Author Topic: am I wrong to call renting a form of secret debt?  (Read 1718 times)

mustache_asker

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am I wrong to call renting a form of secret debt?
« on: January 20, 2023, 03:35:20 PM »
what I mean is:
a) Let's say I buy a flat for 100k$ from a loan - now I pay 4% interest on the loan, thats 333$ per month on interest and I don't pay back the loan. People would say: Yeah, you're in debt, you're "losing" money on paying interest to the bank.
b) Now let's assume I rent a property that is worth 100k$ and my landlord wants 4% interest from me. I pay rent every month 333$.

If I now say paying rent is like paying a secret interest, I'm losing money buy doing it, we're living in a secret debt culture, people in another financial forum really protested that. They say it's not the same. They say you can get out of rent really quickly, but not out of the loan. Well you can sell the flat and use the cash to pay off the debt. It just takes a little longer to find a buyer.
But that guys seemed to derail the conversation. Because my point is: You're paying some form of capital gains to someone else in both cases. Just in the one case it's not so obvious so it's secret to some. While in the other case it's clearly written in the contract how much interest you pay on top of the actual money you get. This way it's obvious to people they are loosing money to the bank.

Well there are differences between direct debt and secret debt (renting): Paying of the debt is a little bit more complicated, cause you need to sell the house. The interest rate might be different. These are different modalities. But what I am interested is: How much difference is there financially if the interest rate is the same in both cases and I find a seller if I want to move?
I think not much difference. But people totally get aggitated in the forum. Maybe my original posting was just confusing because it did only include the examples a) and b)? Or are these guys in denial that they are basically in debt to someone else and don't want to hear that? Or am I wrong?
« Last Edit: January 20, 2023, 03:38:11 PM by mustache_asker »

ixtap

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Re: am I wrong to call renting a form of secret debt?
« Reply #1 on: January 20, 2023, 03:43:33 PM »
What if I told you that rent is sometimes cheaper than buying? Now which one is this "secret debt"?

Morning Glory

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Re: am I wrong to call renting a form of secret debt?
« Reply #2 on: January 20, 2023, 04:06:12 PM »
What if I told you that rent is sometimes cheaper than buying? Now which one is this "secret debt"?
I think this is only true in popular cities with speculative bubbles.

What's in it for the landlord? You would think that in this situation landlords would sell, creating a shortage of rental property that drives up the cost of rent until it again becomes more expensive than buying. They have to be hanging on for no other reason than the "greater fool" theory that drives speculation.

Boll weevil

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Re: am I wrong to call renting a form of secret debt?
« Reply #3 on: January 20, 2023, 04:16:45 PM »
I suppose it depends on how the lease and rent payments are structured. If you sign a multiple month lease, you are on the hook to pay (monthly rate) x (# of months). I guess that’s a form of debt, though  the stakes are relatively low: housing leases typically run 1 year or less, while mortgages tend to last 15-30 years.

But if you’re on a month-to-month lease, you’re paid up. You have no obligation to provide the owner any more money unless you want to re-rent the space.

(And realize that I’m oversimplifying a lot because I’m ignoring 30-60 day notices, damages if the renter causes unreasonable wear and tear, etc.)


mustache_asker

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Re: am I wrong to call renting a form of secret debt?
« Reply #4 on: January 20, 2023, 04:23:41 PM »
I think what I want to talk about is consequences for wealth building.
If I pay rent for 30 years, that rent is an expense that would hurt wealth building.

JLee

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Re: am I wrong to call renting a form of secret debt?
« Reply #5 on: January 20, 2023, 04:32:04 PM »
I think what I want to talk about is consequences for wealth building.
If I pay rent for 30 years, that rent is an expense that would hurt wealth building.

It's a lot more complicated than that.  If you're in a career where you're moving jobs and locations to rapidly increase income, buying a house every time will incur massive transaction costs over time.

nereo

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Re: am I wrong to call renting a form of secret debt?
« Reply #6 on: January 20, 2023, 04:54:37 PM »
What if I told you that rent is sometimes cheaper than buying? Now which one is this "secret debt"?
I think this is only true in popular cities with speculative bubbles.

What's in it for the landlord? You would think that in this situation landlords would sell, creating a shortage of rental property that drives up the cost of rent until it again becomes more expensive than buying. They have to be hanging on for no other reason than the "greater fool" theory that drives speculation.

This forum is proof enough that people frequently rent their former homes at a financial loss because they only compare the PI and the rent and conclude if the rent is a few hundred dollars more it must be a great decision. Or alternatively they just can’t bring themselves to sell because of emotions, or life uncertainty, or whatever.

Or look over the comments in the real-estate thread or on bigger pockets of members frustrated that they can’t find a property that will cash flow in their area

Or consider individual circumstances: buying and selling carry large expenses, for many who move frequently buying is unlikely to be the better deal since they can’t stay in a property for several years.


frugalecon

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Re: am I wrong to call renting a form of secret debt?
« Reply #7 on: January 20, 2023, 04:59:11 PM »
You either pay rent or you pay property taxes, insurance, maintenance, mortgage interest, and the opportunity cost of the capital you have tied up. No free lunch either way. You need to pay a fee to claim the resources underlying the place you live.

GilesMM

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Re: am I wrong to call renting a form of secret debt?
« Reply #8 on: January 20, 2023, 05:30:12 PM »
Your monthly cash flow would be the same in examples A and B, however in example A, as someone mentioned you could have additional costs (maintenance, insurance, potential long term depreciation, etc), additional benefits (mortgage interest tax deduction, potential long term appreciation) and additional flexibility (stay yourself, rent to others, sell, demolish and rebuild, etc).  All that said, the only sense in which a rental contract is "debt" is that you may be on the hook for the entire amount even if you no longer live there.

ixtap

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Re: am I wrong to call renting a form of secret debt?
« Reply #9 on: January 20, 2023, 06:09:48 PM »
What if I told you that rent is sometimes cheaper than buying? Now which one is this "secret debt"?
I think this is only true in popular cities with speculative bubbles.

What's in it for the landlord? You would think that in this situation landlords would sell, creating a shortage of rental property that drives up the cost of rent until it again becomes more expensive than buying. They have to be hanging on for no other reason than the "greater fool" theory that drives speculation.

It can still be a net benefit to the landlord, especially if they bought in lower markets. Selling may not make sense if they don't know where else to put their investment. Remember, the landlord is getting the rent plus any appreciation where as someone who is running rent/buy calculations will have different parameters. Landlords may also be faced with large capital gains if they were to sell.

Another scenario is someone willing to live in a smaller space. There may simply not be any properties available for sale as small as the ones for rent. Buy/rent calculations may work out in favor of renting just because they are forced to have more of everything in order to buy.

Telecaster

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Re: am I wrong to call renting a form of secret debt?
« Reply #10 on: January 20, 2023, 07:05:55 PM »
Or am I wrong?

