Renting vs owning
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Renting vs owning
Posted by Siderophore on 4/7 at 11:12 am
Everywhere I see, it is being proclaimed by many news organizations via monthly cost analysis between the two that owning is cheaper than renting.

Even I have said similar things in the past, usually revolving around the notion that renting was like throwing money away.

But now that I am playing with numbers, it seems that from a balance ledger standpoint renting wins and it isn't even close.

The fundamental killer is the opportunity cost of that down payment that could otherwise presumably sit in a retirement account. And the resulting difference can easily balloon past the million mark, if not multi million if you buy young.

Am I missing something?

Because this would indicate the most financially prudent move would be for first time buyers to ALWAYS put the least amount you can in order to minimize this compounding opportunity cost. Something that gets supercharged with the low rates everything has nowadays.


This post was edited on 4/7 at 11:27 am

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Posted by Doc Fenton on 4/7 at 11:34 am to Siderophore
quote:

Am I missing something?


If you are just coming across this insight/meme, I'd say that you may have missed the last 6 years somehow, especially this message board in 2008.

Anyhoo, the best resource I've ever come across for this topic is this little interactive webpage on buying vs. renting, courtesy of The New York Times.

The best rule of thumb I've come across is just to look at the ratio of home prices to monthly home rental rates for the particular location where you happen to be. If that ratio gets too high, don't buy.

I assume of course that you are referring to personal residential decisions. If you are instead referring to owning versus leasing Learjet aircraft, then please disregard all that is written above.



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Posted by wegotdatwood on 4/7 at 11:39 am to Doc Fenton
I just bought my first house.

2100sq ft, 3br for $155. Mortgage with taxes/insurance is around $870 a month. 0 down with a VA loan.

It would cost rent to rent.



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Posted by Teddy Ruxpin on 4/7 at 11:49 am to wegotdatwood
You've left out the down payment that many do have to put down. As in, you got 0 down because of you unique situation that I would guess a majority don't have.

Also you left out taxes and upkeep which the renter doesn't separately pay. your 870 mortgage is not equal to 870 rent since the renter is paying taxes, etc in his rent already while you are not.

Of course, there is the square footage issue as well, gotta get that comparable obviously.


This post was edited on 4/7 at 11:52 am

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Posted by Ace Midnight on 4/7 at 11:58 am to Siderophore
quote:

Everywhere I see, it is being proclaimed by many news organizations via monthly cost analysis between the two that owning is cheaper than renting.


That was the conventional wisdom until about 8 to 10 years ago.

quote:

Even I have said similar things in the past, usually revolving around the notion that renting was like throwing money away.


It generally is, if you consider paying, as you go, for living space "throwing your money away" - the money never comes back, never grows, never yields any sort of benefit - other than pay for your living space.

quote:

But now that I am playing with numbers, it seems that from a balance ledger standpoint renting wins and it isn't even close.


It's probably closer than you think, but, particularly for someone who does not care for/can't afford the general upkeep of a house, renting is a transparent way to pay for living space. However, once you figure out how much of the interest a mortgage owner gets subsidized, the potential of paying off the mortgage and living "rent/mortgage free" for some time, appreciation (heck, real estate USED to appreciate, in the before times, in the long, long ago), it is probably much closer to a zero balance.

quote:

The fundamental killer is the opportunity cost of that down payment that could otherwise presumably sit in a retirement account. And the resulting difference can easily balloon past the million mark, if not multi million if you buy young.


That's true, but most youngsters get a reduced down payment, bond money, FHA, or other type of assistance for that first buy-in.

There are also transaction costs, significant ones at times, associated with buying versus renting.

I believe that if it is certain you will be in one spot, and happy with the home you've selected for 12 years, plus, it is probably a slight win to buy at that point. Anything less, you're probably much better renting. Buying becomes a clear winner, probably at 20 or 25 years, but that is a longer game than most people are comfortable planning.


This post was edited on 4/7 at 11:59 am

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Posted by LSUwag on 4/7 at 12:12 pm to Siderophore
You assume that you would be able to rent the same property permanently. Renting will often involved moving on a regular basis. Do this a few times and you have spent a lot of money which would probably add up quickly to be the same or even more than a down payment on a mortgage.

Once you own a property it is your forever as long as you pay the taxes. Renting, you have nothing in the end.



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Posted by wegotdatwood on 4/7 at 12:28 pm to Teddy Ruxpin
To rent something comparable, it would be north of 1k a month.



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Posted by wegotdatwood on 4/7 at 1:32 pm to Teddy Ruxpin
That 870 includes and tax and insurance. The note is like 670 a month

It would cost more to rent.



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Posted by Siderophore on 4/7 at 7:05 pm to wegotdatwood
Excluding the down payment in your very special case, it would be.

Relatively few people have access to zero down loans like that though.



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Posted by BeaumontBengal on 4/7 at 8:41 pm to Siderophore
I am trying to decide between renting and buying now. I figured that 3% interest on a $250k mortgage loan will be $7500 and the property taxes for the place I was looking at was $6000. Rent at the place I'm looking at is right around $1000 a month.

I figured it would cost $12000 next year to rent (which could be considered throwing money away) and buying would cost $13500 next year before I pay a dime on the mortgage (I consider this money thrown away as it does not go toward the mortgage).

Not a huge difference but it convinced me to rent when I realized I would be "throwing away" about 12-13k next year either way. Not so in love with the place I was looking at that I couldn't live without it, either. Seemed simple in my head, but I have wondered if I'm missing something.



