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Is it better to buy or rent?

nytimes.com

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Re: Is it better to buy or rent?

#81

Post by frobozz »

todd8 wrote: post #27

There is an important oversimplification that these formulas/programs/spreadsheets often make, and I see it happening here. Consider two alternatives where everything is the same except the amount of money used for the mortgage down payment. The formula assume that money not used for the down payment is invested at a certain rate of return. If the mortgage interest rate is greater than the investment return, then the…

Another point is that the idiom "a penny saved is a penny earned" is incorrect when it comes to loans and investments, because you pay tax on income. A penny saved is worth more than a penny earned.

If I borrow at 4% and invest the same sum at 4%, then I'm guaranteed to lose money on the deal. How much more your investments have to yield, in order to break even on a loan-to-invest strategy depends on the degree of tax liability that your investments are subject to.

Re: Is it better to buy or rent?

#82

Post by akgerber »

eueueu wrote: post #28
saturdaysaint wrote: post #26

Earlier quoted context omitted.

Want to live somewhere else without making a life-altering financial transaction that could lower your net worth tens of thousands of dollars?

Property will always increase over the long term. Unless you're moving every 6 months this isn't a good reason. Of course selling your house and buying a new one will take a few months, so it does restrict your mobility in that way.

My parents bought a 2-family in Milwaukee in 1980 for around $30,000. They sold it in 1988 for around $30,000. It's still worth around $30,000, if it's still standing and maintained.

And Milwaukee is not, by a long shot, Detroit— it's still barely below its peak population. Wages have declined, however— an average young person when my parents were young would make the same amount of money as in San Francisco: http://www.theatlantic.com/business/archive/2015/02/for-grea...

(All of these numbers are nominal dollars— the house has significantly declined in real value.)

Re: Is it better to buy or rent?

#83

Post by to3m »

andymitchell wrote: post #72
to3m wrote: post #64

Earlier quoted context omitted.

Why will rents go up, when they could have gone up already?

If house prices cross a threshold where first time buyers can't afford to get onto the property ladder, they're forced to rent - driving up competition for stock & thus rental prices. (This appears to be affecting more & more people in the UK).

These people pulling the ladder up behind them might be in for a rude surprise.

A sketch of my argument: as we are sometimes reminded to bear in mind, prices are driven by market conditions and affordability, not costs. If prices shoot up, why will the rent increase? Is it not already set to the highest value the market can bear, or something very close to that? We'll assume it must be, because it would be silly to do anything else (and the tenancy market is liquid enough). But then, if prices are at the right level already, how will people pay for increased rent?

If salaries increase as well, then this is just ordinary inflation. House prices go up, rents have go up, salaries go up - well, people have been warning about this for years! On the other hand, if prices increase, and rents go up, and salaries don't, how are people going to be able to afford to pay for any of this? The obvious answer, of course, is that they won't.

Re: Is it better to buy or rent?

#84

Post by JoeAltmaier »

to3m wrote: post #83
andymitchell wrote: post #72

Earlier quoted context omitted.

If house prices cross a threshold where first time buyers can't afford to get onto the property ladder, they're forced to rent - driving up competition for stock & thus rental prices. (This appears to be affecting more & more people in the UK).

These people pulling the ladder up behind them might be in for a rude surprise. A sketch of my argument: as we are sometimes reminded to bear in mind, prices are driven by market conditions and affordability, not costs. If prices shoot up, why will the rent increase? Is it not already set to the highest value the market can bear, or something very close to that? We'll assume it must be, because it would be silly to d…

Prices are what the market will bear. If everybody's costs go up, or supply is limited, then rent can sure go up. Renting is an inflexible demand - unless you want to go homeless.

Re: Is it better to buy or rent?

#85

Post by derekp7 »

One thing to consider -- avoid the 30-year fixed mortgage if you can. If you are buying, then buy a cheaper property that you can pay off in 5 years or so. Then in 5 years, you can sell that and take out another loan for the next property. Example: I bought my house for 180,000 on a 30-year mortgage, and 20% down payment (36,000). 15 years into it I've barely made a dent. I would have been better off buying a $100,000 smaller house or town house/condo, and I could have paid that off in 5 years with what I'm currently putting out per month (counting lower taxes and insurance on the smaller property). Then I could have sold it, and bought a $160,000 house, and 5 years or so later owned that one outright.

This is also a market proof strategy -- if the market goes down, the your current house may lose value (but you're not upside down on your mortgage, because you don't have one after 5 years). But the next house will also be proportionally cheaper too. And if the market goes up, the house you just paid off has gained in value, making for a bigger down payment on the next house.

Re: Is it better to buy or rent?

#86

Post by refurb »

Cherian wrote: post #61
refurb wrote: post #10

Earlier quoted context omitted.

