Author Topic: Renting versus buying: An early-morning eureka moment  (Read 12304 times)

jlajr

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Renting versus buying: An early-morning eureka moment
« on: April 02, 2016, 06:20:56 AM »
Hello.

For a long time, I have been a dyed-in-the-wool renter, for financial and non-financial reasons. Nonetheless, I can't escape the feeling that I could buy a property - with the means to do so for the first time in my life (yay, me, and thanks to MMM and the greater FIRE community) - and have it completely paid for within a few years, if my job and salary situation does not change.

At 3:30 AM this morning (Saturday), the following thought occurred to me:

If I do not live in a property I own, I need to hold assets or be earning income that cover my expected rent. According to the criteria I'm using as a guide for complete financial independence, I would need assets equal to 300 multiplied my expected rent to provide that income. If I can buy a property I want to live in for less than that figure, then, bingo, doesn't it make more sense for me to buy?

Have I stumbled upon the simplest and most convincing FIRE-friendly deciding factor regarding buying or renting a place to live? Is this something I missed in the FIRE literature or possibly have seen and forgotten about?

Any thoughts would be appreciated. If you would like to read a more complete account of what has been going through my mind recently, I invite you to read my latest blog post, , [MOD EDIT: Spam link removed.] 
« Last Edit: April 04, 2016, 05:49:49 AM by arebelspy »

ender

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Re: Renting versus buying: An early-morning eureka moment
« Reply #1 on: April 02, 2016, 06:52:20 AM »
This doesn't make any sense, because you are ignoring the fact that buying a home for cash will reduce your assets by the purchase price of the home.

Reducing monthly expenses is not the only goal of achieving FIRE. I would much rather have $30k/year in expenses with a $1M stache and mortgage/rent than $20k and a $500k one with a paid off home.



Quote
According to the criteria I'm using as a guide for complete financial independence

If you make up your own criteria you can make any scenario make sense. You could even tweak criteria to make it so buying two houses is better!

neo von retorch

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Re: Renting versus buying: An early-morning eureka moment
« Reply #2 on: April 02, 2016, 06:54:38 AM »
What is considered safe financial independence is [ongoing annual expenses] * 25 (in invested assets) if you're renting or have a paid off home.

If you haven't paid off the home yet, it's [ongoing annual expenses] * 25 + [remaining mortgage payoff].

Once the house is paid off, you likely have taxes and insurance, and in many cases, those are less than renting. But to get there, you do spend a lot on buying the home. In many cases, that amount is such that if you'd rented and invested that money, you're actually better off.

If you have [ongoing annual expenses] * 25, but then spend a significant chunk of that buying a home... what are your new [ongoing annual expenses], and do you still have enough invested to cover those going forward?

You don't seem to be including anything other rent or home in your calculations. Do you eat? Healthcare? Utilities? Insurance? Transportation? Clothing?
« Last Edit: April 02, 2016, 06:57:16 AM by neogodless »

ender

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Re: Renting versus buying: An early-morning eureka moment
« Reply #3 on: April 02, 2016, 06:57:46 AM »
If you haven't paid off the home yet, it's [ongoing annual expenses] * 25 + [remaining mortgage payoff].

This doesn't make any sense either. Your mortgage payments are almost assuredly part of your ongoing annual expenses unless you have a really weird way to calculate your expenses (?).

What you are saying might be true if you have only a few years left on a mortgage, so you can reasonably expect to pay if off 1-2 years after FIRE'ing. But most people will have a mortgage as part of their expenses for a long time even after FIRE.

WerKater

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Re: Renting versus buying: An early-morning eureka moment
« Reply #4 on: April 02, 2016, 07:00:43 AM »
At 3:30 AM this morning (Saturday), the following thought occurred to me:

If I do not live in a property I own, I need to hold assets or be earning income that cover my expected rent. According to the criteria I'm using as a guide for complete financial independence, I would need assets equal to 300 multiplied my expected rent to provide that income. If I can buy a property I want to live in for less than that figure, then, bingo, doesn't it make more sense for me to buy?

Have I stumbled upon the simplest and most convincing FIRE-friendly deciding factor regarding buying or renting a place to live? Is this something I missed in the FIRE literature or possibly have seen and forgotten about?

Your idea is basically correct but there are a few more things to consider (obviously, there are non-financial considerations but these can be very subjective, so I'll just talk about the financial ones):
- Taxes. In many jurisidictions, owning your own residence it advantageous. If you rent, you need assets that cover the rent after taxes.
- Upkeep. If you own, you need to reserve a certain amount of money for upkeep that would be be paid by the landlord if you rented. I have heard several rules of thumb about the necessary amount, but I don't own real estate myself, so I can't speak about this with certainty. My gut feeling is that it is more than many people think. But we have many property owners and successful landlord shere and they will be able to tell you more.

And note that your criterion only tells you whether buying will be more useful than renting. It does not tell you how you should finance if you buy. You can pay in cash (thus reducing your stash) or by a mortgage. The question which one of those two is better is essentially equivalent to the forever-ongoing "should I invest or pay off my mortgage" debate.
In particular, this means that there can be situations where renting is better than buying with cash, but buying with a mortgage is better than renting.
« Last Edit: April 02, 2016, 07:14:17 AM by WerKater »

neo von retorch

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Re: Renting versus buying: An early-morning eureka moment
« Reply #5 on: April 02, 2016, 07:04:40 AM »
Ender

So the mortgage payoff is principal + interest. That's not including taxes and insurance, which are ongoing. The P&I will end at some point. If you have [annual ongoing]*25, and on top of that, enough to payoff your mortgage, you have enough. You don't have to pay it off, of course; you can keep that "payoff money" invested and growing faster than your mortgage interest compounds.

