by what others think. We live in a crappy house compared to most of our friends. Every month when I am investing my savings I am glad to be living well below my income. Financial freedom is more important to me than what other people think.
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I don't think there is anything wrong with renting forever. I think that people are more mobile these days, and renting makes it easier.
Honestly, I live in an expensive area (Santa Barbara) - though we've considered NoVa.
We had some seriously bad luck in renting here. Husband's first rental (1BR apt with appliances from the 60's) was great. We made the mistake of upgrading to a 2 BR when we married and I moved out, because we had 2x the stuff.
That was all well and good until the landlords raised the rent $330 a month (from $995 to $1325). They did this right before school started, so the rental market was tight. We ended up in a 1BR condo for $950 a month. (Note: this is the late 90's). 9 months later the owner decides to sell. Ugh. So we end up in student housing, that's frugal! But have to move a couple of years later when he graduated.
We ended up renting a duplex, and then after a couple of years, buying a house. In 2004. Yes, our house is still worth less than we paid for it. After aggressively paying down the mortgage and refinancing, FINALLY we can say that our mortgage + property tax would equal rent on our house, about $3000 (for 1100 square feet). But it will still be decades before we'd be even on the money we've thrown at it on mortgage, prop tax, maintenance. A quick calculation a few months ago came up at about half a million lost. It would have been way better to rent. (I'm glad I own my home. I like it. Renting in our area is tight, and it can be super stressful to find a rental in your chosen school district, which becomes important once your kids are IN school. And renting our house in a better school district would be $4000 a month, easy.)
I know plenty of people who rent, because a starter home is still $750k here. Renting is normal.
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~$420K house with $40K down. My mortgage payments were ~$1.5K/month including property taxes [bumped them up to $1.75K/month to reduce term of mortgage]. $250/month for utilities, insurance and maintenance. So I end up spending ~$24K/yr to own the house. I get ~$9K/yr equity [will be more now that I have bumped payments up]. So my cost per year is ~$15K/yr assuming house prices track inflation.
Your mortgage payments seem awfully low for a $380k mortgage (with PMI, I assume?)...am I missing something? Most of the calculators I've used have shown closer to $2000-$2500/month for that price range, which is more than what our rent is.
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~$420K house with $40K down. My mortgage payments were ~$1.5K/month including property taxes [bumped them up to $1.75K/month to reduce term of mortgage]. $250/month for utilities, insurance and maintenance. So I end up spending ~$24K/yr to own the house. I get ~$9K/yr equity [will be more now that I have bumped payments up]. So my cost per year is ~$15K/yr assuming house prices track inflation.
Your mortgage payments seem awfully low for a $380k mortgage (with PMI, I assume?)...am I missing something? Most of the calculators I've used have shown closer to $2000-$2500/month for that price range, which is more than what our rent is.
Depends on his interest rate (when did he buy the house?)
Also, don't forget to factor in some tax savings.
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Well, since we are factoring in some secondary benefits, how about we factor in the opportunity cost of that $40K down payment? After 30 years, with an initial investment of $40,000 in VTSAX, how much would a renter's stash have grown?
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I moved to a new HCOL area and wanted to rent, but couldn't find anything suitable [cat, needed garage and an office to work from home, didn't want top share a house with other renters or landlord] so I ended up buying.
~$420K house with $40K down. My mortgage payments were ~$1.5K/month including property taxes [bumped them up to $1.75K/month to reduce term of mortgage]. $250/month for utilities, insurance and maintenance. So I end up spending ~$24K/yr to own the house. I get ~$9K/yr equity [will be more now that I have bumped payments up]. So my cost per year is ~$15K/yr assuming house prices track inflation.
It would cost ~$2K/month to rent the same space.
Wow, I'd like to get a deal like that on a mortgage! <10% down and it must be a super low interest rate. How did you manage to swing that one?
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Wow, I'd like to get a deal like that on a mortgage! <10% down and it must be a super low interest rate. How did you manage to swing that one?
I went to a mortgage broker. I have a great credit score and it's a 5yr variable mortgage. The rate is super low, but interest rates are pretty much rock bottom. I'm up in Canada.
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I don't think there's a stigma to renting, and in fact don't know the own-rent status of many of my friends, or my kids' friends!
I think your kid's "real house" comment reveals what there is a stigma for - apartments. I guess if you're in an apartment, as posed to condo or townhouse, that your friends would know you rent and kid would notice that's not "a real house". But whatever, either the apartment suits you or you can rent a house next time.
I like owning because it locks in your monthly housing price for 15-30 years, feeling cheaper over time thanks to inflation, and then gets you however many years after that at just taxes and insurance. But the big downsides are maintenance costs and lack of mobility when it comes to needing something bigger or smaller or wanting to switch towns.
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Wow, I'd like to get a deal like that on a mortgage! <10% down and it must be a super low interest rate. How did you manage to swing that one?
I went to a mortgage broker. I have a great credit score and it's a 5yr variable mortgage. The rate is super low, but interest rates are pretty much rock bottom. I'm up in Canada.
That makes sense now. I figured it must be some sort of an interest-only or 40 year mortgage or something other than the norm in the U.S., which is a 30 year fixed rate. As long as interest rates don't increase dramatically during the next 5 years, it sounds like you've got a good deal.
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No real estate taxes if you rent either.
The only time renters don't pay the landlord's real estate taxes is when the property is vacant.
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Depending on the kids ages and personalities, they might just be curious. Giving your kid answers to the questions might put them all at ease.
"My parents work long hours and are kinda clumsy, so we live in an apartment so they don't have to waste time figuring out how to fix stuff"
If your kid is dealing with mean girls, I don't know how to handle it :)
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In Canada the ownership rate is about 70%, so DH and I are really bucking the trend by planning to rent indefinitely.
There is definitely a stigma to being a renter, like you aren't grown up or successful yet. I anticipate that my toddler will ask questions when she's older (things that may sting a little, like "why don't we have a real home?"), but if I'm going to teach her financial literacy and critical thinking, evaluating situations against conventional wisdom needs to happen.
You can show off your hardwood floors and granite countertops and have friends and family ooh and aah over them. You can publicly beam about your pride of ownership. Without really pissing some people off (at the very least), you cannot show off your fat investment portfolio and gush about your pride of ownership of that. Socially very unacceptable and you will receive very little oohing and aahing.
There's a judgment that you're not doing right by your kids if you don't have a backyard for them and one bedroom per kidlet. The attitude is so entrenched it is ridiculous.
I do care, to some extent, what people think of us. For most, an easily-understood explanation (great deal on rent, DH's job may require we relocate, houses are so expensive) is good enough. If I sense someone is open to the financial argument I might discuss rent vs. own, or excessive risk in concentrating a huge chunk of our NW in one illiquid asset. It's a screening process for me, too. If someone thinks less of us for being renters after they learn we've made a thoughtful decision to do so, I've learned something about that person's values or decision-making capacity.
Keeping shelter costs under control has been a significant factor in our ability to build a stash. We've been through some stressful life events where 1) having that stash was a big comfort, and 2) not having the stress of paying a mortgage or maintenance on an owned property was a relief (we could not own a similar dwelling for anything near the deal we get on rent. Locally, real estate prices have detached from rents so it's not an uncommon scenario.)
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For 22 years of my adult (real job) life, I rented.
Early, because I despised mowing the lawn ect.
Later,because I had a job that had 1day to one week notice for out of town work that could be up to two months away from home.
As a renter, I could have my mom stop by on a bi-weekly basis to water plants and check the mail.
no hassle, nice place with a pool, central location.
Now married, a house has its strong points, but upkeep/upgrades take their toll.
mortgage ~= rent, which was a strong house buying push.
All the people who insist that " you must buy a house mostly want you to join in their misery.
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In general, I think if you are interested in saving money you are better off buying than renting.
Look at this way. Most landlords make a profit renting. Who pays for the profit the landlords make? The renters. So why give the landlords profits when you can make it yourself?
Secondly, there are numerous tax breaks that the government provides to homeowners that long term renters miss out on. The most obvious is, of course, the deductibility of interest and property taxes. There is also a variety of other deductions that are available to homeowners but not renters. So for instance I've reduced the cost of electricity (and gasoline since I own an electric vehicle) to about $30/month, the cost of the system was subsidized by the state, and federal governments.
Perhaps most importantly is the $500K, capital gains exclusion. You got the kids out of the house, and now you can downsize, you can exclude $500K in capital gains, that's a pretty big tax saving. It is virtually impossible to find anything similar in size or scope outside of being a homeowner.
Now that isn't to say that renting is always the right thing, because it isn't. Especially if you have career where you can benefit for being more mobile. But if you think are going to be in a place for at least 5-10 years with the possibility of being there for 20+ I think you are better off buying.
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The only time renters don't pay the landlord's real estate taxes is when the property is vacant.
This isn't true. Although people like to think so, the rent charged is set by the rental market, which is more concerned with supply and demand than how much the landlord pays in property taxes. The landlord would like to pass on all costs (and make a profit) to the renters, but that doesn't automatically happen. It is true that the underlying costs of owning property will be somewhat related to the rental prices, but this is far from an absolute/direct link.
Look at this way. Most landlords make a profit renting.
I also don't know if this is true. I'm sure there are plenty of landlords who make a profit, but have also heard of plenty who don't (if someone has statistics on this, I would be very interested). People are quite bad at calculating the full cost of ownership (the many, many costs; time put in to manage and maintain; risk of very big expenses; risk of eventual sales price being lower than expected). I'm not saying that people don't make money as landlords (there are examples on these forums), but the idea that renting is bad because all/most landlords are making money is bad advice.
Specific situations where landlord could be making a profit and it's still better to be renting:
1. You don't have time/skill/desire to fix up your own house and you would end up paying someone to do all your maintenance. Landlord does his own, so is better off.
2. You move cities, countries from time to time for a better job or life situation. Landlords make profit off of you, but you spend far less money than buying and selling.
3. Housing market is overpriced/hot/high. For you to buy into that market and possibly exit at a lower level in the future could be disastrous. Landlord is profiting short term (and maybe holds on long enough to sell at the right time), but has a large risk of falling prices in the future.
I'm not against house ownership, but I don't like to see blanket statements (usually somewhat emotionally charged statements) that tell people that renting is a always a bad idea.
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Owning even my own property felt like work to me, at one stage I had my property, and two rentals. 'Now I'm a happy renter. Strangely my two rentals felt like less work than my own home!
Never again will I own bricks and mortar and pay the government for the privilege of doing so. Closest I'll come to again is a boat or an RV I live in.
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I bought my current house two years ago. We have kids and like the school district so were bound by physical location.
Before that we rented - first in an apartment. Couple above us had a dog they only seemed to exercise in the apartment. every night. and liked fighting each other. not a great environment.
after that we rented a house. Rent was a lot more than a mortgage would be. nice house and close to school. We paid the rent. owner didn;t pay the mortgage. house was foreclosed on and we had to move again.
obviously as the owner wasn't paying the rent he also wasn't too hot on doing minor repairs like making sure the hot water worked.
Its not always rainbows and waterfalls.
When the kids are done with school we may rent our place out and travel.
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@OP, is going the multi-family home route any help? Even in HCOL area, a duplex will greatly help offset the mortgage, provide awesome equity pay down, retirement diversification if you so decide to keep it that long, etc.
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Look at this way. Most landlords make a profit renting. Who pays for the profit the landlords make? The renters. So why give the landlords profits when you can make it yourself?
This may be true in some markets, but it is definitely not true everywhere. In many places real estate prices are so high that its very difficult, if not impossible, for most landlords to actually make a profit.
If you haven't already, please read MMM's recent post comparing renting vs. owning (http://www.mrmoneymustache.com/2015/07/27/rent-vs-buy/).
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You'll notice that several posters (including OP) have said that they feel or have felt that home ownership was the ultimate sign of success and adulthood. The reason for this is that since the formation of the colonies the "American (or Canadian) dream" has been intrinsically rooted in land ownership. Social mobility meant becoming a landowner - farming was lucrative and owning lands meant you had a real stake in the colony(or kingdom) in a way you could never have back in Europe.
Owning lands = getting rich = greater status
As industrialization occurred, the agrarian lifestyle became less lucrative and less appealing. However, the need to own land persisted - eventually morphing into the idea that owning your own home with two cars and a white picket fence was the ultimate sign that you had "made it". This is the dream your parents and grandparents spent their lives chasing. It was fine for them but, is woefully outdated for the 21st century service economy.
The best thing you can do for your financial future is to give up the definitions of success held by previous generations and redefine it for yourself.
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Look at this way. Most landlords make a profit renting. Who pays for the profit the landlords make? The renters. So why give the landlords profits when you can make it yourself?
This may be true in some markets, but it is definitely not true everywhere. In many places, real estate prices are so high that it's very difficult, if not impossible, for most landlords to actually make a profit.
If you haven't already, please read MMM's recent post comparing renting vs. owning (http://www.mrmoneymustache.com/2015/07/27/rent-vs-buy/).
I didn't say everywhere, I said most meaning a majority. Are you saying that most landlords are stupid and lose money, and year after year subsidize the smart renters? Do you have any data?
Regarding MMM post on Toronto rents, there are definitely some markets where owning is less favorable. That said I've spent most of my life living in High COL places (California, Hawaii), where it has been very difficult to purchase properties that are cash-flow positive. Yet somehow lots of people make money in crazy expensive real estate markets (including Toronto). They do this because properties appreciate over time, and through the use of leverage that increases their returns. Certainly as we found out in 2007/2008 real estate can go down and you can lose money both as a homeowner and a renter. However, over time real estate does appreciate.
The reason I pointed out that most landlords make money was to point out even though there are many distinct advantages for home ownership, primarily tax advantages but also lower interest rates on mortgages, people make money owning homes and renting them out. So logically the lower cost of owning a home for an individual should widen the profits vs a landlord.
Finally, it is worth considering this factoid. In Stanley's book The Millionaire Next Door he found that 97% of millionaires own their own home. If you think that emulating the habits of the Millionaire Next Door is worthwhile than I suggest that buying a home is smart.
If people want to convince themselves that there is no financial advantage to owning vs renting, and retiring early is just as easy if you've rented your whole life as opposed to owned feel free. I suspect that there is precious little data to support the position.
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Happy to see the diversity of opinion here. My wife and I bought our first house 5 years ago (good timing). It's ~1800 sqft, we paid $143K. Nice neighborhood, so-so school (but they recently made it IB and my daughter is 6 mos so we'll see). We're both a little handy, but there's definitely been a learning curve w/ DIY stuff. And there have been times when I've wondered if we wouldn't be better off (psychologically) renting. Financially, I think we're definitely coming out ahead -- according to Zillow our house is now $175K, and our mortgage is basically what we were paying for rent for a 1 BR apt 5 years ago. At the same time, I find home ownership much more stressful and time consuming than renting, and I'm not sure that this is worth it to me. Of course, over the years the stress level has come down a bit.
I don't think we'd move into a rental in our current situation, but if we were to relocate, we'd definitely rent initially and I think we'd consider it longer term.
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Finally, it is worth considering this factoid. In Stanley's book The Millionaire Next Door he found that 97% of millionaires own their own home. If you think that emulating the habits of the Millionaire Next Door is worthwhile than I suggest that buying a home is smart.
This factoid is useless without also knowing the sequence of events and how those millionaires made their money. Did owning a home help make them rich? Or did they get rich and then buy a home? Emulating the wealthy before you ARE wealthy is the easiest way to make sure you never become wealthy.
Warren Buffett and Captain Sparklez are both rich men who own homes but, implying that their home ownership aided their success is quite misleading.
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Look at this way. Most landlords make a profit renting. Who pays for the profit the landlords make? The renters. So why give the landlords profits when you can make it yourself?
