Get Rich Slowly

The proactive homeowner: How to stay on top of home improvement

posted by J.D. Roth on 24 May 2018 26 Comments

Yesterday was an exciting day at the Rothwards household! After three weeks of demolition and construction, we installed our new hot tub.

It took six men an hour of maneuvering before we managed to set the spa into place…but we did it. And we didn’t break anything. Now it’s a matter of completing the decking and roofing, then Kim and I will be able to enjoy our remodeled outdoor oasis!

Installing our hot tub

We’re eager for construction to be over. Since buying our “English cottage” last summer, we’ve poured tons of money and time into a variety of renovations. It’s been a non-stop construction zone.

You see, during the seventeen years the previous owners lived here, they performed very little maintenance and upkeep on the home and property. When we had the place inspected before purchase, the inspector raised a lot of concerns:

Warning from inspection report

The inspection report was so dire that Kim and I almost passed on the purchase.

After we did decide to buy the place, I vowed that I’d be a proactive homeowner. Instead of allowing things to fall into a state of disrepair, I wanted to fix everything that was broken and then stay on top of home improvement in the years to come.

Today I want to share four specific actions I’ve taken to try to be a proactive homeowner. [Read more…]

Spare change: Awesome articles from elsewhere
Why you should get a mortgage through a credit union or a local bank How to write a resumé so you actually have a prayer of getting hired How to slow down time Don't let ego lead you to buy a bigger house than you need 7 helpful posts from the personal finance subreddit	What I wish I'd known at 18: Money advice for a graduating senior 17 insights from 17 months living abroad Jason Zweig selects some of the top investing articles that he's written The algebra of happiness [YouTube] The next time you want to complain at work, do this instead Find an archive of all past spare change links on Pinboard.

Spare change: Awesome articles from elsewhere

Why you should get a mortgage through a credit union or a local bank

How to write a resumé so you actually have a prayer of getting hired

How to slow down time

Don't let ego lead you to buy a bigger house than you need

7 helpful posts from the personal finance subreddit

What I wish I'd known at 18: Money advice for a graduating senior

17 insights from 17 months living abroad

Jason Zweig selects some of the top investing articles that he's written

The algebra of happiness [YouTube]

The next time you want to complain at work, do this instead

Find an archive of all past spare change links on Pinboard.

Does the American Dream require a big American home?

posted by J.D. Roth on 21 May 2018 84 Comments

This is a guest post from Steve Adcock, who writes at Think Save Retire, a blog about early retirement and Financial Independence. Steve and his wife retired in their mid-thirties to travel full time in an Airstream trailer. For more info, check out their YouTube channel.

One of the most deeply-embedded pieces of the “American Dream” is the desire for a large, spacious home with lots of sitting rooms, corners, nooks, and crannies. Large dining rooms and other entertainment spaces! Wrap-around porches! Two- or three-stall garages and one heck of a master suite!

To many of us, a large home is a mark of success. A big house indicate status, and the more space we’re able to call our own, the more successful we look and feel.

But, what if I told you that most of us don’t use even a fraction of that space? That’s not just me talking. A research team affiliated with the University of California studied American families and where they hung out the most inside their homes, how (and where) clutter builds, and the general stress level associated with living big.

The findings were overwhelming: The majority of the space in our homes is wasted.

How We Use Our Homes

As J.D. shared on Saturday, researchers at UCLA conducted a detailed study of 32 dual-income families living in the Los Angeles area, one of the first studies to document so vividly how we interact with the things for which we’ve paid good money. The findings were not pretty. In fact, they helped prove how little we use our big homes for things other than clutter or objects that hold little intrinsic value.

From the press release:

The researchers doggedly videotaped the activities of family members, tracked their every move with position-locating devices and documented their homes, yards and activities with reams and reams of photographs. They asked family members to narrate videotaped tours of their homes and took measurements at regular intervals of stress hormones via saliva samples.

When I originally wrote about the study, I took special note of where families spent the large majority of their time. In the following UCLA-published diagram of one family that was studied, we can easily observe a truth that’s probably common among so many of us: We tend to congregate around two primary areas of the home: food preparation/eating and television.

