Do you agree owning your own home isn't always worth it?

[Greystache]

It's my understanding that the recent trend of real estate appreciation is unprecedented, so your math problem may have a sampling bias.

The big problem with rent instead of own and invest the difference, is that rents increase over time and owning locks in a housing cost that does not increase over time. Yes, property taxes, insurance, and maintenance increase with inflation, but those costs apply to rental properties also and get incorporated into rent increases. I financed my house with 5% down and a 30 year mortgage (later refinanced to 15 year term). At about the 10 year mark, my P&I payments were less than rent payments for a comparable property, and they have been every year for the last 15 years. Currently, my housing costs are less than $1000 per month and rent for a similar property is around $3000 per month. What other low risk investment yields that kind of return?

[Metalcat]

It's my understanding that the recent trend of real estate appreciation is unprecedented, so your math problem may have a sampling bias.

The big problem with rent instead of own and invest the difference, is that rents increase over time and owning locks in a housing cost that does not increase over time. Yes, property taxes, insurance, and maintenance increase with inflation, but those costs apply to rental properties also and get incorporated into rent increases. I financed my house with 5% down and a 30 year mortgage (later refinanced to 15 year term). At about the 10 year mark, my P&I payments were less than rent payments for a comparable property, and they have been every year for the last 15 years. Currently, my housing costs are less than $1000 per month and rent for a similar property is around $3000 per month. What other low risk investment yields that kind of return?

Depending on where you live though, that's comparing apples to oranges if there are rent control laws. It's disingenuous to compare current rental rates with your past home value, unless you live somewhere where landlords can arbitrarily raise rents to market value.

They can't where I live, so my aunt who has been living in her apartment for nearly 30 years is paying far, faaaaar below market average for her place, especially since it gentrified around her. Her building management would love it if she moved, but they have no recourse to kick her out because it's a commercial building, not a privately owned residence.

That said, no one is saying that renting is always financially superior, or superior in general, just that it doesn't get the credit it deserves compared to owning in our culture that is obsessed with home ownership as a way of life and identity.

I say this as someone who prefers renting, but chose to buy because it financially made a lot of sense.

[Zikoris]

It's my understanding that the recent trend of real estate appreciation is unprecedented, so your math problem may have a sampling bias.

The big problem with rent instead of own and invest the difference, is that rents increase over time and owning locks in a housing cost that does not increase over time. Yes, property taxes, insurance, and maintenance increase with inflation, but those costs apply to rental properties also and get incorporated into rent increases. I financed my house with 5% down and a 30 year mortgage (later refinanced to 15 year term). At about the 10 year mark, my P&I payments were less than rent payments for a comparable property, and they have been every year for the last 15 years. Currently, my housing costs are less than $1000 per month and rent for a similar property is around $3000 per month. What other low risk investment yields that kind of return?

These factors are obviously built in to rent vs buy calculations. Did you think renters-by-choice somehow just forgot that mortgages get paid off? Lol.

[FIPurpose]

It's my understanding that the recent trend of real estate appreciation is unprecedented, so your math problem may have a sampling bias.

The big problem with rent instead of own and invest the difference, is that rents increase over time and owning locks in a housing cost that does not increase over time. Yes, property taxes, insurance, and maintenance increase with inflation, but those costs apply to rental properties also and get incorporated into rent increases. I financed my house with 5% down and a 30 year mortgage (later refinanced to 15 year term). At about the 10 year mark, my P&I payments were less than rent payments for a comparable property, and they have been every year for the last 15 years. Currently, my housing costs are less than $1000 per month and rent for a similar property is around $3000 per month. What other low risk investment yields that kind of return?

This is not a hard truth. https://www.apartmentguide.com/blog/apartment-guide-annual-rent-report/

Seattle, NY, San Fran, Colorado Springs, LA, San Antonio have all had  >15% rent decreases yoy.

Where I live right now in a townhome, the rent is running at about .45% of what we could buy the home at. Home prices have been going up, but rents have stayed more or less the same. The market right now has a crazy premium on owning, and at this point, I think there's even interest from the banks to keep prices inflated or else all their mortgages will go up in smoke.

Right now, we're in a 10-20% price bubble, and renting is a nice hedge against that.

[Greystache]

My example is from the LA suburbs. You can find temporary anomalies in any market, but over the long term, rents go up.

[Zikoris]

My example is from the LA suburbs. You can find temporary anomalies in any market, but over the long term, rents go up.

Rent increases are built into rent vs buy calculations as well. I'm thinking maybe you don't understand how this works? When doing a rent vs buy calculation, you have all the buy costs on one side, and all the rent costs on the other side, and you see what gives you a higher net worth over time. Sometimes it's one, sometimes the other.

[FIPurpose]

My example is from the LA suburbs. You can find temporary anomalies in any market, but over the long term, rents go up.

So do home repairs, maintenance, realtor fees, and taxes. The difference is that the full cost of renting is very easy to calculate (with exception to maybe opportunity cost, but owning also has difficult to calculate opportunity costs) whereas the cost of owning and tracking the avg price increases is a lot more difficult to determine.

Example: lumber prices have spiked, so now any repair on your house may be 20-30% higher. Perhaps you don't need any lumber and can ride out the wave, but if you did, would you add it to your cost of owning a home or would you mentally put it a "that was just a one time thing" bucket? And how well are you tracking all of the little "anomalies" that come with owning.

I know when I owned, I didn't keep track of every little thing I bought for that house, but I do know that it added up to a not insignificant figure. At least a couple grand over the course of the 3-4 years that I owned. I bought a short sale, so I actually made a good chunk of money off of it, but I don't see anything in the market today that was anywhere near that deal. So renting continues.

[Panly]

I can provide another data point as an example where renting can come out ahead.