Yes, lots of great discussion, but comparing landlords to individuals may be too simplistic. I assume "most" landlords also have enough money to comfortably invest in rental properties so they're probably in a better position to profit as well. If you're like us, you'd be stretching your finances the first few years to save enough and then incur the initial move-related expenses.
In our situation specifically, it would be years before we could come up with a decent down payment, and in our area, I assume the houses will just keep getting more expensive. Assuming we can buy in 4 years, we'd be sinking a good chunk (if not all) of our savings (minus retirement) into the house, and using the extra monthly cash flow (if we'd been renting) to contribute to the mortgage plus misc/surprise expenses.... not leaving us a ton of cushion for extra savings. If we continued to rent, we could probably bank about $3k/month in savings/investment, but probably only a third of that if we owned. By the time we saved up $80k, 100k, or even 200k, yes, we'd be in a better position to buy, but as someone mentioned before, would it be worth the missed opportunity cost of investing that chunk of change?
The best thing you can do for your financial future is to give up the definitions of success held by previous generations and redefine it for yourself.
Love this!
It seems like even here, a lot of owners who love their homes and don't necessarily regret that choice at least question whether it made sense to invest so much (financially or otherwise) in them. And it's interesting to see how even these owners would seriously considering renting as their next housing option.
This is a bit like the "to have or not have kids" dilemma....there are clear joys of raising children, but very real sacrifices and commitment parents make as well. Is it worth it? Some say yes, some no. Some make the decision by choice, others are forced to choose based on family, health circumstances. There is also some stigma associated with not having children (or not having more than one, even)!
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Well it's up to you but I don't understand some of the pro-rent arguments.
Yes, owning may be more expensive over time, but once the mortgage is clear you have the security. I wouldn't want to be renting in retirement.
And job losses etc are not good reasons. You can be evicted from a rental for not paying just as you can with an owned property. As for 2008 not being a good time - this would be when prices plummeted and buyers bought at vastly reduced prices that have since increased in many areas? Bubbles have happened in the past and will happen again, 2008 was bad but shouldn't be much of a deterrent, especially in the direct aftermath.
Personally I do agree there are pros and cons to each. I've rented and now own and prefer it but there is more concern about things going wrong. But, the people I know who are late 30s or older seem to regret not buying. I work with a 41 year old who wished he had bought and doesn't know how he will now.
And just so people know, homeowners can travel too. In fact, it's easier - I had clauses in my rental contract about not leaving the place empty for too long, and owners can even rent it out if they go away.
I'm pretty much of the opinion that renting has advantages, but many of us will one day wake up and wish we had the security and comfort of our own home. No worry of a rent increase, no worry of a landlord selling and kicking you out, or things not getting repaired
One last point on recessions - if you rent and your landlord defaults, bye bye home. If you own, there are options. A reduced value only matters if you try and sell in that time. If you have good history of payments many lenders will allow a payment holiday, especially if you have a lot of equity or have overpaid. Or if you have good savings like many here, you could afford the mortgage even if the worst happened and you lost the job for a while. The point being, there is a perceived idea of freedom with renting, but I find it far riskier and with far fewer choices
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Look at this way. Most landlords make a profit renting. Who pays for the profit the landlords make? The renters. So why give the landlords profits when you can make it yourself?
This may be true in some markets, but it is definitely not true everywhere. In many places, real estate prices are so high that it's very difficult, if not impossible, for most landlords to actually make a profit.
If you haven't already, please read MMM's recent post comparing renting vs. owning (http://www.mrmoneymustache.com/2015/07/27/rent-vs-buy/).
I didn't say everywhere, I said most meaning a majority. Are you saying that most landlords are stupid and lose money, and year after year subsidize the smart renters? Do you have any data?
My argument is that in many markets around the world, if a landlord takes into account ALL of the costs of owning a property including the opportunity cost of the funds he has tied up in the home(s), it would be nearly impossible to make a profit from renting out residential real estate, yet landlords do it anyway. I wonder why?
Some landlords may have motivations other than pure investment. Many landlords are not really in the business of renting out properties to make a living. They just do it as a side thing, or they're renting out their former residence while they wait for real estate prices to come back up again before selling. It's impossible to know all of the reasons why a landlord would choose to lose money on a property.
Since information on whether landlords in a given area are making a profit on their investments is private, it would be difficult to present data to back up my claim that renting out residential real estate is not a profitable business in many areas. Can you present any data that prove your claim that "most" landlords are making profits on renting out real estate? It seems like an impossible hurdle to put up in order to accept that real estate investment can be profitable in some areas and not so much in others.
The best we can do is reverse engineer the data. We can look at purchase prices of residential real estate in a given market, add in all known costs of real estate ownership, and then subtract out the gross rents that are attainable in that market. If you do this, you will see that some markets offer many profitable opportunities for landlords and others do not.
If you're unwilling to even consider questioning your (apparently) cherished, long-held beliefs regarding the universal profitability of residential real estate, that's fine with me. I realize it's like a religion for many people and any challenge to their beliefs is taken as a personal insult. If you'd like to learn more, why not check out the articles below. You might learn something. :)
Why your house is a terrible investment (jlcollinsnh) (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)
Renters for Life (Go Curry Cracker) (http://www.gocurrycracker.com/renters-for-life/)
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My argument is that in many markets around the world, if a landlord takes into account ALL of the costs of owning a property including the opportunity cost of the funds he has tied up in the home(s), it would be nearly impossible to make a profit from renting out residential real estate, yet landlords do it anyway. I wonder why?
I think a big part of it is that unlike just about any other investment it's possible for a handy person to add a lot of value by doing some work. As a straight passive investment I tend to agree with you, but I suspect that for handy people who don't make real estate a passive investment, they'll get a much better return than investing in index funds as long as you ignore the value of their labor. So they might not have reached financial independence in the sense of "never have to work again," but they have reached it in the sense of being self employed with a relatively steady business that they can always sell in a well developed market unlike more specialized businesses.
It's not for me, although I probably could do it successfully, but I can see the appeal if you're looking for something that you can have a little more active hand in the success of than an index fund.
I didn't really mean to add this part, but as I wrote the above it occurred to me that the same argument can probably be extended to owner occupied real estate. If you're handy and willing to ignore the value of your labor there's a pretty good chance you'll come out ahead financially in any market that's not currently overvalued and fueled by speculation. I still wouldn't consider a home an investment, but as an alternative to rent you get more flexibility in the amount of work you're willing to put into keeping things running instead of paying money. Not saying one way is better than the other, it's just a choice that you need to make.
For us we own now, but after this experience probably won't again until we retire, if then.
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Look at this way. Most landlords make a profit renting. Who pays for the profit the landlords make? The renters. So why give the landlords profits when you can make it yourself?
This may be true in some markets, but it is definitely not true everywhere. In many places, real estate prices are so high that it's very difficult, if not impossible, for most landlords to actually make a profit.
If you haven't already, please read MMM's recent post comparing renting vs. owning (http://www.mrmoneymustache.com/2015/07/27/rent-vs-buy/).
I didn't say everywhere, I said most meaning a majority. Are you saying that most landlords are stupid and lose money, and year after year subsidize the smart renters? Do you have any data?
Regarding MMM post on Toronto rents, there are definitely some markets where owning is less favorable. That said I've spent most of my life living in High COL places (California, Hawaii), where it has been very difficult to purchase properties that are cash-flow positive. Yet somehow lots of people make money in crazy expensive real estate markets (including Toronto). They do this because properties appreciate over time, and through the use of leverage that increases their returns. Certainly as we found out in 2007/2008 real estate can go down and you can lose money both as a homeowner and a renter. However, over time real estate does appreciate.
The reason I pointed out that most landlords make money was to point out even though there are many distinct advantages for home ownership, primarily tax advantages but also lower interest rates on mortgages, people make money owning homes and renting them out. So logically the lower cost of owning a home for an individual should widen the profits vs a landlord.
Finally, it is worth considering this factoid. In Stanley's book The Millionaire Next Door he found that 97% of millionaires own their own home. If you think that emulating the habits of the Millionaire Next Door is worthwhile than I suggest that buying a home is smart.
If people want to convince themselves that there is no financial advantage to owning vs renting, and retiring early is just as easy if you've rented your whole life as opposed to owned feel free. I suspect that there is precious little data to support the position.
I think as always, this depends a lot on where you live and what you do.
In a reasonable COL area, if you have a decent job, I'd imagine that it's better to buy short term and long term.
But there are always the "other places" and "other things".
2007/2008 may be an anomaly, but we got caught in that anomaly. 11 years later and our house is still worth less than we paid for it. Mortgage, prop tax is about $3000 a month. Most of that time, renting the same house would have been about $2k per month. Yes we have tax savings BUT we are hit with the AMT now, so it's not the full amount. $1k a month x 12 months x 11 years.
Long term, it may work out. As in, 20-30 years.
But how many people have the same job in the same place for 20 years? Probably a lot of people, but not in my industry. I know many people who own homes elsewhere, that they rent out at a loss (or break even) because they could not sell their other house. Especially in my HCOL area, rents are outrageous but anyone who bought their house in the last 11 years (except for maybe 2009/2010) is barely breaking even.
So why be a landlord? Well, obviously, it's different in different locations and it can make money. You can get positive cash flow if you can put enough down. And some people get into landlording gradually. My boss bought a condo. Lived in it. Bought another condo (foreclosure) during the downturn. Rents it out. Bought a house a couple of years ago and rents the first condo. So he's neutral on the first condo, but with prop tax loses a couple hundred a month. He's cash flow positive on the second condo. Note that he has NO 401k, all of their investment is in the real estate.
(So kind of drives me crazy when renters complain about the crazy rents, because it's STILL cheaper than buying. And of course owners are "gouging renters" - except a lot of them don't break even. There are landlords who bought their homes for $50k 30 years ago and are making bank on them. So...???)
In upstate NY, I've never run the numbers - but I've noticed that rent is pretty cheap. However, prop taxes are high. Cost to rent a house: $1200 a month, $14,400 a year. Property taxes if you own that house: $4500 a year. Mortgage: $5200 a year. That's $9700 a year if you don't own it outright, before insurance or maintenance.
If you have the type of job where you will move more often, it's generally safer and cheaper to rent.
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We don't intend to ever buy a place, and we could afford to pay somewhere between 50% and 100% of the cost in cash (depending how fancy a place we bought) if we wanted to. It makes zero financial sense to buy in my city when you're capable of ninja-style apartment hunting and routinely pay at the very bottom of the rental scale. We also love the flexibility of being able to move at will, and being able to call someone up and say (politely) "deal with it" when something breaks or leaks or whatever.
I just don't see how you could possibly come out ahead buying a $300,000 condo and having to pay insurance, interest, utilities, maintenance, and condo fees, versus paying $776 for a nice apartment that includes utilities. That's our current situation.
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Look at this way. Most landlords make a profit renting. Who pays for the profit the landlords make? The renters. So why give the landlords profits when you can make it yourself?
Yes, lots of great discussion, but comparing landlords to individuals may be too simplistic. I assume "most" landlords also have enough money to comfortably invest in rental properties so they're probably in a better position to profit as well. If you're like us, you'd be stretching your finances the first few years to save enough and then incur the initial move-related expenses.
In our situation specifically, it would be years before we could come up with a decent down payment, and in our area, I assume the houses will just keep getting more expensive. Assuming we can buy in 4 years, we'd be sinking a good chunk (if not all) of our savings (minus retirement) into the house, and using the extra monthly cash flow (if we'd been renting) to contribute to the mortgage plus misc/surprise expenses.... not leaving us a ton of cushion for extra savings. If we continued to rent, we could probably bank about $3k/month in savings/investment, but probably only a third of that if we owned. By the time we saved up $80k, 100k, or even 200k, yes, we'd be in a better position to buy, but as someone mentioned before, would it be worth the missed opportunity cost of investing that chunk of change?
For people living in an HCOL area, it is almost always a financial stretch to buy your first home. But I'd argue that's a good thing. I think psychologically it is easier to give up the Starbucks habit when you are desperately saving for a down payment in the next few years than to do so for a retirement many years down the road.
Forced saving early in your life is generally a good thing because it maximizes the power of compound interest.
The average rent in the US is about $1,000/month. If we expect rent to 3% per years (slower than recent years) than over the next 10 year the rent will be over $1,300 and you will have paid and additional $20K that a homeowner with fixed mortgage wouldn't have paid. Sure a homeowner will also have some rising expense, but overall cost will rise a much slower rate because the primary cost, interest rate expense, will be declining as the mortgage is paid off.
The median home price in the US is $200,600 so with a 20% down and a 3.5% mortgage the payments will be $964/month. There will be additional expenses for home ownership (insurance, property tax, etc) but for somebody in the 25% bracket the interest rate deduction will almost certainly be worth more than the additional costs. Note this isn't exactly a fair comparison because most rental units are apartments which typically aren't as nice as most house.
To me, the bottom line is renting is a convenience in the same way that leasing a car, or getting take out is a convenience. In some cases (e.g. a self-employed professional with more available work than time), it makes financial sense to opt for convenience but generally it doesn't.
It also seldom makes sense to buy unless you intend to stay in the house for at least 3 and more likely 5 to 10 years due to the high transaction cost associated with real estate.
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We don't intend to ever buy a place, and we could afford to pay somewhere between 50% and 100% of the cost in cash (depending how fancy a place we bought) if we wanted to. It makes zero financial sense to buy in my city when you're capable of ninja-style apartment hunting and routinely pay at the very bottom of the rental scale. We also love the flexibility of being able to move at will, and being able to call someone up and say (politely) "deal with it" when something breaks or leaks or whatever.
I just don't see how you could possibly come out ahead buying a $300,000 condo and having to pay insurance, interest, utilities, maintenance, and condo fees, versus paying $776 for a nice apartment that includes utilities. That's our current situation.
It very well may not make sense in your area, depending on the condo fee and other expense. But the mortgage for your Condo would be about $1,440 if you live in a state with fairly high-income taxes the after-tax cost would probably be under $1,000 month. Condo fees can be all over the map, and as I've learned the hard way really eat into profits. Still if the property appreciates at just a tad over 5% a year in 10 years it will be worth $500k, you can take the 200k profits tax-free and retire to lower cost of living place. Would you have been better off investing the negative cash flow in the market? It is pretty much impossible to say but under the right circumstance even marginal home purchases can and have worked out well.
Between being single, and not being a DIY type, I am far from the ideal homeowner. But to me the inconvenience of having to call a plumber are minor compared to having a landlord call and say I'm selling your place be out in 45 days. I guess different strokes.
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We don't intend to ever buy a place, and we could afford to pay somewhere between 50% and 100% of the cost in cash (depending how fancy a place we bought) if we wanted to. It makes zero financial sense to buy in my city when you're capable of ninja-style apartment hunting and routinely pay at the very bottom of the rental scale. We also love the flexibility of being able to move at will, and being able to call someone up and say (politely) "deal with it" when something breaks or leaks or whatever.
I just don't see how you could possibly come out ahead buying a $300,000 condo and having to pay insurance, interest, utilities, maintenance, and condo fees, versus paying $776 for a nice apartment that includes utilities. That's our current situation.
It very well may not make sense in your area, depending on the condo fee and other expense. But the mortgage for your Condo would be about $1,440 if you live in a state with fairly high-income taxes the after-tax cost would probably be under $1,000 month. Condo fees can be all over the map, and as I've learned the hard way really eat into profits. Still if the property appreciates at just a tad over 5% a year in 10 years it will be worth $500k, you can take the 200k profits tax-free and retire to lower cost of living place. Would you have been better off investing the negative cash flow in the market? It is pretty much impossible to say but under the right circumstance even marginal home purchases can and have worked out well.
