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Renting vs. buying a home

khanacademy.org

71–80 of 155 posts

Re: Renting vs. buying a home

#71
post #8
post #4

One of my favorite interactive pieces from the NYTimes is a Rent vs Buy calculator which is very configurable: http://www.nytimes.com/interactive/business/buy-rent-calcula...

The numbers are very inflated against buying. 10% closing cost, 1.35% property taxes, utilities only if you buy, another 1.35% annually on maintenance/renos/insurance. Who is paying 2.6% of their property value each year on those things? Who gets utilities for free with their rent. That calculator is very dishonest.

It's actually not uncommon in some larger cities to get utilities completely paid. I'm just outside of DC and only pay rent and cable.

Re: Renting vs. buying a home

#74

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…

The video was completely void of real content and seemed more created as an attempt to self-justify and rationalize the choice for the author of it to rent, instead of buy a home.

There are different markets, different economies, different lifestyles, and different situations. For some in some places, renting is wiser. For others, owning a home.

I sure delight in knowing that the home I bought in 2010 for $195k with 20% down and a $160k mortgage at 4.85% is not only worth $220k today, but costs me the same about ($1,200) for mortgage, insurance, and property tax as I used to pay just for my rent. And the place is 3,000sqft versus 1,000sqft of the apartment. And I get all the benefits of a home, such as a lawn, storage, nobody pounding on the floor because I'm listening to music, pets, a security system, and nobody else with a key to let themselves in whenever they feel like it.

In addition, that $1,200 I paid in rent started as $1,000 only four years earlier. In twenty years, it'll probably be at least $2,000+ while my mortgage will still be $850 (not counting insurance/tax). And, in the end, I'll have actual property that is worth something.

I see so many of these arguments back and forth and it always sounds more like people trying to convince themselves that they made the right decision than trying to convince someone else what decision to make. It's a lot like parents frustrated by their kids trying to convince other couples that they should have kids. Or a married couple always trying to convince their friends that they should get married.

It all comes down to individual situations and opportunities. Where that guy lives and with his opportunities in that market, his decision very well may be appropriate for him. For others, not so much. And that's okay.

After all, my next step is to buy more property. Real-estate is a dandy way to counter inflation and when I buy a couple more properties, I'm going to need people like the guy who made that video to be willing to pay me rent.

Re: Renting vs. buying a home

#75
post #74

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…

The video was completely void of real content and seemed more created as an attempt to self-justify and rationalize the choice for the author of it to rent, instead of buy a home. There are different markets, different economies, different lifestyles, and different situations. For some in some places, renting is wiser. For others, owning a home. I sure delight in knowing that the home I bought in 2010 for $195k with…

Agree on everything. The point here is that the video should be a source of information while it's not. +1 for the super-realistic analysis which should inspire future readers.

Re: Renting vs. buying a home

#77
post #45

Two issues. - I'm currently paying $2,300 for a $500k house. I think his rental rates are way off. - In a free market, rental rates are supposed to adjust to make it such that an individual is indifferent between renting and buying. If it was that much more expensive to own than to rent, the landlord would never rent the house out!

A free market doesn't optimize for money. It optimizes for the production of what people are willing to pay for. They don't care if they can be better off financially for renting. What they want is home ownership.

Re: Renting vs. buying a home

#78
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…

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 money would work out to $100,000 x 1.03^30 = $242,726.25, or a gain of $142,726.25

Note that this is already quite a conservative return. A well-balanced portfolio over the last 10 years, even taking into account the disaster of 2008, would have easily exceeded 6%.

3) Maintenance/Upkeep At $2,000/yr and 3% inflation, the future value of the annuity would work out to $95,150.83

So, the cost of owning in your example is actually: $783,370 + $246,202.78 + $95,150.83 = $1,124,723.61

and the cost of renting is: $1,141,809.977 - $142,726.25 = $999,083.727

Re: Renting vs. buying a home

#79
post #49

Slightly tangential: Conventional wisdom is just that - conventional, and an important thing to teach people is that there are times when convention should be broken. Back during the height of housing bubble (2006/2007), a friend of mine decided to buy his first home. It was so obviously a "bubble buy" that even before things started to get bad, it was visible from a mile away that he was making a bad decision: He wa…

>he had to go through mortgage default to get a modification on his loan.

When you take this modification into account, his investment might not look so bad.

But I agree with your general point. I was also taught the middle-class fuzzy thinking that paying rent is "throwing money away".

Re: Renting vs. buying a home

#80
Renting costs just about as much as owning. Using my neighborhood as an example a co-worker rents a house of similar size one street over from the one I own. We both pay roughly $1,200 per month.

The big difference is my interest is tax-deductible and I will always get at least something back from my investment. From a finance/economics perspective: Owning home > renting. Obviously.

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