We rent a studio, $847/month including utilities. And this is by far the most expensive place we've ever rented - we previously had places much cheaper, but moved to our current building for the lifestyle upgrade. That's for a 100% walkable/bikeable area where we don't even need transit passes, let alone any sort of vehicle. Properties in my area start at about 300K for an old, shitty condo with $300/month strata fees, on top of all the other expenses (property tax, utilities, maintenance, water/sewage/garbage, legal fees, mortgage interest, special levies). You can't even get around it by moving further out, because the additional transportation costs would more than cover any savings. Do the math on that and see what you find.

So basically, in our city if you are comparing to rent at the lower end of the rental price spectrum, it is virtually impossible to come out ahead by buying, as there is literally nothing on the market that comes anywhere close. You have to be paying a LOT of rent before the two options even break even financially.

I agree, having made the same calculations and buying absolutely never "made sense".   

But then that 300k  doubled in price almost overnight.    That hurt "the math".   

And before anyone realised, interest rates halved again, ...and again....   soon that shithole was at 900k, as starting point for the bidding war.

And then covid knocks,  and prices take off again, faster than ever.   


Although I haven't done badly with my investments,   I 'm nowhere close to anybody who bought the ugliest houses in my neighbourhood 10y ago. 

Even though the math said it was "virtually impossible".

Ok but if you'd bought those ugly houses 15 years ago and sold 5 years ago you would be telling a totally different story.

hmmm, I don´t live in the US and where I live, 2006-07 was the "cheapest" period since the 80's (still very expensive but the ratio price / avg yearly income was at a low point) . 

hence, perfect timing to make the math totally useless.


and in a neighbouring country, prices have been rising relentlessly since 1986. 









 

[Panly]

@Panly Thing is, though, in a FIRE context then speculating on the value of your own home doesn't make a lot of sense unless you have a specific plan to cash out and downsize. Otherwise, even if your home is "worth" £900k... how are you going to spend that money at the grocery store? Cashflow is more of an issue than own-home-included NW if you want to FIRE and move from accumulation to spending.

think the rent over the years won´t align somehow with the booming prices?   coz you still need to live somewhere, don´t you? 

might hurt the math some more.

[Panly]

It's my understanding that the recent trend of real estate appreciation is unprecedented, so your math problem may have a sampling bias.

when the alternative is the S&P500 or Nasdaq, that bias may not be the strongest argument.

[GuitarStv]

My example is from the LA suburbs. You can find temporary anomalies in any market, but over the long term, rents go up.

So do home repairs, maintenance, realtor fees, and taxes. The difference is that the full cost of renting is very easy to calculate (with exception to maybe opportunity cost, but owning also has difficult to calculate opportunity costs) whereas the cost of owning and tracking the avg price increases is a lot more difficult to determine.

Home repairs are as expensive as you want them to be.  If you're willing to do the work yourself, you should be spending very little on them yearly.  I've spent less than two grand on home repairs that were necessary in the last decade (replaced furnace).  I have spent more than 30 grand on home improvement related things that I wanted to do though - installing solar panels, landscaping, laying a patio, window treatments, etc.

Realtor fees don't change (and therefore don't matter at all) after you've paid them the one time.

Taxes do go up over time . . . but those increases are pretty minimal.  I'm spending about 3200$ a year on our home - we started out paying 2700 a year.

I think there is often a tendency to overestimate costs of home ownership - particularly 'maintenance'.

[MrMoneySaver]

We can't dismiss a mountain of evidence that shows how being shut out of buying left millions with less wealth.  Holding all else equal, those who rented over the course of a lifetime were far worse off than those who were permitted to buy at exactly the age where buying would have made all the difference. No projection of future value in either equities or real-estate that ignores an extensive real world example should be held up as reliable.

Correlation is not causation. In what world was "all else equal"? The individuals faced unequal treatment from many different angles, including the workforce. Maybe social scientists have attempted to isolate rent/buy as a variable, but I imagine it'd be tough.

Anyway, if you're trying to compare these two things:

-A family from days gone by, renting because they lack the opportunity to buy, with little disposable income and zero knowledge/ability regarding stock investment
-A privileged, overpaid software engineer who actively chooses to rent a studio apartment and invest his extra money in Vanguard funds, despite having the ability to buy a house

Then I think any conclusions in the rent/buy debate will be nonsense.

[FIPurpose]

My example is from the LA suburbs. You can find temporary anomalies in any market, but over the long term, rents go up.

So do home repairs, maintenance, realtor fees, and taxes. The difference is that the full cost of renting is very easy to calculate (with exception to maybe opportunity cost, but owning also has difficult to calculate opportunity costs) whereas the cost of owning and tracking the avg price increases is a lot more difficult to determine.

Home repairs are as expensive as you want them to be.  If you're willing to do the work yourself, you should be spending very little on them yearly.  I've spent less than two grand on home repairs that were necessary in the last decade (replaced furnace).  I have spent more than 30 grand on home improvement related things that I wanted to do though - installing solar panels, landscaping, laying a patio, window treatments, etc.

Realtor fees don't change (and therefore don't matter at all) after you've paid them the one time.

Taxes do go up over time . . . but those increases are pretty minimal.  I'm spending about 3200$ a year on our home - we started out paying 2700 a year.

I think there is often a tendency to overestimate costs of home ownership - particularly 'maintenance'.

1. I guess if you consider your own labor worthless. If you're comparing with renting, then you need to add in the cost of spending your own time on the repair whereas when you're renting, that time is paid for by the landlord. Maybe you don't mind the extra labor, but that's still an opportunity cost.

2. Realtor fees at least here, are a percentage of the sale. If you're home is inflating at x%, then the realtor fees are going up by that same amount.

[Morning Glory]

My example is from the LA suburbs. You can find temporary anomalies in any market, but over the long term, rents go up.

So do home repairs, maintenance, realtor fees, and taxes. The difference is that the full cost of renting is very easy to calculate (with exception to maybe opportunity cost, but owning also has difficult to calculate opportunity costs) whereas the cost of owning and tracking the avg price increases is a lot more difficult to determine.