Between being single, and not being a DIY type, I am far from the ideal homeowner. But to me the inconvenience of having to call a plumber are minor compared to having a landlord call and say I'm selling your place be out in 45 days. I guess different strokes.
Condo fees in Vancouver start at about $200/month and are frequently $300-$400. It's pretty hard to come out ahead at those rates, in addition to utilities, maintenance, mortgage interest, and homeowners insurance.
I've never actually been kicked out of a place in my 11 years of renting, but 45 days seems extremely ample to find a new apartment. I'd wish the landlord well and be on my way. Though I don't actually have a landlord right now, being in a housing co-operative - but I might have one again some day if the rents here get too high.
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It's as individual as marriage. Not for all.
Great for many, dreadful and financially ruinous for others.
It also has to be the right one. Choose the wrong house or spouse and it's not going to turn out well.
Also as with marriage, there are good reasons and not so good reasons, but near the top of the list of bloody awful reasons is because you care that others will judge you poorly. That's the sort of notion sets up a disaster.
Nobody thinks about you as much as you think they do.
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We don't intend to ever buy a place, and we could afford to pay somewhere between 50% and 100% of the cost in cash (depending how fancy a place we bought) if we wanted to. It makes zero financial sense to buy in my city when you're capable of ninja-style apartment hunting and routinely pay at the very bottom of the rental scale. We also love the flexibility of being able to move at will, and being able to call someone up and say (politely) "deal with it" when something breaks or leaks or whatever.
I just don't see how you could possibly come out ahead buying a $300,000 condo and having to pay insurance, interest, utilities, maintenance, and condo fees, versus paying $776 for a nice apartment that includes utilities. That's our current situation.
It very well may not make sense in your area, depending on the condo fee and other expense. But the mortgage for your Condo would be about $1,440 if you live in a state with fairly high-income taxes the after-tax cost would probably be under $1,000 month. Condo fees can be all over the map, and as I've learned the hard way really eat into profits. Still if the property appreciates at just a tad over 5% a year in 10 years it will be worth $500k, you can take the 200k profits tax-free and retire to lower cost of living place. Would you have been better off investing the negative cash flow in the market? It is pretty much impossible to say but under the right circumstance even marginal home purchases can and have worked out well.
Between being single, and not being a DIY type, I am far from the ideal homeowner. But to me the inconvenience of having to call a plumber are minor compared to having a landlord call and say I'm selling your place be out in 45 days. I guess different strokes.
Condo fees in Vancouver start at about $200/month and are frequently $300-$400. It's pretty hard to come out ahead at those rates, in addition to utilities, maintenance, mortgage interest, and homeowners insurance.
I've never actually been kicked out of a place in my 11 years of renting, but 45 days seems extremely ample to find a new apartment. I'd wish the landlord well and be on my way. Though I don't actually have a landlord right now, being in a housing co-operative - but I might have one again some day if the rents here get too high.
It is also important to point out that tax laws in Canada and US are very different. Not being able to deduct mortgage interest in Canada makes a huge difference. I also don't believe that Canada has a capital gains exclusion. AFAIK 30 years mortgages are also rare in Canada. If I was Canadian living in the high cost cities I won't buy either.
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I'm in the same city as Zikoris, and our decision to buy in 2002, just before the big run-up in Vancouver real estate was likely one of the best financial decisions we will EVER make in our lifetime. Timing can be everything.
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So many insightful and varied responses - great thread.
My DDH was opposed to the idea of ever owning a home - too much trouble - too much responsibility and what a hassle if we ever decided to move.
I never once saw it that way and over the years have come to realize that some people simply don't want a place they can call their own. I think it is psychological, but of course one can find plenty of logical reason to hide behind.
From what I have seen over my lifetime, it is akin to some people never wanting kids - it is OK if you don't want to. It is just one more lifestyle choice - neither good nor bad - and in truth the numbers behind it do not matter.
For me owning a home is something that makes me happy, my place where I can do what I want and live how I want without interference from others.
A garden - thank heavens, better even a nice big property with plenty of privacy.
I love projects and making our place shine and sparkle until it is the best it can be inside and out.
I can tell you without reservation that even though I am an old lady now, it still gives me purpose and pleasure to putter about. I see it as a gift and a blessing, but I am quite aware that houses can be money pits (I inherited one of those:), but I conquered it in the end.
If you are at a point in your life where you simply don't want to be bothered with a house, then it is smart and sensible for you not to go down that road. You can always stash the money for a down payment and then invest it, in case you change your mind. You are not obligated to own a home simply because you have a good income - this is one area where it would be incredibly foolish to give in to peer pressure. No one runs your life but you:)
We lived in a condo association for a while owned by an out of state owner and it was like having the best of both worlds - someone took care of things, while we enjoyed the pool:)
The second I was on my own I aspired to a place of my own, but as long as my husband was alive I knew there would never be a real home for me. So I insisted on places with a big balcony and decent greenery all around or at least nearby - I understood on some level that he seriously did not want a house - he simply did not like the idea of having to take care of routine maintenance and the necessary upkeep and improvements over the years, not even gardening..
I have owned only three homes in my lifetime and I loved them all - the apartments and condo apartments were nice, but it always irked me to give someone else money so I would have a roof over my head for another 30 days - I was always terrified of not having the money to pay next months rent.
Just the indignity of someone entering our apartment to spray or do whatever the landlord required while I was at work drove me insane. It always felt like a violation of my privacy. I hated being subjected to chemicals and I hated not knowing when and if they would raise the rent - would there finally come a point when we couldn't stay in an apartment we liked, because of a rent increase?
I like the idea or illusion to be in control and renters have no control.
Bottomline - there is nothing wrong with renting forever, there are a lot of nice homes, apartments and condos for rent all over the world. Speaking as a former landlord, it is nice to have a renter who will stay on for awhile and reliably fund your real estate investment for you:)
There are pros and cons, but in the end it is your preference that matters.
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I'm in the same city as Zikoris, and our decision to buy in 2002, just before the big run-up in Vancouver real estate was likely one of the best financial decisions we will EVER make in our lifetime. Timing can be everything.
I was 16 in 2002. so yeah, not really an option... :)
Would you have come out ahead if you'd rented a cheap place instead and invested the difference? I'd be curious how the comparison would come out assuming low rent vs whatever you paid for your place.
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I bought my place in 98 and for the past 10 years I wish I would have rented instead. Crap is breaking all over the place. Water heater, toilet, kitchen sink plumbing, carpet is toast, some tiles are busted. Yeah, I fixed most of it but it is a giant pain in my ass. That kind of stuff puts stress on me. I would rather rent and make that crap the landlords problem.
Part of my RE plan is to sell this place and rent.
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Well it's up to you but I don't understand some of the pro-rent arguments.
Yes, owning may be more expensive over time, but once the mortgage is clear you have the security. I wouldn't want to be renting in retirement.
And job losses etc are not good reasons. You can be evicted from a rental for not paying just as you can with an owned property. As for 2008 not being a good time - this would be when prices plummeted and buyers bought at vastly reduced prices that have since increased in many areas? Bubbles have happened in the past and will happen again, 2008 was bad but shouldn't be much of a deterrent, especially in the direct aftermath.
Personally I do agree there are pros and cons to each. I've rented and now own and prefer it but there is more concern about things going wrong. But, the people I know who are late 30s or older seem to regret not buying. I work with a 41 year old who wished he had bought and doesn't know how he will now.
And just so people know, homeowners can travel too. In fact, it's easier - I had clauses in my rental contract about not leaving the place empty for too long, and owners can even rent it out if they go away.
I'm pretty much of the opinion that renting has advantages, but many of us will one day wake up and wish we had the security and comfort of our own home. No worry of a rent increase, no worry of a landlord selling and kicking you out, or things not getting repaired
One last point on recessions - if you rent and your landlord defaults, bye bye home. If you own, there are options. A reduced value only matters if you try and sell in that time. If you have good history of payments many lenders will allow a payment holiday, especially if you have a lot of equity or have overpaid. Or if you have good savings like many here, you could afford the mortgage even if the worst happened and you lost the job for a while. The point being, there is a perceived idea of freedom with renting, but I find it far riskier and with far fewer choices
I thought about your post last night, because some of it seem directed at things I was saying. I want to point out a few things in your comments, not to start an argument, but just to highlight the different perspectives and thinking on this.
1) "Well it's up to you"--yes, we all get to make our own choices with various reasons that are personal and unique. :)
2) Security argument--there are two ways that I see this. Yes, you "own" the house (i.e. don't have a mortgage) but you still have all of the utilities, property taxes, and maintenance costs. My parents' house has been paid off for years, but it's not like living is totally "free" for them--and it always seems there's another project (replacing flooring, cleaning carpets, new washer/dryer, etc.) not to mention keeping it updated (faucets, light fixtures, etc. from the 1970s when they built have now been replaced). And lots of people are forced to rent or vastly prefer it in retirement when they become less able-bodied--and communities designed for 55+ are pretty popular, at least in my area (Minnesota), and I know they are big business in other areas (Florida, Arizona). Not having to worry about maintenance when you have arthritis or something is a really big deal for a lot of folks. I told my dad that the last time he painted the house would be his last--I am never letting my (nearly) 70-year-old father back up on an extension ladder, so God help me. Also, the sense of community in these places is pretty amazing--people check on each other, have card groups, eat meals together, etc. so for widows or widowers, they don't become disconnected from a social life even though they aren't able to drive or whatever.
3) Yes, you can be evicted for not paying rent, however, in my situation, we've always had the backup option in our lease to do a buyout (pay the equivalent of a couple month's rent and break the lease), and then move in with family, if needed. If we'd been locked into a mortgage when the market crashed, and then lost a job, a foreclosure would be a much bigger hit financially than paying $1,200 to break a lease. My sister actually just broke her lease to buy a place, so I know how easy it is. This is one reason we keep an emergency fund that would cover us in a buyout situation.
4) I don't see my apartment as "not my home"--in fact, I've been there as long as I've been married, and I basically know no different. My apartment feels more "like home" than my parents' house where I grew up. It's got all my stuff, I've decorated it nicely, and it's a lovely building perfectly situated near work and other nice things (parks, etc.)
5) Travel--maybe in Minnesota, this is different, because you don't want to leave your house unoccupied and unattended in winter without someone checking in on it. We check in on my parents' house when they travel in winter, because pipes can freeze, snow piles up and it's obvious nobody's home, etc. Last winter, cities recommended people leave their water running overnight because so many pipes were bursting. We even have friends whose house is warmed by a wood burning system, so they literally cannot leave it unattended with no fire, so they have to find a house sitter if they want to be gone in the winter, even for one day. So when I say we can literally lock up and leave, I mean it. Water will keep running for the other units, so pipes are unlikely to freeze, and somebody else deals with all the snow, and it's easy to alert our apartment manager that we'll be gone and someone keeps an eye on things (all included in the price of rent).
6) Landlords can default--maybe this is more common with renting houses. OP and I are both renting apartments. My building has been owned by the same family for many years--my mom actually rented an apartment in the same complex in the 1960s. I don't think it's as risky as you make it seem. It would be in a bank/lender's interest to keep paying tenants in their units, even if the 'owner' defaulted on their payments--the bank then could collect the rents, and keep it attractive as a buying opportunity for another investor. I have literally never heard of a whole apartment building full of tenants being thrown out without notice because someone defaulted. Maybe it does happen, but it's not something I stay awake worrying about.
7) For us, renting has offered more sense of 'security' than buying. Because of the way my job works, every two years there has been a threat of potential job loss. And my husband's job was not something he could do long-term (he knew he could do it for 5 years, but that was it). By continuing to rent, we've been able to be flexible in our thinking. And our dollars have been very flexible. We would not have been able to fund my husband's graduate school if we'd bought a house. We had a lot of money in savings that would not have been there if it had been part of a down payment--instead, it's paying tuition for him to get a much better longterm career. And there's a sense of security in not having to even think about certain problems--for example, when our refrigerator died two days before Christmas, all we had to do was call up the office and we had a new one in a couple hours--DH and I were able to go to work/school without even thinking about it. The apartment handyman actually moved our food to the new fridge for us. ;)
8) Even though we have been pretty hardcore renters, if/when our financial/job situation changes, we may consider buying a house. I have a pretty loud hobby (opera singing) and would love to own a piano and take lessons. But I know that this is an emotional decision, not a financial one. Renting a one bedroom is always going to be cheaper than owning a 3-bedroom house in our area, and that's pretty much just a fact (every time I run a rent vs. buy calculator, we come out way ahead by renting--investments of the cost difference between renting and buying end up paying our rent).
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If you live in Florida, where the two biggest expenses are property taxes and homeowners insurance, it makes perfect sense to rent forever. In fact, part of our FIRE plan is to sell the clownhouse we've had for 16 years by the end of 2017 and rent a 3 BR condo or townhouse, even though our kids will still be teenagers at that point.
I did the math on where we'd be had we continued to rent rather that bought in 1999. We'd be comfortably FIREd by now. But even Mrs. Live Lean still struggles with the stigma of being renters.
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If you live in Florida, where the two biggest expenses are property taxes and homeowners insurance, it makes perfect sense to rent forever. In fact, part of our FIRE plan is to sell the clownhouse we've had for 16 years by the end of 2017 and rent a 3 BR condo or townhouse, even though our kids will still be teenagers at that point.
Interesting. I might have to do some math...
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Well it's up to you but I don't understand some of the pro-rent arguments.
Yes, owning may be more expensive over time, but once the mortgage is clear you have the security. I wouldn't want to be renting in retirement.
And job losses etc are not good reasons. You can be evicted from a rental for not paying just as you can with an owned property. As for 2008 not being a good time - this would be when prices plummeted and buyers bought at vastly reduced prices that have since increased in many areas? Bubbles have happened in the past and will happen again, 2008 was bad but shouldn't be much of a deterrent, especially in the direct aftermath.
Personally I do agree there are pros and cons to each. I've rented and now own and prefer it but there is more concern about things going wrong. But, the people I know who are late 30s or older seem to regret not buying. I work with a 41 year old who wished he had bought and doesn't know how he will now.
And just so people know, homeowners can travel too. In fact, it's easier - I had clauses in my rental contract about not leaving the place empty for too long, and owners can even rent it out if they go away.
I'm pretty much of the opinion that renting has advantages, but many of us will one day wake up and wish we had the security and comfort of our own home. No worry of a rent increase, no worry of a landlord selling and kicking you out, or things not getting repaired
One last point on recessions - if you rent and your landlord defaults, bye bye home. If you own, there are options. A reduced value only matters if you try and sell in that time. If you have good history of payments many lenders will allow a payment holiday, especially if you have a lot of equity or have overpaid. Or if you have good savings like many here, you could afford the mortgage even if the worst happened and you lost the job for a while. The point being, there is a perceived idea of freedom with renting, but I find it far riskier and with far fewer choices
I thought about your post last night, because some of it seem directed at things I was saying. I want to point out a few things in your comments, not to start an argument, but just to highlight the different perspectives and thinking on this.
1) "Well it's up to you"--yes, we all get to make our own choices with various reasons that are personal and unique. :)
2) Security argument--there are two ways that I see this. Yes, you "own" the house (i.e. don't have a mortgage) but you still have all of the utilities, property taxes, and maintenance costs. My parents' house has been paid off for years, but it's not like living is totally "free" for them--and it always seems there's another project (replacing flooring, cleaning carpets, new washer/dryer, etc.) not to mention keeping it updated (faucets, light fixtures, etc. from the 1970s when they built have now been replaced). And lots of people are forced to rent or vastly prefer it in retirement when they become less able-bodied--and communities designed for 55+ are pretty popular, at least in my area (Minnesota), and I know they are big business in other areas (Florida, Arizona). Not having to worry about maintenance when you have arthritis or something is a really big deal for a lot of folks. I told my dad that the last time he painted the house would be his last--I am never letting my (nearly) 70-year-old father back up on an extension ladder, so God help me. Also, the sense of community in these places is pretty amazing--people check on each other, have card groups, eat meals together, etc. so for widows or widowers, they don't become disconnected from a social life even though they aren't able to drive or whatever.