You're wrong, and you are making it way, way too complicated.   Housing is an expense. Rent is not "secret debt" it is an expense.   Like all expenses, it is prudent to minimize it when possible. Sometimes buying is cheaper.  Sometimes renting is cheaper.   

PDXTabs

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Re: am I wrong to call renting a form of secret debt?
« Reply #11 on: January 20, 2023, 07:40:46 PM »
I think what I want to talk about is consequences for wealth building.
If I pay rent for 30 years, that rent is an expense that would hurt wealth building.

It's a lot more complicated than that.  If you're in a career where you're moving jobs and locations to rapidly increase income, buying a house every time will incur massive transaction costs over time.

I've owned two houses. Both times it would have been cheaper to rent. One time I lost all of my money and ruined my credit.

FINate

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Re: am I wrong to call renting a form of secret debt?
« Reply #12 on: January 20, 2023, 08:04:31 PM »
Maybe my original posting was just confusing because it did only include the examples a) and b)? Or are these guys in denial that they are basically in debt to someone else and don't want to hear that? Or am I wrong?

A renter is not "in debt" to someone else. They can never be underwater on a property. Similarly, if the structure burns down or otherwise becomes uninhabitable they aren't on the hook for the mortgage. A  residential renter's capital generally isn't tied up in the property (different story for commercial tenants). Renters can terminate their relationship with the landlord (with some exceptions around lease terms) and be totally free of the property.
« Last Edit: January 20, 2023, 08:07:05 PM by FINate »

Dicey

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Re: am I wrong to call renting a form of secret debt?
« Reply #13 on: January 20, 2023, 10:54:16 PM »
I think what I want to talk about is consequences for wealth building.
If I pay rent for 30 years, that rent is an expense that would hurt wealth building.

It's a lot more complicated than that.  If you're in a career where you're moving jobs and locations to rapidly increase income, buying a house every time will incur massive transaction costs over time.

I've owned two houses. Both times it would have been cheaper to rent. One time I lost all of my money and ruined my credit.
If it's not too painful, would you care to elaborate a little bit more? Were you forced to sell in a down market?

I've owned a couple of properties that didn't appreciate much, others that took a long time before they finally took off, and others that were like winning the lottery. Real Estate is fickle. Still more fun than renting in my personal experience.

spartana

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Re: am I wrong to call renting a form of secret debt?
« Reply #14 on: January 20, 2023, 11:52:05 PM »
Maybe my original posting was just confusing because it did only include the examples a) and b)? Or are these guys in denial that they are basically in debt to someone else and don't want to hear that? Or am I wrong?

A renter is not "in debt" to someone else. They can never be underwater on a property. Similarly, if the structure burns down or otherwise becomes uninhabitable they aren't on the hook for the mortgage. A  residential renter's capital generally isn't tied up in the property (different story for commercial tenants). Renters can terminate their relationship with the landlord (with some exceptions around lease terms) and be totally free of the property.
This. Renting is basicly just paying a use fee to use a product for a designated time frame. Beyond that there is no long term commitments or financial obligations and you're free to move on if you want. It's like dating compared to marriage ;-).

If you are talking about wealth building thru equality building (and deducting ALL costs associated with ownership over the time you own it) then that's going to be highly dependent on individual situations.

Finances_With_Purpose

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Re: am I wrong to call renting a form of secret debt?
« Reply #15 on: January 21, 2023, 12:08:38 AM »
What if I told you that rent is sometimes cheaper than buying? Now which one is this "secret debt"?
I think this is only true in popular cities with speculative bubbles.

What's in it for the landlord? You would think that in this situation landlords would sell, creating a shortage of rental property that drives up the cost of rent until it again becomes more expensive than buying. They have to be hanging on for no other reason than the "greater fool" theory that drives speculation.

Why do people drive new cars for Uber?  They neglect the high carrying costs and other costs.  It's easy to do the same with houses.  And also, people speculate and hope that the land prices will go up even if they are actually subsidizing someone's costs to get a renter.  Or they just fail to adequately anticipate ownership costs.  All of those happen routinely. 

For instance, some people buy houses like some people pick stocks (though unlike most people who read this forum): they speculate and/or look for outsized returns by picking the right one.  They may look at a house as a way to buy way more housing because of the mortgage and the renter paying a piece of the costs and forget only care about the rise in value over a handful of years, rather than the costs of ownership or other things.  In that case, it may well be cheaper to rent. 

As to Op, renting can be cheaper and in many places it is.  You omitted the carrying costs of the house: maintenance and so on.  That can be more than a mortgage in many cases, and at least a large sum.  Plus other ownership risks. 

There is no one-size-fits-all answer to your question.  It's specific to each transaction: each house and each location. 

It depends on too many things: how much the maintenance is (which depends upon the house + location).  And the time/hassle of ownership in terms of time costs.  And how the local market is: are houses priced way above decent rental returns (making rent more likely to be cheaper than owning, as it is in many HCOL areas)?  Or are houses relatively cheap, as is true in more rural areas (which leans more towards ownership making more sense)?  And other risks: e.g. buying anywhere along the gulf coast/Florida entails its own set of risks, as do many other areas (California/fires, etc.).  Renters can pick up and leave more easily, but the house is where it is. 

Nobody can answer your question without knowing more specifics because the question is so dependent on the various factors, and they can (and do!) vary literally from house to house, city to city, and so on.

spartana

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Re: am I wrong to call renting a form of secret debt?
« Reply #16 on: January 21, 2023, 12:49:03 AM »
I think what I want to talk about is consequences for wealth building.
If I pay rent for 30 years, that rent is an expense that would hurt wealth building.

It's a lot more complicated than that.  If you're in a career where you're moving jobs and locations to rapidly increase income, buying a house every time will incur massive transaction costs over time.

I've owned two houses. Both times it would have been cheaper to rent. One time I lost all of my money and ruined my credit.
Circa 2008 I'm guessing? Lots of foreclosures or underwater houses then. OP needs to take housing market drops into consideration as well as increases if he is trying to make rent vs. buy scenarios.

mustache_asker

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Re: am I wrong to call renting a form of secret debt?
« Reply #17 on: January 21, 2023, 02:07:28 AM »
ok thanks for your comments! Sorry I see, my question was not clear enough. Let's put it into two examples:

Example 1) Someone takes out a 100k$ loan at 4% interest and buys his home with it and now lives in it.
Most people would advice him: Look, your deep into debt. You should pay down the loan as quick as possible to save interest and to live "debt free". And most someones would agree.
Meaning: He has more (free) cashflow and higher net worth.

Example 2) Someone is renting a flat worth 100k$ and paying 4% rent for the building (excluding all utilities, fees and additional costs) annually.
In this case most people would say: Look, you're fine financially you have no debt, but you can build up wealth if you want to. And many someones would agree.
Meaning: All extra cashflow is good but not urgent.