Home repairs are as expensive as you want them to be.  If you're willing to do the work yourself, you should be spending very little on them yearly.  I've spent less than two grand on home repairs that were necessary in the last decade (replaced furnace).  I have spent more than 30 grand on home improvement related things that I wanted to do though - installing solar panels, landscaping, laying a patio, window treatments, etc.

Realtor fees don't change (and therefore don't matter at all) after you've paid them the one time.

Taxes do go up over time . . . but those increases are pretty minimal.  I'm spending about 3200$ a year on our home - we started out paying 2700 a year.

I think there is often a tendency to overestimate costs of home ownership - particularly 'maintenance'.

1. I guess if you consider your own labor worthless. If you're comparing with renting, then you need to add in the cost of spending your own time on the repair whereas when you're renting, that time is paid for by the landlord. Maybe you don't mind the extra labor, but that's still an opportunity cost.

The landlord/handyman's time is baked into the cost of the rent. It's not free.

I'm not saying that owning is always better. It's highly regional and of course depends on the length of time you want to stay in the area and how flexible you can be with regards to moving.

[Wrenchturner]

John Pasalis released some nice info on Toronto condos and the spread against rent today.  I'm not going to read the tea leaves w/r/t rent:value but it is interesting.

"Data from @Urbanation shows that condos were cashflow neutral up until 2017.  The spread between costs and rents has widened."

[Wrenchturner]

It's my understanding that the recent trend of real estate appreciation is unprecedented, so your math problem may have a sampling bias.

when the alternative is the S&P500 or Nasdaq, that bias may not be the strongest argument.

That's a fair point.

[MrMoneySaver]

The landlord/handyman's time is baked into the cost of the rent. It's not free.

Nothing is baked into the cost of rent. Rent is determined by the market.

[Metalcat]

The landlord/handyman's time is baked into the cost of the rent. It's not free.

Nothing is baked into the cost of rent. Rent is determined by the market.

100%

There are multiple units in my building that I know are renting at a cash flow deficit based on what they recently sold for and what they're now renting for.

Also, the longer you own a place, the less the expenses track with the market. I bought my unit for 150K in 2019, an identical unit just sold for 250K, yet we would still be able to charge the exact same rent, so how are either of our expenses "baked in" to the rental price?

[Model96]

Maybe half- baked??😂

[windytrail]

The landlord/handyman's time is baked into the cost of the rent. It's not free.

Nothing is baked into the cost of rent. Rent is determined by the market.

100%

There are multiple units in my building that I know are renting at a cash flow deficit based on what they recently sold for and what they're now renting for.

Also, the longer you own a place, the less the expenses track with the market. I bought my unit for 150K in 2019, an identical unit just sold for 250K, yet we would still be able to charge the exact same rent, so how are either of our expenses "baked in" to the rental price?

Yeah, the 2/1 unit in a duplex across the street that sold for $900k last year would be extremely hard to achieve a positive cash flow. Using the 1% rule, it would need to be rented out at $9,000/month. Realistically, a 1200sq ft 2/1 apartment around here would not fetch more than $3,700/month (.4% of $900k) unless it was unusually luxurious, which this place isn't.

[Morning Glory]

The landlord/handyman's time is baked into the cost of the rent. It's not free.

Nothing is baked into the cost of rent. Rent is determined by the market.

100%

There are multiple units in my building that I know are renting at a cash flow deficit based on what they recently sold for and what they're now renting for.

Also, the longer you own a place, the less the expenses track with the market. I bought my unit for 150K in 2019, an identical unit just sold for 250K, yet we would still be able to charge the exact same rent, so how are either of our expenses "baked in" to the rental price?

Yeah, the 2/1 unit in a duplex across the street that sold for $900k last year would be extremely hard to achieve a positive cash flow. Using the 1% rule, it would need to be rented out at $9,000/month. Realistically, a 1200sq ft 2/1 apartment around here would not fetch more than $3,700/month (.4% of $900k) unless it was unusually luxurious, which this place isn't.

Jeez, why don't they sell the units then?

My state gives a property tax rebate to tenants, not landlords, because it is assumed that the cost of the tax is passed on to tenants in the form of higher rent. If a landlord can't make enough to cover mortgage, tax, handyman, etc.then he ought to sell his units. More houses on the market will bring prices back down so that it isn't cheaper to rent any more.

[Metalcat]

The landlord/handyman's time is baked into the cost of the rent. It's not free.

Nothing is baked into the cost of rent. Rent is determined by the market.

100%

There are multiple units in my building that I know are renting at a cash flow deficit based on what they recently sold for and what they're now renting for.

Also, the longer you own a place, the less the expenses track with the market. I bought my unit for 150K in 2019, an identical unit just sold for 250K, yet we would still be able to charge the exact same rent, so how are either of our expenses "baked in" to the rental price?

Yeah, the 2/1 unit in a duplex across the street that sold for $900k last year would be extremely hard to achieve a positive cash flow. Using the 1% rule, it would need to be rented out at $9,000/month. Realistically, a 1200sq ft 2/1 apartment around here would not fetch more than $3,700/month (.4% of $900k) unless it was unusually luxurious, which this place isn't.

Jeez, why don't they sell the units then?

My state gives a property tax rebate to tenants, not landlords, because it is assumed that the cost of the tax is passed on to tenants in the form of higher rent. If a landlord can't make enough to cover mortgage, tax, handyman, etc.then he ought to sell his units. More houses on the market will bring prices back down so that it isn't cheaper to rent any more.

I'm confused, the example you quoted didn't say that anyone actually tried to rent out the unit, just that the price is so high that they wouldn't be able to at 1%.

[FIPurpose]

The landlord/handyman's time is baked into the cost of the rent. It's not free.

Nothing is baked into the cost of rent. Rent is determined by the market.

