Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Renting vs. buying a home

khanacademy.org

Post reply on HN
Print view View original

121–130 of 155 posts

Re: Renting vs. buying a home

#121

Post by g8oz »

snowwrestler wrote: post #57
jnardiello wrote: post #46

I'm amazed to see how many scientists are in here. Lot of math, lot of graphs, lot of speculation but nobody even mentioned that we are, before technicians, people. We have desires, we have daily routines, we have habits and we have a psychological environment and background. Renting will effectively (as the video outlined) leave a surplus of money in your pockets. Which you will use to buy the latest gadgets, to pay…

> Renting will effectively (as the video outlined) leave a surplus of money in your pockets. Unless your rental is rent-controlled, this is only true in the very short term. Most rents go up over time. The payments on a fixed-rate mortgage do not go up. So the monthly real cost of the mortgage goes down over time. (This is even before taking equity into account.) Renting for a long time is like having a mortgage that…

But if you continually put the difference between the mortgage payment and the rent into an investment it could work out better. You're not accounting for it's possible time value. Again, no absolutes here, it depends on the numbers. The difference you're investing will decline as the rent rises but at the end of 30 years you could well be in the same position as the guy who bought. On the other hand, on a fixed-rate 30 year mortgage, the 30 years is the amortization, not the number of years the rate is fixed, which is typically 5 years I believe, after which it resets to the market rate. If you were disciplined you could adjust the mortgage - rent gap every 5 years based on the interest rate.

Re: Renting vs. buying a home

#122

Post by ig1 »

clavalle wrote: post #112
ig1 wrote: post #108

Earlier quoted context omitted.

The two are inseparable, buying a house to avoid variable rent prices doesn't reduce your exposure to the housing market, it actually increases it because you're leveraging against it (because you're borrowing money to do it). If house prices drop you can be stuck in negative equity whereby you owe more money on your house than it's worth which can easily bankrupt you. If you're renting that's obviously a problem you…

Of course they are separable. If you are buying a home to live in rather than an investment you can ride out the odd declining market. Seems like people have a lot of 'once bitten, twice shy' syndrome when it comes to housing. Market corrections like 2008 are exceedingly rare. I am not saying prices go up forever like so many idiots did around that time, but if you buy in a non-volatile market, it is a pretty safe be…

There's no such thing as a "safe bet". If housing was a safe bet then significant amounts on money would feed into the housing money until it stopped being a safe bet. That's just basic market efficiency theory.

Most mortgages are typically 30+ years, based on historic data you're almost guaranteed to see a house price crash sometime over a 30 year period.

(Although it's important to remember that the future isn't necessarily going to reflect the past)

Re: Renting vs. buying a home

#123

Post by bane »

hhw wrote: post #115
bane wrote: post #105

Earlier quoted context omitted.

> Interest is 100% loss also, so what's your point? The cost of both are already factored into the calculations. Everybody knows that. That's why you can take positive action to minimize interest outlay over the lifetime of the loan and reduce that loss. From refinancing, to shorter loan terms, to early principal pay down. You can't do anything analogous as a renter. Interest is only a small part of the total mortgag…

What are you actually including in that $400/year though? Are you taking full maintenance and upkeep costs into account? A new roof and new coat of paint will already blow your budget. Your pipes will also need replacing after 30 years, as would your hot water heater, among a plethora of other expenses that come up.

So yeah, if I had to replace all of my appliances, get a new roof, repaint all of the interior and include having bi-weekly yard maintenance for 6 months a year then over 30 years I'm probably looking at over $400. But nobody does that unless you've bought a lemon.

Roofs last about 25 years except in very unusual circumstances that insurance covers, our appliances are 10 years old but work fine. I could probably do with a new washing machine, but it's okay. I won't pay more than $500 for one anyway. I'll cross fingers and hope that my hot water heater and heating a/c make it 20 more years. If not, it's not like the cost to fix comes anywhere near the 100% a month in rent I'd be throwing away so my landlord could replace everything with refurbished second rate equipment.

Nobody replaces pipes after 30 years except for leaks or lead.

But let's differentiate normal maintenance from repairs (just like with cars, oil changes from engine replacements). If I had to guess, I'd say my monthly maintenance on my house was under $50/mo? Amortize the repairs I've put in over the last 10 years? I've probably put in $1000 in work or less than $3/mo over 30 years. So I have a lot of room.

