God bless planet earth!
I INSIST, Renting is Better then Buying
- Thread starter TruthSeeker
- Start date
Not long ago, there was a legion of "economists" in sciforums who insisted that buying a house was better (economically) then renting one. Well, here's an article that disagrees (just like I did)!
"Why rent? To get richer
A contrarian's view: Houses don't appreciate any faster than the level of inflation over the long term, so forget about buying a home and put your savings into stocks.
I have something un-American to confess: I rent an apartment despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer.
I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former.
"
There ya go!
Full article: http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx
I don't think it's wise for the author to jump to a conclusion right away, even with all of her empirical observations. Such investments as houses are value-dependent on a number of factors including immigration rates and poverty as well as foreign policy and export. (I was going to comment on the avatar but I found the most immediate thoughts too ambiguous, and I wish to never force a thought. Btw, it seems the most immediate and impulsive thoughts are the ones that aren't as socially and psychologically blocked. Without feeling, they are of a single universal meaning and interpretation, and a single angle of perspective. The most immediate thoughts are engineered by how much we do not feel. As opposed to how much we do.)
It's not. Try to pay attention this time.
If you're talking about renting vs owning an identical property renting is typically going to be more expensive aside from the exceptions I gave above. Owners are not going to purchase a rental property only to operate it at an ongoing loss. What would be the point of renting the property if they did? Therefore they pass the expenses to you, the renter.
I can give you my own example. I rented a house for 2 years. My rental cost was $2250 a month or $27,000 a year. After these 2 years I was out $54,000.
I wound up purchasing this same house from the owner. My down payment was $50,000 and I lost the opportunity cost of that money by locking it up in the mortgage rather than investing it. However, my monthly expenses were less. My mortgage payments worked out to $21,300 a year plus just shy of $3,000 in taxes for a total of $24,300. After 2 years my expenses total $50k + $42.6k + $6000 = $98,600.
Let's now assume I sell the property at the same price I purchased it for. I loose the tax payments and I loose the interest on mortgage (We'll assume about 80% of my mortgage payments went to interest, the other 20% to principal, but this varies depending on the mortgage and how you choose to pay it). When I sell the property I receive $50k + (20% * $42.6) or $58.2k. My realized loss after owning for 2 years is therefore $40,400.
The number we want to look at then are these:
Rental expense = $54k
Ownership expense = $40,400
As you can see, it cost me $10,000 less to own.
Now then, the calculation we need to make to see if this was a good deal is the profit I could have made if I invested the $50k down payment rather than tying it up in a mortgage. Presuming a 7% return, I could have made $7000 by investing my $50k.
$10,000 - $7,000 = $3,000
Therefore I saved $3,000 by purchasing the house rather than renting it. Not a lot, but then we only ran a two year comparison and I didn't take into account any increase in property value for this example. In reality I owned the property for 4 years and the property value went up. I wound up about $65k ahead.
~Raithere
I've already covered this. Yes, there are situations where the local market will drive down rental prices and it will be less expensive to rent.
Most typically these are where there is either a surplus of rental properties available, there are a lot of properties that have been owned for a long time in the area, or property values are skyrocketing. None of these are usually sustainable scenarios and sooner or later it will balance out again. In the first two scenarios the owners will eventually sell out and the surplus will diminish, in the third scenario the owners can rent at a loss because they're making up the difference in value increases but this will eventually dry up and either the rent will go up or they'll sell out.
Again, there is no single answer, it depends upon the scenario.
~Raithere
You can. Just hike out into the forest naked and start eating berries and twigs. No one is stopping you.
~Raithere
Yeah but then he wont be able to play Oblivion anymore.:shrug:
Your $3000 net gain by buying is very dependant on this assumption which is NOT true for first two years unless you have a very short mortgage term. If for example you had a 20year mortgage after two years much less than 10% has gone towards the principle - 10% would be a linear reduction of the principle, but very little of the first years of the mortgage is applied to the principle.
Also you are neglecting the taxes, insurance, settlement cost, real-estate commissions etc, which can take approximately 8% of your sales price. I think careful analysis will always show that for a two year period you are always better off economically to rent.
Here is very easy to use mortgage calculator with graphical display of principle and interest vs. time:
www.jeacle.ie/mortgage/
As you assumed you could earn 7 % I assumed you would pay (at least) 8% on only a 10 year mortgage. I adjusted the loan to be $83,000to make monthly payments almost exactly $1000. I also gave you the very unrealistic benefit of zero taxes, zero maintance, zero insurance zero, zero real estate commission, zero transfer taxes, zero recording fees etc. on your sale and yet LESS than half of all you payment in the first two years went to the principle (i.e. <$12,000 on an $83,000 principle is still not your assumed 20%!)
If it were a 15 year term, instead of a 10 year term, you of course would be even worse off in two years by buying. In any realistic suituation your are way, way behind by buying, if selling after two years.
Last edited by a moderator:
No, it depends on the loan contract. You'd best check such things instead of believing everything you read on the Inter-fuckin'-net.
Baron Max
Billy T:
I wasn't neglecting anything, I was giving a simple example to elucidate a point. If you read my posts I've stated repeatedly that for short term occupancy, renting is often the better option. But that doesn't mean that renting costs less than ownership. Just that you tend get a better return investing in stocks or other vehicles (another large assumption, since we're listing them. 7% is a long term average return and we're discussing a short term investment).
There are a tremendous variety of options available and depending upon how you play them out the best option may go one way or the other. Paying down the principle is generally a good idea, and for the loan I have on my current house about 18% goes to principle even when I just make the montly payment. I used that and rounded up to a nice even 20% for my simplified example.
~Raithere
P.S. Right now your mortgage should be about 2 points lower. 8% is too high.
