Renting vs. buying: The realities of home-ownership

“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:

Renting Buying
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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There are 269 comments to "Renting vs. buying: The realities of home-ownership".

  1. nic says 16 July 2007 at 05:41

    “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 says 25 June 2011 at 15:03

      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.

  2. Guille says 16 July 2007 at 05:51

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

  3. The Tim says 16 July 2007 at 06:05

    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.

  4. Stephen Popick says 16 July 2007 at 06:10

    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.

  5. brad says 16 July 2007 at 06:23

    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 add to the value of the house but do improve our quality of life. However, those may be offset by the headaches of having to deal with and pay for all the repairs ourselves…it was so nice when you could just call the landlord and say, “sorry, but the roof is leaking.”

  6. David Hunter says 16 July 2007 at 06:30

    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.

  7. mary says 16 July 2007 at 06:31

    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.

  8. nic says 16 July 2007 at 06:31

    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%

  9. Chance says 16 July 2007 at 06:36

    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 comparable rates in my area (Atlanta), and see that ~$1500 rent gets you a home that would sell for around $325K.

  10. Jeff says 16 July 2007 at 06:47

    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 have had walked away with nothing (except maybe my damage deposit).

    Yeah owning requires some investment, and anyone can put together a graph showing how renters pay less, but the market changes and when it does, owners have an opportunity to benefit, whereas renters never do.

    • jp says 16 April 2011 at 09:36

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

    • Chucks says 24 May 2011 at 20:45

      “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 says 16 January 2012 at 03:41

      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 says 24 September 2014 at 21:29

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

  11. Michel says 16 July 2007 at 06:50

    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.

  12. brad says 16 July 2007 at 06:53

    @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.

  13. cmarie14 says 16 July 2007 at 06:57

    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.) We bought this house for $185,000, we’ll put the new $13,000 septic system in to bring it up to the new codes. It assessed for $260,000.

    All that to say that if we had rented, we would not have been able to bring our personal value up to a quarter of a million, plus the money we invested from the extra equity after the sale of our first home.

    But…looking at our situation, I would have to consider that it is probably not the norm…

  14. Mike says 16 July 2007 at 06:57

    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.

  15. cmarie14 says 16 July 2007 at 06:58

    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.

  16. icup says 16 July 2007 at 07:08

    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 your 8% after inflation.

    I agree with the underlying point though — Don’t think of your home as an investment.

  17. Melsky says 16 July 2007 at 07:10

    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 real estate. We paid off all of our debts and are enjoying accumulating money and having the flexibility that renting brings us.

    Buying a place to live is not always a good thing, or a bad thing. I plan on buying again at some point, but like another poster mentioned, I’m buying a place to live, not an investment to live in.

    I’m happy to see this post and would like to see more posts like it on this an other personal finance blogs. We need some common sense after several years of “Buy now or be priced out of the market forever – real estate never goes down!!!!!” hysteria.

  18. April Dykman says 16 July 2007 at 07:33

    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.

  19. Aimee says 16 July 2007 at 07:35

    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, where the owner decided to sell and we had to move someplace new). we don’t have to worry about that anymore.

  20. radiantmatrix says 16 July 2007 at 07:40

    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 30, and a big part of why my partner and I decided to buy a home is that our living costs will be significantly lower during retirement.

    (3) Equity in a home can be leveraged to save money. Interest on the loan payment is tax-deductible (meaning most people will recover 20-30% of their interest payment in reduced tax). Home-equity loans are often lower-rate than other credit — I know several folks who’ve reduced high-interest student debt by using a home-equity loan. Regularly paying a mortgage is fantastic for one’s credit score, which can save money when one needs to get a vehicle loan or use consumer credit.

    (4) Maybe not for everyone, but at least for me: owning a home has saved me money because I’d rather do something at home than go out. I’d rather spend an evening sitting on my deck with a glass of scotch than going to the local pub. I’d rather curl up and watch a movie (loudly! no neighbors share any walls, ceilings, or floors!) with friends ( For 4 people: $3 for the movie, pennies for the power, maybe $10 for snacks and drinks) than go out ($36 for the movie, another $30 if you have popcorn and a soda).

  21. MossySF says 16 July 2007 at 07:44

    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 has grown to an amount significantly larger than the theoretical home net worth. Even if my returns were 0% since then, I would match the house sale profit from just the buy-rent difference of 70K-80K over 4 years.

    In the end, it comes down to buy/rent ratios. If the numbers don’t make sense, it’s silly to overspend to satisfy a psychological homeowning need.

  22. icup says 16 July 2007 at 07:48

    “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.

  23. Lynnae says 16 July 2007 at 07:59

    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.

  24. dshipp says 16 July 2007 at 07:59

    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.

  25. SomeGuy says 16 July 2007 at 08:02

    “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 before the bubble and overinflated home prices.

  26. brad says 16 July 2007 at 08:05

    @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.

  27. icup says 16 July 2007 at 08:28

    “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 into retirement than an additional $300K cash in the bank, which I don’t believe would be realized for most people anyway.

    Its not exactly clear cut either way, I think.

  28. Jose says 16 July 2007 at 08:30

    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 4% average appreciation.

    Assuming that you always make money in stock market and at the same time, your house is situated in a very crappy area, then the above statement is true.

    There are other misleading statements as well, but those two above should be enough for now.

  29. Tom says 16 July 2007 at 08:35

    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?

  30. radiantmatrix says 16 July 2007 at 08:38

    @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 is true that there are repair and maintenance costs to consider, but they are quite a bit lower than most renters imagine. My home was built in 1953, and had brand-new windows installed before we purchased. It needs new siding and two new doors. Total cost: $3500. The siding will last at least 15 years, and the doors will last for 50 or more. The annualized cost of such things turns out to be very low.

  31. someguyfromCA says 16 July 2007 at 09:01

    @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 Carolina for $240K in December 2006 in a up coming area as we were planning to live there for ever.I got with all incentives, 0 down and interest only mortgage.

    The property is appraised at $270 now wiithin few months.

    Also we want to take advantage of interest only option on our taxes + appreciation after two years.

    So we are sure to make atleast $40K in two years without any investment.

    Again as Real Estate propfessional say ..Location, Location and Location helps in making a decision in buying or renting.

    Again even we a pretty decent annual salary, we think by buying a home in good appreciation area will certianly help building assets soon.

    • Scott says 08 December 2013 at 10:32

      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 great savings, but buying is a risky venture under the best of circumstances.)