3) Yes, you can be evicted for not paying rent, however, in my situation, we've always had the backup option in our lease to do a buyout (pay the equivalent of a couple month's rent and break the lease), and then move in with family, if needed. If we'd been locked into a mortgage when the market crashed, and then lost a job, a foreclosure would be a much bigger hit financially than paying $1,200 to break a lease. My sister actually just broke her lease to buy a place, so I know how easy it is. This is one reason we keep an emergency fund that would cover us in a buyout situation.
4) I don't see my apartment as "not my home"--in fact, I've been there as long as I've been married, and I basically know no different. My apartment feels more "like home" than my parents' house where I grew up. It's got all my stuff, I've decorated it nicely, and it's a lovely building perfectly situated near work and other nice things (parks, etc.)
5) Travel--maybe in Minnesota, this is different, because you don't want to leave your house unoccupied and unattended in winter without someone checking in on it. We check in on my parents' house when they travel in winter, because pipes can freeze, snow piles up and it's obvious nobody's home, etc. Last winter, cities recommended people leave their water running overnight because so many pipes were bursting. We even have friends whose house is warmed by a wood burning system, so they literally cannot leave it unattended with no fire, so they have to find a house sitter if they want to be gone in the winter, even for one day. So when I say we can literally lock up and leave, I mean it. Water will keep running for the other units, so pipes are unlikely to freeze, and somebody else deals with all the snow, and it's easy to alert our apartment manager that we'll be gone and someone keeps an eye on things (all included in the price of rent).
6) Landlords can default--maybe this is more common with renting houses. OP and I are both renting apartments. My building has been owned by the same family for many years--my mom actually rented an apartment in the same complex in the 1960s. I don't think it's as risky as you make it seem. It would be in a bank/lender's interest to keep paying tenants in their units, even if the 'owner' defaulted on their payments--the bank then could collect the rents, and keep it attractive as a buying opportunity for another investor. I have literally never heard of a whole apartment building full of tenants being thrown out without notice because someone defaulted. Maybe it does happen, but it's not something I stay awake worrying about.
7) For us, renting has offered more sense of 'security' than buying. Because of the way my job works, every two years there has been a threat of potential job loss. And my husband's job was not something he could do long-term (he knew he could do it for 5 years, but that was it). By continuing to rent, we've been able to be flexible in our thinking. And our dollars have been very flexible. We would not have been able to fund my husband's graduate school if we'd bought a house. We had a lot of money in savings that would not have been there if it had been part of a down payment--instead, it's paying tuition for him to get a much better longterm career. And there's a sense of security in not having to even think about certain problems--for example, when our refrigerator died two days before Christmas, all we had to do was call up the office and we had a new one in a couple hours--DH and I were able to go to work/school without even thinking about it. The apartment handyman actually moved our food to the new fridge for us. ;)
8) Even though we have been pretty hardcore renters, if/when our financial/job situation changes, we may consider buying a house. I have a pretty loud hobby (opera singing) and would love to own a piano and take lessons. But I know that this is an emotional decision, not a financial one. Renting a one bedroom is always going to be cheaper than owning a 3-bedroom house in our area, and that's pretty much just a fact (every time I run a rent vs. buy calculator, we come out way ahead by renting--investments of the cost difference between renting and buying end up paying our rent).
Good post, and you're right that some of my post was in response to you (not directly, it's just yours was the first response I read so as I scrolled through the rest I was thinking about yours in the back of my mind).
I think ultimately your post proves that there is no right or wrong answer to this. Some of what you said is very different to my experience and part of that is living in a different country. So it's not just "should I rent or buy?" But where do you live, what do you do, what do you want in life?
Hopefully our posts will help to highlight the big points of consideration with this decision.
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Several thoughts:
If the choices were 1) pay rent or 2) pay a mortgage, it might be a contest ... but what no one's really talking about is that mortgages come to an end, and then living in your paid-for house is much cheaper than either of those two options. I paid off my house more than a decade ago, so for all that time my housing expenses have been taxes (around $1200/year) and upkeep (we did buy a new HVAC system three years ago, and I'm gearing up to replace the carpeting soon). We could never rent anything as cheaply as living in our paid-for house.
Once you've entered into a mortgage agreement, you've essentially locked yourself into that price (assuming you're smart enough to get a fixed-rate interest rate); whereas, if you rent, you're going to face increases forever.
This is more of an intangible, but apartments tend to be smaller and not as nice as houses. I remember when my husband and I were first married and we moved into our house, it was so quiet! I'd never really noticed, for example, that I was used to hearing my neighbor's cars pull into the parking lot at all hours of the night. Recently I was reminded of this when I spent the night in my daughter's apartment; I could hear the neighbors turning on the showers and flushing the toilets. No one was obnoxious, but the noises made me aware that other people were sharing this space. And at her apartment I usually have to park some distance away from her door, whereas in my own home, I have MY parking space right by the door. Living rooms and kitchens in houses tend to be large enough for groups to gather, whereas my daughter has only a loveseat in her apartment -- her living room isn't big enough to hold a real sofa -- and she has no dining room table /just bar stools. This type of thing makes a house a more comfortable living environment.
Also, even if you yourself are great with money and have determined that an apartment is a better financial deal for you personally, your neighbors are going to be mostly people who are living paycheck to paycheck. Most people who can afford to buy a house, prefer to buy a house. It's one of the measures of success in America. While you may have some neighbors who are fine, upstanding citizens ... in my experience living in apartments, you'll always have "those neighbors" who are loud, whose balconies are strewn with beer cans on Sunday morning, and who are just unpleasant. It's no secret that apartments are broken into more often than private houses -- we just a big police stand-off in an apartment complex nearby; I mean, roads were shut down and such. In an apartment, if your neighbor keeps a dirty kitchen and gets roaches, so do you. In an apartment, if your neighbor smokes in bed and sets his apartment on fire, you're in danger too. In short, living that close to other people isn't always a pleasant experience.
In an apartment, the management tells you what you can and can't do: Can't have a clothesline, can't have a dog, can't install a ceiling fan in your living room or paint your bedroom your favorite color. You can't have a private back yard where your children can play without direct supervision. Yes, that park is a great "back yard", but are you going to accompany your child every day and let him play as long as he wants? Even if you live in a neighborhood with an HOA (which is easy to avoid), you have more freedom in a private house.
On the other hand, apartments do often offer pools, tennis courts, exercise rooms, etc. that private houses don't typically have. But these are shared amenities, and I personally don't place the same value on them that I'd place on my personal living space.
But to the OP's question: Is there a stigma about renting forever? If I hear someone who's been out in the work world a while is still renting, I might think that the person 1) is new in the area and isn't ready to put down roots, or 2) isn't particularly good with money. Beyond that, I wouldn't dwell on it or make value judgements about them, but the idea that they could make better choices would cross my mind.
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I'm in the same city as Zikoris, and our decision to buy in 2002, just before the big run-up in Vancouver real estate was likely one of the best financial decisions we will EVER make in our lifetime. Timing can be everything.
I was 16 in 2002. so yeah, not really an option... :)
Would you have come out ahead if you'd rented a cheap place instead and invested the difference? I'd be curious how the comparison would come out assuming low rent vs whatever you paid for your place.
Interesting question. Considering that our monthly housing costs are under $400 (renting a similar place would probably cost $1200) and we are sitting on about 380k of equity (having bought the place for 150k) I think we made the right choice. When we did have a mortgage, it wasn't a large one, and we were able to invest and pay the mortgage down quite aggressively at the same time.
I would not hesitate to say that our decision to buy back then was a HUGE factor in my reaching my FIRE goal. Does a young couple today have this same opportunity to use RE to a similar effect? Sadly, not likely.
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It just makes me wonder then, with all the baggage/headache that comes with homeownership, why do so many (most?) people buy?
I think this is very location-dependent. We bought our house eleven years ago; at the time, our rent on an apartment was $575, and our new mortgage in a nearby but nicer neighborhood was slightly more at $650. Since then, rents have doubled in our old neighborhood. So even if we were still paying our mortgage (we paid it off early) it would still be half the price of renting.
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Several thoughts:
If the choices were 1) pay rent or 2) pay a mortgage, it might be a contest ... but what no one's really talking about is that mortgages come to an end, and then living in your paid-for house is much cheaper than either of those two options. I paid off my house more than a decade ago, so for all that time my housing expenses have been taxes (around $1200/year) and upkeep (we did buy a new HVAC system three years ago, and I'm gearing up to replace the carpeting soon). We could never rent anything as cheaply as living in our paid-for house.
Not in Vancouver.
Comparing the costs of our apartment to a theoretical condo:
Rent: $776/month, includes utilities
Mortgage-free condo: Strata - $300, property taxes - $100, Garbage/sewage/utilities - $100, two bus passes since we would no longer be walking distance to work - $182-$340 (depending how far out we bought), Maintenance - average $100/month?(not sure, probably lowballing)
TOTAL COST of the paid off place = $782-$940/month - boom, better off renting, and that's not even factoring in the massive amount of mortgage interest you would have paid while it was still there.
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I'm in the same city as Zikoris, and our decision to buy in 2002, just before the big run-up in Vancouver real estate was likely one of the best financial decisions we will EVER make in our lifetime. Timing can be everything.
I was 16 in 2002. so yeah, not really an option... :)
Would you have come out ahead if you'd rented a cheap place instead and invested the difference? I'd be curious how the comparison would come out assuming low rent vs whatever you paid for your place.
Interesting question. Considering that our monthly housing costs are under $400 (renting a similar place would probably cost $1200) and we are sitting on about 380k of equity (having bought the place for 150k) I think we made the right choice. When we did have a mortgage, it wasn't a large one, and we were able to invest and pay the mortgage down quite aggressively at the same time.
I would not hesitate to say that our decision to buy back then was a HUGE factor in my reaching my FIRE goal. Does a young couple today have this same opportunity to use RE to a similar effect? Sadly, not likely.
How do your transportation costs work in to that? We always include that in our calculations, since if we bought a place we would most likely not be within walking distance of work, so we would need bus passes (an extra $182-$340/month for two people depending on location). Maybe you have a car and would have it regardless though.
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How do your transportation costs work in to that? We always include that in our calculations, since if we bought a place we would most likely not be within walking distance of work, so we would need bus passes (an extra $182-$340/month for two people depending on location). Maybe you have a car and would have it regardless though.
I worked in construction and my employer provided me a vehicle and paid for insurance and fuel. My wife's work is VERY close to where we live, and this figured prominently in our choice to buy where we did. She will ride her bike or run on good weather days...and take transit or our truck if weather is poor. It's about an 8 minute drive. :)
Zikoris, I would agree with you that it makes ZERO sense for you to even considering buying a home given your individual circumstances couple with the realities of the Vancouver real estate market.
And with the benefit of hindsight, our choice to buy when we did made COMPLETE sense.
Again...timing.
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Right, but a calculator like Michael Bluejay's allows for you to factor in rental increases. For example, right now, my rent is low enough, that even with annual increases of 1-2%, I still come out ahead on renting vs. buying: http://michaelbluejay.com/house/rentvsbuy.html By like $500,000.
In our neck of teh woods (so cal) where $500K is a 50 year old starter home. We come out way ahead to buy.
ML
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@OP your comparing your appartment to a house. Bad comparison. Don't buy more than you would rent. Where I live you can rent a 2BR condo for $2500. You can buy a brand new 2BR condo for around $400K. The mortgage would be around $1800ish/mo (tax included) plus HOA dues of maybe $300. So, roughly on par. However, you've locked in the cost (principle+intrest stays the same for 30 years) while also gaining equity (several hundred of that 1800/mo goes into your pocket via equity). So if you're going to stay put and can buy something similar to what you rent, you come out ahead. With a condo the HOA takes care of major issues. You're responsible for the toilet, walls, garbage disposal. Find a handyman and your done.
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@OP your comparing your appartment to a house. Bad comparison. Don't buy more than you would rent. Where I live you can rent a 2BR condo for $2500. You can buy a brand new 2BR condo for around $400K. The mortgage would be around $1800ish/mo (tax included) plus HOA dues of maybe $300. So, roughly on par. However, you've locked in the cost (principle+intrest stays the same for 30 years) while also gaining equity (several hundred of that 1800/mo goes into your pocket via equity). So if you're going to stay put and can buy something similar to what you rent, you come out ahead. With a condo the HOA takes care of major issues. You're responsible for the toilet, walls, garbage disposal. Find a handyman and your done.
This is perhaps true, but some of what the OP discussed in her post was that they'd be buying a single family home vs. renting an apartment. A condo may make financial sense, but she was talking about having a yard, garage, and extra space for guests, etc.
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This thread has been some delicious food for thought.
On my income, in my area, my rent is $597.50/month for one half of a 2-bedroom, or $1060 for the entire unit (I have a bigger bedroom, so I pay more.) I've been looking into buying, but the HCOL here means that the only places I could afford are studio condos or falling-down-broken houses in the outer limits of the city (definitely not interested, don't have the time/money/skills to fix those up)- any place on the market is going to be a minimum of a $1200/month mortgage + insurance + taxes + HOA, which is over half my post-tax income.
A mortgage on a comparable 2-bedroom condo as I currently live in would be more than I qualify for (>$250,000), so even the math of renting the other bedroom to a roommate doesn't work out because I wouldn't be able to comfortably handle vacancies.
So as much as I want to "own" a house, the math just doesn't line up in my HCOL area. Everytime I hear the whispers in my ear about how it's a sign of financial success, stability, "making it", I have to remember it's just another consumer want trying to lure me into the consumer cesspool trap. Without a mortgage, I comfortably save 50% of my post-tax income, with one, it would be closer to 25% and I wouldn't get to enjoy the consumer indulgences I currently enjoy (fancy whiskey, occasional burrito out, paying for a gym membership.)
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I live on Long Island NY.
My SO and I rent a nice 1 bedroom apartment with a HUGE fenced in yard, 15 minutes from work.
We pay $1100/month and this includes rent, heat, electric, water, and cable internet.
The bare minimum property taxes on a 2b/1b small starter home in a half decent area are $4-6k/yr. After you add in maintenance, utilities, insurance, etc you will be paying more than our all inclusive rent, even WITHOUT a mortgage.
It makes absolutely no sense to buy here given our circumstances.
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But to the OP's question: Is there a stigma about renting forever? If I hear someone who's been out in the work world a while is still renting, I might think that the person 1) is new in the area and isn't ready to put down roots, or 2) isn't particularly good with money. Beyond that, I wouldn't dwell on it or make value judgements about them, but the idea that they could make better choices would cross my mind.
Funny. As a person who owns a home but lives in a rental, I wonder if some folks think that about me...? Just like I don't know if every single one of my friends is a homeowner or renter, certainly many of them don't know that about me!
Oh well, whatever people think, it's the wisest financial decision I ever made.
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In a rent vs. own comparison, don't forget that the equity in the owned property has an opportunity cost. I could sink $500k into buying a similar place to what we rent, and my monthly cash costs after that would be less than rent, but I am foregoing the investment returns that $500k would have brought in my portfolio had I remained a renter.
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Not in Vancouver.
