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Message
Renting vs owning
Posted on 4/7/13 at 11:12 am
Posted on 4/7/13 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.
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 4/7/13 at 11:27 am
8
Posted on 4/7/13 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.
Posted on 4/7/13 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 4/7/13 at 11:59 am
Posted on 4/7/13 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.
Once you own a property it is your forever as long as you pay the taxes. Renting, you have nothing in the end.
Posted on 4/7/13 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.
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.
Posted on 4/8/13 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.
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.
Posted on 4/8/13 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.
Posted on 4/8/13 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.
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.
Posted on 4/10/13 at 1:25 pm to Siderophore
I think Doc Fenton offered the best insight and I'd only add that if you are young and single or just single buying is also questionable...for me, when I was a single professional with limited time for nearly anything outside of work, I liked the fact that there was no upkeep and if anything broke I just called the front office and it was fixed without any additional charges. Renting is convenience....have a house now and if it weren't for the woman at home I don't know how I'd manage it.
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