Now the question:
Executing the advice of examples 1 and 2 would lead to totally different net worth and cash flows.
How come people give totally different financial advice in both examples? Shouldn't in a rational world financial advice be based on cash flow and net worth? Maybe it's simply a framing issue? Please explain this to me like i'm 15.
« Last Edit: January 21, 2023, 02:19:41 AM by mustache_asker »

Morning Glory

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Re: am I wrong to call renting a form of secret debt?
« Reply #18 on: January 21, 2023, 05:32:40 AM »
How long does your peeson want to stay in the flat? In the short term,  if the monthly payment is equal, renting is better because they won't have to worry about deferred maintenance or opportunity cost on the down-payment.

If the time frame is longer however,  the rent will keep going up each year, whereas a person who bought with a fixed rate mortgage will pay the exact same amount for the entire term. This inflation protection will eventually more than make up for the cost of maintenance and the opportunity cost on the equity. The general rule of thumb is to buy if you think you will stay in an area for five years or more. Ignore appreciation or treat it as a nice surprise if it happens.

There is no reason to pay off a 4% mortgage early.  Just keep making the regular payments and stick the rest in the market.

mustache_asker

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Re: am I wrong to call renting a form of secret debt?
« Reply #19 on: January 21, 2023, 06:12:16 AM »
thanks for the answer glory. Well although interesting (5 year rule is good to know), my question is not about buying vs renting discussion.

My question is: What level of wealth should be "normal"?
In example 1) it's "normal" that one holds at least as much wealth as ones own home is worth.
In example 2) it's "normal" to not hold any wealth, but a nice plus.
For mister money moustache holding 1million plus in wealth is normal to cover all living expenses.
In the middle ages, it was "normal" that serfs would not hold any wealth. But from our viewpoint that was not normal.
See the difference? Depending on the reference point, different levels of wealth are deemed "normal"

So we have so many answers to the question which level of wealth should be "normal" - which is the right answer for me? I'm seriously confused. Each answer implies different % of income from capital is normal.
« Last Edit: January 21, 2023, 06:18:24 AM by mustache_asker »

nereo

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Re: am I wrong to call renting a form of secret debt?
« Reply #20 on: January 21, 2023, 06:35:31 AM »
ok thanks for your comments! Sorry I see, my question was not clear enough. Let's put it into two examples:

Example 1) Someone takes out a 100k$ loan at 4% interest and buys his home with it and now lives in it.
Most people would advice him: Look, your deep into debt. You should pay down the loan as quick as possible to save interest and to live "debt free". And most someones would agree.
Meaning: He has more (free) cashflow and higher net worth.

Example 2) Someone is renting a flat worth 100k$ and paying 4% rent for the building (excluding all utilities, fees and additional costs) annually.
In this case most people would say: Look, you're fine financially you have no debt, but you can build up wealth if you want to. And many someones would agree.
Meaning: All extra cashflow is good but not urgent.

Now the question:
Executing the advice of examples 1 and 2 would lead to totally different net worth and cash flows.
How come people give totally different financial advice in both examples? Shouldn't in a rational world financial advice be based on cash flow and net worth? Maybe it's simply a framing issue? Please explain this to me like i'm 15.

I fundamentally disagree with your premise above, both personally and that “most people” or the “conventional wisdom” urges rapid pay down. Certainly living “mortgage free”* is a goal for many, but the entire reason why we have fixed 30y mortgages is to encourage people to make homeowning more accessible and to encourage people to spread out payments over multiple decades.  If you read the Investment Order stickie you will note that paying down a 4% mortgage is pretty far down the list, and if you read the financial statements from large lenders you will see only a small subset are per-paying their mortgage. 

to your broader question, net worth and cash flow are certainly major considerations, but they aren’t the only two, and they may not even “the top two”.  Asset allocation (AA, or “what investments you have”) is incredibly important, and rapidly paying down your mortgage at the expense of everything else can put a person’s NW almost entirely in their house, a situation where a person can have a high on-paper NW but be “house poor”.  Then there’s risk and tolerance, both of which are increased dramatically if you forgo things like establishing an emergency fund in favor of rapid mortgage payoff.  If you are a high earner, ignoring tax-advantaged accounts makes mortgage payoff much less attractive then funding a tIRA or contributing to a company’s 401(k) to get a company match.

All of which brings us back to your original questions about apparently divergent advice.  In short - it’s not. Broadly speaking the commonly accepted wisdom is to first have an E-fund, then contribute to tax-advantaged accounts (at least to the point where you get a match and tax deduction), and then the question of paying down low-interest fixed debt vs investing in taxable accounts comes up.  Regardless of which path you choose by the time you get to that point you are on some pretty solid footing.


*note ‘mortgage free’ still will not get rid of the ‘TI of the “PITI”, which generally eclipses the initial PI portion before the end of the amortization period.

LadyMaWhiskers

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Re: am I wrong to call renting a form of secret debt?
« Reply #21 on: January 21, 2023, 06:56:02 AM »

Example 1) Someone takes out a 100k$ loan at 4% interest and buys his home with it and now lives in it.
Most people would advice him: Look, your deep into debt. You should pay down the loan as quick as possible to save interest and to live "debt free". And most someones would agree.
Meaning: He has more (free) cashflow and higher net worth.

Now the question:
How come people give totally different financial advice in both examples?

I think you may be wrong about most someone’s in example 1. Lots of people applaud the leveraged approach to building wealth through real estate.

To your question, people would be giving different advice because the outcome of the scenarios is different. The loan is amortizing. Rent goes up over time. What’s similar in the examples is that they both solve for the basic need for housing. Buying solves for your future housing needs better than renting, and short term, renting usuallly solves for it better (in terms of cash flow & NW). Usually. And there’s a hypothetical break even point. Sdv8ce should diff3rl because these approaches are quite different.

mustache_asker

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Re: am I wrong to call renting a form of secret debt?
« Reply #22 on: January 21, 2023, 07:11:00 AM »
Thanks for the answers. I am pretty sure about I'm right about example 1 in Germany, in US sure it might be a different story.

In Germany it's all focused on security. So if you have a mortgage, the common wisdom in Germany is to pay it off quickly to really make sure no foreclosure can happen.
Now from the "security" framework in Germany: If you rent you are "safe" because you don't owe an enormous sum of money to someone. And investing might be a risk because you might loose your money (most Germans therefore don't even like stocks).
So I think the different approaches and advice might be very well rooted in the security culture in Germany. The advice does not optimize for wealth, but for "security".

And looking at the culture from another view: In Germany almost no one owns significant wealth. Only the top 10% hold enough wealth to life from it. The rest is far below this. So most people end up working for the capital gains of someone else. Most of them don't seem to realize. I think de facto that's a debt culture. What do you think?

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Re: am I wrong to call renting a form of secret debt?
« Reply #23 on: January 21, 2023, 07:28:49 AM »
Thanks for the answers. I am pretty sure about I'm right about example 1 in Germany, in US sure it might be a different story.

In Germany it's all focused on security. So if you have a mortgage, the common wisdom in Germany is to pay it off quickly to really make sure no foreclosure can happen.
Now from the "security" framework in Germany: If you rent you are "safe" because you don't owe an enormous sum of money to someone. And investing might be a risk because you might loose your money (most Germans therefore don't even like stocks).
So I think the different approaches and advice might be very well rooted in the security culture in Germany. The advice does not optimize for wealth, but for "security".

And looking at the culture from another view: In Germany almost no one owns significant wealth. Only the top 10% hold enough wealth to life from it. The rest is far below this. So most people end up working for the capital gains of someone else. Most of them don't seem to realize. I think de facto that's a debt culture. What do you think?
Ah, so you are in Germany!  That does add some complexity.
I cannot comment on Germany, it’s mortgage laws or the common wisdom there, but I would refute the idea that - in the US - you gain security through paying off a mortgage.  Here, there is no difference with respect to eviction between a person holding a mortgage in good standing and one who owns their property outright.  In fact, one of the main reasons for eviction is failure to pay property taxes (which never go away).  Importantly, your risk is highest during an accelerated pay-down period, as you gain no additional security from making extra payments, and you do not get an improved cash flow until the month after the last payment is made. The increased risk comes from the reduced amount in other investments (since the payments are being made to the mortgage, not to investment accounts or E-funds).

I’m curious how this differs in Germany; how are the laws and mortgage terms different there?

I’m not sure how different the US is from Germany in terms of wealth accrual.  In the US a shockingly large percentage of the adult population are living so closely to the edge that they report they cannot weather an unexpected $400 expense without accruing additional debt. Certainly the overwhelming majority do not have sufficient wealth (and/or have expenses high enough) to be considered FI, and the group that do have that kind of wealth are heavily skewed towards older individuals.

PDXTabs

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Re: am I wrong to call renting a form of secret debt?
« Reply #24 on: January 21, 2023, 07:32:30 AM »
I think what I want to talk about is consequences for wealth building.
If I pay rent for 30 years, that rent is an expense that would hurt wealth building.

It's a lot more complicated than that.  If you're in a career where you're moving jobs and locations to rapidly increase income, buying a house every time will incur massive transaction costs over time.

I've owned two houses. Both times it would have been cheaper to rent. One time I lost all of my money and ruined my credit.
If it's not too painful, would you care to elaborate a little bit more? Were you forced to sell in a down market?

Both were bought with ex-spouses. One was bought in March 2007 and was underwater by the time we needed to sell it. We lost every single dollar we put in.

The second was also sold for divorce*, but at least we got more than our down payment back. It's kind of side note but that spouse fought the sale and also refused to buy out my equity** so I ended up spending $32k on a lawyer to get $50k out of the house and giving the other party more than half the equity to make the sale happen.

But both of those houses cost more per month than the rent that came before them. The most recent house if you were to add up taxes, insurance, and maintenance probably cost $1,400 per month more than the rental we left. Then I owned it for ~30 months. That's $42k right there, plus the opportunity cost of owning. Again, kind of tangential but my lawyer bill would be way less without owning that house too.

* - note: I offered to buy out her equity if she settle the divorce but she wanted to fight instead
** - note 2: actually, she also refused to take all of my equity to settle the case

I've owned a couple of properties that didn't appreciate much, others that took a long time before they finally took off, and others that were like winning the lottery. Real Estate is fickle. Still more fun than renting in my personal experience.

Yea, I don't want to sound totally down on owning. I bought the second house to live in thinking that we would be there for 10 years. I would buy again, but not to save money. The house you live in is an expense/liability not an asset/investment.
« Last Edit: January 21, 2023, 07:43:59 AM by PDXTabs »

mustache_asker

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Re: am I wrong to call renting a form of secret debt?
« Reply #25 on: January 21, 2023, 07:52:02 AM »
"I’m curious how this differs in Germany; how are the laws and mortgage terms different there?"

I'm curious about US! But you talked a lot about the US side. Well in Germany, "debt" has the same word as "guilt" - so debt in Germany is generally considered more of a bad thing.  Except maybe for tuition. For example 99% of people don't use a credit card regularly. So in total, Germans hold less debt then in the US, so less Germans "underwater". But also less Germans really wealthy because Germans are really focusing on security. So they favor buying your own home and paying it down over stocks. This way a lot fall into the trap thinking buying a huge house and then paying it off is an investment. (While you could rent a small appartment and invest into stocks.)
The whole security driven culture climaxes around renting. 58% of population are renters. Renters are really well protected, can't get kicked out basically forever unless they are 3 month behind in payments. So renting is totally ok, because you can't lose anything. But beware: Taking a credit for a house is a risk (because of foreclosure) so you need to pay it down quickly.

So the whole culture is not optimized for financial freedom but for security. Therefore the mentality that renting is "safe" while mortgage is "more unsafe", so mortgages need to be payed of quickly while renters are "safe" so they don't need to invest as much. Doesn't make sense from a financial freedom viewpoint.
Maybe that's the answer I have been looking for. The viewpoint I need to take is not the standard german security viewpoint but more of a financial freedom viewpoint.
And looking from that viewpoint, I should acquire assets ASAP.
« Last Edit: January 21, 2023, 08:02:23 AM by mustache_asker »

PDXTabs

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Re: am I wrong to call renting a form of secret debt?
« Reply #26 on: January 21, 2023, 08:02:55 AM »
...

I fundamentally disagree with your premise above, both personally and that “most people” or the “conventional wisdom” urges rapid pay down. Certainly living “mortgage free”* is a goal for many, but the entire reason why we have fixed 30y mortgages is to encourage people to make homeowning more accessible and to encourage people to spread out payments over multiple decades.  If you read the Investment Order stickie you will note that paying down a 4% mortgage is pretty far down the list, and if you read the financial statements from large lenders you will see only a small subset are per-paying their mortgage.

A 30 year fixed rate mortgage is very much a USA thing. Fannie Mae and Freddie Mac create that market with a questionable use of taxpayer funds. I don't know about Germany, but you can't get a 30 year fixed rate mortgage in Canada, New Zealand, or the UK. Also, you have to be careful when reading about  mortgages in other countries because in the UK they will say "fixed rate" to mean a mortgage that doesn't have an interest rate that floats month-to-month and instead resets after 5 years.

@mustache_asker for what term are mortgage rates usually fixed in Germany? What's the minimum down payment required?

mustache_asker

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Re: am I wrong to call renting a form of secret debt?
« Reply #27 on: January 21, 2023, 08:34:31 AM »
@PDXTabs
Well in Germany you could maybe have a 30 years fixed rate, but this rarely happens. It's on average more like 10 years.
Also because Germany favors security, the minimum down payment ist like 20-30% I believe. Nobody wants and nobody offers zero down.