      Renting gives you flexibility. A mortgage is deadweight. Who can possibly say where they are going to be in terms of health or finances over the course of 30 years or even 15 years? Home repairs, appliances, insurance, and property taxes can approach the cost of renting in some places. The cost of filling up a home, as opposed to a rental space, adds additional costs.

      The housing bubble has destroyed many lives and exposed the fallacies of many of the ideas posted in this forum. Buy only if you have the money and only if you are seeking a home rather than an investment.

  32. SJean says 16 July 2007 at 09:20

    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” by not buying. You say most people wouldn’t invest the difference, but I think a lot of people reading this would

    But really there are a lot of individual and personal reasons to rent or buy, and as always, do what works for you.

    http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?ex=1184731200&en=3422a3f668518d5a&ei=5070

  33. Joel says 16 July 2007 at 09:27

    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 the rent vs. buy numbers. I’ve looked up rentals on zillow and found some that were asking $1500 rent and had just been bought less than a year ago for around $450k.

    I swear, some of you didn’t even read the article. Like “Where I live 1500 in rent gets you a house that would sell for 280-300K.” yeah, Tim mentioned that not areas are bubblicious.

    “but the market changes and when it does, owners have an opportunity to benefit, whereas renters never do.” I think you mean “when the market goes up”. But isn’t that the psychology these days? Everyone assumes that houses can only ever appreciate.

  34. Stephen Popick says 16 July 2007 at 09:33

    @ 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.

  35. John says 16 July 2007 at 09:33

    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)? Housing is great. Buy buy buy.

    Real estate bust? Renting + Stock market is great.

    Makes me think, just keep things simple: buy as boring ass Index fund. When you have a wife and kids, buy one house and live in it for 10+ years before moving. Keep putting spare change in the boring ass Index fund.

  36. mp says 16 July 2007 at 09:35

    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.

  37. Joshua Jackson says 16 July 2007 at 09:43

    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 20% down payment right now. I have no desire to actually buy a house in this area for that very reason. For now, the little nest egg of housing down payment will just get to grow slowly. Course consider that at 5% interest that 120k would grow 6k per year as well…adding almost 500 dollars in interest every year…its quite a predicament.

    I’ll be renting for a long time to come, as do all the people I know down here, because as a single person..you simply don’t make enough on the single salary. Even with eventually two and the friends making 200k+ a year, have no intention of buying a home.

  38. Sam says 16 July 2007 at 10:05

    “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 cheaper. A better example would be two similar houses that were built and sold and the same time, one that is be resold and one that is a rental.

    There are advantages to real property ownership and also to renting. I think a lot depends on individual circumstances and your life plan. If you rent you may have more cash available but you have to make sure you are doing smart things with the cash (investing vs. vacations). Real estate can be a very smart investment if you are buying at a good time (i.e. not at the peak) and you are buying the right real estate (i.e. less than the bank says you can afford) or you plan to keep the real estate for more than a few years.

  39. Baddriver says 16 July 2007 at 10:21

    @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 find the most apt or house for my rental dollar. I don’t care if a landlord is paying more money to the bank and in taxes than he charges me in rent. This is blinding evident in large housing developments where there are hundreds of each model, exactly the same. Whoever sells or rents a house for the cheapest amount sets the market. Later renters and buyers will use that price as a the current market value (as a comp). So please realize that the fact that there are landlords out there with substantial equity who are able to undercut a landlord that bought in the last few years is a feature of this market, not an exception.

  40. Tim says 16 July 2007 at 10:42

    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.

  41. Sarah says 16 July 2007 at 10:57

    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 a roommate paying 1/2 my living fees, and while only a small percentage may go into equity, at least it is.

    I guess my point is that it is really area specific – and it seems silly to write an article saying one option is better than the other, when it would take specific analysis for each individual situation to determine which one is better.

  42. Mike says 16 July 2007 at 11:10

    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 them), but in such situations, renters generally have the option to move, with relative ease, to another rental that’s within their means.

  43. Ming says 16 July 2007 at 11:13

    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. However, I could afford it, it was not much more than rent-control at the time, and it was in an area I felt was undervalued. I also figured that it would allow me to have a “base” in a desirable area, while having the ability to travel and explore.

    My health has been declining for years, in spite of my youth. I am no longer able to work full time, or even in a part time job that requires regular hours. Meanwhile, rents here have increased far beyond my ability to pay, and home prices are through the roof. I was smart enough to get a fixed rate mortgage and am paying less (yes, including maint., prop tax, and ins.) than my poorest friends pay for rent. We grow some of our food, to the extent we are able, and I am frugal beyond measure. More importantly, we have a fantastic community, and as we are all here longer and longer, we are increasingly tight-knit. Some of our best friends are our neighbors. This is priceless.

    I don’t know what I would do as the same “just out of school” kid in this market, but I would encourage anyone weighing these questions to factor in the intangibles and the possibility that they will not be able earn as much and for as long as they do now.

  44. californian says 16 July 2007 at 11:36

    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 and find median home prices at $726K (in 2005) and median rents at $1068 (in 2005). (Disclaimer, you probably want to compare similar houses, this just gives you a trend)
    http://www.city-data.com/housing/houses-San-Francisco-California.html

    Contrast that with Baltimore, MD.
    http://www.city-data.com/housing/houses-Baltimore-Maryland.html
    Median home price, $103K, median rent, $585 (in 2005).

    So, the price in SF for a house is almost 8 times more than Baltimore. But rent is only 2 times more??

    So just because it might make sense to buy in one place it doesn’t translate to buying in the other. (or renting, etc).

    Check the market, check were you live.

    Me, I live in the SF bay area, so I rent.

  45. ClickerTrainer says 16 July 2007 at 11:39

    @John
    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.

  46. californian says 16 July 2007 at 11:40

    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.

  47. wreckingbull says 16 July 2007 at 11:43

    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 to know for sure is to run the numbers.

    Again, the point here is to throw out all the brain-dead arguments Realtors like to spew. Run the numbers and see for yourself. They usually don’t lie.

  48. Peter says 16 July 2007 at 11:46

    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.

  49. Tim says 16 July 2007 at 11:48

    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 some equity to buy a home when I got married. My mom of course said I should wait until I got married before buying a house (but then, she also said I shouldn’t go into computers but be a doctor instead).

    It is now 8 years later and I’m still in the same house, but with a wife and a 3 year old. I’m now watching the houses selling in my neighborhood for about $650k. Rent vs. own? I carefully plotted out my expenses and found that around 5 or 6 years was the break even point for me, so I’m in bonus time (I actually probably broker even about 2 years into it). At this point it would cost me more to rent than it does to live where I do. And I think that’s one of the items this article doesn’t address well.