The smartest thing to do is buy a home under the condition that the previous owners do all that work right before you move in and absorb it out of their equity.

Look at it another way. You're already paying for this stuff built into your rent. If luck happens and nothing breaks, that's money the landlord pockets and you don't have anymore. If you own it, it's just extra money you can use to pay down your principle, reduce your interest losses and pay off your mortgage faster.

Re: Renting vs. buying a home

#124

Post by bane »

michaelochurch wrote: post #114
bane wrote: post #61

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…

Whether buying is better than renting depends entirely on your locality. Price/rent ratios aren't the same in SF, New York, and Baltimore. Baltimore has high rents (relative to prices) because of Hopkins, for example. There are many wealthy people from the Middle East who come here for treatment. Many places, price/rent ratios are under 10 years. If you can buy and will be in the area for a while, you should. In NYC…

> In NYC and San Francisco, price/rent ratios can reach absurd numbers: 40 to 50 years. Why? Emotional bullshit, a sense of prestige, et cetera. Buying only makes sense if you expect apocalyptic increases of housing prices (see: Tokyo, especially in the late '80s).

Yeah, that's certainly true. I'd call those outliers in the same way that I'd call places going through huge economic crashes where you can pick up a house for pennies outliers.

In typical markets, and even ones close to those outliers, over the long run (30 years), buying an equivalent property nearly always makes more sense.

Re: Renting vs. buying a home

#125

Post by m3mnoch »

bane wrote: post #61

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…

tldr: like most things in life, there is no "one correct answer". basically, the cheaper the property, the better idea it is to buy.

yes. this tool illustrates it perfectly. [http://www.nytimes.com/interactive/business/buy-rent-calcula...] it actually shows why the khan video is seriously flawed.

if you plug in the values he uses in the video: (which are stupid and no money manager in the world would tell you to buy a house like that)

  - $1,000,000 house
  - 25% down (all $250k?  really?)
  - 6% interest  (ouch...)
  - $3,000 a month in rent for 1600 square feet? (in the bay area!?!?  hahahahahah)
that, of course, adds up to a terrible loss of $200k after six years for buying.

now, let's change the numbers to something more reasonable.

  - $1,000,000 house. (1600 square foot house in the bay area)
  - 10% down.  (that's all you need and this leaves $150k for investment)
  - $4,500 a month in rent (according to zillow, that's what a 1600 square foot house rents for)
  - 5% interest is more realistic.
that is still a loss for the buyer, but it's $45k instead. plus, you haven't completely destroyed your cash flow and investment capital.

still bad tho, huh?

yeah. because buying a $1,000,000 house in an over-inflated area is dumb.

now, let's look at something where it actually makes sense.

- same house.

- cheaper area -- not everyone wants to live in the bay area.

from some real numbers on a house i actually own (tho, i don't live in it - we're renting it out)

  - $120,000 house.
  - 10% down.  (you have almost *ALL* of that fictional $250k left...)
  - 5% interest
  - $1200 a month in rent (again, zillow for that area)
that's a net win of $59k if you buy.

if i lived in the bay area and didn't need all my intangibles (like, putting in new countertops in my kitchen or adding solar panels if i wanted to), i would totally rent.

if i lived in kirkland? i'd sure as hell buy.

Re: Renting vs. buying a home

#126

Post by clavalle »

ig1 wrote: post #122
clavalle wrote: post #112

Earlier quoted context omitted.

Of course they are separable. If you are buying a home to live in rather than an investment you can ride out the odd declining market. Seems like people have a lot of 'once bitten, twice shy' syndrome when it comes to housing. Market corrections like 2008 are exceedingly rare. I am not saying prices go up forever like so many idiots did around that time, but if you buy in a non-volatile market, it is a pretty safe be…

There's no such thing as a "safe bet". If housing was a safe bet then significant amounts on money would feed into the housing money until it stopped being a safe bet. That's just basic market efficiency theory. Most mortgages are typically 30+ years, based on historic data you're almost guaranteed to see a house price crash sometime over a 30 year period. (Although it's important to remember that the future isn't ne…

You are not understanding.

I am not saying it is a safe /investment/ I am saying it is a safe(ish) /value store/. There is a big difference.