Time spent in the home

While this diagram only represents a single family, the results of the study suggest that this family is very typical of most of those studied, and the majority of traditional homes. [Read more…]

The cluttered lives of middle-class Americans

posted by J.D. Roth on 19 May 2018 47 Comments

Long-time readers are familiar with my decade-long war on Stuff. I was raised in a cluttered home. From a young age, I was a collector. (Some might even say a hoarder!) After Kris and I got married, I began to acquire adult-level quantities of Stuff. When we moved to a larger house, I found ways to acquire even more Stuff. I owned thousands of books, thousands of comic books, hundreds of compact discs, and scads of other crap.

Eventually, I’d had enough. A decade ago, I began the s-l-o-w process of de-cluttering.

While I still bring new Stuff into the house — Kim would tell you I bring too much Stuff home — I’m not nearly so acquisitive as I used to be. In fact, for the past decade I’ve purged far more than I’ve acquired. And that process continues, week by week, month by month, year by year.

The Cluttered Lives of the American Middle Class

Turns out, I’m not the only one fighting this battle. Many Americans struggle with clutter. This is one reason for the popularity of the simplicity movement. When I visit my friends who live in tiny houses, they rejoice at the lack of Stuff in their lives. And it’s why books like Marie Kondo’s The Life-Changing Magic of Tidying Up become popular bestsellers. (That book is great, by the way. Here’s my review from my personal site.)

A while ago, I stumbled on a video that documents the work of a group of anthropologists from UCLA. These researchers visited the homes of 32 typical American families. They wanted to look at how people interacted with their environments, at how they used space. They also wanted to look at how dual-income, middle-class families related to their material possessions. They systematically documented the Stuff people own, where they keep it, and how they use it.

This team produced a book called Life at Home in the Twenty-First Century, which records their findings. They also produced this twenty-minute video that provides an overview of the results:

“Contemporary U.S. households have more possessions per household than any society in global history,” says Jeanne E. Arnold. That’s both shocking and unsurprising all at once.

Her colleague Anthony Graesch notes that our homes reflect this material abundance. “Hyper-consumerism is evident in many spaces,” he says, “like garages, corners of home offices, and even sometimes in the corners of living rooms and bedrooms.”

Graesch continues: “We have lots of Stuff. We have many mechanisms by which we accumulate possessions in our home, but we have few rituals or mechanisms or processes for unloading these objects, for getting rid of them.” All of this stuff causes stress. It carries very real physical and emotional tolls.

One interesting finding? Clutter bothers women more than men. This might be because the responsibility for cleaning the clutter generally falls to women.

“The United States has 3.1% of the world’s children but consumes 40% of the world’s toys,” notes Arnold. In households with children — or, in my case, puppies — the toys can take over the home. Children’s toys and objects spill out of their bedrooms into living areas, kitchens, and bathrooms. The push to become consumers, to value Stuff, starts at an early age.

Why do modern kids have so many toys? It may be because there are so many playthings available so cheaply. There’s more Stuff available for kids than there was fifty years ago, and that Stuff costs less. Plus, priorities seem to have shifted. Modern parents see spending on kids as a priority; parents fifty years ago did not. [Read more…]

How to get started with real estate investing

posted by J.D. Roth on 17 May 2018 14 Comments

Today’s article is from Chad Carson, who writes about real estate investing (and other money matters) at Coach Carson. I’ve always been intrigued by real estate investing but overwhelmed by how much info available. I asked Chad if he’d be willing to write an article that would help me (and other GRS readers) understand the basics of real estate investing. This is the result.

I got started in real estate investing right after college. Because a young adult can basically sleep in a car if he has to (my 1998 Toyota Camry with cloth seats was comfortable), I had little to lose by launching a business. Unfortunately, as a Biology major, I also knew very little about business or real estate. But I did know how to hustle and to learn. That helped.

Slowly, I learned to find good deals and to resell them for a small markup of profit (a.k.a. wholesaling). I also learned to buy, fix, and flip houses for a bigger profit (a.k.a. retailing). After a few years, my business partner and I began keeping some rental properties because we knew that was the path to generating regular, passive income.