    If you move from place to place every two years, rent rent rent! if you buy, expect to be there about 7 years to break even, and do whatever you can to get into a home, 1% down loans are actually pretty nice because of leverage, put $5,000 down on a $500k home and have it go up 5%, and you’ve made $25k (500%). And you never want to have too much equity in your house if you’re really convinced it’s going to be an investment.

    And ultimately I view a house as a place to live that’s how I view buying a house – it’s an expense, not an investment, and when I do my financial planning, the house equity doesn’t factor into my overall plan because it isn’t something I can readily rely on or even want to depend on (much like social security) when determining my purchasing power.

    I’ve also been putting a little bit each month into 401ks, roth ira, a 529 plan, and since i teach part time a 457b and anything left over for the month goes into an investment brokerage account. Average 5 year returns for these accounts has been something like 23% annualized.

    I haven’t done the math yet, but let’s figure i could have put another 1000 a month into investments instead of the house…and let’s say for calculation sake that we have an annualized return of 25%

    $1000 X 12 months is $12,000 X 25% = 15,000

    After 8 years I would have $273,049 in the account following this rather optimistic formula.

    Now let’s look at the house, say I really need to get out of it so list at $550k, sell and pay closing costs around 44k (8% of the value since i’m pessimistic) for an in hand of 506k, subtract the current loan of 170k, for a total walk away of around 336k

    So in this scenario, as a home owner right now, I’m still up 63k 8 years into living there (it’s the power of leverage).

    Now, 20 years out, following this same formula, i would have 3,979,528.87 in my investment account and 31,985,996.39 in 30 years (power of compound interest)

    Bottom line, buy the house because you want to live in it, not because it’s an investment. And only buy if you’re planning on sticking around in the neighborhood for 5 years or more. And if you’ve convinced yourself it’s an investment, you’ll want to flip it about every ten years and buy another property for almost nothing down in order to take advantage of leverage (Tax laws allow you to take no capital gains if you’ve lived there 2 of the 5 years you’ve owned the property).

    AND whatever you do, never, ever, ever, ever put down 20% if you can get away with no money down…use the bank’s money to help you grow rich through leverage.

  50. finance girl says 16 July 2007 at 11:58

    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 will go up, especially in Seattle.

    We have owned this house for almost 5 years here in Seattle (by UVillage) and are now looking at a scenario where we are selling it, moving to Denver, and buying a house there for CASH.

    Couldn’t have done that if I had been renting for the last 5 years.

  51. Steve Olson says 16 July 2007 at 12:18

    Buying a home has been one the smartest financial decisions I’ve made, but I know the market is different today.

    When I bought in ’94 my payment and expenses were less than the rent I paid previously. The home nearly tripled in value by the time I sold it. But back then, in the Mpls/St. Paul market you could buy a decent home for about 70K. Today a starter home is 250K. It’s a whole different ballgame.

  52. californian says 16 July 2007 at 12:36

    I think the problem you have with the idea that renting might be better is that you bought at the right time, when buying was the better option.

    @Tim, you’re saying you get 23% return annually? on your investments?

    If that were the case, why not sell your house (you said you would make $336K right?), then put that money at 23%, that would make you about 77K a year in interest alone.

    Your house is not going to appreciate at 23% no matter what. (I’m actually doubtful that your investments will continue at 23% for a long time, but who knows, maybe you’re good with stocks)

    Right now you’re paying $1100. The price of your house might be going up, but not by a lot this year, say 2%. (actually declining on some markets, so it’s losing money).

    Why not sell the house, invest the money and save the interests? How much more in rent would you have to pay to rent your house?
    Lets say it’s 50% more, so you would need $1600.

    On a conservative strategy, say a CD you make 5%, so your 336K in cash would make you about 17K in interest. Take the extra 6K you need for rent from that and you made 11K.

    (not to mention that if you can get 23% that will make you 77K)

    At 2% a year appreciation, your house increases 11K in value (you don’t really make that because you’ll have to pay the transaction fee if you sell).

    So, under this rent-pessimistic scenario you’re actually almost equal in terms of buy vs rent.

    Just because it was the right time to buy _then_ does not mean it’s the right time to buy _now_.

    Can a money investment make you more money that the housing market? It depends on the interests and it depends on the rent/price ratio.

    @finance girl, no, it doesn’t always make sense to buy. Because the money you are paying in interest is money you are losing. And even though in time you will own a home, in the other option in time you will have a big bank account in cash.

    In your example, once again, you bought at the _right time_, that time is not now.

    (like it’s been mentioned before, it depends on the area)

    The saying about home loans:

    When you rent, you rent a house. When you buy, you rent money to buy a house.

    The question is, which one makes more financial sense?

    And the answer is, it depends. There is no general answer.

  53. Seattle Renter says 16 July 2007 at 13:52

    In 1997 I invested in a tech company, two years later I sold for a 600x return on my initial investment (I now pay my rent and nearly all living expenses from interest on a money market fund). Does this mean I would argue that everyone should invest in tech stocks right now, of course not. Who cares about your past experience, this article is meant as a generalization for millions of people in many different situations.

    PS The level of understanding of basic household finance of some of the posters here is truly frightening.

  54. Angie says 16 July 2007 at 14:24

    I’m a Seattleite as well. The thing that strikes me about this story is that it’s based on “anecdata”–particularly that rental figure. That’s the big red flag everyone’s missing.

    Go to the Seattle Times web site, look in their rental listings, and as of five minutes ago the 3 bedroom houses listed for rent in North Seattle ranged from $1200/month to $4000/month. The big spread is attributable to location, location, location. Suffice to say that $1500/month is on the low end of the scale and invoking that as a typical rental figure is misleading.

    Last Saturday there was a story in the Seattle Times (linked to my name) saying that rents for apartments in the metro area had jumped by 9% since last year–north Seattle by 11%!–and that vacancies all over are really low as population continues to increase. IOW, expect rents to continue to rise.

    Baddriver up at #40 may say that he doesn’t care if landlords don’t make a profit. That may be true, but you can bet your butt that the landlords do care–and the ones that stay in the red for too long don’t continue to be landlords. All this by way of saying that the reason houses rent for lower than “market value” is that the landlord must have far lower expenses, i.e., probably bought when housing prices were much much lower. In Seattle 10 or 15 years ago would do it. (And that the landlord is a relatively nice guy or gal who isn’t out to get every last dollar.)