100%

There are multiple units in my building that I know are renting at a cash flow deficit based on what they recently sold for and what they're now renting for.

Also, the longer you own a place, the less the expenses track with the market. I bought my unit for 150K in 2019, an identical unit just sold for 250K, yet we would still be able to charge the exact same rent, so how are either of our expenses "baked in" to the rental price?

Yeah, the 2/1 unit in a duplex across the street that sold for $900k last year would be extremely hard to achieve a positive cash flow. Using the 1% rule, it would need to be rented out at $9,000/month. Realistically, a 1200sq ft 2/1 apartment around here would not fetch more than $3,700/month (.4% of $900k) unless it was unusually luxurious, which this place isn't.

Jeez, why don't they sell the units then?

My state gives a property tax rebate to tenants, not landlords, because it is assumed that the cost of the tax is passed on to tenants in the form of higher rent. If a landlord can't make enough to cover mortgage, tax, handyman, etc.then he ought to sell his units. More houses on the market will bring prices back down so that it isn't cheaper to rent any more.

Because these aren't individual investors that are driving our current market. The price increases are mostly driven by giant investment portfolios, pension funds, etc looking to diversify their portfolios with RE. The rules change with this type of investment.

I don't think these houses are being bought as investments comparable to stock funds like we think of them. I think these giant funds are treating them more like a bond fund or a currency hedge. So they don't need investment returns, they need a place to store wealth.

The problem I see with this though is that I could see some of the more liberal cities enacting additional taxes on corporate owned SFH's. That might send a lot of house prices down which is a complicated political move. Increasing house prices suddenly becomes a bubble that no one wants burst because everyone would be affected, home owners and renters.

[norajean]

Im generally a big fan of renting to max cash flow for savings during early years. Don’t buy until you really require your own place and intend to stick around or when your employer starts making major contributions specifically toward home ownership. Ownership is a burden and source of major headaches and expenses. Eventually it makes sense.

Our current place has appreciated a bubbly 7 figures in the year we have owned it (according to a local realtor and some amazing recent comps) but we are not selling at the moment, so who cares.

[Morning Glory]

The landlord/handyman's time is baked into the cost of the rent. It's not free.

Nothing is baked into the cost of rent. Rent is determined by the market.

100%

There are multiple units in my building that I know are renting at a cash flow deficit based on what they recently sold for and what they're now renting for.

Also, the longer you own a place, the less the expenses track with the market. I bought my unit for 150K in 2019, an identical unit just sold for 250K, yet we would still be able to charge the exact same rent, so how are either of our expenses "baked in" to the rental price?

Yeah, the 2/1 unit in a duplex across the street that sold for $900k last year would be extremely hard to achieve a positive cash flow. Using the 1% rule, it would need to be rented out at $9,000/month. Realistically, a 1200sq ft 2/1 apartment around here would not fetch more than $3,700/month (.4% of $900k) unless it was unusually luxurious, which this place isn't.

Jeez, why don't they sell the units then?

My state gives a property tax rebate to tenants, not landlords, because it is assumed that the cost of the tax is passed on to tenants in the form of higher rent. If a landlord can't make enough to cover mortgage, tax, handyman, etc.then he ought to sell his units. More houses on the market will bring prices back down so that it isn't cheaper to rent any more.

Because these aren't individual investors that are driving our current market. The price increases are mostly driven by giant investment portfolios, pension funds, etc looking to diversify their portfolios with RE. The rules change with this type of investment.

I don't think these houses are being bought as investments comparable to stock funds like we think of them. I think these giant funds are treating them more like a bond fund or a currency hedge. So they don't need investment returns, they need a place to store wealth.

The problem I see with this though is that I could see some of the more liberal cities enacting additional taxes on corporate owned SFH's. That might send a lot of house prices down which is a complicated political move. Increasing house prices suddenly becomes a bubble that no one wants burst because everyone would be affected, home owners and renters.

I never heard the phrase "store wealth" until recently. It's been applied a lot lately to speculative investments like crypto. I know that real estate speculation has existed for thousands of years, but saying "store wealth" is disingenuous at best.

Taxing unoccupied and corporate owned homes might help, as could getting rid of the mortgage interest deduction.

If you took away the speculation, renting would be just slightly more expensive than owning, so that landlords could make a profit.  It is still worth it to pay a slight premium to rent if you're not sure you will stay in the location. Some cities would appreciate or depreciate over time, but there wouldn't be these wild swings. Prices would fluctuate slightly based on supply and demand. If houses got too expensive, people would sell them and rent until the market got flooded and prices came down. If prices dropped too much, people would buy them up as rentals until there wasn't so much supply.

[Fomerly known as something]

Talking about mortgage rates remaining while rents don’t necessarily implies one is staying in their home long term.  Since becoming my own household I have moved more than 100 miles 4 times living in the same city for about 4-5 years.  The only reason why I could own vs rent from a decent financial perspective was that my company has paid my realtor fees. 

[skip207]

So much depends on the area you want to live in.  The OP is in London.  Rents are quite low, prices are very high.  So you might be able to rent a 2 bed flat for 1500pcm but that flat is worth 1M.  It makes not much sense to buy.  Prices have been flat for a good few years.  There is a reason a lot of people in the SE are punting their properties onto IO mortgages, its just too expensive to capital repay the mortgage.

Look at somewhere like the North of England and rents are high compared to the price of the property.  Same flat would be 250k tops (probably sub 200k), but rents 1000pcm.  So in that case you really are better off buying.

But, alas, its always just a house - somewhere to sleep.  So you have to look at the long game.  The only people who can do well out of it are people who are willing to move from a HCOL area to a LCOL area and downsize.  A lot of people in London will sell their 2-3M property and move to Wales or Devon - punt half their money into their new house and retire on the other half.

Fair play to them.

[GuitarStv]

Talking about mortgage rates remaining while rents don’t necessarily implies one is staying in their home long term.  Since becoming my own household I have moved more than 100 miles 4 times living in the same city for about 4-5 years.  The only reason why I could own vs rent from a decent financial perspective was that my company has paid my realtor fees.