While my early business might sound like an exciting HGTV house-flipping show, it’s not for everyone. I experienced radical ups and downs of cash flow, and there were many unpredictable outcomes. I learned a lot being a full-time investor, but there are actually easier ways to get started.

Most investors I know started with a full-time job. They became valuable at their job, earned good money, lived frugally, and started boosting their saving rate. With their extra savings, they began buying rental properties on the side.

I’m not saying you shouldn’t begin as a real estate entrepreneur like I did — you’ll know if you’re called to make that leap — but if you currently have a non-real estate job and you’re saving money, you’re already going down the easiest path.

The next step is to learn how to invest that money profitably and safely. I personally think real estate investing is one of the best ways to do that. I’ll show you why that’s the case in the next section.

How to get started with real estate investing

Why Real Estate Investing? Because It’s Ideal!

I’ve yet to find a better way to describe the benefits of real estate than this. All you need to remember is the acronym I.D.E.A.L:

Income. The biggest benefit of real estate is rental income. Even the worst rentals I find produce more income than a portfolio of other assets like stocks or bonds. For example, I often see unleveraged (no debt) returns of 5-10% from rental income. And with reasonable leverage, it’s possible to see these returns jump to 10-15% or higher. The dividend rate of the S&P 500, on the other hand, is only 1.99% as of 1/24/17. And the yield on a broad basket of US bonds as of the same date was only 2.41%.
Depreciation. Our government requires rental owners to spread out the cost of an asset over multiple years (27.5 years for residential real estate). This produces something called a yearly depreciation expense that can “shelter” or protect your income from taxes and reduce your tax bill. (For more about this, check my article The Incredible Tax Benefits of Real Estate Investing over at Mad Fientist.)
Equity. If you borrow money to buy a rental property, your tenant basically pays off your mortgage for you with their monthly rent. Trust me: Having somebody else pay your mortgage is a beautiful thing! Like a forced savings account, your equity in the property gets bigger and bigger over time.
Appreciation. Over the long run, real estate has gone up in value about the same rate as inflation, roughly three to four percent a year. Combined with the three benefits above, appreciation can produce a very solid long-term return. But this passive style of inflation is not the whole story. Active appreciation is even more profitable. You get active appreciation when you force the value higher by doing something to the property, like with a house remodel or changing the zoning.
Leverage. Debt leverage is readily available to buy real estate. This means your $100,000 of savings can buy five properties at $20,000 down instead of just one property for $100,000. Interest on this debt is deductible, so you also save on your taxes. (While this can be helpful, keep in mind that leverage also magnifies your losses if things go bad.)

These IDEAL benefits are core reasons to invest in real estate. But as a Get Rich Slowly reader, I think you’ll appreciate another core real estate investing benefit: control!

Controlling Your Financial Destiny

I love J.D.’s message here at Get Rich Slowly: You are the boss of you! You can apply this lesson to so many parts of life, but it especially applies to your finances. Real estate investing fits very well with the GRS philosophy. Why? Because real estate gives you much more control than other more traditional investments.

I’m also a fan of low-cost index fund investing, for example, but do you have an impact on the returns of your stock portfolio? Not really. The 3500+ managers of the companies owned by the VTI total stock market index fund do impact your returns, but not you personally. You simply control when you buy, how much you buy, and when you sell.

But with a rental duplex, for example, your decisions directly affect its profitability (for better or worse!).

You can buy in certain neighborhoods and ignore others.
You can negotiate with your bank, with the seller, and with your vendors to get better prices.
You can choose the property manager and the types of tenants who will ultimately produce the returns for your investment.

If this prospect of control excites you, then keep reading. But if your palms are clammy at the idea of hands-on investments, just focus on a different vehicle. That’s okay. There are options for everyone in this big investing universe!

To make things manageable, we’re going to break things down a little. As a baby, you learned to walk by taking tiny steps. You also fell down a lot, but with a diaper four inches from the ground, what’s the harm?!

Well, you’re no longer a baby. Financially you do have a lot to lose. Your family, your hard-earned savings, your plans for financial independence, and your pride would all suffer if you made bad investments.

