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Renting is Throwing Money Away, Right? (2015)

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

#101

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.

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

To be fair, I know a ton of people in their 20s who took advice from people in their 60s and now have mounds of student debt and no career.

I'm not saying buying a home won't work out well. I'm just saying that the baby boomers seem to have had a unique path towards financial stability that doesn't appear to be sustainable for the generations that followed.

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

#102
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

This is very country-specific. I sold a flat in Scotland at the end of last year. I think I paid a flat-fee of about £2000 for a solicator to create the home-report/brochure, handle the necessary paperwork, post advert(s) online & arrange viewings, etc.

I'm sure the fee was probably calculated based on the sale price, but the idea of paying 6% of the sale-price is very alien to the UK at least, and I suspect Europe too (though in Finland I've just bought a couple of places, never sold one.)

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

#103
The answer in most cases is "yes".

This post is full of the kinds of flawed arguments that usually accompany pro-rent arguments -- which do a real disservice in identifying those cases where the answer is "No".

Breaking down the problems by section:

Equity

"Here’s the rub: Only a small slice of your mortgage payment builds equity."

There you go, the article defeats itself not even a full screen below the correct answer.

   If you rent, 0% of your monthly payments build equity.
   If you own, X% of your monthly payments build equity.
   X > 0
It attempts to list all the parts of a mortgage payment as if itemizing it makes the equity earned meaningless.

   Your mortgage consists of four parts:

   Principal (the equity-building piece)
   Interest
   Taxes
   Insurance
This is basically correct, but the case for "Your rent consists of the same four parts + two additional parts where the property owner may make a profit off of you as well as some additional money to cover various expenses that they'd rather not pay for out of pocket."

Again, nothing in this section invalidates that building equity is better than not.

One way of thinking about renting is that you pay all of this, plus the extra stuff and in the end you've built equity for somebody else and none for you.

Opportunity cost

I didn't bother to read this to be honest, these sections are almost entirely filled with notions that "if I just invested my money in horse farms or leverage backed security instruments I'd make more money in the long run" blah blah blah. The logical flaw in these are usually pretty easy to spot as they involve a scenario setup that's not like-for-like (meaning the same house as a renter vs. as a buyer) and focus on weird time frames like the lifetime of the loan not the life of the person.

In other words, at the end of 30 years, the rent may have made more money in some scenario of a perfect investor, but then they still have to rent to have a place to live. The homeowner now owns their property free and clear and can do all kinds of things with it, and their now future income is entirely liquid.

Should I rent of buy

Do what you want! But don't follow the flawed arguments in this blog. Here's what it really comes down to, do you want your money to be more liquid and your location to be more mobile? Then rent.

Do you want to own large amounts of assets that can be liquidated in a few months (in most places) or that you can live in virtually free in the future? Then buy.

Bonus: if you buy, you can end up in a situation where you just have other people literally giving you money to pay your mortgage away...it's called being a landlord. You can even do it with parts of your property, like a bedroom or a basement. Over time you can own a property outright, rent it out, and use that rent to service another mortgage in a property where you live meaning you live virtually free and accrue assets at a frightening rate.

edit once again, here's probably the best post written on the subject.

http://assayviaessay.blogspot.com/2014/04/rent-or-buy.html

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

#104
post #90

Earlier quoted context omitted.

Your forgetting the tax write off of mortgage interest. Which needs to go into you equation no? That can be sizable.

Note that this will be capped at interest on a value of $750k for houses bought starting this year, so less than before. I think the leverage angle is ignoring the fact that your equity can be wiped as well in a downturn. It's unlikely my index fund will go to zero (and if it does, we'll probably have bigger problems on our hands).

> leverage angle is ignoring the fact that your equity can be wiped as well in a downturn

I call that out when talking about "no recourse". If you leverage 5X in the stock market and invest $1M in index funds and the market drops by 30%, you are on the hook for the $100k beyond your $200k you lost. If you leverage 5X in a personal residence and the market drops by 30% (and you live in a no-recourse state), then you mail the keys to the bank and walk away. Very unique situation.