So in general, Germans are less into credit card / consumption debt, but they rent more but don't invest into stocks, which doesn't help with building wealth.
Also in Germany there is a high social security, so less money is available for saving. but you also will get more money in terms you are in need.

ixtap

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Re: am I wrong to call renting a form of secret debt?
« Reply #28 on: January 21, 2023, 08:45:55 AM »
@PDXTabs
Well in Germany you could maybe have a 30 years fixed rate, but this rarely happens. It's on average more like 10 years.
Also because Germany favors security, the minimum down payment ist like 20-30% I believe. Nobody wants and nobody offers zero down.

So in general, Germans are less into credit card / consumption debt, but they rent more but don't invest into stocks, which doesn't help with building wealth.
Also in Germany there is a high social security, so less money is available for saving. but you also will get more money in terms you are in need.

You can't.try to phrase it as a mathematical question, then try to say we are all wrong for cultural reasons.

However, I will point out that your examples continue to ignore the carrying costs beyond interest. Taxes, maintenance, etc. Any scenario that tries to frame rent as debt has to also include those carrying costs on the ownership side.

Comparing mortgage to rent, especially a mortgage that doesn't include escrow for taxes and insurance, is false advertising.

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Re: am I wrong to call renting a form of secret debt?
« Reply #29 on: January 21, 2023, 09:09:16 AM »
I find the title of this thread kind of annoying, even click-bait-y. It really would have helped if you had been more clear that you are not US based. This is a US based forum and our secret is we have amazing, fixed rate 30 year mortgages easily available, typically at rates below inflation. The rates are fixed, the loans are not callable, and they are an amazing tool for creating wealth. 
« Last Edit: January 21, 2023, 10:51:34 AM by Dicey »

mustache_asker

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Re: am I wrong to call renting a form of secret debt?
« Reply #30 on: January 21, 2023, 09:10:21 AM »
@ixtap not sure we understand. This is not about the renting vs. mortgage discussion.

This is about the viewpoint:
I pay about 6000€ in capital gains to someone else every year. It's either through rent or through working were a part of my salary will be used to pay dividends to the owners of the company.
That's a negative cash flow equal to having a 180k debt.

So am I underwater equivalent to 180k? Or am I not? Maybe depends on the viewpoint. But if I hold 180k in debt an have to pay 6000€ in interest each year. Most people would say, sure you are in debt by 180k and you need to get rid of it.
While if I pay 6000€ in capital gains to someone else each year through renting and working, this seems to be more accepted, while cashflow-wise it has the same financial effect.
Maybe this is because most people already are working and renting, so if you put debt on top of that it becomes too much weight on you. Therefore the one is more accepted then the other.

For reference: I hold a bachelor in economics. So how I see this:
Our culture seems to accept the fact that "normal people" work about 50% of their time to pay capital gains for someone else. So from our cultural viewpoint, surely someone who is renting and working with zero assets is not underwater.
Now from an economic standpoint, about 1/3 of total economic income is capital gains and 2/3 is labor. That means, an average laborer that does not receive any capital gains will pay (1/3)/(2/3)=50% of his wage to pay capital gains for someone else. Yes, this is just a back-of-the-envelope calculation.
From an economic perspective, that laborer is underwater equivalent to holding debt. Even if this whole process is culturally accepted and deemed normal. Even if it's not officially called debt. He's is still paying capital gains to someone even if the word describing the process is different.

ixtap

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Re: am I wrong to call renting a form of secret debt?
« Reply #31 on: January 21, 2023, 09:57:10 AM »
@ixtap not sure we understand. This is not about the renting vs. mortgage discussion.

This is about the viewpoint:
I pay about 6000€ in capital gains to someone else every year. It's either through rent or through working were a part of my salary will be used to pay dividends to the owners of the company.
That's a negative cash flow equal to having a 180k debt.

So am I underwater equivalent to 180k? Or am I not? Maybe depends on the viewpoint. But if I hold 180k in debt an have to pay 6000€ in interest each year. Most people would say, sure you are in debt by 180k and you need to get rid of it.
While if I pay 6000€ in capital gains to someone else each year through renting and working, this seems to be more accepted, while cashflow-wise it has the same financial effect.
Maybe this is because most people already are working and renting, so if you put debt on top of that it becomes too much weight on you. Therefore the one is more accepted then the other.

For reference: I hold a bachelor in economics. So how I see this:
Our culture seems to accept the fact that "normal people" work about 50% of their time to pay capital gains for someone else. So from our cultural viewpoint, surely someone who is renting and working with zero assets is not underwater.
Now from an economic standpoint, about 1/3 of total economic income is capital gains and 2/3 is labor. That means, an average laborer that does not receive any capital gains will pay (1/3)/(2/3)=50% of his wage to pay capital gains for someone else. Yes, this is just a back-of-the-envelope calculation.
From an economic perspective, that laborer is underwater equivalent to holding debt. Even if this whole process is culturally accepted and deemed normal. Even if it's not officially called debt. He's is still paying capital gains to someone even if the word describing the process is different.

This is not the first time that you have said it is not about rent vs mortgage, only to follow on with rent and mortgage examples. Try telling us what it is about with different examples. If not rent vs own calculations, what problem you trying to solve by framing rent as debt?

Are you concerned about Germany's relatively low ownership rate?

Just trying to get people to leave you alone about your decision to buy and carry a mortgage?

If you aren't growing your own food are you in secret debt?





spartana

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Re: am I wrong to call renting a form of secret debt?
« Reply #32 on: January 21, 2023, 10:15:27 AM »
@ixtap not sure we understand. This is not about the renting vs. mortgage discussion.

This is about the viewpoint:
I pay about 6000€ in capital gains to someone else every year. It's either through rent or through working were a part of my salary will be used to pay dividends to the owners of the company.
That's a negative cash flow equal to having a 180k debt.

So am I underwater equivalent to 180k? Or am I not? Maybe depends on the viewpoint. But if I hold 180k in debt an have to pay 6000€ in interest each year. Most people would say, sure you are in debt by 180k and you need to get rid of it.
While if I pay 6000€ in capital gains to someone else each year through renting and working, this seems to be more accepted, while cashflow-wise it has the same financial effect.
Maybe this is because most people already are working and renting, so if you put debt on top of that it becomes too much weight on you. Therefore the one is more accepted then the other.

For reference: I hold a bachelor in economics. So how I see this:
Our culture seems to accept the fact that "normal people" work about 50% of their time to pay capital gains for someone else. So from our cultural viewpoint, surely someone who is renting and working with zero assets is not underwater.
Now from an economic standpoint, about 1/3 of total economic income is capital gains and 2/3 is labor. That means, an average laborer that does not receive any capital gains will pay (1/3)/(2/3)=50% of his wage to pay capital gains for someone else. Yes, this is just a back-of-the-envelope calculation.
From an economic perspective, that laborer is underwater equivalent to holding debt. Even if this whole process is culturally accepted and deemed normal. Even if it's not officially called debt. He's is still paying capital gains to someone even if the word describing the process is different.