Your comment is the equivalent of saying "Saving accounts are not a safe bet. If it were everyone would be putting money into savings accounts until it stopped being a safe bet."

You have to pay so much to have a roof over your head whether it is through rent or through ownership. Even if a house is a loser, investment wise, it can be a winner value-store wise.

Now, you can totally mess that up by buying a home at the peak of a bubble and watch it tumble to near worthlessness, no doubt. But that is not the situation 99.999% of potential homeowners face.

Re: Renting vs. buying a home

#127

Post by g8oz »

switch007 wrote: post #94

I'm in southern England. I have no idea what to do. House prices are insane. I have a sizeable deposit (20-25%) but I would still need a large mortgage. I want to buy because I know rent is going to through the roof as this tiny island becomes more and more populated. However, I don't want to be tied to a job/location. Commuting to London for work is always an option but it comes at a cost of £350-450/mo in travel. N…

The Economist's house price index for the U.K in 1990 was 628, in 2013 it was 2042. That is a 325% increase. Between 1990 and 2013 the Compound Annual Growth Rate (CAGR) of the S&P 500 market stock index was 9.46%, yielding an 875% return.

My advice: rent and be a fanatic about investing the difference in the mortgage payment for a property exactly equivalent to what you'd been thinking about buying. Over the long time horizon you're planning for you should be all right.

Re: Renting vs. buying a home

#128

Post by mtviewdave »

g8oz wrote: post #121
snowwrestler wrote: post #57

Earlier quoted context omitted.

> Renting will effectively (as the video outlined) leave a surplus of money in your pockets. Unless your rental is rent-controlled, this is only true in the very short term. Most rents go up over time. The payments on a fixed-rate mortgage do not go up. So the monthly real cost of the mortgage goes down over time. (This is even before taking equity into account.) Renting for a long time is like having a mortgage that…

But if you continually put the difference between the mortgage payment and the rent into an investment it could work out better. You're not accounting for it's possible time value. Again, no absolutes here, it depends on the numbers. The difference you're investing will decline as the rent rises but at the end of 30 years you could well be in the same position as the guy who bought. On the other hand, on a fixed-rate…

With a "fixed-rate 30 year mortgage", your rate, and payment, will be exactly the same in the first year as the 29th. A mortgage where the rate adjusts after 5 years is a 5-year ARM.

(Edit: in the U.S.)

Re: Renting vs. buying a home

#129

Post by jrs235 »

jnardiello wrote: post #62
snowwrestler wrote: post #57

Earlier quoted context omitted.

> Renting will effectively (as the video outlined) leave a surplus of money in your pockets. Unless your rental is rent-controlled, this is only true in the very short term. Most rents go up over time. The payments on a fixed-rate mortgage do not go up. So the monthly real cost of the mortgage goes down over time. (This is even before taking equity into account.) Renting for a long time is like having a mortgage that…

This is another aspect that should be considered and that is a huge plus in favor of buying. Because of inflation the cost of the mortgage will go down and after 30yrs it will be a lot cheaper. As a practical example, my family purchased a house 20yrs ago. At that time we payed the equivalent of $600 which was quite expensive. Today it's just nothing while the house itself gained a lot in value.

What about the aspect of being able to move without having to worry about whether you can sell you home or not? I believe what made things worse after the economy soured was that unemployed people stuck. Even unhappy people were stuck in jobs they didn't like/enjoy because they couldn't move to another part of the country (or state). One must not forget about opportunity costs in buying vs renting.

Re: Renting vs. buying a home

#130

Post by jrs235 »

_sentient wrote: post #103
hhw wrote: post #78

Earlier quoted context omitted.

Except your example conveniently leaves out: 1) Property Taxes Between 0.18% to 1.89% in the US. Let's assume the mean of the two for 1.035%. In the first year, that would be a payment of $5,175. Over 30 years, using the same 3% inflation to calculate the future value of an annuity, that works out to $246,202.78 2) Opportunity cost of down payment. Assuming a 20% down payment of $100,000, the future value of that mon…

If you're going to do a complete calculation, you also need to factor in the value of the tax write-off from the buy side. Depending on your income and marginal tax bracket, that could be significant enough to swing this equation in favor of the buyer.

But you can't rely on things like the mortgage interest deduction staying place beyond each current period it is passed/allowed.
Post reply on HN