I get that. And that’s why we still need to take safe, baby steps. There’ll be plenty of time to run and grow faster once you’re more confident. But in the beginning, just strive to move forward steadily.

The seven baby steps below provide a simple path to follow. I’ve taken each of these steps personally. You can use them as a blueprint to help you move forward with your own real estate investments. [Read more…]

The Modern Wealth Index

posted by J.D. Roth on 16 May 2018 8 Comments

Charles Schwab has released its 2018 Modern Wealth Index, a survey of the saving and investing habits of 1000 Americans. Here’s how the company describes its methodology:

The Modern Wealth Index…is based on Schwab’s Investing Principles and composed of over 50 financial behaviors and attitudes. Each behavior or attitude is assigned a varying amount of points depending on its importance, out of a total of 100 possible points…Quotas were set so that the sample is as demographically representative as possible.

This survey divides respondents into two categories: those with a written financial plan and those without a written financial plan. About 25% of people are “Planners”; the rest are “Non-Planners”.

Unsurprisingly, the survey found that Planners are more likely to be in control of their finances. For instance, 75% of Planners pay their bill and still manage to save each month. Only 33% of Non-Planners are able to do this. Almost two-thirds of Planners have an emergency fund; less than one-quarter of Non-Planners have set money aside for a rainy day.

And the higher a person’s score in Schwab’s Modern Wealth Index, the more likely they are to have a written plan!

If having a written financial plan is so strongly correlated with desirable monetary outcomes, then why don’t more people do it? For most folks, it’s because they don’t think they have enough money to warrant one.

Personally, I’ve never had a written financial plan, although I do see their value. If I were to start again as an adult today, I’d probably create one.

I thought that the most interesting part of the Schwab survey was how participants viewed wealth. One question asked participants about their personal definition of wealth. What is wealth? Two of the top three answers weren’t about money at all:

Related to yesterday’s article about the relationship between time, money, and happiness, Americans say the things that make them feel wealthiest in their day-to-day lives are having personal free time and spending time with family. (When asked to focus on the numbers, respondents said they needed $1.4 million on average to be “comfortable”, or $2.4 million to really be wealthy.)

Want to see where you fit on Schwab’s Modern Wealth Index? You can take a 16-question quiz at their website. But note that some questions aren’t really applicable to folks who have already retired or achieved Financial Independence. ~~Also note that you’ll have to enter your contact info in order to actually see your results. (I took the quiz, but didn’t see my results because I hate giving out personal info.)~~

Update! I just received an email from the Schwab PR team. As Rita noted in the comments below, it is possible to see your score without supplying contact info. When the contact info form appears on the screen, just leave everything blank and click the button below to move on to the numbers. I scored an 83. I think that’s largely because I didn’t know how to answer the income questions since I don’t really have an income anymore.

The relationship between time, money, and happiness

posted by J.D. Roth on 15 May 2018 28 Comments

The older I get, the more I’m convinced that time is money (and money is time). We’re commonly taught that money is a “store of value”. But what does “store of value” actually mean? It’s a repository of past effort that can be applied to future purchases. Really, money is a store of time. (Well, a store of productive time, anyhow.)

Now, having made this argument, I’ll admit that time and money aren’t exactly the same thing. Money is a store of time, sure, but the two concepts have some differences too.

For instance, time is linear. After one minute or one day has passed, it’s irretrievable. You cannot reclaim it. If you waste an hour, it’s gone forever. If you waste (or lose) a dollar, however, it’s always possible to earn another dollar. Time marches forward but money has no “direction”.

More importantly, time is finite. Money is not. Theoretically, your income and wealth have no upper bound. On the other hand, each of us has about seventy (maybe eighty) years on this earth. If you’re lucky, you’ll live for 1000 months. Only a very few of us will live 5000 weeks. Most of us will live between 25,000 and 30,000 days.

I’ve always loved this representation of a “life in weeks” of a typical American from the blog Wait But Why:

If you allow yourself to conduct a thought experiment in which time and money are interchangeable, you can reach some startling conclusions.