Comparing the costs of our apartment to a theoretical condo:
Rent: $776/month, includes utilities
Mortgage-free condo: Strata - $300, property taxes - $100, Garbage/sewage/utilities - $100, two bus passes since we would no longer be walking distance to work - $182-$340 (depending how far out we bought), Maintenance - average $100/month?(not sure, probably lowballing)
TOTAL COST of the paid off place = $782-$940/month - boom, better off renting, and that's not even factoring in the massive amount of mortgage interest you would have paid while it was still there.
Not to mention Special Assessments. When I owned a studio apartment of 499 sq. feet, I had to pay one very large assessment of $17,000.00 for replacing windows and sliding doors plus a few other things. I owned in a concrete high rise built in 1976. This was by far the largest assessment but there were also 1 or 2 smaller ones in the 7 1/2 years that I lived there. People tend to forget about these. But they sure do come up in an older building. Can't remember what the assessment was to replace the elevators.
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Not in Vancouver.
Comparing the costs of our apartment to a theoretical condo:
Rent: $776/month, includes utilities
Mortgage-free condo: Strata - $300, property taxes - $100, Garbage/sewage/utilities - $100, two bus passes since we would no longer be walking distance to work - $182-$340 (depending how far out we bought), Maintenance - average $100/month?(not sure, probably lowballing)
TOTAL COST of the paid off place = $782-$940/month - boom, better off renting, and that's not even factoring in the massive amount of mortgage interest you would have paid while it was still there.
In my experience, this is not quite the case. We own a 800 sq ft condo in Vancouver proper, close to downtown.
Strata: $275/month
Property Tax: $125/month
Garbage/Water/Sewage - $0 (included in above costs)
Maintenance: Most is included in Strata fee (building maintenance). We have owned for 8+ years and have had very, very minimal maintenance costs. Had to get a plumber once, an electrician once, and a locksmith once in 8 years. That is all. We keep things in as good shape as we can by caring for them properly and cleaning regularly (DIY, of course!).
Hydro: $25/month
Condo Insurance: $25/month
Internet/ 2 Phones: $130/month
We are still paying our mortgage, so spend about $240/month on interest at the moment, but that will be gone in less than 3 years as we are paying principal aggressively. Once mortgage is gone, our monthly housing costs will be only $580/month for a very comfortable and well-located space, including 2 phones/internet, plus a little extra here and there for very, very rare maintenance.
For us, it made sense, but like Jon_Snow, we bought before things got too out of hand as they are now. In today's market in Vancouver, I would likely be renting, like Zikoris. HOWEVER, I do personally know many people who have been reno-victed recently and who are struggling to find affordable family housing in the city.
I think you might be underestimating the maintenance because for condos it tends to come in the form of infrequent special levies. I personally know people who have gotten hit with $50,000+ special levies, and my boyfriend (who works in property management) has seen six figure ones. And of course as a building gets older, strata fees have to increase. Hopefully it works well in the long term anyways.
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In a rent vs. own comparison, don't forget that the equity in the owned property has an opportunity cost. I could sink $500k into buying a similar place to what we rent, and my monthly cash costs after that would be less than rent, but I am foregoing the investment returns that $500k would have brought in my portfolio had I remained a renter.
Very important point.
Where I live, the average house costs over $1MM. In the same city, you can rent a much nicer-than-average house for 40k a year (opportunity cost of 1MM at 4% withdrawal rate), and you wouldn't have to deal with maintenance costs, property taxes, etc. So in this case it's financially much better to rent.
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This thread seems full of personal anecdotes so I might as well add my own. :) I think the person who described renting vs. buying as similar to the decision to marry or not or have kids or not is on to something. The right answer in your personal situation will be different than for other people; there is no universal Right Answer but making the wrong decision in your case can hurt you!
We have been renting a house for three years and prior to that lived in a townhouse we were buying. We rented while owning and renting out our place for two years and eventually sold. (Off topic: it is odd to check both boxes on some forms that ask whether you "rent" or "own".) The goal had been to buy a different/more expensive place closer to work but we have come to the conclusion that living without any debt hanging over our heads is the most light, free, fun feeling! We live in an area where the NYT rent/own calculator firmly comes out to "Rent" except in the 10+ year situations.
There are definitely things that suck about the place we rent now, but that is entirely due to the particular house we rent, not due to renting itself. When I get irritated at the single paned window,/lack of insulation/whatever we talk through it and reaffirm that we can always pay more money to rent a nicer place and still come out ahead. Wanting nicer accommodations does not force one to buy, at least not in our area. As more and more cracks appear in the house due to land subsidence (drought in CA) I am every more grateful that those cracks are NOT MY RESPONSIBILITY. Yay!
FYI - bucking the trend, our household net worth is over $1M and since we don't own a house, that is all in investable assets.
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When people sell their homes they often report that they've made a "profit" based on the fact that they sold the property for more than the original purchase price. "Wow, I'm a real estate tycoon. I just made a big capital gain on the sale of my residence." It's interesting, though, I've never heard anyone report the actual price they paid for their house/condo, which, including mortgage interest, is often 2X+ what the original sale price was.
Even with today's unusually low interest rates, if you buy a $400K home with a 20% down payment and finance $320K at 3.92%, over 30 years you end up paying $544,683 + $80K deposit = $624,683. Wouldn't this be the actual price of the home? Cash buyers are the only ones who get to pay $400K. So when you sell the place for $XXXK, your cost basis isn't the original purchase price. It's the total of all the mortgage payments you've made + the downpayment, right? Wouldn't that make more sense?
It's true that owning a home and having a mortgage forces people to save money in the form of monthly mortgage payments. If they didn't have to pay their mortgage every month, some people might just blow the money on consumables and have nothing to show for it after 30 years of renting. But, for Mustachians who are looking to optimize the amount of time it takes to become FI, a mortgage seems like an extremely inefficient vehicle to promote savings. Don't you think?
Just to be clear, I'm talking about purchasing a single family home/condo to live in, which is what the OP asked about. People who are knowledgeable about evaluating and purchasing appropriate properties, have skills that allow them to add value by doing some/all of the maintenance themselves, and who look at being a landlord as a business, are in a completely different ballpark from someone who is just looking for a place to live.
Many people have become rich by treating real estate investment as a business. But it's a job. It's not passive income like you can get from index funds. On the other hand, many homeowners have become rich despite the fact that they chose to purchase a home rather than rent and invest the savings. While there may be exceptions to my claim, as reported by several posters above in this thread, generally it's been true that the U.S. stock market has grown much more quickly than real estate. I think it's something like double the rate. So, as a homeowner's equity in his home grows, so does the opportunity cost of having money tied up in a house instead of invested in more productive assets.
Rather than blindly following the herd and purchasing a property because that's what all your siblings or friends are doing, I think it's important for Mustachians to actually run the numbers and make a decision on whether to buy or rent based on the market conditions in their particular area, as well as their own personal preferences. As many posters have mentioned above, for some people there are intangible benefits to owning a home on which it's impossible to put a price tag. It's just important to be clear about why you're buying a house before you sign the paperwork and agree to make mortgage payments for decades into the future.
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One should also remember that house appreciation is not realized until you actually sell for that price. Who cares how much your house's fair market price is? You're not selling it; you're living in it.
You could, borrow against the equity, I suppose but that defeats the "security" argument.
Even with today's rock-bottom interest rates, if you factor in the opportunity cost of the 20% down payment over the lifetime of a 30-year mortgage loan, renting ALWAYS wins.
When you factor in the emotional stuff such as "houses are nicer, bigger, with stainless steel and quartz..." Yes, well, to each their own... But be honest with yourself and others and admit that you are paying extra for subjective intangibles.
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Another lifetime (so far) renter here, and my wife and I will definitely rent up through at least the first few years after FIRE. Why? Because it allows us to save way more money. The "at some point your house will be paid off" argument holds no water for us, as rent is about 1/3 the price of a mortgage (bay area). Investing the difference over 30 years allows you to pay rent forever and still have more money than it would paying off a mortgage.
I'll also add that "the landlord makes money" argument is a false dichotomy. The landlord can make a profit AND it can still be beneficial for you to continue to rent. It's not a parasitic relationship.
As far as a stigma, there's definitely not one around here, as it's a populated area and lots of people rent. Not that it should matter what other people think...
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I'm in a HCOL area (NoVa) as well and have been going back and forth on weather to seriously look to buy a place, I don't mind renting, for me the decision on buy vs sell is going to come down to which makes more financial sense, I've always thought that if I spend the effort to maintain my own place it's a better financial choice, but now I'm second guessing that.
I've been playing with the NYT buy vs sell calculator, has anyone else done this and how do you feel its accuracy is and default assumptions? I've only changed the following but with these changes it has the break even point for buying at about $300 less than my current rent.
$300k house
Stay for 10 years
33% marginal tax rate
$400 Monthly common fees
What do people think, is it reasonable to think I might come out ahead in the NoVa area while sticking to renting?
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One should also remember that house appreciation is not realized until you actually sell for that price. Who cares how much your house's fair market price is? You're not selling it; you're living in it.
You could, borrow against the equity, I suppose but that defeats the "security" argument.
Even with today's rock-bottom interest rates, if you factor in the opportunity cost of the 20% down payment over the lifetime of a 30-year mortgage loan, renting ALWAYS wins.
When you factor in the emotional stuff such as "houses are nicer, bigger, with stainless steel and quartz..." Yes, well, to each their own... But be honest with yourself and others and admit that you are paying extra for subjective intangibles.
"Renting always wins" You must be joking?
There are many place in the country where with today's low-interest rates your mortgage payments are less than rent. In some cases, mortgage plus taxes, insurance, HOA is still less than rent.
I'll give you a specific example of Vegas property, and I bet Arebelspy could give you at least 6 even better examples from his properties.
I bought a house in Vegas for $67K in 2012. A homeowner could have put 14K down (3K for closing expenses and fix up costs) borrowed $43K @3.5% his mortgage payments would have been $193/month. Monthly Expenses HOA $50, Insurance $60, Property tax 70, maintenance $100-200 (7 year-old house hardly lived in). Total expense $573 Since homeowners get lower prices on insurance, and property taxes in most place as well as lower mortgage rates, and can do simple home repair the total cost would have likely been well under $500 month.
I rented the house for $850. So the convenience cost for renting was $300-350/month, and possibly more depending on the tax bracket.
Fast forward to today. The 17K put in VTSAX would be worth $27,000 a nice rate of return. However, the house rent has increased to $1,050/month so the cost of rent now exceeding $500/month.
The house is now worth $140K+ and the loan is under 40K, so an 83K profit vs 10K (and I'll add tax free).
Here is the amazing thing even after the huge run up in price in Vegas you still are better off buying than renting. If you bought the house today you need to 32K (for down, closing, and moving in costs) and you would borrow $112,000. This means mortgage payments would be at $500/month all the other expense are the virtually the same so housing expense would about $850 month (not including deducting mortgage interest) So you still are paying $200/month more to rent than buy. It is true there is an opportunity cost for $32K, but in order for the renter to come out ahead, you'd need to be a Buffett caliber investor, and rents and property appreciation would need to be virtually need be in the <2% range
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Barring some massive implosion of the housing market here, I can never see buying. Right now, I could not buy what I am renting for anywhere near the same monthly price and that has been the same basic story for all three rental houses we have lived in since we moved out here a few years ago.
Now the rents are rapidly catching up to or have caught pace with the price of the mortgage based on what I have seen recently. So now I don't think that if we lost this place it would even be worth it to stay in this part of the country. Our rent would go up $500-$1000 for a similar property, assuming we could even find one. Being house poor isn't on my to do list, so I think we are definitely moving back east in that event. Buying then would be on the table as prices are far more affordable and renting isn't nearly as good a deals as we have enjoyed up until probably soon. Currently, we are MTM tenants. Our landlord is beyond ancient. So the shoe could drop tomorrow or two years from now, but he is in his 90s so...yeah...and when he dies I think it is an absolute given whoever gets these properties next will jack up the rent to market rates. He has his reasons for why he charges below market. I'm glad for that, but it is is a pretty insecure place to sit. All the more reason to have as much money squirreled away as possible and living here definitely allows us to save a lot of money.
Buying a house for me is just a place to live where I have slightly more autonomy to do what I like - case in point - have pets without landlord worry or hassle. I don't have any fantasy of making any money off of it. I could just as easily rent forever if it made financial sense to do so like it has for most of my adult life, but the times are changing and home buying is starting to be a more and more reasonable thing to do eventually.
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Several thoughts:
If the choices were 1) pay rent or 2) pay a mortgage, it might be a contest ... but what no one's really talking about is that mortgages come to an end, and then living in your paid-for house is much cheaper than either of those two options. I paid off my house more than a decade ago, so for all that time my housing expenses have been taxes (around $1200/year) and upkeep (we did buy a new HVAC system three years ago, and I'm gearing up to replace the carpeting soon). We could never rent anything as cheaply as living in our paid-for house.
Bolded for emphasis. Not true, I literally pointed this out on the first page, my second post. It's called Michael Bluejay's rent vs. buy calculator which can be extended out to look at 40 years of comparing the costs of renting vs. buying: http://michaelbluejay.com/house/rentvsbuy.html If I invest the money I would have spent on buying, I come out ahead by renting--because my ROI on investing the difference ends up paying my rent.
It really depends on what you're paying in rent vs. what the house will cost in terms of actual price plus utilities, taxes, and maintenance over the time you are living there. Renting and buying is not an easy apples to apples comparison but a calculator like this can help you think about all the true costs of owning.
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Wow, a lot of good stuff here...definitely lots to think about. I played with the NYT calculator as well and it tells me it's only worth it if we stay 10 years or so...and if I up the price of the house by a little more, it tells me to just rent. Factoring in our total lack of DIY skills, it's probably a lot more financially secure to rent and invest the surplus instead of pouring it into a house.
I think at this point, the house is more of a long-term want (remnants of my "American dream" fantasies) than a need (seeing as how our current situation is pretty awesome as I described in my original post), and I'm trying to figure out if this is something my family really wants (ie: how much will our life happiness increase by buying?) or if the whole "stigma" thing is factoring into this.
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Keep in mind, the calculators can only tell you if renting X versus buying X is better. And that's not what you are evaluating, you're weighing renting X versus buying Y.
But for the love of bacon, rid yourselves of any concern about "stigma" as this fear of other people's opinion is what fuels spending money you don't have to buy things you don't need to impress people you don't know.
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We rented until we bought our "for ever" trailer in our 50's. It work well for an childless couple. We could and did accept jobs in distant states and commit to being there in two weeks which enabled us to grab a couple of good opportunities not open to more settled folk. We lived in places where if we had bought a house we might have made money. We also lived in places where if we had bought a house we might have lost money so can't say whether we benefited financially or not. It definitely caused us to be regarded as flakes.
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But for the love of bacon, rid yourselves of any concern about "stigma" as this fear of other people's opinion is what fuels spending money you don't have to buy things you don't need to impress people you don't know.
This, this, this!
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Several thoughts:
If the choices were 1) pay rent or 2) pay a mortgage, it might be a contest ... but what no one's really talking about is that mortgages come to an end, and then living in your paid-for house is much cheaper than either of those two options. I paid off my house more than a decade ago, so for all that time my housing expenses have been taxes (around $1200/year) and upkeep (we did buy a new HVAC system three years ago, and I'm gearing up to replace the carpeting soon). We could never rent anything as cheaply as living in our paid-for house.
Bolded for emphasis. Not true, I literally pointed this out on the first page, my second post. It's called Michael Bluejay's rent vs. buy calculator which can be extended out to look at 40 years of comparing the costs of renting vs. buying: http://michaelbluejay.com/house/rentvsbuy.html If I invest the money I would have spent on buying, I come out ahead by renting--because my ROI on investing the difference ends up paying my rent.