Agreed.  Buying a house and then moving within a year is rarely a wise decision.

[bill1827]

So much depends on the area you want to live in.  The OP is in London.  Rents are quite low, prices are very high.  So you might be able to rent a 2 bed flat for 1500pcm but that flat is worth 1M.  It makes not much sense to buy.

I doubt that you will find a £1M flat for rent at £1500.

To find a 2 bed flat to rent for £1500 you're going to have to look in the less desirable outer suburbs where prices aren't in the millions. Just had a glance at prices in the area I used to live many years ago. A 2 bedroom flat in the block I used to live in sold last year for £330,000. That's about the typical price for small flats in the area (although lower than new builds in fancy blocks). Rents for similar flats are around £1400-£1700.

Repayments on a £300,000 25 year 2.5% mortgage are about £1300.

Financially nothing much has changed in 35 years; the rental payment is in the same ball park as the mortgage payment now as it was then.

[shelivesthedream]

We're renting a ~£900k house for £1850/month. Dunno how that maths out, but can confirm it is actually happening in real life right now.

[Retireatee1]

For financial planning purposes, there is always an equivalent rent amount for any amount you might spend on a home.  I have my own tool that I use to determine where the equivalent point is.

Of course, no two dissimilar things are ever truly equivalent.  The thing I like about renting is that it really puts a box around your expenses.  Your rent will be X on any given month.  Sure it can go up, but there are strong market forces which limit that.  With home maintenance, not so much.  I've gone through a decade of really high and unexpected home maintenance costs which could blow up any financial plan.  So that uncertainty goes in the negative column for home ownership.

But I've benefited from the appreciation in the housing market this year.  You don't get that upside potential with renting.

[GuitarStv]

My example is from the LA suburbs. You can find temporary anomalies in any market, but over the long term, rents go up.

So do home repairs, maintenance, realtor fees, and taxes. The difference is that the full cost of renting is very easy to calculate (with exception to maybe opportunity cost, but owning also has difficult to calculate opportunity costs) whereas the cost of owning and tracking the avg price increases is a lot more difficult to determine.

Home repairs are as expensive as you want them to be.  If you're willing to do the work yourself, you should be spending very little on them yearly.  I've spent less than two grand on home repairs that were necessary in the last decade (replaced furnace).  I have spent more than 30 grand on home improvement related things that I wanted to do though - installing solar panels, landscaping, laying a patio, window treatments, etc.

Realtor fees don't change (and therefore don't matter at all) after you've paid them the one time.

Taxes do go up over time . . . but those increases are pretty minimal.  I'm spending about 3200$ a year on our home - we started out paying 2700 a year.

I think there is often a tendency to overestimate costs of home ownership - particularly 'maintenance'.

1. I guess if you consider your own labor worthless. If you're comparing with renting, then you need to add in the cost of spending your own time on the repair whereas when you're renting, that time is paid for by the landlord. Maybe you don't mind the extra labor, but that's still an opportunity cost.

Hmm.  Picking and choosing to apply rules unequally seems unfair.

What cost have you put on finding a new place and moving all your stuff when you're renting?  This is something that can come up unexpectedly, at just about any time the landlord decides he doesn't want you in the place any more.  I feel like this cost is not being accounted for at all.  Maybe you don't mind the extra time/labour . . . but that's still an opportunity cost, isn't it?

2. Realtor fees at least here, are a percentage of the sale. If you're home is inflating at x%, then the realtor fees are going up by that same amount.

Right, that's the point I was making.  They don't matter at all as long as you're living in the home and thus are not an ongoing cost of homeownership.  You pay them once and then live at the place without caring about them.

[Retireatee1]

Home repairs are as expensive as you want them to be.  If you're willing to do the work yourself, you should be spending very little on them yearly.

I've owned two homes and have had two very different experiences.  Certain types of repairs are simply out of reach for most do-it-yourselfers.  This includes roofing, HVAC, pool liners, some types of plumbing, foundation repairs, etc.  This is really not a guarantee you can make.

[FIPurpose]

My example is from the LA suburbs. You can find temporary anomalies in any market, but over the long term, rents go up.

So do home repairs, maintenance, realtor fees, and taxes. The difference is that the full cost of renting is very easy to calculate (with exception to maybe opportunity cost, but owning also has difficult to calculate opportunity costs) whereas the cost of owning and tracking the avg price increases is a lot more difficult to determine.

Home repairs are as expensive as you want them to be.  If you're willing to do the work yourself, you should be spending very little on them yearly.  I've spent less than two grand on home repairs that were necessary in the last decade (replaced furnace).  I have spent more than 30 grand on home improvement related things that I wanted to do though - installing solar panels, landscaping, laying a patio, window treatments, etc.

Realtor fees don't change (and therefore don't matter at all) after you've paid them the one time.

Taxes do go up over time . . . but those increases are pretty minimal.  I'm spending about 3200$ a year on our home - we started out paying 2700 a year.

I think there is often a tendency to overestimate costs of home ownership - particularly 'maintenance'.

1. I guess if you consider your own labor worthless. If you're comparing with renting, then you need to add in the cost of spending your own time on the repair whereas when you're renting, that time is paid for by the landlord. Maybe you don't mind the extra labor, but that's still an opportunity cost.

Hmm.  Picking and choosing to apply rules unequally seems unfair.

What cost have you put on finding a new place and moving all your stuff when you're renting?  This is something that can come up unexpectedly, at just about any time the landlord decides he doesn't want you in the place any more.  I feel like this cost is not being accounted for at all.  Maybe you don't mind the extra time/labour . . . but that's still an opportunity cost, isn't it?

2. Realtor fees at least here, are a percentage of the sale. If you're home is inflating at x%, then the realtor fees are going up by that same amount.

