Renting vs. buying: The realities of home-ownership

This is a guest-post from Tim Ellis, author of Seattle Bubble, a blog and forum dedicated to discussing real estate market conditions in the Seattle area.

“If you rent, you're throwing away your money.”
“Owning your own home is a forced savings plan.”
“Home ownership is an excellent path to build wealth.”

You've probably heard statements like these plenty of times. On television, radio, the internet, and in casual conversation. Such sentiments are common in any discussion that involves home-buying and personal finances. It's common knowledge that buying a home is a better financial move than renting. After all, you're building equity instead of throwing away your money, right? Well, maybe not quite… Rather than assuming the “common knowledge” on this subject is accurate, let's take a look for ourselves at some of the financial differences between renting and home-buying.

A Real-World Example

For the purpose of comparing renting to owning in this article, I'll be using real-world data gathered from my area (northeast of Seattle). Although most first-time buyers tend to move from renting an apartment to buying a larger, stand-alone house, as much as I can I will compare apples to apples.

  • For rent, I located a 3-bed, 2.5-bath, 1,840 sqft house with an attached 2-car garage, on 0.2 acres. Monthly price: $1,495.
  • For purchase I found a 3-bed, 2.5-bath, 1,850 sqft house with an attached 2-car garage, on 0.22 acres. Price: $424,950.

The two homes are located within two miles of each other in similar neighborhoods, and neither is located on a busy road. We'll assume that our hypothetical homebuyer is a married couple with $85,000 in the bank to make a 20% down payment. To calculate mortgage payments we will use a recent 30-year fixed interest rate of 6.25%.

Let's look at how the monthly costs break down (approximately) for our hypothetical potential first-time homebuyer:

RentingBuying
Rent/Mortgage:$1,495$2,093
Insurance:$20$163
Property Tax:$407
Tax Savings*:($327)
Maintenance:$354
Total:$1,515$2,690

*: (less standard deduction)

Right off the bat, you see that simply trading straight across from renting to owning results in a 78% more expensive monthly bill. That's not exactly chump change. With even a slight upgrade from renting to buying (which most first-time buyers are prone to do), you can easily see how the total monthly costs would be more than double.

“If You Rent, You're Throwing Away Your Money.”

Common knowledge says that despite today's large premium, buying a home is a “good investment”. Hey, at least you're not “throwing away” your money, right? True, the renter in our scenario spends $1,515 every month that they will never see again. I wouldn't exactly say it has been “thrown away” any more than money spent on any other good or service is “thrown away,” but granted, there is zero financial return on that money.

However, when you take a look at the breakdown of the homebuyer's monthly expenses, a large amount is money that will never return, either. Insurance, property tax (less tax savings), and maintenance, add up to $517 every month that is being “thrown away.” Even worse is the amount spent on mortgage interest. Consider how much of a mortgage payment is applied toward loan interest throughout the life of a 30-year fixed loan:

Years% toward interest
0-5~80%
6-10~70%
11-15~60%
16-20~50%
21-25~35%
26-30~10%

In the first five years, approximately 80% of the mortgage payment goes toward interest. That's an additional $1,674, for a total of $2,191 being “thrown away” every single month by the homebuyer for the first five years. Ouch! In fact, not until the homebuyer has been paying down the mortgage for over 20 years will the amount they are “throwing away” be less than the renter.

“Owning Your Own Home is a Forced Savings Plan.”

As you can see above, if home buying is like a savings plan, it's probably the worst savings plan on Earth. Would you voluntarily sign up for a savings plan where well over half of the money you deposit in the first 20 years simply vanishes, and from which you can only withdraw money by relocating and paying a 6-9% fee (not on the amount you have “saved” mind you, but on the total sale price of the home)? Of course not. That doesn't sound anything like a savings plan.

If our potential homebuyer has that $85,000 saved up for a down payment and deposits it along with just half of the monthly savings over buying ($578 per month) into an account at 8% interest, the balance will be nearly $300,000 in just 10 years. That's a liquid investment, that can be used for whatever you want, no relocation required. Buying a home is not a savings plan. Actually saving money every month is a savings plan.

“Home Ownership is an Excellent Path to Build Wealth.”