It really depends on what you're paying in rent vs. what the house will cost in terms of actual price plus utilities, taxes, and maintenance over the time you are living there. Renting and buying is not an easy apples to apples comparison but a calculator like this can help you think about all the true costs of owning.
I like that calculator, I think it factors in all the right things, and it is one of the better calculators I've seen. The challenge is to find the right numbers for things like house appreciation, investment returns, and annual rent increases. So you'll want to run it a few times with a range of assumptions. But once you've done it you can conclusion, owning/rent is cheaper and a range of $.
Then you can factor in the intangibles which are completely personal. Then decide that is worth $1200/year (or whatever) to not have to worry about maintenance, and have the freedom to move to a new place quickly
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If you love the area and want to stay in it until your kid hits college there is a very real risk that you are out priced of the area before he leaves home. It's also likely your landlord sells (potentially to owner occupiers) forcing you to move... multiple times. If you just want an affordable place to live with metro access to the city (i.e. not fixated on suburb x) and don't mind moving often (12 monthly during a boom, as at least here there are caps on how much they can increase your rent by, so they'd rather churn you out and replace you with someone who pays more than renew your lease) then renting could very well be a good way to hit FI sooner. Having seen all of the above happen to friends repeatedly I'm choosing to buy. (Also HCOL with similar income/house price ratio to yours). [The heartbreak I have seen when people have had homes they have lives in for 5+ years ripped from under them as the landlord sells to an owner-occupier is really sad... in each instance the person had to move to an inferior house and neighborhood to keep the rent similar to what they paid previously]. I wouldn't judge someone for renting though as I understand it offers flexibility to move etc.
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If you love the area and want to stay in it until your kid hits college there is a very real risk that you are out priced of the area before he leaves home. It's also likely your landlord sells (potentially to owner occupiers) forcing you to move... multiple times. If you just want an affordable place to live with metro access to the city (i.e. not fixated on suburb x) and don't mind moving often (12 monthly during a boom, as at least here there are caps on how much they can increase your rent by, so they'd rather churn you out and replace you with someone who pays more than renew your lease) then renting could very well be a good way to hit FI sooner. Having seen all of the above happen to friends repeatedly I'm choosing to buy. (Also HCOL with similar income/house price ratio to yours). [The heartbreak I have seen when people have had homes they have lives in for 5+ years ripped from under them as the landlord sells to an owner-occupier is really sad... in each instance the person had to move to an inferior house and neighborhood to keep the rent similar to what they paid previously]. I wouldn't judge someone for renting though as I understand it offers flexibility to move etc.
Again, it sounds like you are assuming the OP is talking about living in a rental house, when she clearly stated in her original post that she is in an apartment. The likelihood of the landlord selling an apartment building to owner occupiers? Zilch.
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.... The likelihood of the landlord selling an apartment building to owner occupiers? Zilch.
Perhaps, but it is possible for apartment building owners to sell to developers. Which is exactly what happened to us. Having to leave and find a new residence is not a great experience when you liked where you lived to begin with.
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.... The likelihood of the landlord selling an apartment building to owner occupiers? Zilch.
Perhaps, but it is possible for apartment building owners to sell to developers. Which is exactly what happened to us. Having to leave and find a new residence is not a great experience when you liked where you lived to begin with.
Even for an apartment building there are many times owners evict tenants: changing the apartment to a condo, in order to put relatives in there (this is a common ploy for rent-controlled cities) and more recently in cities with a good tourism busy converting a long-term apartment rental into a short-term AirBnb.
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Aside from the people who always see different choices as judgment on their choices, I think some of the concern comes from the fact that for many people, buying a house has been seen as the main source of long-term savings. So if someone you cared about was not buying (and you didn't know or understand their investment situation) you might worry that they were not accumulating the wealth they would need later in life.
I think every situation is so different, there's not a lot of point in giving general advice. It so depends on the local real estate market, family needs, etc. etc. In my city, there are a ton of evictions in my level of the rental market because developers are buying up older apartment buildings in desirable neighborhoods and turning them into very expensive townhouses or condos, and rents are going up fast (mine went up 30% in 5 years). The numbers were right for buying--I ended up spending about the same as renting but got a lot more for my money--plus I could see the writing on the wall after I saw three apartment buildings come down on my street. In my last city, I was expecting to be a permanent renter.
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We live in a relatively new building, and so I don't think they'll be tearing it down/kicking us out. I could potentially see them converting to condos at some point, but probably not anytime soon. I think our decision to rent indefinitely hinges on the assumption that we'll stay here in the same place. If we were "forced" to move, when that time comes, we'll probably look seriously at buying then.
If you love the area and want to stay in it until your kid hits college there is a very real risk that you are out priced of the area before he leaves home.
So do you all think this is true? I would think if we rented in the same area until my son goes off to college, we would have so much saved up that even if prices went up, we'd have enough to pay down a good chunk... or am I just being too optimistic?
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Even with today's rock-bottom interest rates, if you factor in the opportunity cost of the 20% down payment over the lifetime of a 30-year mortgage loan, renting ALWAYS wins.
It is absolutely wrong to claim that "renting always wins." Let's take my house as an example, and evaluate it against some of the metrics people have mentioned so far:
The house in question is a 3 bedroom, 2 bath single-family detached home in a gentrifying neighborhood in Atlanta. I bought it in 2009 and paid about $100k. My principal and interest payment is about $500/month, PITI is about $750/month, and PITI + utilities is about $1000/month. The house is now worth almost $300K according to Zillow, or $150-200K according to my (much more realistic) best guess.
Metric 1, monthly cost: To rent a house like mine I'd have to pay at least $1500/month, plus utilities. That's twice what I actually pay (not including the opportunity cost of living in it myself vs. renting it to someone else!). Owning wins. (By the way: if I wanted to rent for the same monthly cost as my mortgage, the best I'd be able to do is a relatively low-quality 2-bedroom apartment.)
Metric 2, "price actually paid" (including interest): Assuming I take my mortgage to term, I would pay $500 * 360 = $180K total for my house, over thirty years. It's worth close to that much now, six years in. I've already broken even! (And that's without taking into account the fact that I haven't actually paid most of that $180K yet.)
Metric 3, opportunity cost of not investing down payment: I bought with (effectively) a negative down payment. First of all, I got a $20K down-payment assistance grant from the city. Even so, the FHA required me to have $1500 in cash at closing... which I borrowed from my parents. Then the Federal government gave me an $8K tax credit (out of which I repaid my parents). If I hadn't bought, I would have had not only fewer assets overall, but less actual cash to invest!
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Again, it sounds like you are assuming the OP is talking about living in a rental house, when she clearly stated in her original post that she is in an apartment. The likelihood of the landlord selling an apartment building to owner occupiers? Zilch.
Actually > Zilch. It happened to a friend of mine recently. She and her cat were comfortably settled in for a couple of years, living close to work, then received 30 days notice to vacate because the owner sold to a developer.
That said, the financial benefits of renting usually overcome the financial benefits of ownership. I've spent most of my life as a renter.
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@monkeytree:
Everyone's situation is different and circumstances may change. I think starting with the plan to rent indefinitely is a great plan. If you proceed on that basis, you should quickly build up your assets.
That had been my plan.
Where I detoured, and am now a homeowner:
During 2010, in the aftermath of the housing collapse, developers were desperate to sell and were even auctioning units at a loss to quickly raise cash. Due to years of saving, I was able to obtain a unit (though not through an auction) at a bargain price.
If your plan is to rent indefinitely, you'll have the opportunity to wait until an overwhelming deal comes your way. Maybe never, but maybe the stars will be in alignment and you can take advantage of a fat pitch -- ideally a property you could easily rent out if you decide to move. If you think in terms of decades (I waited 12 years), you'll probably see an opportunity when it becomes available.
There's no penalty for not swinging at the fat pitch. You can wait years and years and never strike out.
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We live in a relatively new building, and so I don't think they'll be tearing it down/kicking us out. I could potentially see them converting to condos at some point, but probably not anytime soon. I think our decision to rent indefinitely hinges on the assumption that we'll stay here in the same place. If we were "forced" to move, when that time comes, we'll probably look seriously at buying then.
If you love the area and want to stay in it until your kid hits college there is a very real risk that you are out priced of the area before he leaves home.
So do you all think this is true? I would think if we rented in the same area until my son goes off to college, we would have so much saved up that even if prices went up, we'd have enough to pay down a good chunk... or am I just being too optimistic?
If you are mustachian, I do not think you are being too optimistic.
Our net worth is pretty high now. But if we had opted to continue renting 11 years ago instead of buying our house, it would probably be half a million higher.
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Where in the world can you get annual rental increases of only 1-2%?! I assume this is real rate at least? I may have lived in the Comcast versions of apartments, but in each case after the first year the rent jumped >10%. Just 2% seems very low to me.
Comparing the cost of an apartment and a house isn't really fair either, as you "get more" with a house. Apples to apples the rent for our house is likely way more than our mortgage (part of which can be counted as savings). But if you're ok in an apartment this is of course irrelevant.
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Where in the world can you get annual rental increases of only 1-2%?! I assume this is real rate at least? I may have lived in the Comcast versions of apartments, but in each case after the first year the rent jumped >10%. Just 2% seems very low to me.
Since you asked, the midwest of the US, not a large metropolitan area (under 100,000 population). Our rent actually went down from 2014 to now because the price of our garage dropped by $10/mo for no real reason. We started off renting out apartment for $550/mo with no garage in 2008 and now it's up to $660/mo with garage in 2015. There are even cheaper places in our city, but they're in less desirable neighborhoods for our needs.
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I've lived in the same apartment for 9 years and my rent goes up about 2 -2.5% annually. I've rented all my life (I grew up in rented places as well) and I've never been asked to vacate. As Walter White would say, "I am the one who knocks."
I do live in a very HCOL neighborhood...watch as management sells out to a high rise condo developer...
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Where in the world can you get annual rental increases of only 1-2%?! I assume this is real rate at least? I may have lived in the Comcast versions of apartments, but in each case after the first year the rent jumped >10%. Just 2% seems very low to me.
We rent a house, the rent has been the same since we moved in 2011. Our landlord likes a good tenant and wants to keep us around, I guess. This about an hour outside of philly. I think we just got lucky.
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Depending on the kids ages and personalities, they might just be curious. Giving your kid answers to the questions might put them all at ease.
"My parents work long hours and are kinda clumsy, so we live in an apartment so they don't have to waste time figuring out how to fix stuff"
If your kid is dealing with mean girls, I don't know how to handle it :)
My thinking is along the same lines, but the answer I'd teach my kid is "We rent because we have different goals." Should even work on mean girls.
There are a load of great answers if anyone asks what the goals are (which I doubt). The easiest and best is probably "Freedom".
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Tiny homes is the only way out of this madness that I can see. Not for everyone, but some "tiny" homes can still be pretty big...
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We live in a relatively new building, and so I don't think they'll be tearing it down/kicking us out. I could potentially see them converting to condos at some point, but probably not anytime soon. I think our decision to rent indefinitely hinges on the assumption that we'll stay here in the same place. If we were "forced" to move, when that time comes, we'll probably look seriously at buying then.
If you love the area and want to stay in it until your kid hits college there is a very real risk that you are out priced of the area before he leaves home.
So do you all think this is true? I would think if we rented in the same area until my son goes off to college, we would have so much saved up that even if prices went up, we'd have enough to pay down a good chunk... or am I just being too optimistic?
If you are mustachian, I do not think you are being too optimistic.
Our net worth is pretty high now. But if we had opted to continue renting 11 years ago instead of buying our house, it would probably be half a million higher.
Its a risk. Maybe not a big one (I don't know the dynamics of your local market and what underpins demand) but it's a risk that doesn't exist if you buy, only you know if you are willing to take that risk (which you weight up with the risks of buying). Certainly has happened here as the inner city suburbs have gentrified... Some of these areas have gone from $150/ week rent to $500/ week rent in 10 years. (I am pretty sure that's more than 2% growth!) If you are willing to move to other suburbs that are yet to gentrify you have more options... But gentrification (at least here) happens from the inner city out so your commute will gradually get less walkable/bikeable.As others have said it does not need to be an all or nothing, you can keep your eye out for a bargain, or you can reassess at any time if you suspect there will be a shift in market dynamic.
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Even with today's rock-bottom interest rates, if you factor in the opportunity cost of the 20% down payment over the lifetime of a 30-year mortgage loan, renting ALWAYS wins.
It is absolutely wrong to claim that "renting always wins." Let's take my house as an example, and evaluate it against some of the metrics people have mentioned so far:
The house in question is a 3 bedroom, 2 bath single-family detached home in a gentrifying neighborhood in Atlanta. I bought it in 2009 and paid about $100k. My principal and interest payment is about $500/month, PITI is about $750/month, and PITI + utilities is about $1000/month. The house is now worth almost $300K according to Zillow, or $150-200K according to my (much more realistic) best guess.
[snip]
Metric 2, "price actually paid" (including interest): Assuming I take my mortgage to term, I would pay $500 * 360 = $180K total for my house, over thirty years. It's worth close to that much now, six years in. I've already broken even! (And that's without taking into account the fact that I haven't actually paid most of that $180K yet.)
You'd pay $750 * 360 = 270000. Taxes and insurance are part of the carrying costs.
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I ran a poll on early-retirement.org. Among retirees (generally early) 88% own homes, among those looking to retire early its about 80% that own. The rates are substantially higher than the country as a whole and close to the percentage found in the millionaires next door. As rule most people bought as soon as possible.
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I knew that that"ALWAYS" would come back to haunt me. I should have said "almost always".
That aside,
1. I still don't know why homeowners take the "value" of their primary residence into account when they do net worth calculations or ROI calculations or rent vs buy comparisons. Your primary residence's value (however you may have arrived at that value) means not-a-whole-lot as long as you continue to live in it. Is everyone assuming that they will always buy low and sell high?
2. It seems to me like many homeowners are happy to rattle off their PITI numbers but they hardly ever talk about the cost of repairs/maintenance/improvements on their house. Friend of mine just got done paying for lead abatement for the exterior paint of his house. Another friend put in a $75,000 kitchen*. Another, added a dormer for I don't know how many thousands of dollars even though he did most of the work himself. Is this a side-effect of the problem above? Do people think the new kitchen adds to the "value" of their house? If so, I have news: it does not.
* I know... Nobody on this forum would do such a stupid thing.
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Do people think the new kitchen adds to the "value" of their house? If so, I have news: it does not.
Yes. This is the biggest joke of all. I remember watching a home improvement type show some years back. The question of the day was: Which home improvement has the biggest payoff when you go to sell? They discussed the usual i.e. Add a new bathroom. Add a swimming pool. Finish the basement and such. The #1 thing was -remodel the kitchen-. The Expert said a remodeled kitchen could bring in --up to-- 90% of the cost of the remodeling job!
Gee! Under perfect conditions, if you remodel your kitchen you can lose a minimum of 10% of the improvement cost!
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Even with today's rock-bottom interest rates, if you factor in the opportunity cost of the 20% down payment over the lifetime of a 30-year mortgage loan, renting ALWAYS wins.
It is absolutely wrong to claim that "renting always wins." Let's take my house as an example, and evaluate it against some of the metrics people have mentioned so far:
The house in question is a 3 bedroom, 2 bath single-family detached home in a gentrifying neighborhood in Atlanta. I bought it in 2009 and paid about $100k. My principal and interest payment is about $500/month, PITI is about $750/month, and PITI + utilities is about $1000/month. The house is now worth almost $300K according to Zillow, or $150-200K according to my (much more realistic) best guess.
[snip]
Metric 2, "price actually paid" (including interest): Assuming I take my mortgage to term, I would pay $500 * 360 = $180K total for my house, over thirty years. It's worth close to that much now, six years in. I've already broken even! (And that's without taking into account the fact that I haven't actually paid most of that $180K yet.)