I wasn't neglecting anything, I was giving a simple example to elucidate a point. If you read my posts I've stated repeatedly that for short term occupancy, renting is often the better option. But that doesn't mean that renting costs less than ownership. Just that you tend get a better return investing in stocks or other vehicles (another large assumption, since we're listing them. 7% is a long term average return and we're discussing a short term investment).
There are a tremendous variety of options available and depending upon how you play them out the best option may go one way or the other. Paying down the principle is generally a good idea, and for the loan I have on my current house about 18% goes to principle even when I just make the montly payment. I used that and rounded up to a nice even 20% for my simplified example.
~Raithere
P.S. Right now your mortgage should be about 2 points lower. 8% is too high.
Not usually. - Do the numbers instead of guessing. Use the convenient mortgage calculator and consider the other costs I mentioned in my just made post and you will see that even in five years, renting is more economical in most cases.
When it is possible to get mortgage loan at 6% then it is not reasonable to assume you can safely earn 1% more. - If that were the case, why would any one loan your the money at 6% instead of invest it at 7% themselves?
Rather than just guess, make un supported statements - you and one-raven need to actually do the numbers. I gave link to handy mortgage calculator with dynamic graphcs that immediately shows the effect of changing various parameters, allows you to realisiticly enter the annual taxes and insurance payments etc.
DO THE NUMBERS before asserting falsehoods. Tell what you asssumed. Unless you are in a very high income tax bracket, the saving on income taxes will not usually cover the maintance expenses. (When honest about them, including the big things like amortized new roof, furnace, hot water tank etc, down to little things like gasoline and new grass bag for the lawn moyer, which is replace every 5 or so years.) so neglect both the tax saving and cost of being the owner. Include only the real estate taxes and the fire insurance costs as the calculator link I gave permits.
rent in london is way too high i do not think renting is better here, many people here rent a single room for over £130 per week.
buying is better long term for your investments and income i think,
peace.
buying is better long term for your investments and income i think,
peace.
Low risk, low return. This is fundamental. Mortgage lending is very secure. So are CDs; try finding one that returns 8%.
Try reading. I've already stated that the analysis will depend on the specifics of the situation.
Certainly all these things need to come into consideration making a purchase.
But please take a moment and think about this. Do you think that the owner of a rental property is simply eating these costs? Of course not. His depreciated roofing expense, water heater, new furnace, and other maintenance expenses are built into your rent. A smart owner will anticipate these expenses and build them into the rent before they are even needed. So is the lawn maintenance, if provided. If it's not provided guess who goes out with their own mower and gas?
Somehow you're coming up with the idea that owners are renting properties at a loss. Why would anyone do that? I know I don't.
~Raithere
Might be, but again I suggest you do the numbers. - Don't just guess.
I note almost every one guesses that buying is better - I think I know why:
Three reasons:
(1) There is an army of people telling you this - they are called real estate agents, anxious to make a sale.
(2) Governments think home owners are more stable, better citizens, more likely to support the staus quo (re-elect them) etc. so encourage home ownership by tax breaks and propaganda.
(3) Personnal rationalization. I.e. there are many non-economic arguments in favor of owing your own home. - It is hard to admit that it may be economic foolishment. Homes depreciate as it is cheaper every year to make the SAME house as last year.
Fact that home prices have on avearge gone up is mainly due to inflation, increased avearge size, and more appliance being included in the mortgage. (not to mention that the modern house is beter built - things like better insulation, more efficient refrigerator, furnace airconditioner, etc.
If you want a real estate investment that strongly does appreciate, then buy farm land* in the path of development - that is what I did. Unlike houses, which increase in number every year and which are cheaper and better every year, the amount of land availble is decreasing every year.
-------------------------
*By at least pretending to be honey bee farmer, I keep it in low rural tax status until I sub divided and sold lots.
Last edited by a moderator:
i was thinking of buying land before but i thought itwould be out of my price range to aquire a large piece of land.
farmland price rose by 9% here.
peace.
wow farmland is pretty cheap. i was just reading up.
edit- what can i do with farmland apart from farm on it and let it mature like fine wine?
peace.
edit- what can i do with farmland apart from farm on it and let it mature like fine wine?
peace.
Exactly my point. You can not fairly compare (as equal) widely differnt risk investments. If you want to claim that you will earn a higher rate than you will pay on mortgage then be honest. - admit you are willing to run greater risk of losing more. To take an extrement example to drive home the this point: go to Las Vegas to "invest" for really high risk and high possible returns.
I did (read all your post) That is why I took a case extremely favorable to your POV - Namely only a 10 year mortgage, no fire insurance, no real estate taxes, no commission to real estate agent selling at end of two years, no transfer taxes, no recording fees, title expese, apprasal adverisising etc. cost and still your claim of gain compared to renting was very false.
You, like most every one who has not done the numbers, are a victim of the three pressures for buying I listed in recent post 56.
Don't get me wrong - buying often is the thing to do. I did it. But not for the economics. - Buy because you can afford to, not to be economical, and you want to live in your own house. I.e. stop lying to yourself about the economics.
For an example of this lying: You claimed / assumed that 20% of your payment would go to the principle in the first two years. Use the mortgage calculator link I gave to see what set of mortgage condition can make that true and then see if anyone actually has such a mortgage. Don't be afraid of the economics facts.
I dare you to publish the terms of a mortgage that will put 20% into the principle in the first two years as you assumed to be the case.
To take another extreme example: No feels that they must lie to themself and say: "Eating meat, etc. is more economical that eating day old bread and powder milk." Likewise why should you lie to yourself and say "buying home for a few years is more economical that renting."? You do both these things because you can afford to and want to. - NO need to lie to yourself about why.
Last edited by a moderator: