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Renting vs. buying a home

khanacademy.org

51–60 of 155 posts

Re: Renting vs. buying a home

#51
This seems to really depend on where you live and what the house/rental prices are.

Where I live, you can get a variable rate mortgage that's advertised at 3%. More than likely, the bank will look at your credit rating and offer something lower. Even if they don't, that's half of what the video is showing.

Likewise, a 4% return on investments seems unreasonable. The same bank with the 3% mortgage is offering a non-cashable GIC (which seems to be the Canadian version of a CD) which pays 2.3%. That's only a little better than half of what's shown in the video.

As for housing prices, it's very hard to find identical houses available for rent and for buying, but here's what I found:

For rent, a 3 bedroom, 1.5 bathroom, 1100 sq ft townhouse for $1500/mo. For buying, a 3 bedroom, 2 bathroom, 926 sq ft townhouse in the same area of the city for $225K. It's not apples to apples by any means. The one for purchase is smaller, plus it's a condo so there will be additional fees on top of the regular things you'd pay for in an owned house. In spite of the differences, $3K of rent does not equal a $1M house in my part of the world.

I plugged the numbers into the New York Times rent vs buy calculator that was mentioned elsewhere (http://www.nytimes.com/interactive/business/buy-rent-calcula...). With these two properties, with these interest rates on the mortgage and investment, with local taxes and utility costs applied, buying is better after three years.

That said, it might not be all about cost. If you like to move around a lot, maybe renting is better because not renewing your lease is easier than selling a house. Maybe renting is better because you don't have the savings for a downpayment or don't qualify for a mortgage. Maybe buying is better because you like to do the handyman type of stuff and rarely move.

There's all kinds of reasons that renting or buying can be better, which is why I don't buy blanket statements that say "renting is always better" or "buying is always better".

Re: Renting vs. buying a home

#52

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…

If you are buying house because it is great investment then DO NOT BUY HOUSE. You should buy house because you need to place to live and you want to settle down in certain area (grow roots...).

The first thing that people like me need to understand is that we are not professional investors.

Normal people need to buy house on the following factors: is it affordable? what is chance of you or your significant other moving to different area? do you like location? do you expect to live there for next 30 years? are schools good? etc. The excel spreadsheet comparing costs of owning vs. renting should be also there as one of factors, but spreadsheet showing how you are going to be rich by "owning" the house should be ignored.

Re: Renting vs. buying a home

#53
I just went from owning a house for 15 years (bought at 23) to renting, and I love it. Maintenance was a huge burden and having a lot of capitol tied into the housing market was an anchor for several reasons. I also have the freedom to just get up and go at any time.

I am fortunate to live in a renters market, you can get some really great deals for long-terms rentals if you put in the work.

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

Re: Renting vs. buying a home

#54
post #44

maybe I missed something but it seems like he ignored the house value. Even if we assume that the rent & the house price remains the same of 30y, after 30y you end up with a house that worth $1M & spent ~$15K more per year. Over 30y it's $450K in cash vs owning a house of $1M, meaning buying the house was the right decision. Where is my mistake?

> after 30y you end up with a house that worth $1M In his video, Sal Khan did an apples-to-apples comparison: He compared the net out-of-pocket costs of (i) an interest-only mortgage in which you build no equity, and (ii) renting, where you likewise get no equity. If you also want to build equity in your house, in addition to merely paying the interest, then that's an additional out-of-pocket cost (which unlike the i…

It doesn't make sense to ignore the fact that you ending with owning the house. Maybe the numbers still works but if he ignores that fact his entire presentation is useless.

Re: Renting vs. buying a home

#55
post #48

Earlier quoted context omitted.

> What you are really doing, when you buy a house, is forcing yourself in saving a liable equity for you and your family. Yes, there's a forced savings component, but it's expensive in terms of opportunity cost. It's not unlike insurance agents who want to sell you life-insurance policies that have "investment" components to them, when what you really want is to buy inexpensive term protection and put the difference…

> Remember that Sal Khan's comparison is of an interest-only mortgage versus renting. If you also want to build equity, well then, that's additional money out of your pocket (non-tax-deductible). That will save you tens of thousands of dollars/euros in avoided interests over the years.

So maybe a true apples-to-apples comparison needs to be for the entire period that you own the house -- that is, for each case:

+ what is the total net value of the money you spend in each case, and

+ what is the total net residual value at the end of the period.

With term life insurance you get zero residual value at the end of the term; what you're paying for is nothing more than insurance protection, not an investment. Ditto with renting.

Re: Renting vs. buying a home

#56
post #52

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…

If you are buying house because it is great investment then DO NOT BUY HOUSE. You should buy house because you need to place to live and you want to settle down in certain area (grow roots...). The first thing that people like me need to understand is that we are not professional investors. Normal people need to buy house on the following factors: is it affordable? what is chance of you or your significant other movi…

I agree, yet i'm convinced that there's also an investment/financial side that the wanna-be-owner has to consider. This school thing is typical only in the US btw.

Re: Renting vs. buying a home

#57

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 you refinance to a higher payment every couple few years.

Re: Renting vs. buying a home

#58
post #55

Earlier quoted context omitted.

> Remember that Sal Khan's comparison is of an interest-only mortgage versus renting. If you also want to build equity, well then, that's additional money out of your pocket (non-tax-deductible). That will save you tens of thousands of dollars/euros in avoided interests over the years.

So maybe a true apples-to-apples comparison needs to be for the entire period that you own the house -- that is, for each case: + what is the total net value of the money you spend in each case, and + what is the total net residual value at the end of the period. With term life insurance you get zero residual value at the end of the term; what you're paying for is nothing more than insurance protection, not an invest…

Of course it should. Buying a house is a long-term investment. You can't compare it to renting. If you do, of course it will be a more expensive solution. But what is the impact of owning over a life-time span? It could be an interesting analysis that i wish someone will do. Yet, i bet that owning will effectively create value for you and the family.

Re: Renting vs. buying a home

#59
post #47
post #25

Earlier quoted context omitted.

I don't have any knowledge of the home market in the valley, but I will say that the numbers he uses for interest rates are very off from current real world rates. The method is instructive but the numbers used are so off they don't offer proof one way or the other.

This video was made in 2008, when mortgage rates were 6% and money market accounts were paying close to 4%. Now, mortgages go for 4.5% and money market accounts pay less than 0.5%. In 2008, rent prices were low while home prices were high, too. Today, a $1M house would cost closer to $10K/month in rent. It certainly doesn't pay to rent today, but it's harder to get a loan today, too.

If this video was made in 2008 and all the numbers are off, leaving this video up without any caveats in a site where kids go to learn is beyond irresponsible.

Re: Renting vs. buying a home

#60
post #12
post #3

I've rented for my entire adult like (I'm currently 31 living in Somerville/Boston). While my sister bought her first house in Pittsburgh when she was 23, and my parents had moved between several houses they purchased by my age... I've been happy renting. I didn't want to buy a house until recently, but now I want to buy one around here. Why? For one thing, in the major cities the rents keep going up at a rate faster…

There are other costs to owning - maintenance, property taxes, closing costs, and your agents fee (when you eventually sell - unless you keep forever). I bought a condo at age 24 in LA in 2002. I hated that the HOA could do things like, we need to fix the roofs, so pay up. We voted on it. Ditto re-paving the parkinglot ever x years. Damn if my first year in the condo was somehow fix everything year. Ugh.

Renters pay all these costs too; they are just hidden in the rental payment.
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