Like you said, if you only have a few years left, say $10-20k left on your mortgage, are you going to include the full mortgage payment (P&I) in your nest egg to reach 4% SWR? The moment your mortage is paid off, you'll feel like you have way too much money... and you could've retired sooner :) So given that, why wouldn't that calculation be just as valid if you have 5 years left? 10? 30?
« Last Edit: April 02, 2016, 07:07:32 AM by neogodless »

ender

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Re: Renting versus buying: An early-morning eureka moment
« Reply #6 on: April 02, 2016, 07:13:38 AM »
Ender

So the mortgage payoff is principal + interest. That's not including taxes and insurance, which are ongoing. The P&I will end at some point. If you have [annual ongoing]*25, and on top of that, enough to payoff your mortgage, you've have enough. You don't have to pay it off, of course; you can keep that "payoff money" invested and growing faster than your mortgage interest compounds.

Like you said, if you only have a few years left, say $10-20k left on your mortgage, are you going to include the full mortgage payment (P&I) in your nest egg to reach 4% SWR? The moment your mortage is paid off, you'll feel like you have way too much money... and you could've retired sooner :) So given that, why wouldn't that calculation be just as valid if you have 5 years left? 10? 30?

None of that is described in your overly simplified equation.

If I had a mortgage which had 25+ years remaining going into FIRE, I would absolutely count my mortgage payment as part of my annual expenses.

If I had a mortgage which had 10+ years remaining going into FIRE, I would still probably count my mortgage payment as part of my annual expenses (if you look at FIREcalc after 10 years you pretty much are doomed or fairly set as most failures happen within this timeframe).

If I had a mortgage with < 10 years remaining, I would evaluate the mortgage in light of other income/expense streams I expect for the rest of my life (SS, pensions, etc).

If I had one with 2 years left, I would consider it differently and perhaps not include it in my annual expenses.

But I would never make a broad generalization where I ignore my mortgage payment entirely as part of my expenses.

neo von retorch

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Re: Renting versus buying: An early-morning eureka moment
« Reply #7 on: April 02, 2016, 07:25:35 AM »
And I never would either. (And I never did.) I am not saying ignore it. I'm saying if you have all other expenses covered by your 25x calculation, and you have the full amount of your mortgage payoff on top of that, you're covered. The easy way to determine this is... if you took that extra money and paid off your mortgage, you'd have $0 for mortgage P&I on your expense sheet, and exactly 25x your remaining expenses left invested. Just because you choose to keep the mortgage and invest the money doesn't make it any less true.

Retire-Canada

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Re: Renting versus buying: An early-morning eureka moment
« Reply #8 on: April 02, 2016, 07:42:18 AM »
I intended to rent when I moved to my current city, but for a variety of reasons couldn't and ended up buying a modest house. Having 5-6yrs worth of data now I can evaluate the financial pros and cons.

Pros

- mortgage/tax cost vs. rental cost for same space is a wash so there is no extra cost here
- each year I get ~$12K of equity built up in the home based on the purchase price with no capital gains considered
- maintenance/up keep has been minimal [I budget for $1K/yr, but have never spent that full amount yet]

Cons

- if a big ticket maintenance item(s) happen I am on the hook for it
- less flexibility as I can't just give notice and run
- my built up equity is "stuck" in the house until I sell

All in all I can't see how I'm going to lose on this deal. I'm getting $12K - $1K = $11K/yr value built in the house and hopefully some capital gains on top of that. As I build equity the risk of a big maintenance bill drops because even a $10K repair is not going to set my overall equity situation back a ton. Home prices in my area are pretty secure so they price isn't going to free fall and rental costs aren't going down.

That said a lot of this is the product of super low interest rates. I'm paying 1.65% with inflation at a bit over 1% my actual interest charge is 0.5%.  If interest rates were up at 7% with 3% inflation I'd likely be singing a different tune.

So what I'd suggest is you model out all the costs for renting and all the costs for owning in your area. Once you have that all down in a spreadsheet it shouldn't be super hard to see what makes sense.

One interesting thing is that once my house is paid off I compared the cost of renting to living in the house and it actually costs me more money to stay in the house as all that equity isn't working for me vs renting and unleashing that capital. So as I build up equity I may re-mortgage the house to take out $$ and put it to work in the market or I may decide to sell at some point and become a renter.

« Last Edit: April 02, 2016, 07:47:15 AM by Retire-Canada »

AdrianC

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Re: Renting versus buying: An early-morning eureka moment
« Reply #9 on: April 02, 2016, 07:48:57 AM »
Let's see, so if you buy a home you pay your mortgage and 15 years later you own a home outright, or you rent and 15 years later your landlord owns your home outright.

What's the argument, again? :-)

Retire-Canada

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Re: Renting versus buying: An early-morning eureka moment
« Reply #10 on: April 02, 2016, 08:01:02 AM »
Let's see, so if you buy a home you pay your mortgage and 15 years later you own a home outright, or you rent and 15 years later your landlord owns your home outright.

What's the argument, again? :-)

It depends if the cost of renting vs. the cost of owning. That equation will give a different result depending on where you live.

Heckler

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Re: Renting versus buying: An early-morning eureka moment
« Reply #11 on: April 02, 2016, 08:22:50 AM »
Let's see, so if you buy a home you pay your mortgage and 15 years later you own a home outright, or you rent and 15 years later your landlord owns your home outright.

What's the argument, again? :-)

Don't forget you must continue to pay the rent after the landlords home is paid for!  Indefinitely. 


I think we all just need to agree to disagree and make our own decisions.

jim555

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Re: Renting versus buying: An early-morning eureka moment
« Reply #12 on: April 02, 2016, 08:35:17 AM »
I bought a condo for cash prior to FIREing.  My logic, to rent would be about $1,400 a month.  If I buy a place I pay taxes and maintenance which is $517 a month.  So $1,400-$517=$883 month.  The $883 is the implied interest on the price of the condo.  So that is about a 6% implied return.  If I had to rent at $1,400 and the money earned 6%, renting and buying would be equal.  I can't get 6% without a lot of risk, so 6% basically risk free is better.  Also implied interest is not taxable.

This move lowers my monthly expenses and lets me earn a lot less without a loss of living standard.  This is important for ACA subsidies, the lower the income the better the subsidy.  Owning has a lot of other advantages such as being in control of your living situation, homestead exemptions in the event of lawsuits, tax free capital gains up to $250,000, ability to rent to a tenant, control of cost of living since rents increases always exceed taxes/maintenance increases, spousal asset protection for LTC. 

I rented for many decades and got sick of landlord non-sense, being kicked out on a whim, ever increasing rents, and no heat.

Travis

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Re: Renting versus buying: An early-morning eureka moment
« Reply #13 on: April 02, 2016, 09:47:25 AM »
I had a similar moment yesterday while updating my MadFientist FIRE ledger.  If you haven't seen it, it is an excel sheet with a ton of calculations that translates your individual expenses into a portion of your FIRE amount as both a dollar amount and how many months until FIRE based on that expense.  Anyways, because I'm renting it projects I need to set aside almost $500k towards housing because I'm currently renting and it is projecting me renting indefinitely.  I got onto Zillow and if I were to buy the house I'm currently renting I could have it at today's interest rate on a 15-year mortgage for half that (including amortized interest).  The monthly mortgage payment would be the same as my current rent, but I'd own it after 15 years and it would all but disappear as an expense with regards to my 'stache.  That doesn't mean I'm going to ignore that expense in my FIRE calculations because I'll have a mortgage for the first 15 years of FIRE, but it does make me think I won't need quite as much as the calculator thinks based on the current market.  It also led me to research a couple more places to retire, and holy crap cost of living is a huge factor in calculating a FIRE amount!

Interest Compound

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Re: Renting versus buying: An early-morning eureka moment
« Reply #14 on: April 02, 2016, 11:48:22 AM »
I think we all just need to agree to disagree and make our own decisions.

That's just the thing, this isn't something subjective to agree or disagree on. It's just math. There is a definitive right, and wrong, answer to this question for each individual. In some situations renting results in more money, in some situations buying results in more money.

The biggest thing we're debating is how to calculate it, and unfortunately, most people don't bother to calculate it at all. Hence the constant influx of threads like this.

matchewed

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Re: Renting versus buying: An early-morning eureka moment
« Reply #15 on: April 02, 2016, 11:56:01 AM »
What does this have to do with investing?

bobechs

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Re: Renting versus buying: An early-morning eureka moment
« Reply #16 on: April 02, 2016, 12:33:36 PM »
What does this have to do with investing?

Uhhh-ohh...

The investing police are here.


[ In case you haven't noticed until now that the couple dozen sub-fora categories are a complete dog's breakfast, this is your wake-up call to the dog's breakfast.

But feel free to clean it up, I guess... if you have to, that is.]

AdrianC

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Re: Renting versus buying: An early-morning eureka moment
« Reply #17 on: April 02, 2016, 01:53:43 PM »
Let's see, so if you buy a home you pay your mortgage and 15 years later you own a home outright, or you rent and 15 years later your landlord owns your home outright.

What's the argument, again? :-)

It depends if the cost of renting vs. the cost of owning. That equation will give a different result depending on where you live.

Of course, but over the long term and in aggregate renting has to cost more than buying or there'd be nothing in it for the landlord.

Where folks might go wrong is buying a much more expensive place than they were happy renting.

Interest Compound

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Re: Renting versus buying: An early-morning eureka moment
« Reply #18 on: April 02, 2016, 03:13:51 PM »
Let's see, so if you buy a home you pay your mortgage and 15 years later you own a home outright, or you rent and 15 years later your landlord owns your home outright.

What's the argument, again? :-)

It depends if the cost of renting vs. the cost of owning. That equation will give a different result depending on where you live.

Of course, but over the long term and in aggregate renting has to cost more than buying or there'd be nothing in it for the landlord.

Where folks might go wrong is buying a much more expensive place than they were happy renting.

A big reason why Buying ends up better in some cases, is because the alternative involves investing the excess in stocks. Everyone I've physically spoken to on this topic has two things to say about this:

1. Stocks = "gambling"
2. Renting = "Throwing your money away"

In other words, many landlords never consider stocks, so even when Renting is shown to result in more money than Buying in specific areas, they will Buy anyway.

ender

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Re: Renting versus buying: An early-morning eureka moment
« Reply #19 on: April 02, 2016, 03:32:16 PM »
Let's see, so if you buy a home you pay your mortgage and 15 years later you own a home outright, or you rent and 15 years later your landlord owns your home outright.

What's the argument, again? :-)

It depends if the cost of renting vs. the cost of owning. That equation will give a different result depending on where you live.

Of course, but over the long term and in aggregate renting has to cost more than buying or there'd be nothing in it for the landlord.

Where folks might go wrong is buying a much more expensive place than they were happy renting.

There are plenty of landlords who lose money on a short term or even long term basis.

Just because someone owns a property you rent does not mean it is cheaper to buy than rent.

Travis

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Re: Renting versus buying: An early-morning eureka moment
« Reply #20 on: April 02, 2016, 04:56:03 PM »
Let's see, so if you buy a home you pay your mortgage and 15 years later you own a home outright, or you rent and 15 years later your landlord owns your home outright.

What's the argument, again? :-)

It depends if the cost of renting vs. the cost of owning. That equation will give a different result depending on where you live.

Of course, but over the long term and in aggregate renting has to cost more than buying or there'd be nothing in it for the landlord.

Where folks might go wrong is buying a much more expensive place than they were happy renting.

There are plenty of landlords who lose money on a short term or even long term basis.

Just because someone owns a property you rent does not mean it is cheaper to buy than rent.

We've seen a number of landlords on this forum who don't even realize they're breaking even on their properties, but want to stick it out because of the sunk costs, potential appreciation, not wanting to admit defeat, etc.

jlajr

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Re: Renting versus buying: An early-morning eureka moment
« Reply #21 on: April 02, 2016, 11:00:59 PM »
This doesn't make any sense, because you are ignoring the fact that buying a home for cash will reduce your assets by the purchase price of the home.

Reducing monthly expenses is not the only goal of achieving FIRE. I would much rather have $30k/year in expenses with a $1M stache and mortgage/rent than $20k and a $500k one with a paid off home.



Quote
According to the criteria I'm using as a guide for complete financial independence

If you make up your own criteria you can make any scenario make sense. You could even tweak criteria to make it so buying two houses is better!

Thanks for your reply, ender. The question is how much I would be reducing my assets to purchase the property. Below a certain amount it should make sense, above that amount it shouldn't.

I'm not making up the criteria. 300 multiplied monthly living expenses (or 25 multiplied annual living expenses) is not something I made up. That goal is much different if living expenses include rent payments or do not include rent payments. I wouldn't consider myself completely financially independent if I'm paying off a mortgage without enough of a portfolio to cover that expense.

jlajr

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Re: Renting versus buying: An early-morning eureka moment
« Reply #22 on: April 02, 2016, 11:03:01 PM »

Your idea is basically correct but there are a few more things to consider (obviously, there are non-financial considerations but these can be very subjective, so I'll just talk about the financial ones):
- Taxes. In many jurisidictions, owning your own residence it advantageous. If you rent, you need assets that cover the rent after taxes.
- Upkeep. If you own, you need to reserve a certain amount of money for upkeep that would be be paid by the landlord if you rented. I have heard several rules of thumb about the necessary amount, but I don't own real estate myself, so I can't speak about this with certainty. My gut feeling is that it is more than many people think. But we have many property owners and successful landlord shere and they will be able to tell you more.

And note that your criterion only tells you whether buying will be more useful than renting. It does not tell you how you should finance if you buy. You can pay in cash (thus reducing your stash) or by a mortgage. The question which one of those two is better is essentially equivalent to the forever-ongoing "should I invest or pay off my mortgage" debate.
In particular, this means that there can be situations where renting is better than buying with cash, but buying with a mortgage is better than renting.

Thank you, WerKater. I am considering all of those items, and addressed some of them in my blog post.

jlajr

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Re: Renting versus buying: An early-morning eureka moment
« Reply #23 on: April 02, 2016, 11:06:27 PM »
I had a similar moment yesterday while updating my MadFientist FIRE ledger.  If you haven't seen it, it is an excel sheet with a ton of calculations that translates your individual expenses into a portion of your FIRE amount as both a dollar amount and how many months until FIRE based on that expense.  Anyways, because I'm renting it projects I need to set aside almost $500k towards housing because I'm currently renting and it is projecting me renting indefinitely.  I got onto Zillow and if I were to buy the house I'm currently renting I could have it at today's interest rate on a 15-year mortgage for half that (including amortized interest).  The monthly mortgage payment would be the same as my current rent, but I'd own it after 15 years and it would all but disappear as an expense with regards to my 'stache.  That doesn't mean I'm going to ignore that expense in my FIRE calculations because I'll have a mortgage for the first 15 years of FIRE, but it does make me think I won't need quite as much as the calculator thinks based on the current market.  It also led me to research a couple more places to retire, and holy crap cost of living is a huge factor in calculating a FIRE amount!

Yes, Travis, exactly this. I'm glad I'm not the only who realized this, and good luck with whatever you choose.

jlajr

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Re: Renting versus buying: An early-morning eureka moment
« Reply #24 on: April 02, 2016, 11:07:53 PM »
Where folks might go wrong is buying a much more expensive place than they were happy renting.

I see that, too, AdrianC.

jlajr

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Re: Renting versus buying: An early-morning eureka moment
« Reply #25 on: April 02, 2016, 11:12:06 PM »
What does this have to do with investing?

I did think twice about posting in this category, matchewed, but I didn't see a more-appropriate category - except maybe the Welcome and General Discussion.

I guess, for me, any instrument in which I place my assets is an investment, so the decision to continue renting or buying is a decision at least partially related to investment.

jlajr

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Re: Renting versus buying: An early-morning eureka moment
« Reply #26 on: April 02, 2016, 11:18:18 PM »
What is considered safe financial independence is [ongoing annual expenses] * 25 (in invested assets) if you're renting or have a paid off home.

If you haven't paid off the home yet, it's [ongoing annual expenses] * 25 + [remaining mortgage payoff].

Once the house is paid off, you likely have taxes and insurance, and in many cases, those are less than renting. But to get there, you do spend a lot on buying the home. In many cases, that amount is such that if you'd rented and invested that money, you're actually better off.

If you have [ongoing annual expenses] * 25, but then spend a significant chunk of that buying a home... what are your new [ongoing annual expenses], and do you still have enough invested to cover those going forward?

You don't seem to be including anything other rent or home in your calculations. Do you eat? Healthcare? Utilities? Insurance? Transportation? Clothing?

Thanks, neogodless.

I apologize if I implied that rent is my only expense. It's actually a little more than my average regular living expenses. But I can separate my Stash into logical portions that cover certain expenses, especially housing, correct? Sure, I'll need to consider maintenance and other homeowner-related expenses when calculating my FIRE goal, but the math does change significantly if there is no rent or mortgage payment.

jlajr

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Re: Renting versus buying: An early-morning eureka moment
« Reply #27 on: April 02, 2016, 11:33:21 PM »
Again, thank you everyone.

I'm currently renting a 2BR/1BA apartment for about USD 600 per month, which includes property tax. I would want to have about USD 180,000 in my Stash to support that monthly/annual expense. I'm fairly certain it would make sense to pay USD 100,000 for a property to live in, but that it wouldn't make sense to pay USD 250,000. There are 2BR/1BA apartments for sale at all points in that price range in the small city where I live.

Again, even though this is broad-level math, I do not live in the US, and I do not know all of the tax ramifications, I would not have previously thought that it could make sense for me to pay anywhere close to USD 180,000 for a place to live in.
« Last Edit: April 02, 2016, 11:35:07 PM by jlajr »

Interest Compound

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Re: Renting versus buying: An early-morning eureka moment
« Reply #28 on: April 03, 2016, 08:29:19 AM »
Again, thank you everyone.

I'm currently renting a 2BR/1BA apartment for about USD 600 per month, which includes property tax. I would want to have about USD 180,000 in my Stash to support that monthly/annual expense. I'm fairly certain it would make sense to pay USD 100,000 for a property to live in, but that it wouldn't make sense to pay USD 250,000. There are 2BR/1BA apartments for sale at all points in that price range in the small city where I live.

Again, even though this is broad-level math, I do not live in the US, and I do not know all of the tax ramifications, I would not have previously thought that it could make sense for me to pay anywhere close to USD 180,000 for a place to live in.

Here's a good buy/rent calculator that takes care of the math for you. In my area, it would not make sense to buy a $100,000 place, when rent is only $600 a month.

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

Retire-Canada

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Re: Renting versus buying: An early-morning eureka moment
« Reply #29 on: April 03, 2016, 09:13:17 AM »
Here's a good buy/rent calculator that takes care of the math for you. In my area, it would not make sense to buy a $100,000 place, when rent is only $600 a month.

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

Thanks for posting the link. Rent for a similar house would be ~$1800/month and the calculator says my break even point is $636/month with a 7% market return and $409/month with a 5% return.
« Last Edit: April 03, 2016, 09:19:35 AM by Retire-Canada »

dodojojo

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Re: Renting versus buying: An early-morning eureka moment
« Reply #30 on: April 03, 2016, 04:24:18 PM »
Hmmm...so it seems my rent has increased enough where a 315K home would make sense.  The issue though is I rent in a neighborhood where I have a 94 walk score and I do not need to own a car.  To buy a house, I'd need to move to the suburbs where realistically I would need a car.  Yes, yes, I know...no one NEEDS a car but honestly to have a life, I'd probably have a car.  Add in the purchase, insurance and maintenance of the car--then renting is still better than owning.  The NYTimes calculator is great but I can't input the car cost.

I could stay in the neighborhood and buy a condo at 300K with a HOA of less than $400.  A condo with those numbers in my neighborhood though is really old and rundown.

Interest Compound

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Re: Renting versus buying: An early-morning eureka moment
« Reply #31 on: April 03, 2016, 04:34:30 PM »
Hmmm...so it seems my rent has increased enough where a 315K home would make sense.  The issue though is I rent in a neighborhood where I have a 94 walk score and I do not need to own a car.  To buy a house, I'd need to move to the suburbs where realistically I would need a car.  Yes, yes, I know...no one NEEDS a car but honestly to have a life, I'd probably have a car.  Add in the purchase, insurance and maintenance of the car--then renting is still better than owning.  The NYTimes calculator is great but I can't input the car cost.

I could stay in the neighborhood and buy a condo at 300K with a HOA of less than $400.  A condo with those numbers in my neighborhood though is really old and rundown.

Then it's not comparable. If you can't buy a home/condo for less than $315k, that's of a desired Walkscore (Walkscore.com for those who haven't used it) and age, then the edge goes to renting.

It can go the other way too. You just have to calculate it. I've added things like additional car expenses to the "Monthly common fees" section under "Maintenance and Fees" for the house. It doesn't matter what the fee is called, if it's consistent it can be easily calculated.

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Re: Renting versus buying: An early-morning eureka moment
« Reply #33 on: April 03, 2016, 10:41:57 PM »
Here's a good buy/rent calculator that takes care of the math for you. In my area, it would not make sense to buy a $100,000 place, when rent is only $600 a month.

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

Thanks, Interest Compound. I have seen the NY Times calculator before, and of course it can be a valuable tool. Up until now, I've been a firm believer that there is a price-to-rent ratio that makes more sense to rent, especially for Mustachians and others who are financially independent and can stay in one place forever if they choose and not have to worry about working five days a week at a certain location.

Meaning, at and above a certain price-to-rent ratio, I can confidently predict to afford rent and achieve a better return by investing those assets elsewhere instead of buying a property to live.

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Re: Renting versus buying: An early-morning eureka moment
« Reply #34 on: April 04, 2016, 05:43:31 AM »
If I do not live in a property I own, I need to hold assets or be earning income that cover my expected rent. According to the criteria I'm using as a guide for complete financial independence, I would need assets equal to 300 multiplied my expected rent to provide that income. If I can buy a property I want to live in for less than that figure, then, bingo, doesn't it make more sense for me to buy?

Have I stumbled upon the simplest and most convincing FIRE-friendly deciding factor regarding buying or renting a place to live? Is this something I missed in the FIRE literature or possibly have seen and forgotten about?

What you're missing is you're assuming you need assets to cover that expense indefinitely, when the mortgage will end.

For example, picture someone who owes 20k left on a mortgage that costs them 10k/yr, spends 30k/yr without counting the mortgage.  Their total cost of living, right now, is 40k (30k + 10k mortgage).  They calculate that, for a 4% WR, they'd need 1MM to cover that 40k spending.

The reason that this is wrong is that they don't need to cover that 40k spending forever.  The mortgage, at a balance of 20k, will be paid off in 2 years (at the 10k/yr).  After that, they just need to cover the 30k spending.  So they correct amount they need to FIRE is 25x30k expenses = 750k + the 20k mortgage balance = 770k.  This will leave them with, in two years (ignoring market movements in the meantime), 750k to cover their 30k spending at a 4% WR.

770k is much less to save than 1MM, and it's because they don't have to cover that mortgage payment (10k) indefinitely--that expense ends.

So even if they're keeping that extra 20k invested, rather than paying off their mortgage now, because it makes them more money, they don't need to save more than that mortgage balance.

Your "save 300x the payment to cover the mortgage, and use that as a comparison" doesn't work, for that reason.  Does that make sense?  :)

neogodless posted the right answer, but there's a ton of other irrelevant posts, which are important considerations for FIRE (like house upkeep, and other expenses) but don't actually address the original question, of "does this 300x calculation to compare make sense."  neogodless's answer is perfect, but hopefully my explanation helped clarify it.  No, 300x comparison doesn't work, unfortunately.
« Last Edit: April 04, 2016, 05:46:59 AM by arebelspy »
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Re: Renting versus buying: An early-morning eureka moment
« Reply #35 on: April 04, 2016, 08:18:13 AM »
I think we all just need to agree to disagree and make our own decisions.

That's just the thing, this isn't something subjective to agree or disagree on. It's just math. There is a definitive right, and wrong, answer to this question for each individual. In some situations renting results in more money, in some situations buying results in more money.

The biggest thing we're debating is how to calculate it, and unfortunately, most people don't bother to calculate it at all. Hence the constant influx of threads like this.

It's just math. And several of the inputs are assumptions: investment rate, property appreciation (or depreciation), interest rate. No one knows what these numbers will end up at, we just make educated guesses. So really, it's not just math.


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Re: Renting versus buying: An early-morning eureka moment
« Reply #36 on: April 04, 2016, 08:56:56 AM »
The mortgage, at a balance of 20k, will be paid off in 2 years (at the 10k/yr).  After that, they just need to cover the 30k spending.  So the correct amount they need to FIRE is 25x30k expenses = 750k + the 20k mortgage balance = 770k.  This will leave them with, in two years (ignoring market movements in the meantime), 750k to cover their 30k spending at a 4% WR.

I've seen a lot of people say similar things, that you need to have enough saved/invested to cover the remaining principal. This confuses me. Shouldn't it be the principal balance plus the sum of the interest for the rest of the term? In the example above, after two years they would be left with (750k - InterestPaid), right?

Perhaps there's an assumption that the investments returns on the invested "mortgage principal" will be enough to cover the interest? But that is just an assumption, and could be wrong in some situations.

arebelspy

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Re: Renting versus buying: An early-morning eureka moment
« Reply #37 on: April 04, 2016, 09:17:27 AM »
The mortgage, at a balance of 20k, will be paid off in 2 years (at the 10k/yr).  After that, they just need to cover the 30k spending.  So the correct amount they need to FIRE is 25x30k expenses = 750k + the 20k mortgage balance = 770k.  This will leave them with, in two years (ignoring market movements in the meantime), 750k to cover their 30k spending at a 4% WR.

I've seen a lot of people say similar things, that you need to have enough saved/invested to cover the remaining principal. This confuses me. Shouldn't it be the principal balance plus the sum of the interest for the rest of the term? In the example above, after two years they would be left with (750k - InterestPaid), right?

Perhaps there's an assumption that the investments returns on the invested "mortgage principal" will be enough to cover the interest? But that is just an assumption, and could be wrong in some situations.

Sure, but discounted to present value (i.e. yes, the investment returns should cover it).

It'd be silly to think "I have a 100k mortgage balance, due over the next 30 years, and I'll pay 250k total (or whatever), so I need to save up 250k now to cover that."  But it depends on your risk tolerance, I guess.  If you think you'll get 0% returns over the next 30 years, you're probably the type to pay off your mortgage anyways.

And you shouldn't be FIREing under any sort of SWR (definitely not close to 4%)--your ER depends on those returns.  If that's your perspective, you'll need to save up way more than 25x your assets.
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FrugalFan

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Re: Renting versus buying: An early-morning eureka moment
« Reply #38 on: April 04, 2016, 09:49:16 AM »
The mortgage, at a balance of 20k, will be paid off in 2 years (at the 10k/yr).  After that, they just need to cover the 30k spending.  So the correct amount they need to FIRE is 25x30k expenses = 750k + the 20k mortgage balance = 770k.  This will leave them with, in two years (ignoring market movements in the meantime), 750k to cover their 30k spending at a 4% WR.

I've seen a lot of people say similar things, that you need to have enough saved/invested to cover the remaining principal. This confuses me. Shouldn't it be the principal balance plus the sum of the interest for the rest of the term? In the example above, after two years they would be left with (750k - InterestPaid), right?

Perhaps there's an assumption that the investments returns on the invested "mortgage principal" will be enough to cover the interest? But that is just an assumption, and could be wrong in some situations.

Sure, but discounted to present value (i.e. yes, the investment returns should cover it).

It'd be silly to think "I have a 100k mortgage balance, due over the next 30 years, and I'll pay 250k total (or whatever), so I need to save up 250k now to cover that."  But it depends on your risk tolerance, I guess.  If you think you'll get 0% returns over the next 30 years, you're probably the type to pay off your mortgage anyways.

And you shouldn't be FIREing under any sort of SWR (definitely not close to 4%)--your ER depends on those returns.  If that's your perspective, you'll need to save up way more than 25x your assets.

I've seen this mentioned a few times but this part finally just clicked for me. We will be in a similar situation at FIRE. Thanks arebelspy!

arebelspy

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Re: Renting versus buying: An early-morning eureka moment
« Reply #39 on: April 04, 2016, 10:32:17 AM »
Awesome, glad to've helped.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Interest Compound

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Re: Renting versus buying: An early-morning eureka moment
« Reply #40 on: April 04, 2016, 11:28:21 AM »
I think we all just need to agree to disagree and make our own decisions.

That's just the thing, this isn't something subjective to agree or disagree on. It's just math. There is a definitive right, and wrong, answer to this question for each individual. In some situations renting results in more money, in some situations buying results in more money.

The biggest thing we're debating is how to calculate it, and unfortunately, most people don't bother to calculate it at all. Hence the constant influx of threads like this.

It's just math. And several of the inputs are assumptions: investment rate, property appreciation (or depreciation), interest rate. No one knows what these numbers will end up at, we just make educated guesses. So really, it's not just math.

Agreed, this falls under "The biggest thing we're debating is how to calculate it".

dodojojo

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Re: Renting versus buying: An early-morning eureka moment
« Reply #41 on: April 04, 2016, 01:27:39 PM »
This thread with the new NY Times calculator has seriously challenged my preference to rent mantra.  I was looking to buy in 2013 and got seriously cold feet.  Actually researching "own versus buy" was how I came (indirectly) across MMM.  Soon after logging onto MMM, I put the kibosh on home ownership.

If I'm willing to move further away from DC and to another town center, owning is, according to the calculator, better.  This town center is further away but has a walk score of 80 so going car-free is possible. Though it would make it much harder and expensive to visit some friends.


Interest Compound

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Re: Renting versus buying: An early-morning eureka moment
« Reply #42 on: April 04, 2016, 07:50:05 PM »
This thread with the new NY Times calculator has seriously challenged my preference to rent mantra.  I was looking to buy in 2013 and got seriously cold feet.  Actually researching "own versus buy" was how I came (indirectly) across MMM.  Soon after logging onto MMM, I put the kibosh on home ownership.

If I'm willing to move further away from DC and to another town center, owning is, according to the calculator, better.  This town center is further away but has a walk score of 80 so going car-free is possible. Though it would make it much harder and expensive to visit some friends.

Remember, if the town center is further away, you have to compare against rentals that are further away, preferably in that same area. Otherwise you're just comparing owning in a lower cost of living area vs renting in a higher cost of living area...owning will always win.

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Re: Renting versus buying: An early-morning eureka moment
« Reply #43 on: April 04, 2016, 11:33:49 PM »

Your "save 300x the payment to cover the mortgage, and use that as a comparison" doesn't work, for that reason.  Does that make sense?  :)

neogodless posted the right answer, but there's a ton of other irrelevant posts, which are important considerations for FIRE (like house upkeep, and other expenses) but don't actually address the original question, of "does this 300x calculation to compare make sense."  neogodless's answer is perfect, but hopefully my explanation helped clarify it.  No, 300x comparison doesn't work, unfortunately.

Thanks, arebelspy.

Even though I did not mention it in this thread, I'm actually using as a rough goal reach-and-maintain-a-net-worth-that-equals-300-multiplied-by-monthly-expenses. Any balance on a mortgage would of course affect net worth.

So, I think for me, in the real situation I previously described - USD 600/month rent, apartments in the range of USD 100,000-250,000 - the logic still applies. I wouldn't put all of my assets into an apartment I live in, of course, but it could make more sense in the long run for me to pay cash (or almost cash) for a, say, USD 125,000 apartment, and live in it, financially independently without having to move - because I lost my job, for example - than paying USD 600 indefinitely.

BTW I also do recognize that nothing we discuss is written in stone. Even if I decide to buy tomorrow, I could turn right around and decide to sell a year from now, and I would have to take into account all costs and possibly depreciation for doing so.

arebelspy

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Re: Renting versus buying: An early-morning eureka moment
« Reply #44 on: April 05, 2016, 12:39:33 AM »

Your "save 300x the payment to cover the mortgage, and use that as a comparison" doesn't work, for that reason.  Does that make sense?  :)

neogodless posted the right answer, but there's a ton of other irrelevant posts, which are important considerations for FIRE (like house upkeep, and other expenses) but don't actually address the original question, of "does this 300x calculation to compare make sense."  neogodless's answer is perfect, but hopefully my explanation helped clarify it.  No, 300x comparison doesn't work, unfortunately.

Thanks, arebelspy.

Even though I did not mention it in this thread, I'm actually using as a rough goal reach-and-maintain-a-net-worth-that-equals-300-multiplied-by-monthly-expenses. Any balance on a mortgage would of course affect net worth.

So, I think for me, in the real situation I previously described - USD 600/month rent, apartments in the range of USD 100,000-250,000 - the logic still applies. I wouldn't put all of my assets into an apartment I live in, of course, but it could make more sense in the long run for me to pay cash (or almost cash) for a, say, USD 125,000 apartment, and live in it, financially independently without having to move - because I lost my job, for example - than paying USD 600 indefinitely.

BTW I also do recognize that nothing we discuss is written in stone. Even if I decide to buy tomorrow, I could turn right around and decide to sell a year from now, and I would have to take into account all costs and possibly depreciation for doing so.

I would absolutely be renting in that circumstance, with those numbers.
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jlajr

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Re: Renting versus buying: An early-morning eureka moment
« Reply #45 on: April 05, 2016, 10:17:49 PM »
I would absolutely be renting in that circumstance, with those numbers.

Yeah. Maybe I temporarily and for the first time felt that emotional home-ownership adrenaline rush.

Thanks, again, arebelspy, this time for bringing me back down to earth.

BTW Yesterday (Tuesday), I realized that a moderator had removed from my original post the link to my latest blog post. Is that really not allowed on the MMM forums?

arebelspy

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Re: Renting versus buying: An early-morning eureka moment
« Reply #46 on: April 05, 2016, 10:42:47 PM »
Correct.

From the forum rules:
http://forum.mrmoneymustache.com/forum-information-faqs/forum-rules/

Quote
"Spam" in rule number 5 ("No spam.") includes linking to your own blog.  You may add a link to your blog in your signature, and it will show up under every post you make.  Please do not start a new thread just to link to a post you wrote.  If the content is good enough, others will do that for you.  If your blog post is relevant to another thread that is ongoing, feel free to add the link, but do not abuse this - if too many of your posts are direct links to your own content, that is spammy.  Enforcement will be at the moderators' sole discretion.  If you are not sure, please contact a moderator before posting.

(Emphasis added.)

We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

jlajr

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Re: Renting versus buying: An early-morning eureka moment
« Reply #47 on: April 06, 2016, 10:57:34 PM »
Correct.

From the forum rules:
http://forum.mrmoneymustache.com/forum-information-faqs/forum-rules/

Quote
"Spam" in rule number 5 ("No spam.") includes linking to your own blog.  You may add a link to your blog in your signature, and it will show up under every post you make.  Please do not start a new thread just to link to a post you wrote.  If the content is good enough, others will do that for you.  If your blog post is relevant to another thread that is ongoing, feel free to add the link, but do not abuse this - if too many of your posts are direct links to your own content, that is spammy.  Enforcement will be at the moderators' sole discretion.  If you are not sure, please contact a moderator before posting.

(Emphasis added.)

Got it. Thanks, again, arebelspy.