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

#105
post #63

These articles always ignore leverage. Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment. To use the example in the article, if your investment doubled between 2009 and now, your $200k in a $1M home just became 1.2M. 6x growth beats out 3x growth in stocks in the same period. Sure, you can be leveraged…

> Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment. But if inflation is 3%, you're probably paying 3% (or more) interest on your loan. So suppose your home costs X. You pay 0.2X downpayment and borrow 0.8X through your mortgage. The first year your home appreciates to 1.03X but you also pay around 3% o…

> But if inflation is 3%, you're probably paying 3% (or more) interest on your loan.

Not only that, leverage is risk. Buy a home in 2006, or in a city on the decline, and you may lose everything you put in. Leverage multiplies the losses as well as the gains.

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

#106
"You hold a 5 percent fixed-rate 30-year mortgage"

Yeah, no. I know that many people may have loans of this size and I never understood it. And it is of course a reason for high prices.

When my parent's bought a house a typical mortgage was paid off in maybe 10 years. I myself took a loan of 12 years. And not at 5% percent! The real rate is about 0.2% at the moment (and has been 1-2% during the ten years I've been paying). After paying this reasonably sized loan I can buy another house with a similar loan.

I have also heard of 60 year loans! (eg. sweden). Now that is indeed stupid and throwing money away.

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

#107

These articles always ignore leverage. Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment. To use the example in the article, if your investment doubled between 2009 and now, your $200k in a $1M home just became 1.2M. 6x growth beats out 3x growth in stocks in the same period. Sure, you can be leveraged…

I’m not following the leveraged point - why is a 3% increase equal to 15% growth?

In the Bay Area HOA fees plus property tax add up to nearly my existing rent even before considering a mortgage which has made me nervous to buy. I’d be banking entirely on the upward trajectory of the market for it to be a better bet than renting with roommates.

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

#108
I recently did the math on this myself, I just sold my Condo and right now I am renting while looking for a house. I have all cash so I can ignore interest rates which makes it easier, I also have a pretty good wealth manager so I have a pretty good idea of what my return will be if I invest the money in stocks and bonds and rent rather than buying a house. For me, renting comes out ahead strictly looking at the dollars over time, by a pretty good margin.

But, guess what, I am buying a house anyway for one very simple reason. I want to own my house and be able to do whatever I want. I am getting a place with a big basement and it will be my dream lab, with all my computers, 3D printer, test equipment, soldering station and so on. I could never set something like that up in an apartment. To me that is more important than the money.

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

#109

These articles always ignore leverage. Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment. To use the example in the article, if your investment doubled between 2009 and now, your $200k in a $1M home just became 1.2M. 6x growth beats out 3x growth in stocks in the same period. Sure, you can be leveraged…

A few notes:

Deductability of interest (and property tax) is a lot smaller than it was before with the new tax code. On a $1M house for a married couple, you might get ~$9k back but (in CA) that's offset by the $12k (EDIT: likely non-deductable due to SALT max) property tax.

Anyway, using my own calculator (https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul... with other defaults), the situation you describe only works if the market is offering a price/rent ratio of 14 (years) or less (which is true in much, but not all, of the country).

Regardless, there's a lot of added costs to ownership: property taxes, HOA fees, loss of leverage as you pay down mortgage, closing costs, etc.

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

#110
Several bad assumptions in the article 1: 8% a year in the stock market is a very old number that you only achieve if you go back to the Great Depression. It’s actually under 7% if you take the last 30 years as your baseline 2: The local real estate market matters a lot. Crunch those numbers again for San Francisco real estate and you will have beaten the S&P by at least a factor of x3 in the last 30 years. Similar for NYC 3: not only is the real investment leverage with deductible interest and downside caps, but the capital gains are also waved on the first 250K/500k (unlike stock market gains) 4: you will not pay 5% on any loan. More like 3-4%

You can claim that the SF gains are a fluke, however there seems to be a general trend of most of the high end employment opportunity concentrating in a few large cities across the world. Those cities are outperforming the overall stock market consistently

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