    If the rental property isn’t in the black and the owner has to sell, you can bet your bottom dollar that the renter will not continue to enjoy the below-market rents when a new owner takes over.

    Happened at our (3 br, 1.5 ba) house. The prior residents rented from a relative for $600/month…then their relative died, and willed the place to someone else, who sold it. We bought it and now our PITI is about $1750/month. We rent out the basement alone for almost as much as the prior rent.

  55. fubek says 16 July 2007 at 15:31

    Two things:

    1.) If you buy, you put all your eggs into one basket. Wait, you borrowed money for “leverage”. So you also get into debt to put even more eggs into this one basket called “real estate”. Bad.

    2.) You can’t fucking stand your boss and would like to quit and restart somewhere else. Wait! You have this house that you own 30% of. And that mortgage. Selling is a big pain. Well, I guess you’d better put up with your boss for a decade longer. I’ve seen this inflexibility because of home ownership around me. Bad.

    One more thing:

    If I can’t stand my apartment anymore, I move. I have quite some free cash flow that I can put into the bank. It even pays me interest! There might be situations when home ownership improves quality of life, like when you have a family and a nice garden and stuff, but for singles or dinks, it’s just plain stupid to buy.

    My $0.02. BTW, I live in a nice apartment for €375 all inclusive in Berlin.

  56. Dave says 16 July 2007 at 15:47

    After reading the article and the comments so far, I see one additional point that no one has made yet. You talk about having $85k in the bank to make the 20% down payment, but not everyone has that kind of money available to them. We sure didn’t when we bought our first house. I used my VA eligibility to get a house for zero down. I had to come up with a small amount (pre-paid interest, closing costs, etc. – about $2k, IIRC), but that was it. We got a 3 BR house in San Diego for roughly the same cost as the rent we were paying on a 2 BR condo (once you figure the tax break on the mortgage payment). Sure, our incidental costs rose slightly, but not significantly. When it came time to move to a bigger house, we had built up significant equity. That equity allowed us to move to a house that was almost twice the size (2000 sq. feet vs. 1200 sq. feet). We never would have accumulated that amount through just savings.

    In a high rent area like southern California, it would have taken us years to save up a 20% down payment. Debt is not always bad – it can work as a multiplier for your financial leverage, and at least when buying a house, you’ll probably get a return – better than you’ll ever see on an expensive car!

  57. Tim says 16 July 2007 at 15:51

    @californian – common misconception about home ownership there, although I think maybe your statement about your rent the money to buy the house is right on.

    The longer you own a home, the less leverage you have. There is a break even point where the equity overcomes the fees, but then when you have too much equity in the home, it just sits there earning 2%.

    Lets take your 2% scenario ( although in truth, i think real estate averages something more like 5-10% )

    if i buy a 600k home for cash, i get 2% return on my investment.

    if i put 10% down, that 2% appreciation now becomes 20% on my initial investment – which beats out the 8% I’d have to pay on a 30 year, netting me 12% return.

    if i put 1% down, that 2% appreciation now becomes 200% return, making me 192% in the first year.

    These are all first year scenarios, and as you own the home and have additional costs the return goes down because the equity changes the leverage values.

    Think of the money you put at risk vs. the expected return. Using the bank’s money, you can magnify the work done by the initial investment.

    Because of fees, taxes, and closing costs though, generally “flipping” a house is a bad idea in 2 years. However, if you work this formula out over 8 years, you can see a pretty solid return. Eventually, in the next two years I will be selling my home, but I’ll look to put 1% or 2% down on my next home, put the rest into stocks and other investments, and let the leverage genie work for me.

    The reason I don’t do this with 10 houses, is of course there is too much risk in renters, depreciation, etc. but as long as I’m thinking “I could live in this house forever”, I’m protected against the falling market because I can always just stay put and be happy with whatever my current mortgage is at the time.

    (and yes, this stock market ride has to end sometime soon, but 5 years of 23%.. not too bad, i’m forcasting my retirement fund to grow at 10% annually and planning for that in all my financial forcasts when i retire in 35 years or so)

  58. Dave says 16 July 2007 at 15:57

    Hey fubek – where in Berlin? When I lived there (Charlottenburg, 87-90, within sight of the Funkturm) we lived in a nice 2 BR place for about 2000 DM/month – depending on the exchange rate that would be about $1000 to $1200 dollars. (Every 1 pfennig change in the exchange rate changed my rent by about $5 US) With the Wall down and the resultant building boom, everything I’ve read said that housing costs went up steeply in Berlin.

  59. JenK says 16 July 2007 at 15:58

    An advantage to a fixed-rate mortgage is that the payment stays the same. This is why my parents had a $112 mortgage payment in the early 90s – they’d bought their house in Shoreline in 1964.

    $112 did not rent a 2-brdm house or apartment then in the 80s or 90s. But it paid the mortgage.

    Of course, this also assumes a fixed-rate mortgage.

    Personally, though, I think that a house you live in derives its value from the fact that you live in it. You can’t live in a mutual fund. You also have more control. I’m not going to get an eviction notice because someone else wants to rebalance their portfolio or because their kid needs a place to live. Yes, earthquakes and windstorms still happen – but some of the chaos is reduced.

  60. Dave says 16 July 2007 at 16:03

    Regarding JenK’s comment: I remember a coworker once announcing that he had made his last mortgage payment in the same range as your parent’s amount – $200 or so. Several of us made comments about how we’d like to have that payment for ourselves. He pointed out that it was just as large a percent of his take home 30 years ago as our payments were today. He also pointed out that he now had kids in college, so he had other expenses to soak up his cash, while we “youngsters” still had a while to go before worrying about tuition for our kids. It’s all relative!

  61. Dusty says 16 July 2007 at 16:05

    As a fellow Seattelite, I can attest to these numbers…. I’ve been watching house prices for a while, and the ‘anecdata’ provided really is accurate. The house I live in was purchased 2 years ago for $330K, split into two living spaces (1br daylight basement – still being renovated, 2.5br main floor w/ garage), and we rent the 2.5br for $1400 (includes elec/water/sewage/trash). The house has a lot of windows and is poorly insulated, so average utilities are probably $300-$400/month.

    Our landlord is paying money out-of-pocket on the property currently, and even when she gets the bottom floor renovated and renting, it’ll still take her years to make up the cost of lost rent AND the cost of renovation. The market is predicted to bust within the next 5 years (the amount of growth has been astronomical, but they expect that there will be a tech-worker-migration to outlying towns, as telecommuting becomes more common).