Right, that's the point I was making.  They don't matter at all as long as you're living in the home and thus are not an ongoing cost of homeownership.  You pay them once and then live at the place without caring about them.

"Picking and choosing"? No, you just brought up a different type of expense. Moving applies to both renting and owning, though you're right that the risk of being told to leave when you don't necessarily want to are higher when renting (though I've personally never experienced this nor have I known anyone who has though I know it happens). This would be a highly personal thing depending on your own situation.

The median US home ownership period is 13 years, so even if we said that you got kicked out of your rental every 4-5 years (seems very improbable), we're talking about an additional 3 moves. (And I assume would be local moves). I recently moved and paid some guys $150 to move the big stuff and took about half a day to move the rest of our stuff with 3 people. I probably could've paid an extra $400 to have it done professionally. So let's make it an even $600 to do a local move.

Price in an extra $10 a month for unexpected moves. (though realistically, I'd think it's closer to $5 on average)

But the crux of this is that I didn't bring up opportunity costs associated with renting, you're the one that claimed that home repairs are cheap if you do them yourself. If you want to compare hours spent owning vs. renting, I hope we'd agree that owning absolutely takes more hours especially if you're doing the repairs. (The process of buying a house itself can take 2-3x as long as finding a place to rent).

On point 2, maybe there's a difference in Canada, but here, the seller pays the larger share realtor fees (usually). So no, you don't pay them once and forget it, the price of the fee inflates at the same rate as your home appreciation. Even if you die in the home, your estate will still end up paying those fees at some point. Yes, if you spend 50 years in a home you can declare your realtor fees "negligible". But moving homes every 10 years still comes out to about $1000 / yr fee for a typical SFH.

[kite]

Rent versus own is a math problem. Most of the explanations in Own vs. Rent analyses risk coming to the wrong conclusion because a few relevant inputs are overlooked. It's not really "should I OWN X versus rent X?"  It's "Should I BUY this home using leveraged financing and garnering all available tax advantages or should I rent for the rest of my life?" 
We can't dismiss a mountain of evidence that shows how being shut out of buying left millions with less wealth.  Holding all else equal, those who rented over the course of a lifetime were far worse off than those who were permitted to buy at exactly the age where buying would have made all the difference. No projection of future value in either equities or real-estate that ignores an extensive real world example should be held up as reliable.
It's still a math problem. The ROI when you can purchase a home with leveraged financing has been an incredible wealth builder. It's not for everyone. But it continues to be an incredible wealth builder.

The big issue here is that the rent-and-invest-the-difference system was not feasible until fairly recently (at least on a large scale), because decent, low-fee investing did not used to be commercially available to the masses. There were no ETFs, discount brokerages, or Vanguard - if people had the ability to invest at all (meaning they already had a fairly high net worth and access to a broker), their options were absolute shit. Obviously if you do the math comparing real estate to shitty garbage investments, the real estate would come out ahead.

So yes, for someone looking at buying or renting TODAY in 2021, we can safely ignore things like you mentioned above for the purposes of the calculation.

Safely ignore the means that rich people have used to store & generate wealth for centuries in favor of investment products whose prospectuses specifically state "Past performance is not indicative of future returns."  ???  mmmkay.

[Morning Glory]

Rent versus own is a math problem. Most of the explanations in Own vs. Rent analyses risk coming to the wrong conclusion because a few relevant inputs are overlooked. It's not really "should I OWN X versus rent X?"  It's "Should I BUY this home using leveraged financing and garnering all available tax advantages or should I rent for the rest of my life?" 
We can't dismiss a mountain of evidence that shows how being shut out of buying left millions with less wealth.  Holding all else equal, those who rented over the course of a lifetime were far worse off than those who were permitted to buy at exactly the age where buying would have made all the difference. No projection of future value in either equities or real-estate that ignores an extensive real world example should be held up as reliable.
It's still a math problem. The ROI when you can purchase a home with leveraged financing has been an incredible wealth builder. It's not for everyone. But it continues to be an incredible wealth builder.

The big issue here is that the rent-and-invest-the-difference system was not feasible until fairly recently (at least on a large scale), because decent, low-fee investing did not used to be commercially available to the masses. There were no ETFs, discount brokerages, or Vanguard - if people had the ability to invest at all (meaning they already had a fairly high net worth and access to a broker), their options were absolute shit. Obviously if you do the math comparing real estate to shitty garbage investments, the real estate would come out ahead.

So yes, for someone looking at buying or renting TODAY in 2021, we can safely ignore things like you mentioned above for the purposes of the calculation.

Safely ignore the means that rich people have used to store & generate wealth for centuries in favor of investment products whose prospectuses specifically state "Past performance is not indicative of future returns."  ???  mmmkay.

"Rent and invest the difference" has been around since at least the Roman empire. Only the investment products have changed.

[Zikoris]

Safely ignore the means that rich people have used to store & generate wealth for centuries in favor of investment products whose prospectuses specifically state "Past performance is not indicative of future returns."  ???  mmmkay.

Okay, you tell me what sort of non-real-estate investment options would have been available to, say, an average income receptionist in the 1960s who did not win the lottery or receive any sort of windfall. And they have to be investments that would lead to that receptionist being about to retire in their 30s. Because we have that now, and as far as I know, did not back then.

[Morning Glory]

Safely ignore the means that rich people have used to store & generate wealth for centuries in favor of investment products whose prospectuses specifically state "Past performance is not indicative of future returns."  ???  mmmkay.

Okay, you tell me what sort of non-real-estate investment options would have been available to, say, an average income receptionist in the 1960s who did not win the lottery or receive any sort of windfall. And they have to be investments that would lead to that receptionist being about to retire in their 30s. Because we have that now, and as far as I know, did not back then.

US savings bonds used to have a relatively high interest rate. The original ymoyl included a whole chapter on them. Otherwise she could start or invest in a small business.