You'd pay $750 * 360 = 270000. Taxes and insurance are part of the carrying costs.
I was basing that metric off of Shane's statement below. He didn't include taxes or insurance, so I didn't either.
When people sell their homes they often report that they've made a "profit" based on the fact that they sold the property for more than the original purchase price. "Wow, I'm a real estate tycoon. I just made a big capital gain on the sale of my residence." It's interesting, though, I've never heard anyone report the actual price they paid for their house/condo, which, including mortgage interest, is often 2X+ what the original sale price was.
Even with today's unusually low interest rates, if you buy a $400K home with a 20% down payment and finance $320K at 3.92%, over 30 years you end up paying $544,683 + $80K deposit = $624,683. Wouldn't this be the actual price of the home? Cash buyers are the only ones who get to pay $400K. So when you sell the place for $XXXK, your cost basis isn't the original purchase price. It's the total of all the mortgage payments you've made + the downpayment, right? Wouldn't that make more sense?
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Where in the world can you get annual rental increases of only 1-2%?! I assume this is real rate at least? I may have lived in the Comcast versions of apartments, but in each case after the first year the rent jumped >10%. Just 2% seems very low to me.
Province of Ontario has rent control for buildings completed and occupied prior to Nov 1, 1991. The guideline is based on inflation (going back to 2000 it looks like only 2002 and 2012 had guidelines above 3%.*) Your landlord can apply for an exemption to increase your rent more than the guideline, but there needs to be justification, like capital improvements. For a new tenant the landlord can charge the market rate (but is then subject to the guideline for future increases for the duration of that person's tenancy.)
The legislation isn't perfect, but the 1/11/91 cutoff means the plush, luxury amenity condos built in the past 15 years can gouge as the market will bear, but older, unfancy places can't brutally squeeze existing tenants. That must have some effect of protecting lower income people (who may only be able to afford the older, cheaper buildings), though admittedly DH and I are benefitting from it, too.
* Source: http://www.landlordselfhelp.com/RentIncreaseGuideline.htm
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I ran a poll on early-retirement.org. Among retirees (generally early) 88% own homes, among those looking to retire early its about 80% that own. The rates are substantially higher than the country as a whole and close to the percentage found in the millionaires next door. As rule most people bought as soon as possible.
Given the emphasis placed on home ownership in our society, it's not surprising there's a correlation between FI people and people who own their own homes. But, I think you're asking the wrong question. Rather than asking what % of FI people own their own homes, the question should be: did purchasing a home instead of renting speed up or slow down your journey to FI? Depending on the market(s) where the respondents to your poll live, their answers to that question may go either way if they're honest.
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1. I still don't know why homeowners take the "value" of their primary residence into account when they do net worth calculations or ROI calculations or rent vs buy comparisons. Your primary residence's value (however you may have arrived at that value) means not-a-whole-lot as long as you continue to live in it. Is everyone assuming that they will always buy low and sell high?
This is kind of a sideways response to this question. In the early days of my journey to FI, I included my home equity, primarily because I had a lot and it gave me a mental boost. I knew it was artificial, but seeing that net worth number grow was inspirational. Once I achieved FI, and had accrued more money than I ever really thought possible (OMG, it works, it really works!), I omitted the value of my home from my numbers. I also do not count the value of rental property in my portfolio, just because, I'm conservative that way. I don't include my cars (yes, plural and paid for) either. I know that my FIRE/Net Worth number is, in its way, is as imaginary as home equity. I mean, in the sense that I'm never going to spend it all, right? My point is that whatever tricks you employ to get yourself to your magic number are okay, as long as you get to real number$.
2...Do people think the new kitchen adds to the "value" of their house? If so, I have news: it does not.
I agree that 75K for a kitchen sounds over-the-top, but an outdated kitchen surely subtracts value when it's time to sell. It's sad to see what happens when an older house that hasn't been kept reasonably up-to-date goes on the market, in comparison to one that has. The trick is to be smart about how you do it. For a stunning example, check out Cheddar Stacker's awesome kitchen remodel.
http://forum.mrmoneymustache.com/journals/the-cheddar-block/msg840651/#msg840651
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1. I still don't know why homeowners take the "value" of their primary residence into account when they do net worth calculations or ROI calculations or rent vs buy comparisons. Your primary residence's value (however you may have arrived at that value) means not-a-whole-lot as long as you continue to live in it. Is everyone assuming that they will always buy low and sell high?
This is kind of a sideways response to this question. In the early days of my journey to FI, I included my home equity, primarily because I had a lot and it gave me a mental boost. I knew it was artificial, but seeing that net worth number grow was inspirational. Once I achieved FI, and had accrued more money than I ever really thought possible (OMG, it works, it really works!), I omitted the value of my home from my numbers. I also do not count the value of rental property in my portfolio, just because, I'm conservative that way. I don't include my cars (yes, plural and paid for) either. I know that my FIRE/Net Worth number is, in its way, is as imaginary as home equity. I mean, in the sense that I'm never going to spend it all, right? My point is that whatever tricks you employ to get yourself to your magic number are okay, as long as you get to real number$.
2...Do people think the new kitchen adds to the "value" of their house? If so, I have news: it does not.
I agree that 75K for a kitchen sounds over-the-top, but an outdated kitchen surely subtracts value when it's time to sell. It's sad to see what happens when an older house that hasn't been kept reasonably up-to-date goes on the market, in comparison to one that has. The trick is to be smart about how you do it. For a stunning example, check out Cheddar Stacker's awesome kitchen remodel.
http://forum.mrmoneymustache.com/journals/the-cheddar-block/msg840651/#msg840651
Our kitchen is crazy outdated. It's just terrible. And it is one of the main reasons why our house is assessed at $15K to $20K lower than otherwise comparable houses on our block. If we do a decent upgrade in that range, we will certainly make our money back, probably more, if/when we sell.
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It just makes me wonder then, with all the baggage/headache that comes with homeownership, why do so many (most?) people buy?
Because for me, renting was worse! I grew up in an apartment and was always acutely aware that our home wasn't ours: it could be taken away from us with just 30 days notice. My mother dreaded the rent increases every year, never knowing how much it was going to cost THIS time. Renting on my own was shit too. There was one place we loved... until it got sold and the new owners decided to renovate the entire complex. The water got turned off twice a week for two months, the workout room was closed for three, the workmen ripping the units apart started at 9am with the power tools, and there was that fun week when they renovated our unit while we were still there. And lets not forget rent increases, everywhere, every year. The only thing you can do is move, which is a giant pain in the ass, even when I only had one room of stuff!
Now? With kids? I will happily and gladly exchange my weekends on home maintenance if I know no one can kick us out next month, our costs will be the same every year for as long as we stay, and if anyone turns off our water for a day, it's going to be us!
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I ran a poll on early-retirement.org. Among retirees (generally early) 88% own homes, among those looking to retire early its about 80% that own. The rates are substantially higher than the country as a whole and close to the percentage found in the millionaires next door. As rule most people bought as soon as possible.
Given the emphasis placed on home ownership in our society, it's not surprising there's a correlation between FI people and people who own their own homes. But, I think you're asking the wrong question. Rather than asking what % of FI people own their own homes, the question should be: did purchasing a home instead of renting speed up or slow down your journey to FI? Depending on the market(s) where the respondents to your poll live, their answers to that question may go either way if they're honest.
Most of the comments were that home ownership speed up the path to FI. You are certainly right the answers would depend on when and where.
I haven't seen anybody on this thread show data that over the last 30 years renters came out ahead of owners in my state or my city. Several of us have shown examples where ownership was clearly better than renting. While correlation isn't causation at some point it pretty safe to make some assumption. Why is there a big emphasis on home ownership in our society? Answer because it leads to wealth accumulation. Now if you think that assumption is faulty fine but I'd love to see some data to back it up.
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Earlier you buy, the earlier you own it outright and begin years of mortgage free living.
This discussion seems to go nowhere because there are many people involved in even this small discussion and they don't all agree (or acknowledge) some basic facts.
For example, shouldn't it be well accepted by everybody here that if you have a mortgage free home that you also have all of the value of the home tied up in a non-producing asset. If your home is worth $500k, then you are forgoing (based on the commonly used 4% safe withdrawal rate*) $20k/year in income. That is over $1500/month that could be paying for rent.
Add on top of that the basic costs usually mentioned (tax and insurance) and often forgotten (maintenance) and you have a pretty substantial "cost" of living mortgage free.
*Adjust this rate to whatever you want, but investing this money (in the US stock market) has historically been able to produce reliable returns around 4% (inflation adjusted).
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Earlier you buy, the earlier you own it outright and begin years of mortgage free living.
This discussion seems to go nowhere because there are many people involved in even this small discussion and they don't all agree (or acknowledge) some basic facts.
For example, shouldn't it be well accepted by everybody here that if you have a mortgage free home that you also have all of the value of the home tied up in a non-producing asset. If your home is worth $500k, then you are forgoing (based on the commonly used 4% safe withdrawal rate*) $20k/year in income. That is over $1500/month that could be paying for rent.
Add on top of that the basic costs usually mentioned (tax and insurance) and often forgotten (maintenance) and you have a pretty substantial "cost" of living mortgage free.
*Adjust this rate to whatever you want, but investing this money (in the US stock market) has historically been able to produce reliable returns around 4% (inflation adjusted).
How do you figure its non-producing asset? In a place like California home prices have appreciated 6.92%/year over the last 40 years. In fact, there are only about a 1/2 dozen state where housing prices appreciated less than inflation over this period. It is pretty hard to argue today that a bond portfolio (e.g. Vanguard Total Bonds) is a better inflation hedge than a house.
That is in addition to providing a place to live and a substantial saving on rent. There aren't many places you can rent a $500K house for $1,500/month. Moreover, the income from home appreciation is deferred and up 500K exclude whereas you have to pay taxes on that 4%.
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Whether it is more financially sound to rent or buy is entirely dependent on the housing market where you are. There is no point in discussing this because one person's set of "facts" is entirely different than another person's set of "facts."
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How do you figure its non-producing asset? In a place like California home prices have appreciated 6.92%/year over the last 40 years. In fact, there are only about a 1/2 dozen state where housing prices appreciated less than inflation over this period. It is pretty hard to argue today that a bond portfolio (e.g. Vanguard Total Bonds) is a better inflation hedge than a house.
Housing prices depend very heavily on your particular neighborhood, so I question the 6.92% per year appreciation. Some places will be more and others less. The census data on housing doesn't support your hypothesis. It only goes through 2000, so I had to hunt for 2010 numbers, and those dont seem to square with the census data. Zillow data shows median prices dropping in California from a high in 2008 of 538k to a low in 2012 of 310k. (-40%). Values are now at 470k which is still under 2008 peak. So, I don't see any way to get to a 7% appreciation, and it's still way more volatile than financial markets (and much less liquid).
Notice California and NY both go down between 1990 and 2000, and we can see drops between 2000 and 2010.
https://www.census.gov/hhes/www/housing/census/historic/values.html
2000 1990
California - $211,500 $249,800 -15.3%
New York - $168,100 $148,700 -11.5%
These values are adjusted for inflation - wow, you could get a house in Hawaii for $75k in today's dollars in 1950!
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How do you figure its non-producing asset? In a place like California home prices have appreciated 6.92%/year over the last 40 years. In fact, there are only about a 1/2 dozen state where housing prices appreciated less than inflation over this period. It is pretty hard to argue today that a bond portfolio (e.g. Vanguard Total Bonds) is a better inflation hedge than a house.
Because it doesn't "produce" anything until you sell it, meaning you have to move/leave/give it up. It's non-producing while you live in it, unlike investments, which you own and can product wealth which can be sold easily at any time, unlike a house. Prices may appreciate, but to realize them, you have to sell and move.
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Earlier you buy, the earlier you own it outright and begin years of mortgage free living.
This discussion seems to go nowhere because there are many people involved in even this small discussion and they don't all agree (or acknowledge) some basic facts.
For example, shouldn't it be well accepted by everybody here that if you have a mortgage free home that you also have all of the value of the home tied up in a non-producing asset. If your home is worth $500k, then you are forgoing (based on the commonly used 4% safe withdrawal rate*) $20k/year in income. That is over $1500/month that could be paying for rent.
Add on top of that the basic costs usually mentioned (tax and insurance) and often forgotten (maintenance) and you have a pretty substantial "cost" of living mortgage free.
*Adjust this rate to whatever you want, but investing this money (in the US stock market) has historically been able to produce reliable returns around 4% (inflation adjusted).
This +1!
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Earlier you buy, the earlier you own it outright and begin years of mortgage free living.
This discussion seems to go nowhere because there are many people involved in even this small discussion and they don't all agree (or acknowledge) some basic facts.
For example, shouldn't it be well accepted by everybody here that if you have a mortgage free home that you also have all of the value of the home tied up in a non-producing asset. If your home is worth $500k, then you are forgoing (based on the commonly used 4% safe withdrawal rate*) $20k/year in income. That is over $1500/month that could be paying for rent.
Add on top of that the basic costs usually mentioned (tax and insurance) and often forgotten (maintenance) and you have a pretty substantial "cost" of living mortgage free.
*Adjust this rate to whatever you want, but investing this money (in the US stock market) has historically been able to produce reliable returns around 4% (inflation adjusted).
This +1!
Well, no. That's only really comparable if you could rent $500k home for $1500. You could never do that where I live, where $500K homes are not all that common. Again, what's the point in debating something that is so circumstance dependent? It sounds like a lot of posters are just trying to justify their personal decision to buy or rent.
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I ran a poll on early-retirement.org. Among retirees (generally early) 88% own homes, among those looking to retire early its about 80% that own. The rates are substantially higher than the country as a whole and close to the percentage found in the millionaires next door. As rule most people bought as soon as possible.
Given the emphasis placed on home ownership in our society, it's not surprising there's a correlation between FI people and people who own their own homes. But, I think you're asking the wrong question. Rather than asking what % of FI people own their own homes, the question should be: did purchasing a home instead of renting speed up or slow down your journey to FI? Depending on the market(s) where the respondents to your poll live, their answers to that question may go either way if they're honest.
Most of the comments were that home ownership speed up the path to FI. You are certainly right the answers would depend on when and where.
I haven't seen anybody on this thread show data that over the last 30 years renters came out ahead of owners in my state or my city. Several of us have shown examples where ownership was clearly better than renting. While correlation isn't causation at some point it pretty safe to make some assumption. Why is there a big emphasis on home ownership in our society? Answer because it leads to wealth accumulation. Now if you think that assumption is faulty fine but I'd love to see some data to back it up.
Again, @Clifp, asking those of us who disagree with you to somehow magically produce data specific to your state and your city seems like an unreasonable request, don't you think? How could we possibly know where you live?
I don't disagree with your premise that owning a home has traditionally been a means of wealth accumulation in our society, but just because that's what people have traditionally done doesn't mean it's the only way or the most efficient way to save money. If we're talking about "normal" people who spend everything they make, plus a little more, then you're absolutely right, locking in a mortgage for as much as they can possibly afford, as young as they can will force them to save and, over time, cause them to accumulate wealth.
On the other hand, we're not talking about "normal" people here. Many people who are reading/posting on this board are not "normal!" :) Many of them seem to be downright Unamerican! They spend less than they make, sometimes MUCH LESS. Some of them are saving and investing 70-80% of their gross salaries. This is not "normal" behavior! Because we're not dealing with "normal" people here, I think we need to adjust our thinking a little bit.