    The numbers honestly work here… This isn’t anecdotal, our landlord is losing money, and the only way she could make money was to split the house into two apartments.

  62. wreckingbull says 16 July 2007 at 16:06

    Angie,

    There is nothing anecdotal about taking the home one rents, plugging it into Zillow, computing PITI + maintenance, and coming up with an ‘ownership premium’. It would cost me 3x what I pay in rent to own the house I live in. Yes Zillow is probably not perfect, but looking at what has sold around me, it is pretty accurate.

    I fully believe every person on this blog who states “My home was my best investment ever”. I assure you that the ownership premium was not 3x when they purchased their homes though.

    As far as rents rising, I just don’t see it. The reason may be that I choose to rent from private landlords, not the corporations which are used for those rent surveys touted by MSM reporters like Lizzie Rhodes.

  63. Angie says 16 July 2007 at 16:52

    wreckingbull, with all due respect, that’s still anecdotal.

    This is not to say I don’t believe you. My family couldn’t afford what Zillow says our house is worth, either. Prices are still rising fast in Seattle. Supply, meet demand.

    So, 15 years from now, you’ll still need someplace to live. Do you think your rent will still be so proportionately low? What do you think the average crackerbox in Seattle will sell for?

    I lived on the SF Peninsula in the late 80s/early 90s when plain-jane old one-story houses sold for the shocking price of $250K. Now you couldn’t look at those same places for $800K or better. Prices for middlin’ houses up the penininsula in the city limits for San Francisco jumped the shark two generations before that; Manhattan a few generations before that; urban centers in Europe, a few hundred years before that.

    This is not the first time that population pressures have put real estate prices out of reach of average people.

  64. wreckingbull says 16 July 2007 at 17:52

    “So, 15 years from now, you’ll still need someplace to live. Do you think your rent will still be so proportionately low?”

    No. With easy credit drying up, King County inventory at nearly an all-time record, rising interest rates, and a nasty wave of ARM resets coming on a huge chunk of already-unaffordable loans, I am certain I will own again when the ownership premium is reasonable. For now, I am happy to have found a greater fool.

    “This is not the first time that population pressures have put real estate prices out of reach of average people.”

    Really?

    http://tinyurl.com/35r7qm

  65. Kris says 16 July 2007 at 18:23

    I think many people have made up their minds on this subject. I personally rent, and that is fine with me.

    But something that I do not think has been mentioned here yet is what happens if you can’t stand the other person that is paying for the house with you?

    Divorce is common enough that it will start to happen; people will have to sell their houses at a loss or live with the person that can’t stand b/c they cannot pay the mortgage alone.

    Many people do not admit to having financial troubles until they cannot hide it anymore. I suspect many of us know these people. It just might take a while for it to become apparent.

  66. Liz says 16 July 2007 at 19:07

    i think a key argument for this post is affordability… for those that are FORTUNATE (!!) enough to buy their own homes – or own properties – it is a good deal if you can get in on the ground floor and buy something.

    but for instance, in the market that I live in right now, it is one of the highest growing real estate markets in canada, and percentage wise one of the most overinflated markets in north america. my parent’s modest 3 bedroom bungalow went from approximately 100K in 2004/2005 to now where they could sell it probably for 400K. if i would have bought back then, i would have made money. but now? its out of my reach. is renting in this market so bad? no, cause i can’t afford to buy! so renting is fine!

    for instance, a one bedroom CONDO – just a condo – is about $300K average price for a downtown-ish location. there is no way, on my $50k salary with $40k in debt that I can buy that place. even if I could with help for a downpayment, i would still have HUGE payments every month. it is much better that I pay off my debt and then later on look at buying something.

    at least an article like this is a bit of fodder for me to throw back at all those people asking me why i don’t buy a place.

  67. B says 16 July 2007 at 20:20

    As a Seattlite who JUST finished looking for a new lease (for exactly the reasons that Tim posted about), I think I can add some more data points to this thread.

    There are a lot of owners who are engaging in self-justifying math, comparing counterfactuals, etc etc. Basically, the entire argument relies on recency. Try the same argument in a falling market (real estate roughly keeps up with inflation, long term. Look it up. And think of how you would feel if your real investments performed that poorly).

    As for the pacific northwest rental scene — don’t believe everything you read, either in the real-estate-cheerleading regional newspapers, nor in ads from landlords who seem to be trying out the “big rent increases!” line in their postings. We decided on a lease from four final choices, *all* of whom negotiated down on price by between 3-5% at a monthly rate. I’d guess that if anything, rents jumped by about the rate of inflation. Bought gas or building materials lately?

    My point is, from the market in used/new houses, to apartments, you gotta push back in order to arrive at the real price. 7/10 of the landlords I interviewed were soft on price.

    Oh, also, anyone who thinks that real estate will continue to appreciate the way it did over the most recent cycle is deluding themselves. There are going to be some people who get burned out there — be careful!

  68. The Tim says 16 July 2007 at 21:01

    Thanks for all the feedback everybody. I apologize that I have been unable to respond throughout the day. I would however like to address a few of the things that have been brought up here.

    A number of people have said things along the lines of: “Your numbers don’t make any sense. Where I live, houses that rent for $1,500 are much cheaper than $425,000.” or “your article is not accurate where I live.” As I said near the end of the post, there are plenty of housing markets, especially those away from the coasts, where the numbers do work out in favor of buying. If that’s the case for you, great! I’m not attempting to show that renting is always better than buying, everywhere. I am just trying to get people to do the critical thinking for themselves, rather than simply believing the hype that buying real estate is always a better way to spend your money than renting.

    There are also a few people making comments similar to: “But I bought a house five years ago, and now it’s worth three times what I paid. Clearly buying is better.” I would think that it would be obvious the savvy readers of Get Rich Slowly, but past performance is not a guarantee of future returns. You’re taking the best five years of performance in the history of real estate and using it as an example for why buying is better? Sorry, but that makes no sense.

    In a normal market, buying usually works out to be the better financial choice over time periods longer than 5-10 years. However, for much of the country, the current real estate market is anything but normal. Potential homebuyers should consider their own specific circumstances carefully before deciding to buy. That’s all I’m saying.

    Also, some people are repeating the old argument that “housing costs are fixed if you buy, but rent always goes up.” First off, unless you live in California, property taxes are always increasing. Furthermore, maintenance and insurance also increase with time. Granted, the increase in these expenses will not equal the increase in rent, but they are by no means fixed, and are unavoidable for the homeowner. However, I think that SJean in comment #39 makes an excellent point: “if you were to invest the difference in the market, one day you could pay your rent strictly off the interest of the money you “saved” by not buying.”

    Lastly, I’d like to address those of you that are bringing the “intangibles” into the conversation. I agree that buying has some distinct non-financial advantages, such as stability, customizability, and even pride. Renting also has its own advantages: flexibility and ease of use (call the landlord if something breaks). This article was not intended to address these aspects of the debate. I intentionally kept the scope as narrow as possible, focusing strictly on the financial aspects of each.

    I will respond to a few individual comments below.

  69. The Tim says 16 July 2007 at 22:04

    Angie @ 56 said:

    I’m a Seattleite as well. The thing that strikes me about this story is that it’s based on “anecdata”—particularly that rental figure. That’s the big red flag everyone’s missing.

    Go to the Seattle Times web site, look in their rental listings, and as of five minutes ago the 3 bedroom houses listed for rent in North Seattle ranged from $1200/month to $4000/month. The big spread is attributable to location, location, location. Suffice to say that $1500/month is on the low end of the scale and invoking that as a typical rental figure is misleading.

    Indeed Angie, $1,500 per month may be on the low end of the scale for rent on a 3-bedroom house. However, I would argue that $425,000 is also on the low end of the scale for the purchase price of a 3-bedroom house (it is well below the June King County median SFH price of $470,000). As much as possible, I selected a rental and for sale home that were very similar, including in their location.

    Run the numbers for just about any part of the Seattle area, with comparable houses or condos/apartments in similar locations, and you’ll find very similar ratios, I guarantee it.

  70. The Tim says 16 July 2007 at 22:18

    David Hunter @ 6 said:

    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.

    David, I recommend you read the CNNMoney article linked at the bottom of the post: Stocks vs. Real Estate. It’s a great comparison of the investment benefits of each, and definitely takes into account the leverage aspect.

    From the article:

    Stocks win the bout four rounds to three, with one round a draw. But the fight is in truth considerably more lopsided.

    Stocks roll up large margins of victory in performance, costs, diversification and effort you need to expend as an investor.

    Real estate’s only big win is in leverage. Using that leverage to buy a home you can afford makes sense. You’re building equity and collecting other benefits as well. (And no landlord can stop you from owning a big, hairy dog or throwing a party for 200 of your noisiest friends.)

    But jumping into the real estate ring thinking you’ll use others’ money to score an investing knockout is plenty risky.

  71. Andrea >> Become a Consultant says 16 July 2007 at 22:18

    Vancouver (BC) is in a similar predicament. I’d estimate that larger 2-bedroom condos (1000 sq ft) in my neighbourhood sell for about $560k. When you add $300 for strata fees and $100 for maintenance, you’re paying $3000 a month. But they only rent for $1800. That’s a difference of $1200 a month.

    Still, $670+ of that goes to equity. So the difference is more like $530 per month. (You can’t deduct interest on a personal mortgage in Canada.) Perhaps you could invest your $140k downpayment at 5% and make $7k a year. But you’d be taxed on that at up to 40%. So it’s really worth $4200 a year or $350 per month. Between the investment and the “savings” from renting, the renter appears to be ahead by $880 a month. But if the property increases at 1.6% per year, you’ll be on par with renting. In the short-term, this is risky, as there would be a cost if you decided to sell and the market might drop. But, over the long haul, you’ll do better by owning, especially since rent will increase over time.

    However, is now a good time to buy in markets where there’s such a huge difference between renting and buying? Not if you’re planning to move in fewer than 10 years. You could be caught upside-down on your mortgage if you need to sell. But if you’re selling to buy something more expensive, it will have dropped too. If you’re staying in the same market, you’re okay. You may choke if the property values drop just after you buy, though.

  72. The Tim says 16 July 2007 at 23:20

    icup @ 23 said:

    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.

    Now that I’ve had time to go back to my spreadsheets, I’m pretty sure I was using 3% per year rent increases. That’s actually somewhat generous for Seattle, where the average yearly increase since 1990 has been closer to 2.6% (source).

    Going by that figure, after 20 years of 3% increases, rent+insurance will be $2,657 per month. However, the homebuyer’s taxes, insurance, and maintenance are all increasing as well. Assuming that their insurance and maintenance costs also increase at 3% per year, and that their tax assessments lag the value of their property by three years, their monthly costs are $3,686. Only $1,085 of that is principal, the remaining $2,601 is “thrown away.”

    By that time, the renter has thrown away a grand total of $488,500, while the buyer has thrown away $607,500. Download the spreadsheet at Priced Out Forever and see the numbers for yourself. Or for a more user-friendly method (which results in very similar results, try the New York Times calculator.

  73. The Tim says 16 July 2007 at 23:23

    Lastly, thanks to everyone who expressed kind words of appreciation regarding this post. I did my best to make it relevant to this site, and as practical and useful as possible. I’m glad that many of you found it to be of value.

  74. Liz says 17 July 2007 at 00:01

    i used to live in Vancouver, and a big difference between there and calgary is that Vancouver has a rent cap, where as Calgary doesn’t – so in Van, if you are teetering between renting and buying you are almost better off renting b/c the costs *will* stay relatively fixed. In Calgary, we’ve seen rents jump as high as 200%, which makes the push to buy even greater…. thus why here renting a house is a heckuva lot cheaper than buying a condo… if you are willing to live outside of downtown, you can find a 4 bedroom townhouse for the same price as a one bedroom in the d.t. area.

    But yup, Vancouver is a special cat. I’m interested to see what happens after the Olympics – if the market crashes or continues to go up.

  75. Roger says 17 July 2007 at 02:19

    One thing that everyone is ignoring here is that the vast, vast majority of people don’t buy and stay put, they buy and then move within a few years. And often that move will be to a bigger, more expensive house.

    Now, the folks moving will often have more money coming in as they mature in their careers, but every time you move, assuming you get conventional loans, that “we no have to pay our mortgage” clock resets.

    I’m 40. We’re building our “final” house here. But a 30 year loan means that I won’t get to enjoy that “no mortgage” thing (assuming no extra towards principal) until I’m 70…assuming a fat tub of lard like me makes it to that age.

