Renting vs. buying a home

The numbers here are weird at least in my area, so it's hard to compare. But in general, in most places, over a 30 year comparison, buying is better than renting unless you get very lucky with your alternative investment decisions.

A couple things to add, house payments stay exactly the same over a very long time. They don't increase at all. The absolute dollar amount is fixed. So while rent in an area might triple over 30 years due to inflation and local housing market fluctuations, mortgage payments don't. It's a time-value of money idea. It's cheaper to buy now than later.

Most people buy or rent homes where the monthly payment is at around 1/3 of their take-home income. As a home owner, that percentage decreases as your pay increases (inflation, pay raises, promotions, etc.).

What makes the decision difficult is the cost of servicing a loan vs. just paying for rent. [1]

The problem is that, even with a low interest rate, you pay a lot of extra money towards interest. A $500,000 home with a 3% 30 year loan costs something like $750,000 in the end. You can effectively lower your rate by artificially paying down your principle. If you view the monthly payment as a minimum monthly payment, just pay extra and pay down the principle faster. One simple way to do it, as your income grows, just keep paying 33% of your take home pay towards your mortgage. If you get a big bonus, pay that as well. Most mortgages don't have a limit to how much you can pay in a month. Doing this will reduce the effective interest rate, lower the minimum required payment, and shorten the length of the loan. Even better, during months where you need lots of fluid cash, just pay the then minimum payment and different you were paying is now usable. It's like giving yourself a pay raise if you need one.

Also, when interest rates drop, you can refinance and otherwise change the terms of your loan to be more favorable. You can turn equity into large sums of cash almost on demand if you need to. You can't do any of that as a renter.

After a few years, if you run the numbers, you'll probably find that you can comfortably service a shorter-term loan, say a 15-year loan. Which also have lower interest rates than 30 year.

As a quick example, my "minimum" mortgage payment + amortized property tax is about $1500 less per month than the current market rental rate for a similar sized home.

In the end, once you finally own your house, all you are responsible for is upkeep and property taxes, which will be a tiny fraction of the then market rate for renting a similar sized property. You'll likely have more income coming in by then then you'll really know what to do with. Whereas if you had rented a similar sized property the entire time, you'll still be renting and have nothing to show for it and you'll be subject to the whims of your landlord.

I know a number of families who started out renting the house they eventually bought, but if they had just bought a house to start with would be close to owning the property instead of 10 years behind. Renting those properties bought them very little.

1 - Here's a fun experiment, let's suppose I buy a home at $500,000 with a 3.25% interest rate over 30 years. My monthly payment is $2176.03. Supposing I decided to stick with that, I'll pay $783,370 for the house.

Now let's say I rent the same property and I get lucky and it's an even $2,000/mo or $24,000/year. But let's say rent increases with the current rate of inflation (1.5%) for 30 years. Over that time you'll pay $900,928.40 for the same place. And the owner of the property will now own the place you live in and have made $117k off of you. Inflation rarely stays at 1.5% though, so let's say it's a more normal rate of 3%. Well now you've paid 1,141,809.977 for somebody else's to own their property. In other words, they'll have made $358k off of you and gotten a house of out it.

In fact, the property owner is probably just taking the increase in payment and paying down the principle even faster like I propose above.

2 - Here is an awesome tool that sort of shows my point http://www.nytimes.com/interactive/business/buy-rent-calcula... In my notional example, buying is better at around 6 years.

3 - and another one somebody else mentioned http://www.trulia.com/rent_vs_buy/ in my notional example, buying is almost 1/3rd cheaper than renting over 30 years.

Note that one can also buy an apartment and have the apartment company do basic maintenance. (Different countries do this differently).

>A house is not an investment for the average buyer, it's an emotional purchase.

I'd say the house is an investment for the average buyer, even if the average buyer doesn't buy it as an investment.

>- In a free market, rental rates are supposed to adjust to make it such that an individual is indifferent between renting and buying.

I don't quite agree with that. If you're renting out, the apartment owner must pay for the risk of you destroying the apartment. If you instead buy the apartment you don't need to pay for the risk, assuming that you don't yourself destroy it.

Well, I don't know where you live but in America houses are definitely not designed to last centuries. A few may last for centuries, just due to the sheer numbers of houses built, but they're not designed that way. They're designed to be cheap to build. The typical stick built house uses a frame of cheap 2 by 4s covered by cheap plywood. They're vulnerable to rot, insects, severe weather, etc. Maybe you live in an area where concrete houses are the norm.

Stick built houses are a plague upon the land.

Pretty much this. The interest rates on both sides seem just thought up on the spot to prove his own point.

Second, if I were to buy a house, I'd first go to my bank to check what kinda mortgage I could get, see how much that would cost me a month, and only then find a house.

Third, can't really compare rental homes with bought homes around here (netherlands); rentals are usually apartments and the like, while bought houses are... well, real houses.

Fourth, you get more house for the same amount, or pay less in mortgage/interest when you buy a house. I choose to rent for now, because the main advantage over renting vs buying is flexibility. I can give my landlady a one month notice and I'm outta here. Not so with buying a house; you've got to sell it, and hope that you can use that money to pay off your mortgage, or whatever. You're pretty much stuck on a 25-30 year mortgage if you get one.