Investing in real estate would have been more difficult than it is now because gender discrimination in lending was legal until the 70's.

[PDXTabs]

Safely ignore the means that rich people have used to store & generate wealth for centuries in favor of investment products whose prospectuses specifically state "Past performance is not indicative of future returns."  ???  mmmkay.

Okay, you tell me what sort of non-real-estate investment options would have been available to, say, an average income receptionist in the 1960s who did not win the lottery or receive any sort of windfall. And they have to be investments that would lead to that receptionist being about to retire in their 30s. Because we have that now, and as far as I know, did not back then.

Furthermore, real estate subsidies provided to residents of the USA are relatively rate in other parts of the world. FHA loan, GI loan, USDA loan, mortgage interest tax deduction, 30 year fixed rate, capital gains exclusion, etc.

[Zikoris]

Safely ignore the means that rich people have used to store & generate wealth for centuries in favor of investment products whose prospectuses specifically state "Past performance is not indicative of future returns."  ???  mmmkay.

Okay, you tell me what sort of non-real-estate investment options would have been available to, say, an average income receptionist in the 1960s who did not win the lottery or receive any sort of windfall. And they have to be investments that would lead to that receptionist being about to retire in their 30s. Because we have that now, and as far as I know, did not back then.

US savings bonds used to have a relatively high interest rate. The original ymoyl included a whole chapter on them. Otherwise she could start or invest in a small business.

Investing in real estate would have been more difficult than it is now because gender discrimination in lending was legal until the 70's.

I'm not sure if I'm reading the charts right, but it looks like bond rates were like 3-4%? Keep in mind that this is in the context of rent versus buy calculations. Things like starting a business as an investment would not have been a very realistic option for an average working person in the 1960s with a full time job looking for an investment option to put the money saved by renting versus buying.

The reality is, using renting instead of buying as a tool to accelerate wealth growth is a relatively recent phenomenon. The math just doesn't work out without things like low cost index portfolios and the like.

If you disagree, could you show a math example? As in, Average-Income Joe in 1960 rented for $X instead of buying for $Y. He put the money into Z investment, which accelerated his wealth growth and resulted in him retiring much earlier than he would have if he bought property instead. I'd be really curious how the numbers would work given what was available at the time.

[Morning Glory]

Safely ignore the means that rich people have used to store & generate wealth for centuries in favor of investment products whose prospectuses specifically state "Past performance is not indicative of future returns."  ???  mmmkay.

Okay, you tell me what sort of non-real-estate investment options would have been available to, say, an average income receptionist in the 1960s who did not win the lottery or receive any sort of windfall. And they have to be investments that would lead to that receptionist being about to retire in their 30s. Because we have that now, and as far as I know, did not back then.

US savings bonds used to have a relatively high interest rate. The original ymoyl included a whole chapter on them. Otherwise she could start or invest in a small business.

Investing in real estate would have been more difficult than it is now because gender discrimination in lending was legal until the 70's.

I'm not sure if I'm reading the charts right, but it looks like bond rates were like 3-4%? Keep in mind that this is in the context of rent versus buy calculations. Things like starting a business as an investment would not have been a very realistic option for an average working person in the 1960s with a full time job looking for an investment option to put the money saved by renting versus buying.

The reality is, using renting instead of buying as a tool to accelerate wealth growth is a relatively recent phenomenon. The math just doesn't work out without things like low cost index portfolios and the like.

If you disagree, could you show a math example? As in, Average-Income Joe in 1960 rented for $X instead of buying for $Y. He put the money into Z investment, which accelerated his wealth growth and resulted in him retiring much earlier than he would have if he bought property instead. I'd be really curious how the numbers would work given what was available at the time.

Joe would have come out ahead, but that option would not have been available to Jane:

https://www.realtor.com/news/trends/untold-history-discrimination-against-women-seeking-mortgages/

[Zikoris]

Joe would have come out ahead, but that option would not have been available to Jane:

https://www.realtor.com/news/trends/untold-history-discrimination-against-women-seeking-mortgages/

Again, show me how Joe, Jane, or Joe and Jane working together would have come out ahead by renting and investing the difference versus buying in 1960. What investments would he/she/they have had access to that would have resulted in a better financial position long term be renting versus buying. If it existed, I would be really interested to see it.

[Retireatee1]

Again, show me how Joe, Jane, or Joe and Jane working together would have come out ahead by renting and investing the difference versus buying in 1960. What investments would he/she/they have had access to that would have resulted in a better financial position long term be renting versus buying. If it existed, I would be really interested to see it.

I'll take a crack at this.  Again, I find that when comparing apples to oranges it is better to start where they are the same.  I've mocked up two Retireator simulations, one with Joe the Owner and one with Joe the Renter.  The Joes were born in 1940 and the simulations start in the year 1970.  The Joes made $8330 a year in 1970 which was the median household income at that time.  They invest 4% in a 401K every year during the accumulation phase and live to 94.  Joe the Owner buys a house which is worth $215,000 today.  Joe the Renter rents.  I've mocked up some additional living expenses.  They are equivalent except the renter gets a small break on utilities.  Their distribution phase expenses increase substantially and their retirement dates both occur at age 62.  Joe the Buyer has the advantage of using a reverse mortgage, which he closes on at age 62.  Both take Social Security at age 67.  The 401Ks are invested in a target date fund using actual historical data from 1970 to present and extrapolated data in the future.  Any surplus income is deposited in the core account which is also invested in the target date fund.

So what is the monthly rent for Joe the Renter at which point it is a wash?  $870 a month in today's dollars.  Who achieved a higher net worth?  Joe the Renter, but only by about $50,000.  But that's a pretty lean rental budget to make that even.  Joe the Buyer, on the other hand, is a bit more comfortable with that median home.

Both simulations are attached.