    I bought my first house in 1996 for 175K, and sold it in 2000 for 250K. Pretty nice, eh? This was a 2/1 in north Seattle. But keep in mind that the guy I bought it from paid $170K in 1989 for it. I made a nice sum in four years due to the huge run-up in Seattle real estate, but he essentially made nothing (and accounting for inflation and interest, lost a bunch of bux). It can go either way. Making money on a house is not a given.

    Imagine tomorrow Microsoft says “you know, it’s just too darn expensive to operate here in greater Seattle, we’re moving our headquarters to the Ozarks.” Unlikely but certainly not unheard of…and there go 50,000 high paid jobs. Think your McMansion on the plateau is going to be appreciating at 10% a year then?

    I like owning a house…it allows me a lot of freedom to do things I enjoy. But I don’t have many illusions it’s a slam-dunk investment strategy or even the smartest use of our money. But it makes me happier than renting.

  76. girl150 says 17 July 2007 at 09:47

    You bring up some good points, and I agree that its absolutely worthwhile to consider renting instead of buying. However, one thing that gets lost in your monthly renting v. buying cost calculation is compensation for the fact that you do indeed recoop some of the money that you pay for the mortgage as you build equity, leading up to the point when you sell the house. Even if you only get back half of what you’ve paid into the mortgage over time (so, say $1000 for every $2000 you make in mortgage payments), that would bring the total monthly “expense” of owning a home within a $100 range of renting. (That is the $2690 – $1000, with the latter figure being the overall equity in the home.)
    To be fair, that still makes owning a home a more expensive proposition. But some of us take joy in being able to make decisions about the house, such as what color to paint our walls, where to put a garden, or whether to put in Astroturf. So, in addition to the financial benefits, some people get an emotional benefit out of owning a home. (Ok, me. I’m addicted to HGTV. Consequently, this probably makes owning a home even more expensive… but oh so rewarding.) :o)
    Thanks, again.

  77. Michael says 17 July 2007 at 09:53

    This scenario works for Seattle, and most of the over-inflated West Coast real estate market. I lived in Portland for seven years. If you are willing to consider other parts of the country, things start looking affordable pretty quickly. Here’s a good starting point:

    http://finance.yahoo.com/real-estate/article/103226/Most-Affordable-Towns

  78. plonkee says 17 July 2007 at 10:10

    @ Roger (no. 78)
    Can’t you get mortgages that last for 22 years in the States?
    Over here, you can get a mortgage of any length between 10 and 35 years (depending on the lender).

  79. californian says 17 July 2007 at 10:44

    @tim 59

    Well, it’s true that average appreciation is not 2%, it depends on the area. I don’t have official data for all of time, but I do for the last 27 years. The highest change is in New England, 7% with the lowest change in “West South Central” at 3%.

    http://www.ofheo.gov/

    The Office of Federal Housing Enterprise Oversight.

    Their report has a lot of data, like how California appreciation was 114% for 2001-2007 (13% anual) and how it was -15% between 1991 and 1996.

    The first few pages of the report are probably a good overview.

    The report basically shows that the last 5 years have been phenomenal. However, prices are not climbing like before, and some areas are having “corrections”. Page 30 lists the top metro areas with falling prices over the last year.
    (whadya know, 60% in California)
    Top is Punta Gorda, FL, with -4.57%, second is Sacramento, CA with -4.41%.

    So, my point is that over the long run you’ll get somewhere between 3-6, but on the short run it’ll be low.

    Also, even though you can make money over the whole loan you’re also paying interest over the whole loan, not to mention the fees. So, if your loan is at 5% and your house doesn’t go up at some reasonable rate you’re not making money. That 2% increase is not going to help you a lot, specially if you put 0% down and have to pay the fees (so you actually lost money).

    But I admit, 1 year investments is not what houses were made for (in this market).

    Cheers

  80. Jordan says 17 July 2007 at 12:56

    what about in the even longer term? say over a 40 year period where the last 10 years (assuming a 30 year mortgage) you no longer have that mortgage and you can then take that money and invest it while the person who is renting still has to pay the rent? the home owner would surely have a significant advantage at this point.

  81. John says 17 July 2007 at 13:11

    I already bought a home several years ago but there are situations where RENTING is indeed better. Consider this anecdote about the 2006 Nobel Prize winner in Economics, Edmund S. Phelps:

    He and his wife, Viviana Montdor Phelps, an interpreter fluent in four languages, have lived for 32 years in a three-bedroom apartment overlooking Central Park. They own neither a car nor a country home, not wanting the bother of maintaining a second residence, Ms. Phelps said. They like to travel, including trips to Argentina, his wife’s native country.

    “We never had enough money to buy an apartment as large and as comfortable as the one we live in,” she said, “and the rent for this one is relatively low.”

    (From NYTimes)

  82. Dave says 17 July 2007 at 15:12

    John provided a quote from the winner of the 2006 Nobel prize in Economics about the low cost of renting their apartment in New York City. It would only be fair to report that NYC is rent-controlled, and since this couple has lived in the same place for 32 years, I think that would make a significant difference in the costs. I am guessing, but I would think that if you wanted to start a new lease on a 3BR apartment overlooking Central Park today, the rent payment would be more than enough to pay for ahouse almost anywhere else in the country. Can any New Yorkers confirm my guess?

  83. Seattle Renter says 17 July 2007 at 15:24

    Andrea said:

    “Perhaps you could invest your $140k downpayment at 5% and make $7k a year. But you’d be taxed on that at up to 40%. So it’s really worth $4200 a year or $350 per month.”

    Even if you are only able to make a 5% return on your 140k investment you seem to have forgotten about compound interest and the fact that in Canada you are not taxed on investment income until the investment is sold. If you have an ounce of common sense you would know that it is fairly easy to avoid being taxed at the 40% bracket on your investments in Canada.

    I hope you aren’t a financial consultant.

  84. MossySF says 17 July 2007 at 17:12

    Jordan, the answer to your question is an emphatic no. The way compounding returns work, money invested early is worth more than money invested later in life by a huge factor.

    Let’s do a really simple example. Say the difference between buying and renting was 10K and you put 1 years worth into the stock market. Then you buy a house with a 30 year mortgage. After 30 years, your house is paid off and you pick up investing again with your annual 20K mortgage payments in a separate account. It would take 30 more years of contributions to catch up to the initial 10K amount! That’s because at 10% returns, 10K grew to 191K after 31 years and the freed up 20K would just barely match the pre-house portfolio growth. In fact, just another 5% increase (1 more month of renting) and the post-house contributions will never catch up.