Wealth and Work

When I began to fully grasp the relationship between money and time, my first big insight was that wealth isn’t necessarily an abundance of money — it’s an abundance of time. Or potential time. When you accumulate a lot of money, you actually accumulate a large store of time to use however you please.

And, in fact, this seems to be one of the primary reasons the Financial Independence movement is gaining popularity. Financial Independence — having saved enough that you’re no longer required to work for money — provides the promise that you can use your time in whichever way you choose. When I attend FI gatherings, I ask folks what motivates them. Almost everyone offers some variation on the theme: “I want to be able to do what I want, when I want.”

To me, one of the huge ironies of modern society is that so many people spend so much time to accumulate so much Stuff — yet never manage to set aside anything for the future. Why is this?

In an article on Wealth and Work, Thomas J. Elpel explores the complicated relationship between our ever-increasing standard of living and the effort required to achieve that level of comfort.

Ultimately you are significantly wealthier than before, but you are also working harder too. Nobody said you had to pay for oil lamps and oil or books and freshly laundered clothes, but you would feel deprived if you didn’t, so you work a little harder to give your family all the good things that life has to offer.

It’s a catch-22. You work more to have more money to buy more Stuff…but because you have so much Stuff, you need more money, which means you have to work more. It’s almost as if the more physical things you possess, the less time you have.

How do you escape this vicious cycle? There are two ways, actually. [Read more…]

18 favorite financial rules of thumb (and some useful money guidelines)

posted by J.D. Roth on 14 May 2018 44 Comments

After twelve years of reading and writing about money, I’ve come to love financial rules of thumb.

Financial rules of thumb provide helpful shortcuts for making quick calculations and decisions. You don’t always have time (or want to take the time) to create elaborate spreadsheets when choosing a course of action. In these cases, it’s nice to have some rough guidelines you can rely on.

You’ve probably heard of the “rule of 72”, for example. This shortcut says that if you divide 72 by a particular rate of return, you’ll get the number of years it’ll take to double your money. If your savings account yields 4%, say, it will take about 18 years for your nest egg to increase by 100%. But if you were able to earn 12% on your investment, that money would double in six years.

Like all rules of thumb, the rule of 72 isn’t precise. It doesn’t give an exact answer but a ballpark figure. Financial rules of thumb don’t always hold true. But they’re true enough for us to make loose plans based on them.

I have some engineer friends who’d get tense at this sort of sloppy guesswork, but most of the rest of us are happy to trade a bit of precision for speed. That’s what rules of thumb are all about!

The trick, of course, is knowing which rules of thumb to use. Most are handy, but some common guidelines do more harm than good.

Rules Gone Wild

In the past, you’ve probably seen my rant about some of my most-hated financial rules of thumb. Let’s look at three things I think conventional wisdom gets wrong (and what I believe are better alternatives).

How much should you save for retirement?
For instance, I get frustrated when I hear financial advisers push the idea that you should base your retirement savings on 70% of your income. Instead of estimating your retirement needs from your income, it makes far more sense to base them on spending. Your spending reflects your lifestyle; your income doesn’t.

I think a better rule of thumb for determining retirement needs is this: When estimating how much you’ll need to save for retirement, assume you’ll spend as much in the future as you do now. Use 100% of your current expenses to calculate your retirement spending. (And if you want to build in a safety margin, base your future needs on 110% of your current spending.)

How much should you spend on a house?
As I mentioned last week, another rule of thumb that makes me cranky is this common guideline espoused by all sectors of the homebuying industry: “Buy as much home as you can afford.” No no no no no! Of all financial rules of thumb, this is probably the worst. It’s certainly one of the most prevalent. This is how folks end up house poor, chained to a mortgage they resent.

Lenders quantify this guideline by saying your housing payments should be nor more than 28% or 33% or 41% of your income. But, as David Bach wrote in The Automatic Millionaire Homeowner, “You should generally assume that the amount the bank or mortgage company is willing to loan you is more than you should borrow.” A better rule of thumb? Spend as little on housing as possible. Spending less than 25% of your net income is best — less than 20% is even better.

How much life insurance should you carry?
A third rule that bugs me is the one for determining how much life insurance you should buy. Different experts give different answers. Some say your policy should cover five times your annual income. Others say ten times. And Suze Orman recommends 20 times annual income needs.