EDIT: Re-posted with fixes discussed later

[Zikoris]

Again, show me how Joe, Jane, or Joe and Jane working together would have come out ahead by renting and investing the difference versus buying in 1960. What investments would he/she/they have had access to that would have resulted in a better financial position long term be renting versus buying. If it existed, I would be really interested to see it.

I'll take a crack at this.  Again, I find that when comparing apples to oranges it is better to start where they are the same.  I've mocked up two Retireator simulations, one with Joe the Owner and one with Joe the Renter.  The Joes were born in 1940 and the simulations start in the year 1970.  The Joes made $8330 a year in 1970 which was the median household income at that time.  They invest 4% in a 401K every year during the accumulation phase and live to 94.  Joe the Owner buys a house which is worth $215,000 today.  Joe the Renter rents.  I've mocked up some additional living expenses.  They are equivalent except the renter gets a small break on utilities.  Their distribution phase expenses increase substantially and their retirement dates both occur at age 62.  Joe the Buyer has the advantage of using a reverse mortgage, which he closes on at age 62.  Both take Social Security at age 67.  The 401Ks are invested in a target date fund using actual historical data from 1970 to present and extrapolated data in the future.  Any surplus income is deposited in the core account which is also invested in the target date fund.

So what is the monthly rent for Joe the Renter at which point it is a wash?  $870 a month in today's dollars.  Who achieved a higher net worth?  Joe the Renter, but only by about $50,000.  But that's a pretty lean rental budget to make that even.  Joe the Buyer, on the other hand, is a bit more comfortable with that median home.

Both simulations are attached.

Thank you for that - it's really interesting! The only issue I see is that 401Ks weren't available until 1981 - and I have no idea how long it was between that and them being very widely available to the point that most people could access them. It would be interesting to know both what sort of fees people were looking at in the early 401K days, and also what average people had access to before they became widely available.

Your numbers are very close to my own personal situation, interestingly - with my $850 rent, my napkin math was that the break even point for buying vs renting would be about $150,000 purchase price. Given that in my area the shittiest things on the market start at about 300K, it was a pretty obvious choice financially.

[Model96]

Again, show me how Joe, Jane, or Joe and Jane working together would have come out ahead by renting and investing the difference versus buying in 1960. What investments would he/she/they have had access to that would have resulted in a better financial position long term be renting versus buying. If it existed, I would be really interested to see it.

I'll take a crack at this.  Again, I find that when comparing apples to oranges it is better to start where they are the same.  I've mocked up two Retireator simulations, one with Joe the Owner and one with Joe the Renter.  The Joes were born in 1940 and the simulations start in the year 1970.  The Joes made $8330 a year in 1970 which was the median household income at that time.  They invest 4% in a 401K every year during the accumulation phase and live to 94.  Joe the Owner buys a house which is worth $215,000 today.  Joe the Renter rents.  I've mocked up some additional living expenses.  They are equivalent except the renter gets a small break on utilities.  Their distribution phase expenses increase substantially and their retirement dates both occur at age 62.  Joe the Buyer has the advantage of using a reverse mortgage, which he closes on at age 62.  Both take Social Security at age 67.  The 401Ks are invested in a target date fund using actual historical data from 1970 to present and extrapolated data in the future.  Any surplus income is deposited in the core account which is also invested in the target date fund.

So what is the monthly rent for Joe the Renter at which point it is a wash?  $870 a month in today's dollars.  Who achieved a higher net worth?  Joe the Renter, but only by about $50,000.  But that's a pretty lean rental budget to make that even.  Joe the Buyer, on the other hand, is a bit more comfortable with that median home.

Both simulations are attached.

Interesting, but unfortunately it doesn't work where I live. The houses here appreciated in value by an average of $1000 per week for those 50 years……

[Retireatee1]

Thank you for that - it's really interesting! The only issue I see is that 401Ks weren't available until 1981 - and I have no idea how long it was between that and them being very widely available to the point that most people could access them. It would be interesting to know both what sort of fees people were looking at in the early 401K days, and also what average people had access to before they became widely available.

Your numbers are very close to my own personal situation, interestingly - with my $850 rent, my napkin math was that the break even point for buying vs renting would be about $150,000 purchase price. Given that in my area the shittiest things on the market start at about 300K, it was a pretty obvious choice financially.

That's a good point about the 401K.  I removed the retirement account contribution so only the core (non-retirement) account is funded.  The owner retirement date pushed back 7 months, and the renter 5 months. 

You could create Retireator simulations for your two scenarios which would be at least as good as the napkin calculations.

[Retireatee1]

Interesting, but unfortunately it doesn't work where I live. The houses here appreciated in value by an average of $1000 per week for those 50 years……

I accept that there are many scenarios where you might get wildly different outcomes.  I don't assert these results are universally precise predictors, but rather they are two plausible realities based on sound financial modelling and historical data as an academic exercise.

But there are obvious limitations.  Joe the Buyer bought his house at age 30 and stayed there forever.  Most homeowners upgrade at some point.  That can be modelled in Retireator, but it's a manual process and can't be uploaded easily.

[GuitarStv]

Interesting, but unfortunately it doesn't work where I live. The houses here appreciated in value by an average of $1000 per week for those 50 years……

I accept that there are many scenarios where you might get wildly different outcomes.  I don't assert these results are universally precise predictors, but rather they are two plausible realities based on sound financial modelling and historical data as an academic exercise.

But there are obvious limitations.  Joe the Buyer bought his house at age 30 and stayed there forever.  Most homeowners upgrade at some point.  That can be modelled in Retireator, but it's a manual process and can't be uploaded easily.

OMG, I'm Joe!

[Retireatee1]

OMG, I'm Joe!

Did you buy your "forever" home at age 30?  I would say that's very Mustachian!

[kite]

OMG, I'm Joe!

Did you buy your "forever" home at age 30?  I would say that's very Mustachian!

I'm Joe's younger sister. Bought in my first home in my early 20's. Paid it off in my early 40's.  A starter home makes a great 'downsize' home, as it happens.