This is not the first time that you have said it is not about rent vs mortgage, only to follow on with rent and mortgage examples. Try telling us what it is about with different examples. If not rent vs own calculations, what problem you trying to solve by framing rent as debt?

Are you concerned about Germany's relatively low ownership rate?

Just trying to get people to leave you alone about your decision to buy and carry a mortgage?

If you aren't growing your own food are you in secret debt?
I kind of get where the OP is coming from from a German social standard as my Mom is German and didn't immigrate to the US until she was almost 30. She holds the same "security first" mindset the OP talked about and held no debt but a mortgage...ever. Which she would have paid off early if she could have.

However I agree that he/she is still talking about rent verse own (with a mortgage) and some of the word choices make it difficult to understand what they are asking. 

ixtap

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Re: am I wrong to call renting a form of secret debt?
« Reply #33 on: January 21, 2023, 10:50:06 AM »

Quote


Are you concerned about Germany's relatively low ownership rate?

Just trying to get people to leave you alone about your decision to buy and carry a mortgage?


I kind of get where the OP is coming from from a German social standard as my Mom is German and didn't immigrate to the US until she was almost 30. She holds the same "security first" mindset the OP talked about and held no debt but a mortgage...ever. Which she would have paid off early if she could have.

However I agree that he/she is still talking about rent verse own (with a mortgage) and some of the word choices make it difficult to understand what they are asking.

Oh, I get l of that and that is why I offered these two examples when asking what problem they are trying to address.

« Last Edit: January 21, 2023, 11:04:05 AM by ixtap »

nereo

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Re: am I wrong to call renting a form of secret debt?
« Reply #34 on: January 21, 2023, 10:58:14 AM »
@ixtap not sure we understand. This is not about the renting vs. mortgage discussion.

This is about the viewpoint:
I pay about 6000€ in capital gains to someone else every year. It's either through rent or through working were a part of my salary will be used to pay dividends to the owners of the company.
That's a negative cash flow equal to having a 180k debt.

So am I underwater equivalent to 180k? Or am I not? Maybe depends on the viewpoint. But if I hold 180k in debt an have to pay 6000€ in interest each year. Most people would say, sure you are in debt by 180k and you need to get rid of it.
While if I pay 6000€ in capital gains to someone else each year through renting and working, this seems to be more accepted, while cashflow-wise it has the same financial effect.
Maybe this is because most people already are working and renting, so if you put debt on top of that it becomes too much weight on you. Therefore the one is more accepted then the other.

For reference: I hold a bachelor in economics. So how I see this:
Our culture seems to accept the fact that "normal people" work about 50% of their time to pay capital gains for someone else. So from our cultural viewpoint, surely someone who is renting and working with zero assets is not underwater.
Now from an economic standpoint, about 1/3 of total economic income is capital gains and 2/3 is labor. That means, an average laborer that does not receive any capital gains will pay (1/3)/(2/3)=50% of his wage to pay capital gains for someone else. Yes, this is just a back-of-the-envelope calculation.
From an economic perspective, that laborer is underwater equivalent to holding debt. Even if this whole process is culturally accepted and deemed normal. Even if it's not officially called debt. He's is still paying capital gains to someone even if the word describing the process is different.

Framing things as “in debt” without any consideration of assets, liabilities and equity just makes this whole conversation go wonky.

For example, if you take out a $200k mortgage on January 1st with a monthly payment of $900, you aren’t suddenly $200k poorer on January 2nd (in other words, your net work has not dropped by the amount of the loan).  instead you have the debt (-$200k), your monthly liability ($900, plus applicable taxes/fees/maintenance and carrying costs), the asset (+$200k) and home equity ($0 on day 1, but hopefully increasing as you make payment to principle and the value possibly increases).  Most of those are not realized until you sell, and at least in the US mortgage are not callable debt, so from a personal budgeting standpoint it’s often helpful not to think of your home as an asset but as an ongoing expense, as PDXtabs has indicated.

It’s easier to think of renting as an reoccurring liability as well, rather than a debt. You don’t have any equity nor is your home an asset, but you are not carrying a debt. Unlike with a mortgage, you cannot pay off the monthly liability - the best you can do is prepay for future months.

If we insist on broadening the definition of “debt” to include “anything that anyone owes another person” things get weird fast, at least from a lexicon perspective.  Because then your company is in debt to its employees for the work they have done up until payday, and you are in debt to the phone company, Netflix or other streaming services.  If you eat at McDonalds they are in debt to you between the time you pay and the time you consume yoru food, whereas the opposite is true for sit-down restaurants.  Which just sounds silly. Every transaction is one party being in debt to another until all accounts are settled.  Even the banks would be in debt to you for your savings.  Which is why they use terms like liabilities and assets (counterintuitively you are a liability to the bank after you deposit money, and an asset when you take out a loan and are making a monthly payment… except when you don’t and then your missed payment becomes a liability).


clarkfan1979

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Re: am I wrong to call renting a form of secret debt?
« Reply #35 on: January 21, 2023, 03:16:42 PM »
@ixtap not sure we understand. This is not about the renting vs. mortgage discussion.

This is about the viewpoint:
I pay about 6000€ in capital gains to someone else every year. It's either through rent or through working were a part of my salary will be used to pay dividends to the owners of the company.
That's a negative cash flow equal to having a 180k debt.

So am I underwater equivalent to 180k? Or am I not? Maybe depends on the viewpoint. But if I hold 180k in debt an have to pay 6000€ in interest each year. Most people would say, sure you are in debt by 180k and you need to get rid of it.
While if I pay 6000€ in capital gains to someone else each year through renting and working, this seems to be more accepted, while cashflow-wise it has the same financial effect.
Maybe this is because most people already are working and renting, so if you put debt on top of that it becomes too much weight on you. Therefore the one is more accepted then the other.

For reference: I hold a bachelor in economics. So how I see this:
Our culture seems to accept the fact that "normal people" work about 50% of their time to pay capital gains for someone else. So from our cultural viewpoint, surely someone who is renting and working with zero assets is not underwater.
Now from an economic standpoint, about 1/3 of total economic income is capital gains and 2/3 is labor. That means, an average laborer that does not receive any capital gains will pay (1/3)/(2/3)=50% of his wage to pay capital gains for someone else. Yes, this is just a back-of-the-envelope calculation.
From an economic perspective, that laborer is underwater equivalent to holding debt. Even if this whole process is culturally accepted and deemed normal. Even if it's not officially called debt. He's is still paying capital gains to someone even if the word describing the process is different.

I don't have a negative attitude toward the word or concept of "debt." I use debt as leverage to increase my net worth.

I own 3 rental properties (4 doors) and a primary home. Over the past 15 years, my total debt has been negatively correlated with my net worth. As my debt increases, my net worth increases. As I progressed from 1 property to 4 properties, my net worth and total debt increased.


mustache_asker

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Re: am I wrong to call renting a form of secret debt?
« Reply #36 on: January 24, 2023, 11:21:37 AM »
thanks for your answers and for the suggestion to give alternative examples to understand this better.

