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Renting is Throwing Money Away, Right? (2015)

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Re: Renting is Throwing Money Away, Right? (2015)

#51

Post by libertyhouse »

Renting or owning from a purely financial point of view is a relatively straightforward problem and is answered quite nicely with the NY Times Rent vs. Buy calculator (with the caveat that the calculator has not been updated to reflect the new tax laws).

That being said, the biggest reasoning mistakes I run across are:

1. "You pay the landlords expenses plus some profit." Not true. The rental market is just that - a market that fluctuates with supply and demand. There are plenty of landlords who are losing money on their rental property.

2. "Once I have paid off my house I'm done paying for housing." Not true - you still have taxes, insurance, and maintenance whose costs will most likely increase over time.

3. Forgetting about the opportunity costs. Great - you paid off your mortgage. Now you have $500k in equity. Guess what - if you took that $500k and put it in a 5 year treasury you can earn a risk free 3% or 15k/year on that money. Better yet stick it in a broad based index fund and you will grow 6% albeit with more risk. That's your opportunity cost of your equity.

Overall this is such an emotional subject for most. I'm personally glad to see some push-back on the "buying is always better" argument because its been dogma for some time.

Edit: fixed typo

Re: Renting is Throwing Money Away, Right? (2015)

#52

Post by flyGuyOnTheSly »

I know a handful of people in their 60s...

The ones who made a point to buy instead of renting their entire lives are laughing all the way to the bank.

The ones who are still renting are still working nearly full time and will probably be doing so until the day that they die.

Buying and committing to a mortgage forces you to save money for your future, plain and simple.

Re: Renting is Throwing Money Away, Right? (2015)

#54

Post by code4tee »

The “pro renting” crowd has a lot of consistent falacies in arguments:

- Financial calculations ignore the leveraged nature of buying a home. Small increases in property value are multipled relative to your initial investment.

- Calculations also often assume someone just pays the minimum mortgage payment for the full term of the loan. Even small additional principal payments (which most mortgages allow without penalty) drastically reduces the duration of the loan and interest paid.

- “I don’t want to pay those high real estate taxes.” Renters still pay the same real estate taxes, it’s just baked into the rent and can’t be deducted from taxes.

- The tax system is very biased in a favor of home ownership. You basically get penalized at tax time if you don’t own your home as expenses both owners and renters “pay” (property taxes, mortgage interest) are only deductible for the property owner. This can make a huge difference. A renter paying $2000 a month in “after tax” money is spending a lot more than a home owner spending $2000 a month but paying the interest / propert tax portion of that 2k with pre-tax money!

- Capital gains from home ownership are also tax free (up to half a million in gains for couples).

Re: Renting is Throwing Money Away, Right? (2015)

#55

Post by cosmie »

chrisseaton wrote: post #21
jimmy1 wrote: post #16

When the goal is to have a roof over your head, between renting or buying, the better option is to buy. If the goal is to invest wisely, of course buying a house is worse than say something like an index fund. But the problem is: I can't sleep in an index fund. A house isn't a depreciating asset. Renting is not an asset at all. Mortgages are fixed. Rent tends to frequently increase, skyrocketing at worse. This articl…

> owning is cheaper than renting This is the key thing! Obviously owning is cheaper than renting, as renters have to cover the costs of their landlord owning, and then some profit for them on top of that.

The market tends to decouple from that logic in an appreciating market.

My landlord bought the house I'm in about 10 years ago. His mortgage is a fixed monthly payment that's locked in from when my house was worth less than half it's current value. The rent for where I live tracks really closely to the mortgage rate it'd cost me to buy at it's current valuation. For any investor that bought a rental right now, they'd barely make anything per month. But for my landlord that bought 10 years ago, he nets $1k - $1.5k per month above his costs.

It's also not as straightforward in a depreciating market, either. In a depreciating market, some property owners may rent a property out at a loss, with the expectation that the monthly loss is temporary and less than the loss they'd take it they sold now.