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Posted by JonTheTigerFan on 4/7 at 11:20 pm to Teddy Ruxpin
quote:

You've left out the down payment that many do have to put down. As in, you got 0 down because of you unique situation that I would guess a majority don't have.


A good portion of first time home buyers would be eligible for a USDA RD loan (depending on location) or downpayment assistance for an FHA loan. Even without that assistance, the down payment on $155,000 is less than $5,500 for 3.5% down. That would require PMI but that would be less than $200 per month. I would still rather pay $1,000 per month for a house note than rent in the same amount for a comparable house. Everybody is different, though and there's nothing wrong with renting. At least you don't have to worry about maintenance and repairs as a renter. That's worth some money in itself.



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Posted by Bear Is Dead on 4/8 at 8:26 am to Siderophore
There are many good points being made in this thread. However, the point is that housing is a cost we all incur, and right now is the best time to borrow. You will probably never see these rates again in your lifetime. Its simply too cheap to borrow for someone to keep renting (if they had enough to make a reasonable down payment).
Im not a fan of no money down loans, if you had to get out of the house, you will probably lose money in a no money down mortgage.



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Posted by lynxcat on 4/8 at 8:42 am to Bear Is Dead
quote:

There are many good points being made in this thread. However, the point is that housing is a cost we all incur, and right now is the best time to borrow. You will probably never see these rates again in your lifetime.


This does not necessarily mean the CBA for owning vs. renting is in owning's favor. It just means that right now the cards are stacked so that owning has some variables playing in its favor.

quote:

Its simply too cheap to borrow for someone to keep renting (if they had enough to make a reasonable down payment).


You cannot make this statement as a fact. There are too many variables.




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Posted by Lsut81 on 4/8 at 8:49 am to Siderophore
quote:

Am I missing something?


You make some good points, but it also matters where and when you buy... I just bought my second home and have made a killing already.

1st Home: Bought in 2003 for $118k, sold in 2009 for $147k

Current Home: Bought as foreclosure in 2011 for $205k, it currently appraises for $250k... Plus, rent estimates are about 2k a month whereas I pay about 60% of that in Mortgage, Taxes, Insurance, etc...

So in my situations, it has been MUCH MUCH MUCH smarter to buy than rent.




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Posted by ZereauxSum on 4/8 at 9:16 am to Teddy Ruxpin
quote:

Also you left out taxes and upkeep which the renter doesn't separately pay. your 870 mortgage is not equal to 870 rent since the renter is paying taxes, etc in his rent already while you are not.


Renters don't pay taxes and upkeep directly, but unless the landlord is an idiot he's going to charge enough in rent to cover the P&I, taxes and some profit to make it worthwhile.

Of course, if the market won't allow the landlord to make money there will be less supply and rents will go up eventually.

I think someone already said it, but IMO the best rule of thumb is time. If you're going to live there for 15-20 years then its probably a good idea to buy, especially with the cheap money people are getting today.



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Posted by Zach on 4/8 at 9:47 am to Siderophore
You're leaving out the profit from resale. You can't do that renting. Of course, you have to be really good at judging trends.

I am in house No. 3. When I bought 1 and 2 I asked myself "what's gonna be a popular neighborhood in five or ten years?" I bought, lived in them five to ten years and sold at huge profits.

I'm gonna live in House 3 until I die. Already gave strict instructions to the wife to sell and get a condo. It will sell for 4 times what I paid for it.



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Posted by Bear Is Dead on 4/8 at 11:00 am to lynxcat
quote:

You cannot make this statement as a fact. There are too many variables.

I understand your point, but lets assume that everyone eventually would prefer to own. I would assume that no one wants to be a renter for their whole life. With that assumption, this is unquestionably the best time to buy that we will probably ever see.



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Posted by LSUTigers00884 on 4/8 at 11:05 am to Bear Is Dead
I have a couple basic questions about this. I'm in college and not sure which to do after college.

How much is a normal down payment (what percentage)?

What other costs are associated with owning? (Besides obvious maintenance)

What would be the minimum length of time you stay somewhere to own?

For example, I'm going to be a minister and might be at 3-5 churches throughout my life. And you can't move if your house doesn't sell.



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Posted by Bear Is Dead on 4/8 at 11:18 am to LSUTigers00884
quote:

How much is a normal down payment (what percentage)?

Some loans dont require anything, but im not a proponent of that route. You avoid paying PMI (mortgage insurance) by putting 20% down. I would recommend that if you can afford it.

quote:

What other costs are associated with owning?

Property taxes in LA are cheap, mine are only like $100/month (if you put it in escrow)
Homeowner's insurance is about $1,200/year for me.
Flood insurance may be an expense, not sure how much those premiums can be.



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Posted by ItNeverRains on 4/8 at 3:19 pm to BeaumontBengal
quote:

I am trying to decide between renting and buying now. I figured that 3% interest on a $250k mortgage loan will be $7500 and the property taxes for the place I was looking at was $6000. Rent at the place I'm looking at is right around $1000 a month. I figured it would cost $12000 next year to rent (which could be considered throwing money away) and buying would cost $13500 next year before I pay a dime on the mortgage (I consider this money thrown away as it does not go toward the mortgage). Not a huge difference but it convinced me to rent when I realized I would be "throwing away" about 12-13k next year either way. Not so in love with the place I was looking at that I couldn't live without it, either. Seemed simple in my head, but I have wondered if I'm missing something.


Where are you looking to move that would have 6k in property taxes on a 250k place?

You're also neglecting the tax benefits of home ownership.


This post was edited on 4/8 at 3:21 pm

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