Ok, here's the example:
So I calculated, that about 42% of all my expenses go towards paying for "renting capital" right now (including things like renting a flat, money and so on).
If this trend continues for the rest of my life, I will have paid about 22 full years of income on "renting capital". (42%*53 remaining years = 22)

Or in other words: Over the course of my life I will have spent 22 full years, almost half of my life, working to pay interest on capital for someone else.
I am not cool with working 22 years for someone else. What do you think about this? Would you be cool with that? And what % of expenses toward "renting capital" would be acceptable for you long term?

nereo

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Re: am I wrong to call renting a form of secret debt?
« Reply #37 on: January 24, 2023, 12:55:49 PM »
thanks for your answers and for the suggestion to give alternative examples to understand this better.

Ok, here's the example:
So I calculated, that about 42% of all my expenses go towards paying for "renting capital" right now (including things like renting a flat, money and so on).
If this trend continues for the rest of my life, I will have paid about 22 full years of income on "renting capital". (42%*53 remaining years = 22)

Or in other words: Over the course of my life I will have spent 22 full years, almost half of my life, working to pay interest on capital for someone else.
I am not cool with working 22 years for someone else. What do you think about this? Would you be cool with that? And what % of expenses toward "renting capital" would be acceptable for you long term?

What percentage are you “cool” with? 42% is certainly on the high side, but full disclosure I’ve spent more when our incomes were lower and we were living in a VHCOL area.


Metalcat

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Re: am I wrong to call renting a form of secret debt?
« Reply #38 on: January 24, 2023, 01:39:22 PM »
I'm so confused by this thread.

There are ways to determine if you come out ahead renting vs owning. Sometimes renting is the more frugal option, sometimes owning is.

But I have no idea how on earth you are defining rent as a "secret debt." It's an expense, that's it.

Is 42% of your expenses high?? Depends on what makes up the rest of your expenses and budget.

If I take home 10K/mo, spend $2200 on all-inclusive rent, $50 on my cell phone, $200 on food, and don't have a car, then housing is only 22% of my income, but over 80% of my expenses. Let's say the same apartment costs 450K to buy with $1000/mo condo fee. There's no way I come out ahead in buying.

This is not a fictional example, I'm using numbers for a listing in my building that rents for $2200 and is for sale for 450K, which is not terribly unusual in my area. Other areas are different, that's why we analyze them with a rent vs buy calculator to get a sense of where the line is to make buying worthwhile.

Housing is expensive no matter how you approach it. If renting isn't the right option for you, then buy a house. But don't fall into the trap of assuming that owning is by default superior to renting, because it just isn't.

Run the numbers and figure them out for yourself. 22 years may sound like a long time, but what if owning bumped that up to 32? That would be a pretty bad deal.

Is it possible for you to relocate to a place with lower housing costs?

FINate

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Re: am I wrong to call renting a form of secret debt?
« Reply #39 on: January 24, 2023, 02:28:32 PM »
thanks for your answers and for the suggestion to give alternative examples to understand this better.

Ok, here's the example:
So I calculated, that about 42% of all my expenses go towards paying for "renting capital" right now (including things like renting a flat, money and so on).
If this trend continues for the rest of my life, I will have paid about 22 full years of income on "renting capital". (42%*53 remaining years = 22)

Or in other words: Over the course of my life I will have spent 22 full years, almost half of my life, working to pay interest on capital for someone else.
I am not cool with working 22 years for someone else. What do you think about this? Would you be cool with that? And what % of expenses toward "renting capital" would be acceptable for you long term?

This just isn't how I think about housing or finances in general. It's all fungible once cost of capital and opportunity costs are accounted for.

Let's say I buy a $500k house to live in with a 30 year mortgage. I have a chunk of money tied up in the down payment, and (in the US at least) an amortization schedule that front-loads the interest, with an interest rate that is the risk free rate plus a risk premium based on my profile as a borrower. This means early in the loan I'm mostly paying interest to the bank, which is another way of saying I'm paying for the cost of capital. As time progresses I pay more principal and eventually own the house outright, which means I'm not "throwing away rent". But that also means I have more and more capital tied up in the house that's not generating income. This can be viewed as imputed rent, but it's still consumption because I'm occupying the house which means there's no actual income stream. In other words, as time progresses and I pay down the loan, the opportunity cost of the house increases.

Now, let's say instead of owning that home I save and invest $500k in a total market stock fund. Using the 4% rule-of-thumb, this generates $20k/year of income in perpetuity. Huh,  that's interesting because it's roughly the same amount of money I would need to spend annually to rent an equivalent house in my area. [This is approximately true in many places though not all, which is why rent vs. own calculators are useful.] If the rental is financed by a mortgage then I'm paying rent to the landlord and the landlord is paying interest to the bank. Whereas if the landlord owns the rental outright then they have a ton of capital tied up in the house, which is an opportunity cost as they are not invested elsewhere, and so my monthly rent payments compensate them for this opportunity cost + the additional risk they assume.

TL;DR - housing is best understood as an expenditure. Renting isn't "throwing money away", and owning doesn't magically make one richer. It's all about invested assets, which doesn't include where one lives.
« Last Edit: January 24, 2023, 02:38:31 PM by FINate »

mustache_asker

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Re: am I wrong to call renting a form of secret debt?
« Reply #40 on: January 24, 2023, 03:01:54 PM »
thanks for your answers!

Well this is not about the renting vs buying a home debate.
This is about: I am not sure how much capital I should hold. The example I gave would be one way to determine I should hold more assets then I own right now (which is no assets).
It would be an answer to the question: Is not saving bad? Or should I ask this in another subforum?

Metalcat

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Re: am I wrong to call renting a form of secret debt?
« Reply #41 on: January 24, 2023, 03:10:20 PM »
thanks for your answers!

Well this is not about the renting vs buying a home debate.
This is about: I am not sure how much capital I should hold. The example I gave would be one way to determine I should hold more assets then I own right now (which is no assets).
It would be an answer to the question: Is not saving bad? Or should I ask this in another subforum?

Okay, I'm now even more confused by what you are asking.

Yes, you should always save enough to cover your expenses, that's a given, but you still wouldn't refer to ongoing expenses as "secret debt," they would just be ongoing expenses that you need to save for.
« Last Edit: January 24, 2023, 03:16:55 PM by Metalcat »

dandarc

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Re: am I wrong to call renting a form of secret debt?
« Reply #42 on: January 24, 2023, 03:12:14 PM »
"Is not saving bad if I have no assets?". Yes. Yes it is. Unless you also lack the income to live a frugal life and save something at the same time, then it is less bad than just your reality until you can fix the income problem or find an even more frugal lifestyle.