If your goal is to build wealth, you will be much better off investing your money in the stock market than buying a home. While both stocks and housing are cyclical markets, long-term historic trends show that housing appreciates at a rate barely above inflation, while stocks tend to return an inflation-adjusted 7-10%. In our hypothetical scenario, a renter who invested in the stock market with the $85,000 down payment plus the monthly difference between the $1,515 rent and the $2,690 home-buying costs would be over $500,000 better off after 30 years than the homebuyer, assuming 4% average appreciation.

An important thing to consider is that home prices in the United States are just now beginning to correct from an enormous unprecedented run-up in recent years. Despite what those in the business of selling real estate may insist, the correction in housing is still in the early stages. Four percent is most likely overly optimistic for most areas in the next 5-10 years. The only thing we know for sure is that double-digit gains are gone and won't be coming back any time soon.

Also keep in mind — I mentioned it above but it bears repeating — in order to cash in on any “wealth” you build through your home you will need to sell that home and move. No, “extracting equity” does not count, since that simply results in a larger debt. Debt is not equal to Wealth.

Conclusion

For most people buying a home will result in their largest monthly bill (by far), and because they believe that it will bring them wealth or that they are “throwing away their money” if they rent, they often take on a much larger home debt than a prudent budget would allow. It is a real shame when people are driven to get into the housing market because of misplaced notions of imagined financial benefits. Of course, everyone's circumstances are different, and for some (particularly those that live away from the coasts) the numbers may actually work out in favor of buying.

Don't misunderstand me here. I am not saying that no one should buy a home, or that my example scenario is a golden standard of truth for all. Don't take my word for it. Run the numbers for yourself, check out other articles (a small collection is listed below), and do what works for you. I highly recommend the great graphical calculator from The New York Times for comparing the financial aspects of renting and buying. Many people will consider all of the consequences — financial, emotional, etc. — and conclude that buying a home is the best decision. Just don't trick yourself into thinking it's a good financial decision if it's not.

I myself intend to buy a house some day. However when that day comes, I will be buying a house because I want a nice, “permanent” place to live where I'm the boss, not because I think it will help me get me rich.

Additional Resources

Wall Street Journal: Your Home Isn't the Nest Egg That You May Think It Is
New York Times: A Word of Advice During a Housing Slump: Rent
New York Times: Is it better to buy or rent? (graphical calculator)
The Motley Fool: The Worst Investment Ever
SmartMoney.com: Renting Makes More Financial Sense Than Homeownership
CNN Money: Stocks vs. Real Estate
Priced Out Forever: Renting vs. Purchasing

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nic
nic
12 years ago

“In fact, not until the homebuyer has been paying down the mortgage for over 20 years will the amount they are “throwing away” be less than the renter.”

This assumes that the renters rent never goes up, unlike a fixed rate mortgage it surely will. Also if the homeowner had gotten a 15 year fixed then at year 20 he would be on his fifth year of rent/mortgage free living.

smartmoney
smartmoney
8 years ago
Reply to  nic

NIC,

Rent doesn’t always go up. Over the past 5 years, my rent has decreased substantially at the same apartment. I recently moved to another apartment because of even cheaper rent.

Guille
Guille
12 years ago

Great article, describes perfectly what’s happening also here in Spain and the excuses that’s buyers use to justify themselves.

The Tim
The Tim
12 years ago

This assumes that the renters rent never goes up, unlike a fixed rate mortgage it surely will.

Actually that’s not true. That figures in annual rent increases of something like 3-5%. I forget the exact figure I used, but it was factored in.

JerichoHill
JerichoHill
12 years ago

Wonderful, wonderful article. Loved it.

Bankrate has alot of good tools on this as well.