Re: Renting is Throwing Money Away, Right? (2015)

#56

Post by phamilton »

imbur wrote: post #26

Home buyers often overlook the cost of selling their home when considering if renting is cheaper. That is 6% in realtors fees and another 2-3% in closing costs. Renting is a great deal if you are not going to live somewhere for 5+ years before moving

> 6% in realtors fees and another 2-3% in closing costs

It certainly varies by region, but in my area most realtors have been pressured down to 5% by Redfin and other competition. Closing costs (which aren't really percentage based) were between a quarter and half a percent on a $700k home.

Re: Renting is Throwing Money Away, Right? (2015)

#57

Post by ouid »

KillerRabbitt wrote: post #17
ouid wrote: post #12

Rent, in an arbitrage free economy, should be exactly equal to the interest on the mortgage plus wear and tear on the house.

There is an old story about a financial economist and passionate defender of the efficient markets hypothesis (EMH) who was walking down the street with a friend. The friend stops and says, "Look, there is a $20 bill on the ground!" The economist turns and coolly replies, "Can't be. If there was a $20 bill on the ground, somebody would have already picked it up."

I realize I'm analyzing a joke, but dollars on the street aren't assumed to exist in an arbitrage free economy because there aren't enough actors. The joke isn't saying that the theory is wrong, it's saying that the economist is wrong for applying it. In the case of housing markets, if anyone can borrow money to buy a house for less than they can make on renting that house, then there are enough people alive that they will do that.

Also, I should mention that this is the zero arbitrage principle and not the efficient market hypothesis. The efficient market hypothesis asserts that everything we know about the future value of a house is reflected in the current price of the house, which is also relevant to the discussion, but not what I was referring to.

Re: Renting is Throwing Money Away, Right? (2015)

#58

Post by ouid »

dqpb wrote: post #32
ouid wrote: post #12

Rent, in an arbitrage free economy, should be exactly equal to the interest on the mortgage plus wear and tear on the house.

You would still have supply and demand dynamics in an arbitrage free economy. If there is too much supply, no one's going to care what your mortgage is.

Too much supply, housing prices go down, interest on the housing prices goes down, rent goes down. Equality is maintained.

Re: Renting is Throwing Money Away, Right? (2015)

#59

Post by cperciva »

Johnny555 wrote: post #46

There's another intangible benefit to owning if you know you're going to stay in the area long term -- you can't be forced out of your home. I was forced out of one home I rented due to owner move-in, which led to a stressful 30 days of trying to find a new apartment in a tight housing market. We managed to find a place outside of the city, but close enough to transit for a manageable commute. And rent was about the…

There's another intangible benefit to owning if you know you're going to stay in the area long term -- you can't be forced out of your home.

Well, you can. The city decides to put in a new subway line and your house is where they want to build a station. Or (depending on your local laws) the other members of your strata corporation vote to sell the building to a developer who wants to tear it down and build a tower.

But sure, it's far less common for someone to be forced out of a home they own, and when it does happen there's typically years of notice.

Re: Renting is Throwing Money Away, Right? (2015)

#60

Post by codedokode »

> You hold a 5 percent fixed-rate 30-year mortgage.

Is that really so? I've read that the mortgage interest rates are around 2-3% in Europe (by the way, in Russia they start from 9%-11% and can be as high as 15%).

> A house in 1897 cost the same as a house in 1997, adjusted for inflation.

It is hard to believe, given new technologies that are supposed to make it cheaper.

Also what the author didn't take into account - she assumes that she will be able to work forever. But what if you get too old and won't be able to do your job well? What if you get sick? What if you get fired? What if there is a financial crisis? What if the company you work at shuts down?

In all of these cases, a renter will be kicked out on the street (I know in some countries like Finland the government provides free apartment for people who don't have money, but I assume in US you'll have to live in the street). But if you own a house then you can live there even if your income drops. You can live without renovations, you can consume less electricity, you can ask for a tax deduction, you can rent out a room.

Also, an owner can leave a house or an apartment to his children.

The author writes about opportunity cost, that you can invest your money. But it is very high risk. If you invest into a private fund, it can become a bankrupt any time, if you invest into something government-related, tough luck if the national currency crashes. Investing into a house looks like a more safe option.

Of course, there are downsides to the mortgage. If you buy a house or an apartment, it will be probably not in the best location, far away from the center of the city in an undeveloped area, no good transportation around. Because the good ones are too expensive.

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