But your definition of assets might be out there vs. a more standard financial definition (house is but one kind - money in the bank, investments like index funds or rental housing you rent out to others, even a car or a bicycle are assets, or if someone owes you money that's an asset to you)

I've seen a bunch of odd stuff coming out of "moneyless society" folks elsewhere - is one of those?
« Last Edit: January 24, 2023, 03:15:24 PM by dandarc »

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Re: am I wrong to call renting a form of secret debt?
« Reply #43 on: January 24, 2023, 03:29:24 PM »
@PDXTabs
Well in Germany you could maybe have a 30 years fixed rate, but this rarely happens. It's on average more like 10 years.
Also because Germany favors security, the minimum down payment ist like 20-30% I believe. Nobody wants and nobody offers zero down.

So in general, Germans are less into credit card / consumption debt, but they rent more but don't invest into stocks, which doesn't help with building wealth.
Also in Germany there is a high social security, so less money is available for saving. but you also will get more money in terms you are in need.
Aha - the thing that is missing from your numbers analysis. You have to come up with 20-30% in cash to buy, and yet upthread I see nothing trying to estimate the investment return on that. That's one of the fundamental things in favor of renting - the lower up-front cost.

Yes there are places where for the most part buying makes more sense and places where renting makes more sense, but almost everywhere renting is significantly less expensive up-front than buying. Particularly if the assessment here holds that you cannot buy without a substantial downpayment.

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Re: am I wrong to call renting a form of secret debt?
« Reply #44 on: January 24, 2023, 04:20:06 PM »
thanks for your answers!

Well this is not about the renting vs buying a home debate.
This is about: I am not sure how much capital I should hold. The example I gave would be one way to determine I should hold more assets then I own right now (which is no assets).
It would be an answer to the question: Is not saving bad? Or should I ask this in another subforum?
If you don't save any assets, you'll have to trade your labor for money for the rest of your life to eat and get shelter. I think you might be conflating terms. A house is an asset, a share of stock in a company is an asset, a bar of gold is an asset, a huge stockpile of food is an asset, an annuity is an asset.

FINate

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Re: am I wrong to call renting a form of secret debt?
« Reply #45 on: January 24, 2023, 04:25:10 PM »
thanks for your answers!

Well this is not about the renting vs buying a home debate.
This is about: I am not sure how much capital I should hold. The example I gave would be one way to determine I should hold more assets then I own right now (which is no assets).
It would be an answer to the question: Is not saving bad? Or should I ask this in another subforum?

Okay, I'm now even more confused by what you are asking.

Yes, you should always save enough to cover your expenses, that's a given, but you still wouldn't refer to ongoing expenses as "secret debt," they would just be ongoing expenses that you need to save for.

I'm also thoroughly confused about what OP is asking.

@mustache_asker if you have a practical question about finances and/or real estate, can you please rephrase your question with specifics without attempting to redefine terms (e.g. debt and assets) or getting into abstract debates. If you ask concrete questions you're more likely to get meaningful answers. For example, maybe provide some details about your finances followed by asking for input on how much house you can afford, or perhaps how much of an emergency fund you should maintain. I'm willing to provide opinions on this.

If, on the other hand, you're here to argue that we should change the definition of very well understood technical terms then I'm out. [BTW - your use/understanding of debt is incorrect, which adds to the confusion.]. IMO, you're not going to accomplish anything with this other than a bunch of confused and aggravated folks.

ixtap

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Re: am I wrong to call renting a form of secret debt?
« Reply #46 on: January 24, 2023, 04:46:56 PM »
Maybe ERE has been slow lately? This strikes me as the kind of conversation that was once popular over there.

Villanelle

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Re: am I wrong to call renting a form of secret debt?
« Reply #47 on: January 24, 2023, 05:14:31 PM »
thanks for your answers!

Well this is not about the renting vs buying a home debate.
This is about: I am not sure how much capital I should hold. The example I gave would be one way to determine I should hold more assets then I own right now (which is no assets).
It would be an answer to the question: Is not saving bad? Or should I ask this in another subforum?


Not saving is definitely bad.  Very bad.

Do you really have "no assets"?  Or do you know understand what an asset is.  A home is an asset.  So are a gold bar, a partnership in a firm, shares of stocks, valuable art, collectables, fine jewelry, a race horse, a dog with an pedigree that makes it attractive as a stud, or mutual funds.  Technically, even a car and a sofa are assets, although they depreciated quickly and the car costs money to own (insurance, registration, plus any costs associated with actually using it) so it usually doesn't make much sense to count them.   

Saying you own "no assets" means you own nothing, or nothing in which you have equity after any associated debts on those items.  Or in a less pedantic definition, "no assets" means you have no savings account, no retirement accounts, no investments accounts, and basically nothing of substantial value.

As far as "how much capital you should hold", the answer is "as much as possible", I guess.  This question doesn't really make sense, and again I think it's because you don't understand the terms.  You're basically asking, "how much money [or things worth money] should I have".  That's not a question anyone can answer for your, really.  You could use the 4% rule to determine how much you should have in accounts (or other forms) that you will liquidate to live off of.  But that tells you how much you should have when you quite earning any income, not how much you should have today.
If that is anywhere near your actual situation, you should neither buy a house no rent one.  You should fine the cheapest room for rent in someone else's house, eat beans (cooked from dried) and rice and whatever other cheap meals you can find, and save every penny possible because that is a dire situation indeed.

nereo

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Re: am I wrong to call renting a form of secret debt?
« Reply #48 on: January 24, 2023, 05:43:18 PM »
So far we have this:

I think what I want to talk about is consequences for wealth building.
My question is: What level of wealth should be "normal"?
This is about: I am not sure how much capital I should hold.
It would be an answer to the question: Is not saving bad?

Reading that together, it seems this is a more philosophical question, and that it isn’t even focused on renting or buying one’s home. I think we got off the track because of the thread subject and numerous examples.


SeattleCPA

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Re: am I wrong to call renting a form of secret debt?
« Reply #49 on: January 25, 2023, 11:35:05 AM »
@mustache_asker I think you get a better grasp of the economics by doing what the Federal Reserve and BLS do, which is impute the rental income of home ownership.

This pretty centrist article discusses: https://www.clevelandfed.org/publications/economic-commentary/2021/ec-202122-evaluating-homeownership-as-the-solution-to-wealth-inequality

Here's a quote of a key bit:

Quote
Financial returns from homeownership
The financial return to a homeowner comes from two primary sources: the capital gain on the home (assuming the home appreciates over time) and the owners’ equivalent rent (OER), which is the value of rent payments that the homeowner would otherwise have had to make to live in an equivalent shelter.5 From these returns, there are a number of costs that must be subtracted. The largest cost is generally the mortgage payment,6 but other significant expenses such as property taxes, maintenance costs, and homeowners insurance also reduce the overall return.7

Note to all: No, I will not be engaging in another discussion of whether or not home ownership can be a good investment. Nor whether imputing rent makes sense. Don't worry!
« Last Edit: January 26, 2023, 06:25:51 PM by SeattleCPA »

 

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