If the choice is buy a house and make mortgage payments for 30 years or blow all the money on fast cars and fancy drinks at the bar, then buying a house will win every time. But those aren't the choices for Mustachians. It's buy a house or rent and invest the difference between rent and the costs of home ownership (often higher) in the stock market. This is the comparison we have to make. As pointed out by another poster above, every dollar of equity a homeowner has in her home is money that could be invested in the stock market, and any capital appreciation in a home has to be compared to returns in the stock market in order to see which investment wins.
If you're looking for an inflation hedge or a diversification away from equities and you want to own real estate, buying shares in an REIT is a much safer way than owning a home.
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For example, shouldn't it be well accepted by everybody here that if you have a mortgage free home that you also have all of the value of the home tied up in a non-producing asset. If your home is worth $500k, then you are forgoing (based on the commonly used 4% safe withdrawal rate*) $20k/year in income. That is over $1500/month that could be paying for rent.
Sure, but there are two problems with this:
1. if you get a paid off house by paying down a mortgage instead of renting for similar costs you are essentially building up that equity as a bonus. In my case buying and renting the same house would cost the same per month with all expenses factored in. That means I get ~$9K/yr equity [not including value appreciation] on my house whereas if I rented I would need to save an additional $9K over the same living costs to build up an investment portfolio equivalent to my house's equity.
2. Plus the houses around here are steadily appreciating in value above inflation so you'd be losing that tax free capital gains opportunity by selling now.
Frankly the only sensible advice in this thread is to look closely at your situation and work out a business case that takes into account your own data.
Any sweeping statements about renting or owning being better/worse globally are stupid.
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Earlier you buy, the earlier you own it outright and begin years of mortgage free living.
This discussion seems to go nowhere because there are many people involved in even this small discussion and they don't all agree (or acknowledge) some basic facts.
For example, shouldn't it be well accepted by everybody here that if you have a mortgage free home that you also have all of the value of the home tied up in a non-producing asset. If your home is worth $500k, then you are forgoing (based on the commonly used 4% safe withdrawal rate*) $20k/year in income. That is over $1500/month that could be paying for rent.
Add on top of that the basic costs usually mentioned (tax and insurance) and often forgotten (maintenance) and you have a pretty substantial "cost" of living mortgage free.
*Adjust this rate to whatever you want, but investing this money (in the US stock market) has historically been able to produce reliable returns around 4% (inflation adjusted).
This +1!
Well, no. That's only really comparable if you could rent $500k home for $1500. You could never do that where I live, where $500K homes are not all that common. Again, what's the point in debating something that is so circumstance dependent? It sounds like a lot of posters are just trying to justify their personal decision to buy or rent.
I believe the point is that a house is riskier and costlier than having an equivalent-valued portfolio of diverse income-producing financial assets. A home might increase in value when sold, unlike most consumer products, but it is not an income-producing asset while you own it, as investments are. (Unless of course the house is a rental house.) Also a house is an asset that *costs* you money to own, unlike income-producing financial assets. And you can't easily diversify in real estate, unless you live somewhere where houses are cheap, or you have multi millions to invest in multiple properties, and property managers to manage them in their various locations.
Agree with above posters that this is largely a location-dependent argument. Sometimes it makes financial sense to rent, sometimes it does not.
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Question for those firmly in "renting is better" camp?
Do you lease your car, too?
I don't. Why do you ask? :)
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Question for those firmly in "renting is better" camp?
Do you lease your car, too?
Again, this shouldn't be a debate between the "renting is better" camp and the "buying is better" camp. The reality is that IT DEPENDS on where you are and your personal situation. Each person needs to evaluate her own situation, run the numbers and see if renting or buying works best for her family. Buying isn't always better and renting isn't always better. It depends where you live! And a lot depends on your personal preferences. There's no one right answer to this question.
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Question for those firmly in "renting is better" camp?
Do you lease your car, too?
Again, this shouldn't be a debate between the "renting is better" camp and the "buying is better" camp. The reality is that IT DEPENDS on where you are and your personal situation. Each person needs to evaluate her own situation, run the numbers and see if renting or buying works best for her family. Buying isn't always better and renting isn't always better. It depends where you live! And a lot depends on your personal preferences. There's no one right answer to this question.
I agree, which is why I tried to describe our situation to provide context, and how even if we bought, it would have to be at least a few years down the road...which would mean different circumstances, price fluctuations, different opportunity costs, etc. I think if I had found this site 10-15 years ago and started at least trying to live more MMM-style earlier, I may have leaned toward buying too (with more time to save, etc). But I'm already in my late 30s, just finishing up paying off all our debts and want to maximize our finances the best we can in the "limited" time we have left til college/retirement/etc in the HCOL we ended up at. That's why in MY situation, the thought crossed my mind that renting indefinitely may be better or even just easier.
Also, yes, we own, not lease, our car too. I don't see how that matters - you can't compare owning a $10-20k car with a $400-500k house.
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This link must already have been provided once or twice in this thread but here we go again:
http://www.gocurrycracker.com/renters-for-life/
Take a look at Jeremy's example of buying a $100K house with 20% down in 1985 (30 years ago) vs renting the exact same house (price-to-rent ratio of 19 is assumed for this hypothetical market) and investing the down payment and the savings due to renting into index funds (with dividends reinvested)
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Question for those firmly in "renting is better" camp?
Do you lease your car, too?
Like the other ERE-leaning Mustachians, I don't have a car to begin with, leased or otherwise. The $250 I paid for my bicycle put me well ahead of renting a bike very quickly.
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How do you figure its non-producing asset? In a place like California home prices have appreciated 6.92%/year over the last 40 years. In fact, there are only about a 1/2 dozen state where housing prices appreciated less than inflation over this period. It is pretty hard to argue today that a bond portfolio (e.g. Vanguard Total Bonds) is a better inflation hedge than a house.
Housing prices depend very heavily on your particular neighborhood, so I question the 6.92% per year appreciation. Some places will be more and others less. The census data on housing doesn't support your hypothesis. It only goes through 2000, so I had to hunt for 2010 numbers, and those dont seem to square with the census data. Zillow data shows median prices dropping in California from a high in 2008 of 538k to a low in 2012 of 310k. (-40%). Values are now at 470k which is still under 2008 peak. So, I don't see any way to get to a 7% appreciation, and it's still way more volatile than financial markets (and much less liquid).
Notice California and NY both go down between 1990 and 2000, and we can see drops between 2000 and 2010.
https://www.census.gov/hhes/www/housing/census/historic/values.html
2000 1990
California - $211,500 $249,800 -15.3%
New York - $168,100 $148,700 -11.5%
These values are adjusted for inflation - wow, you could get a house in Hawaii for $75k in today's dollars in 1950!
Here is the source http://www.estateofmindsites.com/subscriber_new/map.php?user_id=1&share=y (http://www.estateofmindsites.com/subscriber_new/map.php?user_id=1&share=y) of the data. If you hover over a state it shows the year by year price appreciation so I'm inclined to believe that they did the math correctly. As you can see it shows California leading the nation with a 6.92% annualize appreciation since 1975. Inflation over the same period was just under 3.8% so other than a few state in the midwest and south in most state housing prices appreciated faster than inflation.
As for your claim that house markets are more volatile than financial markets, I hope you don't really believe that. The standard deviation of the S&P 500 is ~16% over a long periods of time (Morningstar has SPY at 15% over the last 15 years) and other asset classes even more volatile. If you look at the year by year price appreciation of the housing market you'll see that the 15% declines occurred in a few states during a couple of years.
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This link must already have been provided once or twice in this thread but here we go again:
http://www.gocurrycracker.com/renters-for-life/
Take a look at Jeremy's example of buying a $100K house with 20% down in 1985 (30 years ago) vs renting the exact same house (price-to-rent ratio of 19 is assumed for this hypothetical market) and investing the down payment and the savings due to renting into index funds (with dividends reinvested)
First of all is hypothetical market assumptions are pretty unfavorable for buying because his rents are way to low, and based on an obscure academic study, rather something like Case Shiller.
Realtytrac publishes reports of rental trends. The most recent report I found showed this
Among all 461 counties analyzed the average potential annual gross rental yield for homes purchased in February 2015 was 9.34 percent.
This equates to P/R of 11. Using this figure the rent on his 100K house starts at $780/month considerable more than the $569 monthly payment for buying. The renter starts out behind and falls further each month. In the same report. http://www.realtytrac.com/news/home-prices-and-sales/april-2015-residential-rental-property-analysis/ (http://www.realtytrac.com/news/home-prices-and-sales/april-2015-residential-rental-property-analysis/) Realtytrac shows the 76% of the counties mortgage payments are lower than rents.
But honestly I'm less interested in project future returns (cause as Twain says forecast is difficult especially of the future) than historical examples where over longish 10+ year renting came out better than buying. The two example of houses he used were ok, but he needed to show how much a renter would have spent during that same time period.
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Here is the source http://www.estateofmindsites.com/subscriber_new/map.php?user_id=1&share=y (http://www.estateofmindsites.com/subscriber_new/map.php?user_id=1&share=y) of the data. If you hover over a state it shows the year by year price appreciation so I'm inclined to believe that they did the math correctly. As you can see it shows California leading the nation with a 6.92% annualize appreciation since 1975. Inflation over the same period was just under 3.8% so other than a few state in the midwest and south in most state housing prices appreciated faster than inflation.
The site you linked to is run by a mortgage broker, someone who has a vested interest in getting everyone to believe it's a good thing to take out a big loan to buy a house. I'm sure that doesn't affect the data, though. :)
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Here is the source http://www.estateofmindsites.com/subscriber_new/map.php?user_id=1&share=y (http://www.estateofmindsites.com/subscriber_new/map.php?user_id=1&share=y) of the data. If you hover over a state it shows the year by year price appreciation so I'm inclined to believe that they did the math correctly. As you can see it shows California leading the nation with a 6.92% annualize appreciation since 1975. Inflation over the same period was just under 3.8% so other than a few state in the midwest and south in most state housing prices appreciated faster than inflation.
The site you linked to is run by a mortgage broker, someone who has a vested interest in getting everyone to believe it's a good thing to take out a big loan to buy a house. I'm sure that doesn't affect the data, though. :)
I've crossed check the year by year data for two states I'm familar with NV and HI. The year by year numbers corresponded to the numbers compiled by the Real Estate boards for those two states over the last 5 years. Do you have specific examples of incorrect data, or are you make wild ass accusations?
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Didn't read the whole thread but did search for "security" and read those comments.
I think there is an argument for security that no one has mentioned yet: getting priced out of a place you want to stay.
Say you moved to a city in ~2006 for a good, new job and found a nice neighbourhood that is perfect for your MMM tendencies. You decide to rent since you are not sure how long you will stay at the job/city and the rents here are cheap (you checked the NYT buy/rent calculator and looks like 7 years is the timeframe buying is better). After a year you are in love with the surrounding area, the city at large is pretty agreeable, and the economy seems to be doing pretty well. You've made a nice circle of friends and do various little things/events in the neighbourhood. You would feel comfortable sticking around here for a while but you are still early in your career, no family, etc. You keep renting for another year. During this time, the housing bubble pops and homes start going on sale/foreclosing all across the country. You could buy a place and come out ahead if you stay in the city for ~5 years.
Now, you have to make a decision. Keep renting or Buy.
In one possible future, your gut feelings were right and the city's economy weathers the recession just fine and has a large influx of jobs. You could easily maintain your career here. Your hunch about the neighbourhood was even more on the mark and it's super awesome. Over the next year, rents go up by close to 25% and house costs in your neighbourhood are starting to really go through the roof; buying is better after 14 years. Hope you bought, else after a few more years you will be forced to move out of the neighbourhood because of soaring rent, at least a couple miles away.
I largely made up the numbers, but the situation is perfectly believable. There's another scenario where it's not such a boom/bust as well. But the end result is the same that if you want to secure your location, you have to buy else be forced out.
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I've crossed check the year by year data for two states I'm familar with NV and HI. The year by year numbers corresponded to the numbers compiled by the Real Estate boards for those two states over the last 5 years. Do you have specific examples of incorrect data, or are you make wild ass accusations?
I haven't inspected the data, but I wonder if they control for various things besides sales price, for example, increase in the average size of houses and money spent on renovations. In addition, if they're using average sales price instead of median it could be skewed by high appreciation on the most expensive houses (people who are less affected by real world economics) and lower appreciation on the rest.
It seems a challenge to get trustworthy, accurate numbers on this. If someone can find some that specify what factors are taken into account, that would be helpful (no luck on my end).
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Well, no. That's only really comparable if you could rent $500k home for $1500. You could never do that where I live, where $500K homes are not all that common. Again, what's the point in debating something that is so circumstance dependent? It sounds like a lot of posters are just trying to justify their personal decision to buy or rent.
I think you missed my point. I don't care if $1500 can rent an apartment in your neighbourhood. I was only trying to point out that the opportunity cost of living mortgage free is quite substantial. It may still make more sense to own in that case, but the cost is not "only taxes and insurance," as a previous poster said.
If you ignore the tied up capital in your home, then you are missing a large part of the equation. How the decision falls in your neck of the woods is not something any of us can tell you about (or particularly care about), we* just want everybody to make a truly informed decision.
*sorry for the royal "we"
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Well, no. That's only really comparable if you could rent $500k home for $1500. You could never do that where I live, where $500K homes are not all that common. Again, what's the point in debating something that is so circumstance dependent? It sounds like a lot of posters are just trying to justify their personal decision to buy or rent.
I think you missed my point. I don't care if $1500 can rent an apartment in your neighbourhood. I was only trying to point out that the opportunity cost of living mortgage free is quite substantial. It may still make more sense to own in that case, but the cost is not "only taxes and insurance," as a previous poster said.
If you ignore the tied up capital in your home, then you are missing a large part of the equation. How the decision falls in your neck of the woods is not something any of us can tell you about (or particularly care about), we* just want everybody to make a truly informed decision.
*sorry for the royal "we"
I didn't miss your point. I don't think the majority (if any) of the posters here are ignoring the fact that capital is tied up in a house until it is sold. It goes both ways, the cost of renting is not merely the monthly rent that one pays. What people are largely ignoring is that most people in the US don't live in an inflated housing market.
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I didn't miss your point. I don't think the majority (if any) of the posters here are ignoring the fact that capital is tied up in a house until it is sold. It goes both ways, the cost of renting is not merely the monthly rent that one pays. What people are largely ignoring is that most people in the US don't live in an inflated housing market.
I don't want to get into a back and forth on particular points (and become annoyingly nitpicky in the processes), so hopefully my answering here is not getting to that point yet.
1) A specific post on this thread said very clearly that a family member was living on the cheap because they were mortgage free. Maybe most people understand the tied up capital issue, but there are some who don't.
2) I'm not sure what you mean by "the cost of renting is not merely the monthly rent one pays." Unless you are trying to move the possible equity gains on the house to the rental side of the equation. The way it's discussed in this thread, the costs, equity gain and opportunity cost related to owning has been considered on the owning side (tallying up a all-in ownership number). On the renting side is pretty much just the rent. You can also shift "missing out on equity gain" to the renting side, but it doesn't change the factors involved.
3) I don't know about "inflated housing market" but more places I look on the internet (that aren't trying to sell houses) seem to say that house prices have stayed more or less even with inflation over time. I'm not an expert, so figuring out what is fact and fiction on the internet is a challenge. I ran into Robert Shiller. His work seems to suggest that long-term houses stay even or fall in value (inflation adjusted) and that the gains seen by people in the past 20-30 years was an anomaly (a very lucrative anomaly for a lot of people, no doubt) caused by a number of factors like easy mortgages.
In case it's not clear from what I wrote, I'm sure that buying and renting can both be the better choice under differing circumstances. I only hope that people don't make incorrect assumptions, a big one being that houses nearly always increase greatly in value (much more than inflation).