Author Topic: Rent vs. Owning with jlcollinsnh  (Read 12148 times)

tannybrown

  • Stubble
  • **
  • Posts: 118
  • Age: 40
  • Location: South Scottsdale, AZ
Rent vs. Owning with jlcollinsnh
« on: June 14, 2012, 09:41:52 AM »
I read this blog entry at jlcollinsnh today and wanted to hear the MMM's community's take.  I think the rent vs. buy debate as it comes to one's own home is intriguing -- I go back and forth on it, as a recent first-time home owner.  At a very high level, it seems that the argument against paying down a cheap mortgage (opportunity costs of paying down 4% debt when you could earn 7-8%, on average) also cast doubt on buying a home at all (other, similar opportunity costs).

http://jlcollinsnh.wordpress.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

I'm no finance guru, but it seems like there may be a gap in the analysis: while the opportunity costs calculated include VGLSX's potential gains, it does not include the house's appreciation.  Should this figure into the analysis?



« Last Edit: June 14, 2012, 09:45:21 AM by tannybrown »

gestalt162

  • 5 O'Clock Shadow
  • *
  • Posts: 34
  • Age: 8
  • Location: Buffalo, NY
  • Junior Mustachian
Re: Rent vs. Owning with jlcollinsnh
« Reply #1 on: June 14, 2012, 11:33:34 AM »
I'm no finance guru, but it seems like there may be a gap in the analysis: while the opportunity costs calculated include VGLSX's potential gains, it does not include the house's appreciation.  Should this figure into the analysis?

Jim only used the annual dividends of VGLSX when calculating the opportunity cost. He states that VGLSX might rise in value as well, as it has in the past: 57% over the past 10 years, including a nearly 50% drop in 2008

tannybrown

  • Stubble
  • **
  • Posts: 118
  • Age: 40
  • Location: South Scottsdale, AZ
Re: Rent vs. Owning with jlcollinsnh
« Reply #2 on: June 14, 2012, 11:44:12 AM »
So the logic is, as either the mutual fund or the home could out-gain the other, we call it a wash and only count the relative 'guaranteed' dividends?

MMM

  • Administrator
  • Stubble
  • *****
  • Posts: 182
    • Mr. Money Mustache
Re: Rent vs. Owning with jlcollinsnh
« Reply #3 on: June 14, 2012, 11:47:31 AM »
I'm obviously more in the "own" camp than Jim Collins is.

Part of it depends on property taxes - he lives in one of the most expensive parts of the country in this regard, and I live in one of the cheapest.

Part of it depends on how much you like maintaining your own house - the costs of house maintenance can be even higher than property taxes for someone who hires out everything.

The price/rent ratio in your area makes a big difference as well. In expensive cities, rentals are often undervalued, so you profit greatly from renting.

In Boulder right down the road from me, you can rent a $400,000 house (which only buys a run-down 2 bedroom shack in Boulder) for under $2000/month. As you move up the quality scale, this ratio improves further.

In the Midwest, on the other hand, you can often buy a house for $100k or less, which would cost $900 or so to rent. That's a much better situation to be a buyer in, and a landlord as well.

I need to do a whole article on this, with examples from around the country - there's no overall rule that works, it really depends on the local numbers.

gestalt162

  • 5 O'Clock Shadow
  • *
  • Posts: 34
  • Age: 8
  • Location: Buffalo, NY
  • Junior Mustachian
Re: Rent vs. Owning with jlcollinsnh
« Reply #4 on: June 14, 2012, 11:53:38 AM »
My personal belief is that the whole rent vs. buy debate is very location-dependent. Personally, I can't get over some of the figures Jim spits out- $2500 in heating costs, $8500 in taxes, $2000 rent for an apartment- either this guy really lives the high life, or maybe it's a New Hampshire thing.

