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Renting is Throwing Money Away, Right? (2015)

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

#151

Post by klipt »

ProAm wrote: post #90
klipt wrote: post #63

Earlier quoted context omitted.

> 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…

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

Sure, but that's a "the government is giving home owners a tax discount to encourage home ownership" argument, not a "leverage can turn inflation-tracking assets into inflation-beating assets" argument.

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

#152

Post by paulsutter »

elvirs wrote: post #73

I guess the main determinant should be mobility. If you are 23 and you dont have a career yet, want to go to a law or medical school, do your phd or whatever then chances are next 5-10 years you will be moving a lot and have no idea where you will end up settling down. In such cases having had committed to such an investment is a bad idea. But if you are 30 years old registered nurse married to your high school sweet…

Several of my friends have bought a new house whenever they move, and rent our their prior house instead of selling. It has worked out really well for them. Past performance is no guarantee of future returns, of course, but it's worth considering

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

#153

Post by dash2 »

phamilton wrote: post #104
throw_away wrote: post #95

Earlier quoted context omitted.

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 m…

> 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.

But that seems dishonest.

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

#154

Post by gnicholas »

usaar333 wrote: post #109
phamilton wrote: post #41

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 descri…

Good point about the property tax deduction becoming much less valuable in high-income tax states like CA. It used to be the case that property tax was basically built-into the cost of renting. That is, your landlord pays property tax, gets to deduct some, and then passes the pro rata share onto each of the renters. This implicit property tax created an equivalence with the property tax that you would pay if you bought a home.

But we now find ourselves in a strange situation where businesses (i.e., landlords) can deduct property taxes but individuals cannot. So it shifts the balance in favor of renting because one major cost (at least in SF/LA/etc) is no longer deductible to most individual homeowners.

I found it odd that as the tax bill was winding its way through Congress, no one asked why businesses should be allowed to deduct SALT, but individuals should not be able to. I can't think of a good reason for this, and I am a (former) corporate tax lawyer.

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

#155

Post by rosege »

littlestymaar wrote: post #130

> You hold a 5 percent fixed-rate 30-year mortgage Wait, are you Americans paying 5% interest on mortgage, whitout even counting insurance? For real?! Edit: Having looked at other comments in this thread, it looks like interest are taxe-deductible, which makes it more affordable, but that's also really weird: it means the gouvernment subsidizes financial institutions to charge American consumers a lot more than the n…

interest rates vary pretty widely around the world. Im guessing you might be in Europe where rates are pretty low still. In Australia they never dropped anything like they did in Europe. If you're lucky you can get a loan around 3.9% but lots of ppl are close to 5% here and you can only tax deduct it if its an investment property

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

#156

Post by ojilles »

stevekemp wrote: post #133
icc97 wrote: post #116

Earlier quoted context omitted.

The costs of buying a house in Belgium is ridiculous. It's 10% tax, lawyers cost about 5x more. If you put an offer down you're on the hook for 10% of the price if you pull out.

Ouch that does sound like a lot of money! I do recall that in the two Finnish places I bought my offer also had a penalty clause - if I pulled out for any reason other than "failure to find financing" I had to pay €6,000 or so. (I wouldn't have made an offer had I not intended to follow-through, but it was still a little scary to imagine having to pay out!)

In NL that is 10% of the purchase price, and gets hold in escrow. That works out well, the sellers are most likely making a similar commitment buying their new house.

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

#157

Post by tobyjsullivan »

Another factor I found missing from this article was the inflation of rent prices over time. Back when I did my own rent vs. buy analysis, I found mostly as the author did. However, the key argument in favour of buying ended up being that rent increases seem to far-exceed inflation.

I could only find US trends for the period of 1940-2000 but, over that time, rents increased 5.32% per year compared to inflation of approx. 3.5% per year.

What this means is that if I don't buy a house now, and trends continue, the space that I was renting last year for $1500/mo will cost approx. $5,600/mo in real dollars in 2042 (a 25-year projection) or $2,360/mo in inflation-adjusted dollars.

This is just one more factor in a complex decision but it seems important to the cost-benefit analysis.

I implore you to find the data and run the numbers yourself if you're trying to decide but my prior research did not paint a good picture for life-long renters.

Edit: It's worth acknowledging that rent protections exist and can keep rents steady for some. However, these usually require that a tenant never moves which is an assumption the author made a good argument against.

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

#158

Post by misja111 »

phamilton wrote: post #41

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…

You are forgetting that you don't only get the leverage of the $1M, you also have to pay the loan for the full sum of $1M.

There is a section in the article about 'opportunity cost' which covers this.

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

#159

Post by KKKKkkkk1 »

Since housing is an emotional subject, let's try to argue by analogy.

I regularly buy lots of dairy products. Milk, yogurt, cheese. Why shouldn't I save some money and buy myself a cow instead? That way, I could satisfy all my dairy needs, and maybe even have some extra milk to sell to my neighbors. No more making the dairy farmers rich at my expense.

Now, assume that I sell my cow ten years later. And let's say that cattle prices grow 3% annually. (As we all know, cattle prices can only go up.) Will my cow investment yield me a 3% annual profit, given that my cow has gotten older and I must have made significant investments to feed it and keep it healthy?

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

#160

Post by sirwitti »

While I like the idea of doing the math for such impactful decisions, it's probably not that easy to get correct constants/values to do it so you get meaningful numbers. For example in Austria (europe) renting prices went up ~25% in the last 4 years or so, so the 2% inflation correction (per year) the author assumes is probably wrong for many countries/cities.

At the same time rent (in Austria) includes several cost factors such as water supply, garbage, insurances for the house,... whereas the cost of your house's mortgage does not.

What I'm saying is: If you do the math it only makes sense to do it in such a detailed way that you get meaningful results.

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