I hear the “buying is smarter” all the time. Folks dont like it when you show them that buying isn’t necesarily smarter. I think there’s a stigma to renting.

brad
brad
12 years ago

As a late-blooming homebuyer (I waited until age 48 to buy my first home), I do find myself a bit nostalgic for the relatively carefree renter’s life. I went from renting a three-bedroom apartment for $550/month to a three-bedroom house (not much more room but we now have a basement) for which I’m paying $2600/month (15-year mortgage), so the biggest impact on me has been cash flow. There are also lots of expenses that I don’t think we’d be making if we moved to another apartment, like new (better) furniture, curtains, a lawnmower, yard tools, etc., none of which will… Read more »

David Hunter
David Hunter
12 years ago

I agree with much of what you have said. However I think you need to rethink the investment aspect. The leverage makes a difference because it effectively allows you to multiply your returns. While I am aware you can borrow to buy stocks the APR on these loans is typically much higher and the LVR lower. I’m personally keen on a mixed portfolio including both stocks and property.

mary
mary
12 years ago

Rents increase over time. The PI portion of a fixed-rate mortgage will not increase. Property taxes will increase over time. Leases often say that the rent can be increased by an amount equal to the increase in property taxes. House values also increase over time.
A renter gets no benefit from this.

nic
nic
12 years ago

At just 3% 20 years looks about right, at 5% its looking more like 15 years. I guess having a good figure for annual rent increase could be a big part of this equation. I was assuming higher than 3%

Chance
Chance
12 years ago

While I agree with most of your points, I have to say the example data is unrealistic, at least for the purpose of proving your point. Generally speaking, you won’t find $425K houses renting for $1500. As your numbers show, that’s a hefty loss from what the landlord would likely be paying each month for mortgage, tax, and insurance. While landlords often do rent at a loss for the first few years (until they can raise the rent), a 40% loss is MUCH higher than normal. The housing market would have to have just tanked. I just looked at some… Read more »

Jeff
Jeff
12 years ago

I hate it when PF Blogs let someone post about how renting isn’t such a bad deal. Renting sucks. How much do the renters benefit when property values rise? They don’t. If you own, you have a stake in a market that consistently rises. I purchased a condo for 62K, and continued to pay mortgage and taxes consistent with what I would have paid to rent it. Sold that condo 5 years later for 148,500. Even if the market had not gone up, I would have walked away with thousands in equity. If I had just rented it, I would… Read more »

jp
jp
9 years ago
Reply to  Jeff

dude, you could have just put that money in a good stock and got the same return if not better.

Chucks
Chucks
9 years ago
Reply to  Jeff

“you have stake in a market that consistently rises”

hurr hurr hurr. How bout that housing bubble?

Your profit was entirely due to the housing bubble, which caused an unprecedented rise in home values that will probably never be seen again

dave
dave
8 years ago
Reply to  Jeff

I love it – your hose payment is not leverage, it is simply debt. Now the mention that real estate always goes up is obviously delusional, you caold spend decades hoping to “break even” if you happen to buy near a blow off top. I agree with this article and have been a rich renter.

ansaar19
ansaar19
5 years ago
Reply to  Jeff

how does that match to cost of living in the 5 year time to actual profit?

Michel
Michel
12 years ago

I’d like to add that there is another aspect: money availability.
Life is uncertain, you might need extra cash someday, and if you need to sell your house for that, that’s not easy. And if you desperately need that money you surely won’t make the best possible deal.

brad
brad
12 years ago

@Jeff, to make a fair comparison you need to estimate how well you’d be off if you took the money you’d save by renting and invested it. In fact, in some markets where property values are not consistently rising (and those bought in a bubble that is about to burst), you may come out ahead in the long run by renting and investing the difference. This is now common financial wisdom, there’s nothing controversial about it.

cmarie14
cmarie14
12 years ago

I agree with Jeff. There is something to be said for those of us fortunate enough to have caught the real estate boom. We bought our first house in 1999 for $75,900 and sold it three years later for $152,000. We purchased another house in an area that had yet to catch up to the US market for $114,000 and it is currently on the market for $217,000. Finally, because of a job relocation we’ve purchased another house in a county with issues regarding the septic systems (laws are being hashed out and it’s slowed the real estate market considerably.)… Read more »

Mike
Mike
12 years ago

This is also completely based on location as well. Maybe in seattle where an 1850sqft house is over $400,000, it works out to be a better deal to rent.

Where I live, where that same house would go for about $170,000, it makes a whole lot more sense to buy. Especially considering that renting that house is about the same figure quoted in the article.

I’m sure in some situations, it can make sense to rent. But, for the majority of people, I think buying is usually the better decision.

cmarie14
cmarie14
12 years ago

I should also point out that the reason we didn’t rent initially (and we did look) is that in our area a 1 bedroom cost $800. Before utilities, our first home cost us about $700 a month, including taxes and insurance. If renting would have been cheaper, we probably would have rented.

icup
icup
12 years ago

Do most people live in overinflated markets though? I wonder. I agree you shouldn’t be buying now if the market is overinflated where you live, but is that the case everywhere? This also assumes that the person is going to invest the difference, or even save the difference, which most people won’t. Worse, it assumes they will be a savvy investor, which requires a certain amount of dedication and interest in the stock market, which most normal people don’t have. Unless they pay a pro to do it (ie get a mutual fund), but that is going to eat into… Read more »

Melsky
Melsky
12 years ago

How much do the renters lose when property prices drop? Home buyers have a lot to lose when housing prices drop. It’s a double edged sword. Just because you made some money on your house doesn’t mean it’s universal or even normal. There’s a lot of people out there trapped in their overpriced homes, or worse, facing foreclosure because they thought the market would always go up and they got in over their heads. My husband and I made 150k when we sold our house. Right now we are happy renters because it’s not always a good time to buy… Read more »

April D
April D
12 years ago

Another aspect of this is whether you plan to continually “buy up” into bigger and bigger homes. My fiance and I are going to build a house in 2 years, but we don’t plan to ever move, so by the time we retire we will no longer have a house payment.

Aimee
Aimee
12 years ago

very good points made, and certainly people should look long and hard at the actual cost of renting vs. buying. for us, buying only made us have an increase of $100 a month, so it was the wise move. in our area rents are were as high, or close to, buying costs (this may have changed in the past years). and, although it’s rarely mentioned in financial circles… there is a very good feeling in knowing that you are going to be somewhere for a long time. renting is a very unsure way to live (such as in our case,… Read more »

radiantmatrix
radiantmatrix
12 years ago

It’s true that one shouldn’t accept conventional wisdom on its face, and I’m glad that you’ve pointed this out. However, there are a few things that you don’t seem to have calculated for: (1) The value of a home is likely to rise, often at a higher rate (over the long run) than the loan interest. It may not be as good a return as a quality mutual fund, but since you have to pay for housing anyhow… (2) At some point in the future, you can be *done* paying your mortgage. That’s never true with rent. I’m not quite… Read more »

MossySF
MossySF
12 years ago

Back in 2003, I made an offer on a house but it was not accepted as I was about 35K under the top bidder. Now assuming I had bid 535K instead, I would now be in a house valued at about 800K-850K. Reduce the difference with 4 years of ~3300/mo tax-adjusted non-equity payments so the net gain would be about 110K-160K. If I had to sell, chopping off 6% would drop total profit to 60K-110K. Because my bid was not accepted, I did not have to liquidate my entire investment portfolio for the downpayment. And since that time, my portfolio… Read more »

icup
icup
12 years ago

“Actually that’s not true. That figures in annual rent increases of something like 3-5%. I forget the exact figure I used, but it was factored in.”

Please explain. When I take out my calculator and add 5% to $1495, I get almost halfway to the mortgage payment in only 5 years.

In other words, if your rent goes up 5% a year, in 5 years you will be paying $1905 a month.

I have no idea whether rent goes up that much per year, but it seems reasonable considering back when I rented, it went up that much each of the 2 years I rented.

Lynnae
Lynnae
12 years ago

I agree with a lot of what you said. Maybe it’s because I live in the expensive PNW, too. Every time I plug our info into a rent vs. buy calculator, we are always way ahead renting.

Someday we do hope to buy, but when we do, it won’t be for the purpose of investing. It will be because we want a permanent place to call home.

dshipp
dshipp
12 years ago

This analysis is incomplete. It fails to take into account that the day you buy your house, while you have a debt of hundreds of thousands, you also have an investment of hundreds of thousands, if house prices are rising at a rate that is higher than the interest you are paying on your debt, then you have the potential to make gains far higher than by investing a few hundred dollars a month into equities.

I like to see some actual calculations based on a variety of scenarios, regarding inflation, interest rates, and houseing market performance.

SomeGuy
SomeGuy
12 years ago

“For most people buying a home will result in their largest monthly bill (by far)” Simply not true. Just because you can find exceptions or extreme scenarios, doesn’t mean it’s true for “most people” The math works in this instance, but you wont find too many places where 425K houses rent for 1500. Where I live 1500 in rent gets you a house that would sell for 280-300K. I’m betting this is closer to the national norm than Seattle. The math on rent vs. buy on that one looks quite different. The “conventional wisdom” about buying vs. renting came about… Read more »

brad
brad
12 years ago

@radiantmatrix: it’s true that at some point you’ll be done paying for your house, but the longer you stay in your house the older it gets and the more money you sink into repairs and renovations. Plus property taxes will keep going up. The annual property and school taxes on the house we just bought amount to almost as much as we were paying in rent every year on our apartment. So I think it’s worth keeping in mind (for future financial planning purposes) that even a paid-off house still costs money to live in.

icup
icup
12 years ago

“even a paid-off house still costs money to live in.” sure, but its nowhere near what your mortgage was or rent would be. If my property taxes are $400 a month ($4800 a year, A LOT for my area), yeah I’m still paying money, but there is no way in hell I would find a place to rent for $400 a month that is in any way comparable to my house. Even adding 1%/month maintenance to that, the person who has his mortgage paid off is the clear winner in my mind. I would rather have a $500/month housing bill… Read more »

Jose
Jose
12 years ago

I think this article is somewhat misleading in terms of numbers. Rent: – $1,495 ($1,495 coming out of pocket) Mortgage: $2,093 (need to break it down to which goes into your pocket vs interest) You also need to mention the possibility of rent hikes as well as tax breaks from the government for the first-time home buyer. “In our hypothetical scenario, a renter who invested in the stock market with the $85,000 down payment plus the monthly difference between the $1,515 rent and the $2,690 home-buying costs would be over $500,000 better off after 30 years than the homebuyer, assuming… Read more »

Tom
Tom
12 years ago

This is a great article. In my area rent is higher than mortgage payments so this doesn’t really apply. San Francisco or other high priced markets are different. Speaking of SF real estate, I just read an article about equity sharing where an investor covers the down payment so that someone who could not buy a house can now buy it. I’m trying to get more information and just posted about it here:

Equity sharing – Prosper for real estate

Has anyone been involved in an equity share deal? Pros/cons?

radiantmatrix
radiantmatrix
12 years ago

@brad: “So I think it’s worth keeping in mind (for future financial planning purposes) that even a paid-off house still costs money to live in.” That’s an excellent point, and one I wish I would have made more clear, but it doesn’t change my conclusion. If property tax goes up in an area, so does rent. Besides which, I live in an area considered to be a high-property-tax county. Still, my property tax payments work out to about 5% of my total housing costs. (about 85% is the mortgage, and the remaining 10% is insurance, repairs, and so on). It… Read more »

someguyfromCA
someguyfromCA
12 years ago

@Someguy I agree with someguy. In Seattle I totally agree but it in reality it depends on area. And also if you buy a property with an guranteed increase of 10% annually then you are well off buying and selling it every two years to take the profit tax free. I am computer programmer earning about $150K and wife is a homemaker. We bought our house in Atlanta for $240K and now it is appraised for $265K. If we sell our property, after paying 6% real estate commision I would make fairly small profit. We bought a home in Charlotte,North… Read more »

Scott
Scott
6 years ago
Reply to  someguyfromCA

In retrospect, so many of these comments have been proven to be laughable. Appraisals are snapshots in time and they are not real money. I bought my home in 2004 for $305K. On the purchase date it was appraised at $310K. I refinanced after six months and it was appraised at $360K. I sold it in 2011–to buy a retirement home–for $255K. The housing bubble swallowed the difference. “Equity” is an illusion; it’s not real money. (Because this house was my second purchase I managed to break even between those two homes and purchased a more expensive third home at… Read more »

SJean
SJean
12 years ago

As some like buying for “stability”, i like renting for its flexiblity. Plus, I never have to fix anything or call anyone to fix things. But I’m young and expect things to change someday. Once I plan to stay somewhere for an extended period of time, I will reconsider and run the numbers. To those who say something to the effect of “one day, you won’t have to pay your mortgage” Very true, but if you were to invest the difference in the market, one day you could pay your rent strictlly off the interest of the money you “saved”… Read more »

Joel
Joel
12 years ago

I didn’t expect to see so many clueless commenters on this blog. Everybody that whines about The Tim not factoring appreciation would do well to note that he assumed 4% appreciation which is quite generous given that even the NAR is predicting price declines. And there’s always someone blathering about “leverage”. Well guess what, leverage does just as much harm as it can do good when home values are tanking. Just look at all of the sob stories in the press of people upside-down in the mortgages that are being kicked out of their houses. I can also vouch for… Read more »

JerichoHill
JerichoHill
12 years ago

@ SomeGuyFromCA

buy a property with an guranteed increase of 10% annually then you are well off buying and selling it every two years to take the profit tax free

–There is no such thing as a guarantee in any form of investment except Treasury Bills, really.

–You must factor in transactions costs and risk. Since you took the IO option, you bet that you could sell the place for a profit after two plus years (avoid cap gains) and after RE commission to avoid getting hit by the ARM reset and/or balloon payment coming due.

John
John
12 years ago

I have seen several articles in ’07 saying this (Buying a house is not such a sure thing investment after all). The analysis in these articles has been very engaging to me. My only question is: where were these articles during the boom years of ’03, ’04 and ’05? For example, it seems all the articles you cited are from ’07 as well. I guess people just follow trends in establishing conventional wisdom. Stock market bubble year (’96 – ’99)? Stocks rule. Buy buy buy. Stock market bust (’00-’01). Stocks are bad. Sell and wait. Real estate bubble year (’02-’05)?… Read more »

mp
mp
12 years ago

I’m in Seattle and I do think the numbers in the example make sense. Yes, you can rent a $400K property for even less than $1500. My roommate and I rent a 2 bedroom 2 bath condo in a very desireable location for $1250 a month. It would definitely sell for over $400K, probably closer to $450K. And as more condos are built in Seattle and bought by investors, renting condos will probably continue to be a deal.
Yes, I say probably. No, I don’t know what will happen. Yes, I wish I had bought a house in Seattle 10 years ago.

Joshua Jackson
Joshua Jackson
12 years ago

Well, I’ll put in my two cents on this issue. Please not that I’m a 24 year old with currently no outstanding debt (less credit card that is paid off every month). I live in the bay area. I make as much as my parents make individually currently. Which for most people is a decent salary and allows me to live in the area with just watching my budget to an extent. The average base price for a home is 600k plus. Meaning that to have a 20% down payment I need to have 120k. I have 20% of that… Read more »

Sam
Sam
12 years ago

“Generally speaking, you won’t find $425K houses renting for $1500.” I thought the same thing, being an investment property owner and landlord. We rent our properties to cover the mortgage, the real estate tax, insurance (high expense here in Fla.) and a small amount for repairs & upkeep. Our least expensive rental is at $1200 and that is for a house that we bought at $140,000. The author may have used an example where somone bought a house pre-boom and while it would sell for $425,000 now they bought it much cheaper and therefore can rent it out for much… Read more »

Baddriver
Baddriver
12 years ago

@Sam “The author may have used an example where someone bought a house pre-boom and while it would sell for $425,000 now they bought it much cheaper and therefore can rent it out for much cheaper. A better example would be two similar houses that were built and sold and the same time” No that would not be a better example. Unfortunately for landlords (and upside-down flippers who have become landlords) rental prices aren’t set by adding up your monthly costs and maybe a slight profit. Rental costs are set by the market. As a renter I am going to… Read more »

Tim
Tim
12 years ago

It is worth noting that if you assume a 4% gain in value and a 6% mortgage rate on a 100k home with 20% down the interest and gains in property value are fairly close. 4k to 4.8k. If you look at it this way you only loose about $800 (0.8%) the first year. Your tax deduction could even leave you in the positive range depending on how much you spend on maintenance.

It isn’t necessarily a good investment, that depends on the market, but is one of the few ways to buy a home.