I've done the research around here, and to move from our cheapo duplex in a slum-like neighborhood to a nice starter home in a decent neighborhood close to work, a 30 yr mortgage would cost maybe $75 more per month than we're paying in rent, and a good deal of that is (currently) tax-deductible interest. Just the gas I would save from being closer to work might close that gap. So to me, I can live in a trashy neighborhood with screaming neighbors in my building or live close to work, in a solid house of my own, with 60% more square footage, in a neighborhood I wouldn't mind my future kids growing up in, for basically the cost of home maintenance. I'll take that deal any day. Now to just scrape together that down payment...

gestalt162

  • 5 O'Clock Shadow
  • *
  • Posts: 34
  • Age: 8
  • Location: Buffalo, NY
  • Junior Mustachian
Re: Rent vs. Owning with jlcollinsnh
« Reply #5 on: June 14, 2012, 11:54:40 AM »
So the logic is, as either the mutual fund or the home could out-gain the other, we call it a wash and only count the relative 'guaranteed' dividends?

Bingo.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28379
  • Age: -999
  • Location: Seattle, WA
Re: Rent vs. Owning with jlcollinsnh
« Reply #6 on: June 14, 2012, 03:30:44 PM »
I don't disagree with many of his ideas, but I do agree that it's completely dependent on the area.

Many, many areas it'd be silly to rent right now.

Here in Vegas your rent is ~900-1000 for a 3 bed, 2 bad.  Your mortgage (including the principal, interest and taxes, and insurance) would be around $400.  By both of his post-script calculations, it's a screaming buy.

In SF or Manhattan buying would be the silly thing.

It totally depends.

Eventually I will stop being a homeowner and rent.  But it's all about running the numbers, not just saying one is better than the other.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

tooqk4u22

  • Handlebar Stache
  • *****
  • Posts: 2480
Re: Rent vs. Owning with jlcollinsnh
« Reply #7 on: June 14, 2012, 03:31:55 PM »
I am definitely in the camp that homeownership is a lousy investment but for me provides signifcant returns in stability and and sense of community for my children, and therefore priceless.  If not for them I think I would be more inclined to rent if for nothing other than the flexibility.

Setting that aside, jc analysis has a slight amount of apples to oranges comparison but the point is correct, as are the above posters that say it is highly regional dependant. 

To be apples to apples you should compare your actual house in a buy vs. rent scenario.  Based on local market data I could rent my house for about $1800/month

taxes - $8000
insurance - $750
R&M - $3600   
Total $12,350

If rented - $21,600
Less VGSLX Yield (3.25%) - $8,125
Net Rent - 13,475

I would have some tax liability on the dividends so it is about a wash and there could be rent increases.  This actually makes me feel better because the R vs B always was on my mind.  But it also proves my point that i said in other posts that rentals don't make much sense in my area mainly because of property taxes.  It kills me when I here about people buying rentals for $100k and being able to rent them out for $1200-1500/month - proof that markets are not always efficient.

*In my opinion jc's R&M is high probably includes things that could either fall under remodeling (new counters are not R&M) or large things (such as HVAC) that can cost a lot and over a short term can skew the numbers - they really should be amortized over the expected useful life.  A heater may cost $5000 but will last 20+ years, or $250/year, roof $6000 last for 20 years or $400/year, etc.  My figure factors this in and spreads it out.  I also put away $300/month in an account to cover this and include this as part of my FI budget because it is only a matter of when.  In fact, when I bought my house I evaluated the remaining life of my large items and anything that had a risk of going in the first three years (only the HVAC - 23 YO) was deposited as well.
« Last Edit: June 14, 2012, 03:33:31 PM by tooqk4u22 »

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28379
  • Age: -999
  • Location: Seattle, WA
Re: Rent vs. Owning with jlcollinsnh
« Reply #8 on: June 14, 2012, 03:44:02 PM »
I am definitely in the camp that homeownership is a lousy investment

People conflate and confuse the issue by talking about it as an investment.

But you need somewhere to live.

Let's compare the two scenarios I mentioned before (owning @ 400 mortgage vs renting at 1000).

Say you put down 25k in down payment/fix up costs, and the mortgage is 400/mo (and we'll say maintenance, etc. at $200/mo = 600/mo total ownership costs).

Versus renting at 1k/mo. 

That 25k down payment could instead be invested, and at a 4% SWR it would give you 1000/mo (or one month free rent).  So you'd spend 11,000 on rent for the year.

Versus owning, having that 25k in equity gives you no returns, so you spend 7200 on owning the house.

Wow, you saved 3800 by owning.  (Plus all the other unmentioned things like mortgage interest deduction, potential appreciation, equity/principal paydown, etc.)

Don't think of the house as an investment.  Why the hell would you compare apples to oranges, or house ownership to stock ownership?  It's not an investment, you're right.

But what you should compare is owning to renting.  Because you need to do one of those, because you need a place to live.  Compare those, and choose the best.

People who rent because "owning is a bad investment" are fooling themselves.  How good of an investment it is is completely irrelevant. 
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Uncephalized

  • Stubble
  • **
  • Posts: 136
  • Age: 33
  • Location: Phoenix, AZ
Re: Rent vs. Owning with jlcollinsnh
« Reply #9 on: June 20, 2012, 09:30:01 AM »
Have to agree with arebelspy--especially for the Southwestern states. We're in Phoenix and looking to buy in Tempe within the next year. We're paying $1000 per month in rent for a <1000sqft 2bd/1ba in a decent neighborhood in a historic district of Phoenix. The house isn't really very nice, either. We can get a 1500sqft+ 3/2 or 4/2 house in Tempe, in a great walkable/bikeable area, bike distance to my job and in great condition, for <$150k. Or we can get something a little smaller or in need of a little TLC for ~$100k! The mortgage would be half our current rent, and property taxes here are about 0.65%, less than $1k per year for the price range we want.

And the rental market is hot in that area too, because ASU is so close. So there's no reason to sell when we want to move--we'd just become landlords. And if we want to become landlords sooner than that (which I am interested in doing), the money we're NOT spending on rent any more can go toward buying and fixing up a duplex near ASU, which will start generating cash flow as soon as it's move-in ready.

I think owning makes a ton of sense here.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28379
  • Age: -999
  • Location: Seattle, WA
Re: Rent vs. Owning with jlcollinsnh
« Reply #10 on: June 20, 2012, 01:53:12 PM »
Absolutely.

The problem is too many people see it as black and white.  Either renting is bad, "because you're throwing money away" or owning is bad "because your house is not an investment."

Sometimes it makes financial sense to rent.  Sometimes it makes financial sense to own.

Sometimes it makes financial sense to do one, but is better to do the other for reasons besides money.

The key is to be an independent thinker and analyse the situation, not just blindly think that one is right and the other is wrong.

FWIW, I think owning is better than renting in most places now in 2012.  But again, it depends on when, and where, and other particulars.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

mechanic baird

  • Stubble
  • **
  • Posts: 109
Re: Rent vs. Owning with jlcollinsnh
« Reply #11 on: June 21, 2012, 10:21:53 AM »

Sometimes it makes financial sense to rent.  Sometimes it makes financial sense to own.

Right on. For example, my elder parents rent so they don't lock up their nest egg in home equity that they will never see again. So they sold their house which is paid for, and rent and spend that money as part of their retirement money.

We have young kids, gotta stay put for a long while so we buy and plan to pay the mortgage off in a few years.. At the end of the day if you factor in the interest - tax deduction (we take more than standard deduction), property tax, insurance, it's a better deal than rent. So it depends on area and it also depends on personal situation..

Doing math with your own number and you will figure it out..

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1197
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Rent vs. Owning with jlcollinsnh
« Reply #12 on: June 22, 2012, 03:59:31 PM »
Absolutely.

The problem is too many people see it as black and white.  Either renting is bad, "because you're throwing money away" or owning is bad "because your house is not an investment."

Sometimes it makes financial sense to rent.  Sometimes it makes financial sense to own.

Sometimes it makes financial sense to do one, but is better to do the other for reasons besides money.

The key is to be an independent thinker and analyse the situation, not just blindly think that one is right and the other is wrong.

FWIW, I think owning is better than renting in most places now in 2012.  But again, it depends on when, and where, and other particulars.

Exactly.

There are plenty of rent vs own calculators out there. The big issue is closing costs when you buy, and real estate agent fees (6%) when you sell. So over the short term it may make more sense to rent. As Arebelspy notes, you have to live somewhere. Either rent or pay the interest on a loan to buy.

It strikes me that most people rent because they don't even have the 20% deposit and their income isn't enough to pay the higher interest rates a low credit score gets you.

There's also a difference in risk. Renting you could get kicked out when your lease expires, or the rent could go up, and you'll miss any gains from a rising house market. Buying means you risk a drop in market value and hence a loss in equity. Then there are the issues of property tax and maintenance.

The intangible value of owning your house and thus being able to change the paint or do other things without having to ask a landlord is something only you and your family can know.

sol

  • Walrus Stache
  • *******
  • Posts: 8474
  • Age: 44
  • Location: Pacific Northwest
Re: Rent vs. Owning with jlcollinsnh
« Reply #13 on: June 22, 2012, 04:01:36 PM »
But what you should compare is owning to renting.  Because you need to do one of those, because you need a place to live.  Compare those, and choose the best.

One thing that has always confused me is that the rent vs own comparisons always seem to assume that the property is perpetually financed.  If you buy a house, then theoretically you will someday own it free and clear.  Whether you live in it yourself or rent it out to someone, it continues to provide utility for you for it's useful life, which might be hundreds of years.

In an efficient market, I would expect renting to be a better deal on a month to month basis up front, but owning to be a better deal over the long term.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28379
  • Age: -999
  • Location: Seattle, WA
Re: Rent vs. Owning with jlcollinsnh
« Reply #14 on: June 30, 2012, 09:07:31 AM »
BadMoneyAdvice had a blog post recently about this topic, Rent vs. Owning

http://badmoneyadvice.com/2012/06/renting-vs-buying.html

He tears up a SmartMoney article which uses bad math (as he often does) with correct math.  Turns out in favor of buying.

I especially like his conclusion:
Quote
A thoughtful observer might note that at current mortgage rates, and accounting for tax effects, what a homeowner pays in interest could easily be expected to be less than a conservative estimate of appreciation from inflation. Put another way, if you can borrow at 3% and inflation increases the nominal value of the house by 3%, you are living there almost for free.

Beats renting.

Exactly.  And that's a great argument for not paying off the mortgage too (versus the totally debt free people that want a house free and clear... while in the accumulation phase!).

That being said, I do want to reiterate this:
But it's all about running the numbers, not just saying one is better than the other.

But BMA's analysis is pretty solid.  Worth reading if you enjoy the rent/own debates.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Bakari

  • Handlebar Stache
  • *****
  • Posts: 1799
  • Age: 41
  • Location: Oakland, CA
  • Veggie Powered Handyman
    • The Flamboyant Introvert
Re: Rent vs. Owning with jlcollinsnh
« Reply #15 on: June 30, 2012, 09:27:56 AM »
The NYT calculator is pretty through, if you click "advanced settings": http://www.nytimes.com/interactive/business/buy-rent-calculator.html
where you can adjust appreciation and taxes for your area, closing costs, maintenance (which will vary depending on how much you do yourself), expected market gains, etc.


But here is one thing no one mentioned that I have been thinking about:

Suppose you have enough in savings and credit to finance one - and only one - house.  You are in an area which typically has high rent in comparison to mortgages; but you personally have lower than typical rent in your current place.
Wouldn't it be better to buy a house and rent it out to other people, while you continue renting yourself, if the rent you bring in is more than your current rent plus the mortgage combined?
That way the house actually is an investment, one which will pay an increasing amount of passive income as it pays down its own mortgage (the interest payments drop as the principal is paid down)

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28379
  • Age: -999
  • Location: Seattle, WA
Re: Rent vs. Owning with jlcollinsnh
« Reply #16 on: June 30, 2012, 09:57:35 AM »
But here is one thing no one mentioned that I have been thinking about:
Suppose you have enough in savings and credit to finance one - and only one - house.  You are in an area which typically has high rent in comparison to mortgages; but you personally have lower than typical rent in your current place.
Wouldn't it be better to buy a house and rent it out to other people, while you continue renting yourself, if the rent you bring in is more than your current rent plus the mortgage combined?
That way the house actually is an investment, one which will pay an increasing amount of passive income as it pays down its own mortgage (the interest payments drop as the principal is paid down)

Yes, absolutely.  And that's a sound strategy, especially if you only need a small place for yourself.  Buy a larger place as an investment and rent it out.

I wouldn't call the increasing amount going to the principal as passive income (as it's trapped equity), but you will get increased passive income due to the fact that your mortgage payment stays the same, but rents rise over time with inflation.

That's a good strategy akin to getting a multiplex and living in one of the units, or getting a house and renting out part of it.  Basically you don't need all the space, so you rent it out.  If it's easier, you can rent the whole thing out and continue to rent yourself (which, as you point out, only works if you have a good deal on rent).

Clever, and you're right, that's not presented as an idea very much.  Likely, IMO, due to lifestyle inflation.  The wife and I own multiple houses, but live in our 400 sq. ft. condo.  People tell us to move into one of our big 3 or 4 bedroom places, but why would we?  We don't need the space.

Most people don't think that way though.  They buy a big place so they can move in there and fill it with stuff.  And only later decide to turn it to a rental.  You idea is great for a Mustachian thinking/planning ahead.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

liquidbanana

  • Stubble
  • **
  • Posts: 100
Re: Rent vs. Owning with jlcollinsnh
« Reply #17 on: June 30, 2012, 11:34:32 AM »
Suppose you have enough in savings and credit to finance one - and only one - house.  You are in an area which typically has high rent in comparison to mortgages; but you personally have lower than typical rent in your current place.
Wouldn't it be better to buy a house and rent it out to other people, while you continue renting yourself, if the rent you bring in is more than your current rent plus the mortgage combined?
That way the house actually is an investment, one which will pay an increasing amount of passive income as it pays down its own mortgage (the interest payments drop as the principal is paid down)

I'm thinking of doing this in the next two years. In the city that I'll be living in, living in an area where you can easily go "carfree" in (downtown), a decent house will run about $300K. But I can rent a decent apartment or townhouse in that area for about $600/month. At the same time, I can buy a nice house in the 'burbs for under $100K and rent it out for about $800-$1,000 a month as most people in this area have no desire to live in a walkable neighborhood. So in this instance, I'll be doing better to buy the house in the burbs and rent it out while renting my own place downtown.
« Last Edit: June 30, 2012, 11:37:00 AM by liquidbanana »

Passed Doo

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: Rent vs. Owning with jlcollinsnh
« Reply #18 on: June 30, 2012, 12:19:26 PM »
As to the plethora of comments and 'opinions' above:

1. ALL real estate is local.

2. ALL real estate is personal.
« Last Edit: July 01, 2012, 07:03:16 AM by Sparafusile »

Gerard

  • Handlebar Stache
  • *****
  • Posts: 1462
  • Location: eastern canada
Re: Rent vs. Owning with jlcollinsnh
« Reply #19 on: July 03, 2012, 06:42:24 AM »
Wouldn't it be better to buy a house and rent it out to other people, while you continue renting yourself, if the rent you bring in is more than your current rent plus the mortgage combined?

This is an even better idea in Canada, where mortgage interest is tax-deductible only if you're renting the place out (i.e., the interest on your residence is not deductible). And, as others say, it leverages the mustachian worldview (we can afford a big place, but we know we only need a little place).

A possible downside in some of the later scenarios on the page is if you need to sell the property. If the world is actually getting slightly more mustachian, or unsustainable lifestyles become, uh, unsustainable, then it's exactly the neighbourhoods where housing is cheap to buy right now that will drop further in value. But I guess most of us expect to have our shit together enough that we'll never be in a forced-sale situation.

grantmeaname

  • Walrus Stache
  • *******
  • Posts: 5087
  • Age: 28
  • Location: Cincinnati
  • Cast me away from yesterday's things
Re: Rent vs. Owning with jlcollinsnh
« Reply #20 on: July 03, 2012, 08:05:49 AM »
If the world is actually getting slightly more mustachian, or unsustainable lifestyles become, uh, unsustainable, then it's exactly the neighbourhoods where housing is cheap to buy right now that will drop further in value. But I guess most of us expect to have our shit together enough that we'll never be in a forced-sale situation.
If people are getting cheaper or being forced not to live lives of luxury, demand for luxurious houses will drop (along with their prices) and demand for cheap, simple houses will increase (along with their prices). Or am I misunderstanding something?