The truth is that not everyone needs life insurance. Like all insurance, it’s designed to prevent financial catastrophes. You only need it if other people — like a spouse or children — would face financial hardship when you die. If you don’t have kids, if your spouse has a good income, or you have substantial savings, then life insurance isn’t a necessity.

Even if you do need life insurance, you probably don’t need to carry as much as your insurance agent is willing to sell you. To find out the amount that’s right for you, check out the Life Insurance Needs Calculator from the non-profit Life Happens organization. (How much life insurance should I carry? According to this calculator, I shouldn’t have any at all. And I don’t.) [Read more…]

April 2018 spending update: Did moving to the suburbs save me money?

posted by J.D. Roth on 12 May 2018 12 Comments

When Kim and I moved last summer from our riverfront condo to this country cottage on the outskirts of Portland, one of my primary aims was to slash our spending on both housing and food.

Although we owned our condo free and clear, living there still cost us roughly $1200 per month. Plus, there were the added costs that came from living so close to bars and restaurants. Sure, we didn’t have to eat out as often as we did — we understand that was a choice — but we enjoyed exploring what the neighborhood had to offer.

Well, I’ve now had time to gather enough data to determine whether we were able to achieve this goal, to cut our monthly costs. I’m pleased to say the answer is “yes”! But for a few years, this gain is going to be completely negated by our massive home remodeling project.

Let’s look at some numbers.

Saving on Housing

To start, here’s how my monthly housing costs have changed:

During the first four months of 2017, we paid an average of $1169.91 to live in our condo. Of that, $644.65 went to our HOA and utilities. The remaining $525.27 was spent on taxes and condo insurance.
During the first four months of 2018, we paid an average of $472.55 to live on our house. Of that, $187.91 went to utilities and $284.64 went to taxes and insurance.

Before we made the move, I estimated that it’d cost us about $500 per month for housing expenses. That was a good guess. My expenses are actually a little lower than that. And because Kim is paying me $500 per month to “vest” into ownership of the house, my net monthly housing costs are actually minus $21.45. I’m making money by living here! (Haha. I wish.)

Food for Less

Meanwhile, our eating habits have also changed. We don’t go out to eat nearly as much as we used to. When we do dine out, we choose cheaper places. (Our current neighborhood isn’t quite as hip as our old neighborhood.) Last night, for instance, we hit up our favorite pub. It cost us $54, and that’s expensive for this neck of the woods. In our previous neighborhood, we’d often hit a hundred dollars when dining out.

Here’s how my food spending has changed:

During the first four months of 2017, I spent an average of $568.42 per month on groceries and $554.14 on restaurants. That’s a total of $1169.91 per month on food. Holy cats! (And that doesn’t include money that Kim paid for groceries…)
During the first four months of 2018, I spent an average of $477.33 per month on groceries and $332.01 per month on restaurants. That’s a total of $809.34 per month on food.

Let me be the first to point out that I spend a lot of money on food. I acknowledge that. This wasn’t a weak spot in my budget back when I started Get Rich Slowly in 2006, but it certainly is today!

That said, moving to the suburbs did indeed help me spend less on food. My grocery bills aren’t down as much as I’d expected — only about 16% — but that’s still saving me nearly $100 per month. Meanwhile, my restaurant spending has been cut nearly in half! Overall, my monthly food budget has declined by 28% (which is more than $300 per month).

Creating Cash Flow

When we were planning for our move last spring, I wrote that I hoped my cash flow would improve by $1200 to $1300 per month. With the reduction in housing and food spending, I’ve saved an average of $1010.58 per month so far in 2018. When you add in Kim’s monthly $500 “mortgage” payment to me, my cash flow has improved by $1510.58.

That’s outstanding!

“But wait, J.D.” you may be saying. “Have other aspects of your budget ballooned because of the move? Are you driving more, for instance? And what about your outlandish home improvement projects? You’ve already admitted that you’ve spent roughly $100,000 on renovations since moving in!”