Sarah
Sarah
12 years ago

While I can not say if this article is accurate in the global sense, i can say it is not accurate for the area I live in. My own personal example: I bought my condo at 156k – 1200 sqft, 2 bed, 2 bath An apartment down the street, close to the same size – rents at 1200. After my mortgage, association fees, and property taxes, i get pretty close to that 1200. in fact, its almost a wash. However – I was able to rent that extra bedroom and bathroom – which is added income for me. I had… Read more »

Mike
Mike
12 years ago

Sam – Agreed, it is indeed realistic to find affordable rentals. Rental markets aren’t solely based on current purchase prices; there’s a rental market, and owners will charge whatever that market will sustain, often adjusted downward for good, long-term tenants and low cost-of-ownership, such as when the property was purchased long ago or is one of a set among which costs and rents are distributed. Another point that is often overlooked is that yes, rents do go up sooner or later, just like incomes sometimes get interrupted or go down (something many new homeowners seem to believe won’t happen to… Read more »

Ming
Ming
12 years ago

Something that hasn’t been touched on by anyone is changing personal circumstances. Yes, it’s important to take into account the housing market, and I write this fully admitting that I bought at an advantageous time. However, your house is more than an investment, it is your home, and it is a hedge not only against inflation, but against other personal circumstances. I bought a house right out of college, and many of my friends thought I was nuts. People told me a one bedroom was a “bad investment” because people who had or wanted kids would never consider buying it.… Read more »

californian
californian
12 years ago

Chiming in from the SF bay area. It is not uncommon here to find houses valued at $800K renting for $1700. So most of the times it doesn’t make sense to buy. On the other hand, friends from Baltimore have a very different story, renting for $1200 vs buying $250-300 When you need to make a big decision (such as buying a house) you better be informed. Like others said, sometimes investing is not the only goal when buying a house. Check prices for the area (including rent): http://www.city-data.com/ http://www.rentometer.com/ http://www.zillow.com/ http://www.housingtracker.net/ For example, you can check out San Francisco… Read more »

ClickerTrainer
ClickerTrainer
12 years ago

@John ESI Money
Stock market bubble year (’80 – ‘86)? Stocks rule. Buy buy buy.
Stock market bust (’86-’87). Stocks are bad. Sell and wait.
Real estate bubble year (’85-’89)? Housing is great. Buy buy buy.
Real estate bust years (’90-’95)

Study history, it does repeat itself.

californian
californian
12 years ago

Just to be exact, then price increase is for the house is actually 7 (I guess I can’t round), and the rent increase is 1.83.

wreckingbull
wreckingbull
12 years ago

I am astounded at how many people here are missing the point of the article. The point is this. Use a model like the one ‘The Tim’ used to decide *quantitatively* which is best. If you don’t like the model ‘The Tim’ used, make your own. (I happen to think his model is pretty accurate) Yes, I am sure some of you live in areas which a $150K house rents for $1200. Great. You should probably buy. In Seattle, one ends up renting a $470K house for $1500/month. Buying right now here would be a terrible choice. The only way… Read more »

Peter
Peter
12 years ago

In the short term resnting may be cheaper, but in the long run owning has to be.

All else being equal, when you rent you’re paying the mortgage, utilities, repairs, etc… AND the landlord is making a profit. It’s hard to see how that can be cheaper than paying for all those things yourself and not having to let someone make a profit.

Of course the reality is a lot more complex than that and there are many, many other factors to consider.

Tim
Tim
12 years ago

Ok, might as well put in my 2.5 cents as well. I’m probably one of the lucky ones, in that I bought my house just out of college for $195k in southern California in 1999. I had almost no down payment, and swung the mortgage (about $1100 on a 30 year) by renting out two rooms to college buddies for a couple of years. At the time i had about $13k in the bank from an inheritance from my grandmother. My thoughts on this was fix my cost of living, get a tax shelter, a little extra income and have… Read more »

finance girl
finance girl
12 years ago

If you get into a fixed rate mortgage and put down 20% to avoid mortgage interest, or do an 80/10/10 to avoid mortgage interest, over time it will make more sense to buy. Why? Because over time you will indeed own the home, your mortgage is fixed (you property taxes and insurance will go up though), and over time you will be paying more % in principal than interest. Also don’t forget to deduct the true cost of the interest and property taxes by the tax deduction you get to take (effectively at your tax rate). Through time your rent… Read more »

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