Here is my take.... 1. People think they can afford to buy a place at $X 2. People find a place at $X+Y and say "it'll be tough, but I love this place" 3. People find out actually owning a house costs $X+$Y+$Z and they can barely make their house payments and supporting costs 4. Eventually (after enough mortgage payments) your principal payments become large enough to take on the form of "forced savings" I think this…

Even in this case, isn’t there a reasonably good chance the person could have sold it for 10% more than ($X+$Y+$Z)[1] at the time of the crisis? The lender and the loaner will part with the equity based on the mortgage payments over the years. Based on cursory look into Redfin data, homes in the Bay Area are vanishing in 5-12 days, selling at 100-300K above the listed price. [1] I hope we don’t cite recession here.

In the bay area over the last 5 years? Sure.

Across much of the US? Probably not. Don't forget the average cost of selling a house is 6%. Buy a place for $500K and if the value of the house doesn't go up by at least 6% you've lost money.

That doesn't include all the other costs associated with buying a new house (moving costs, etc).

Re: Is it better to buy or rent?

#87

Post by ido »

pkolaczk wrote: post #68
ido wrote: post #53

Earlier quoted context omitted.

In Berlin, Germany it's (at least at first) a lot cheaper to rent. The place we're renting for 500 euro/m would be about 200k euro if we wanted to buy it, which would mean something like 600-650 euro/m for 30 years (with maybe 40-50k euro down-payment).

Well, but after 30 years, when you retire the place is yours own and your monthly payment goes down. Even if you saved that 100-150 euro every month, you'd not afford buying it after 30 years, assuming it stayed at the same price-point. On the other hand, it is hard to believe you can rent a 200k€ place for 500€/m. In Warsaw, a 2-room 40-50 m² apartment in the city center costs about 400-500€/m to rent, but if you wa…

    On the other hand, it is hard to believe you can rent a
    200k€ place for 500€/m. In Warsaw, a 2-room 40-50 m² 
    apartment in the city center costs about 400-500€/m to
    rent, but if you wanted to buy it, offer prices start
    below 100k€.
Believe it! Or look at http://www.immobilienscout24.de/ for Berlin (in the combo box right of the search field "kaufen" means buy and "mieten" means rent - pick the first option in both).

There are places that are unusual (like Mitte - the center of the city), but for ~90%+ of Berlin the pattern I described above more or less holds.

Re: Is it better to buy or rent?

#88

Post by abakker »

ocdtrekkie wrote: post #77
tinkerrr wrote: post #51

Earlier quoted context omitted.

This is a very common fallacy and I am surprised people still think 'renting is throwing your cash out the window'. It isn't. With a mortgage, you're essentially leveraging around 1:5, which means you put down your 20%ish and get 100% of an asset. If the asset moves down 20%, your net equity is worth exactly 0. If the asset moves up 20%, you've made a profit of 100% (simplified, not considering the fees and other cos…

What money do you get back out of renting?

The theory goes that you get a non-leveraged value of having a place to live...

rent is a 1:1 cost:value on living space. Mortgage is leveraged.

Re: Is it better to buy or rent?

#89

Post by ido »

pkolaczk wrote: post #68
ido wrote: post #53

Earlier quoted context omitted.

In Berlin, Germany it's (at least at first) a lot cheaper to rent. The place we're renting for 500 euro/m would be about 200k euro if we wanted to buy it, which would mean something like 600-650 euro/m for 30 years (with maybe 40-50k euro down-payment).

Well, but after 30 years, when you retire the place is yours own and your monthly payment goes down. Even if you saved that 100-150 euro every month, you'd not afford buying it after 30 years, assuming it stayed at the same price-point. On the other hand, it is hard to believe you can rent a 200k€ place for 500€/m. In Warsaw, a 2-room 40-50 m² apartment in the city center costs about 400-500€/m to rent, but if you wa…

    Even if you saved that 100-150 euro every month, 
    you'd not afford buying it after 30 years, assuming 
    it stayed at the same price-point.
The thing is that many people don't have an extra 150 euros per month (not to mention ~50k euros for the down payment) to save or invest in a mortgage, they spend everything they earn every month even when renting.

If you're in a position where you have extra money and you can choose whether to invest it in the stock-market, buy a nice car, or put a down-payment+mortgage on a place to live it's a different consideration.

Re: Is it better to buy or rent?

#90

Post by tinkerrr »

ocdtrekkie wrote: post #77
tinkerrr wrote: post #51

Earlier quoted context omitted.

This is a very common fallacy and I am surprised people still think 'renting is throwing your cash out the window'. It isn't. With a mortgage, you're essentially leveraging around 1:5, which means you put down your 20%ish and get 100% of an asset. If the asset moves down 20%, your net equity is worth exactly 0. If the asset moves up 20%, you've made a profit of 100% (simplified, not considering the fees and other cos…

What money do you get back out of renting?

You don't get money back from renting. It's an expense, just like any other. However, you don't have to tie in 20% of say $500,000 into a home at 0% return. Over a long period of time, your return on this would be expected to be a little over 8% annual returns, based on S&Ps historic return rates.
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