I am spending about twice as much on fuel as I was before. During the first four months of 2017, I spent an average of $25.79 per month on fuel. So far in 2018, I’ve averaged $56.69 per month on fuel. Other than that, however, the move has had no adverse effect on my finances…except for the very expensive remodeling projects we’ve been doing.

The Big, Fat Elephant in the Room

I haven’t included the remodeling costs in the above numbers because they’re not a regular expense. Trust me: I’m perfectly aware of how much I’m spending on home improvement, and it’s caused me plenty of anxiety. But those costs aren’t recurring, so I don’t include them when calculating average monthly expenses.

What I have been doing is some mathematics gymnastics:

My cash flow has improved by $1510.58 per month.
Our pre-deck (and hot tub) home improvement costs totalled $92,934.61. Of that, $59,000 came from selling the condo, which means we’ve had $33,934.61 in un-budgeted home improvements since moving in.
We don’t have a final tally on the deck and hot tub project (and won’t for several weeks), but I expect it to be close to that $33,934.61.

Based on these numbers, we can calculate how long it will take to recover the remodeling costs (compared with having remained in the condo). Dividing our $33,934.61 excess costs by my $1510.58 per month improved cash flow, we find that it’ll take 22.5 months — just under two years — to compensate. And, of course, it’ll take roughly the same amount of time to compensate for the deck and hot tub.

Translation for non-nerds: Moving from the condo to this house saved me just over $1500 per month. This savings has been temporarily negated by all of the home projects. But after about four years — assuming we find no further problems — we’ll pass the break-even point. At that time, the move will become a financial win!

Fingers crossed, my friends. Fingers crossed.

Is it better to rent or buy? How to know when renting a home makes sense

posted by J.D. Roth on 10 May 2018 57 Comments

I’ve been a homeowner for 24 of the last 25 years. Based on this, you might think I’m an advocate of homeownership over renting. That’s not the case. The older I get, the more I appreciate there’s no correct answer in the perennial “is it better to rent or buy?” debate. Sometimes buying a home makes the most sense. Sometimes renting is the smarter choice.

In an editorial in the June 2007 issue of Kiplinger’s Personal Finance, Knight Kiplinger wrote, “It often costs less to rent. The annual cost of owning a property, be it a house or a condo, is usually greater than the cost of renting, after taxes.” I agree.

Today, let’s look at a handful of ways to evaluate the rent versus buy decision from a financial perspective.

The Price-to-Rent Ratio

One way to tell whether it’s better to rent or buy is by calculating the price-to-rent ratio (or P/R ratio). This number gives you a rough idea whether homes in your area are fairly priced. Figuring a P/R ratio is simple. All you need to do is:

Find two similar houses (or condos or apartments), one for sale and one for rent.
Divide the sale price of the one place by the annual rent for the other. The resulting number is the P/R ratio.

For example, say you find a $200,000 house for sale in a nice neighborhood. You find a similar house on the next block for rent for $1,000 per month (which works out to $12,000 per year). Dividing $200,000 by $12,000, you get a P/R ratio of 16.7. But what does this number mean?

Writing in The New York Times, David Leonhardt says, “A rent ratio above 20 means that the monthly costs of ownership well exceed the cost of renting.” That’s a little opaque, I know. Leonhardt is saying that the higher the P/R ratio, the more it makes sense to rent — and the less it makes sense to buy.

The normal P/R ratio range nationwide is between 10 and 14 (meaning it would cost between $1200 and $1600 to rent a $200,000 house). During the 1990s, just before the housing bubble, the national P/R ratio was usually between 14 and 15 (about $1100 to $1200 to rent a $200,000 house). During last decade’s housing bubble, national price-to-rent ratios rose to 22.73 (in 2005) then to 24.50 (in 2007) before the market collapsed. As most folks were rushing to buy homes, the numbers said they ought to be renting.

Based on this info, I’d argue that:

When price-to-rent ratios are under 12, it’s generally better to buy than to rent.
When price-to-rent ratios are between 12 and 15, the financial decision is murky.
When price-to-rent ratios climb above 15, you’re probably better off renting.

Nationwide numbers don’t tell the full story, of course. While the national price-to-rent ratio might be around 20, the actual numbers in your city could be very different. [Read more…]