  85. MossySF says 17 July 2007 at 17:15

    Dave, a new lease on a NYC apartment now would definitely be more than most people would pay for a house in various parts of the country. However, that’s immaterial — the only important factor is that a new lease would STILL be cheaper than what it would cost to buy a place in NYC by a lot.

  86. Dave says 18 July 2007 at 10:13

    MossySF – agreed, both buying or leasing now would be significantly more expensive than it was 32 years ago. What I was attempting to point out though, was that, because this couple had been able to lock in the price of their housing 32 years ago, the cost is quite reasonable in today’s terms. However, what would have happened if that area had not stayed so desireable? What if, over the course of those 32 years, the building owner had skimped on maintenance and let the place fall into dis-repair? What if they had wanted to move elsewhere, for whatever reason? I think I can successfully predict what would have happened to their housing costs. The reality is that, were it not for rent-control artificially keeping their rental costs low, this probably wouldn’t be a good example to use for supporting renting over buying.

  87. Anon says 18 July 2007 at 10:52

    If you buy a house and then rent it out and use the equity to buy another property, is it still the same logic? I mean, if you have tons of equity and the rental you can get on your house is more than enough to cover expenses and mortgage, then won’t it have made sense to buy the house? And, will equity borrowing against that house still be bad debt? From what I hear, the bankers consider it income at that point, not debt. Am I wrong?

  88. Dave says 18 July 2007 at 12:33

    With this conversation in mind, I was surprised to find a column on MSN discussing the exact same thing. Their conclusion is that buying comes out ahead, in the long run.

    http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/ItsStillBetterToBuyAHome.aspx

    Interesting counterpoint, if nothing else.

  89. californian says 19 July 2007 at 01:01

    @Dave 94

    A counterpoint? Did you take a look at the numbers? That might be the case in Lewisville TX, a 3/4-bedroom house for 150K, but in some places, that will not be the case.

    In their example the house is $150K and rent is $1250 /month. Try to run the same numbers when rent is $2000 and the house is worth $800K.

    Btw, they assume a 20% downpaiment, wich is 30K for the 150K house and about 160K for the 800K house. Yes, the 20% downpayment for our numbers would be larger than the price of the house in that article.

    Another thing not very clear in the article is what happens when you wait to buy the house.

    They say in the article that if you bought in 1990 you would be ok by now. What he doesn’t address, in that article or in the other article with some “real California prices”, is that the same person could have waited, saved money and bought the house in 1995 and be way better than then 1990 scenario.

    Also, note that for his example in the
    http://assetbuilder.com:9669/blogs/scott_burns/archive/2007/04/07/The-Sublime-Beauty-of-Falling-Knives.aspx
    article he uses somebody making $200K a year buying a 600K house that would otherwise coust 30K to rent. That is, a $600K house rented for about $2500. (those are optimistic numbers for his example).

    I hope he knows his stuff but when I run the numbers I’m nowhere close to what he comes out with. How does he reach the lifetime savings of each?

    To make his numbers sort of work (not by a lot). He uses a theory called consumption smoothing. I don’t know the ins and outs of this theory but I can see 2 flaws from the surface. For one, it aims at dying with 0 money. (You try to maximize what you spend in life, not what you save). Secondly, it tries to do it by basing itself on what you can afford on your current situation. Basically, it doesn’t plan on you improving finantially, it aims to keep you at the same level. This kind of works out if you’re rich, but doesn’t play so well if you’re not. And I’m sure the Doctor in his example making 200K a year won’t suffer if he keeps that lifestyle. Somebody family making 40K might want to improve it, and who knows, maybe die with some money left over so their kids can aim at the 200K doctor life.

    (That being said, it’s an interesting economic theory)

  90. Millionaire Mommy Next Door says 19 July 2007 at 14:16

    Selling our too-big house, investing our equity, then renting, has contributed significantly to our net worth and cash flow. I’ve experienced that in today’s real estate market and in many places, one can afford to rent a much nicer home when compared to buying.

  91. Matt_In_TX says 19 July 2007 at 20:37

    A lot of responses just parrot conventional wisdom directly contradicted by the facts in the article (from a bubble area). This is sad and scary to see on this particular website. Read, think, comprehend. Challenge your preconceived notions and mental blind areas.

    Lemmings and cliffs: not a fable. Beware the herd.

  92. Garrett says 21 July 2007 at 15:50

    Depending on your mortgage payment, renting is so much more hassle free and easy. Great post…owning involves so many more expenses that you can’t recoup on the sale.

  93. pondering says 21 July 2007 at 18:30

    I’m sure glad, sometimes, for the internet-provided ability to share “thought” with so many others. I felt relieved, today, to find this page.

    I have spent my afternoon crunching numbers and doing a “what if” scenario(s).

    I am a single mom with 30,000 annual income from nontraditional sources (ie, not employee), 800 FICO score, and zero debt. And, I do mean: zero. I am, though, very embarrassed to say that I live in a single wide mobile home that I bought 25 years ago. It’s in a very nice and very, very small park — I’m buried in pine trees on a hillside with a wonderful view. But, still, I’m in a small, flat-roofed mobile.

    It’s paid off. My lot rent is 245/month.

    So all in all, my total costs to live every month is about 900, including food and gas and sundry purchses. My son, 17, was just admitted to college. He enters as a junior as he was taking college courses in high school. The university he is attending is free, as they provided him 19,000 in scholarship money. So I do not have college debt to worry about.

    I’ve longed for a home as I don’t tell a soul where I live — and my son has learned to keep our secret, too. How horrid. I’m embarrassed to let anyone know that I live here. It’s a small town of 27,000 and we’ve been really good at keeping the secret. But, sheesh.

    Anyway, I started crunching spreadsheet of numbers today. I compared buying a 100,000 home with staying where I am for the next five years. I compared, more specifically, where I would be financially in five years.

    Imagine my shock when the numbers (not emotions/unfounded talk) said that if I invested at 5 percent per annum the difference between the home payment and the current lot rent/taxes that I would in five years have more money on hand than if I bought that home and sold it in five years. My scenario included the real estate institute’s national appreciation average for homes — 5%; IRS advantages (none as my head of household deduction is higher than the mortgage interest), real estate agent sales percentage and more. Every detail I could find.

    I was stunned to see that I would have more money if I saved the difference and stayed here.

    So now, I’m really confused. I’m thinking it might be better for me to just plunk money into my mobile and make it an amazing abode so I can get over my embarrassment.

    Any comments?

    (Oh, and yes, getting financially ahead from buying a home is critical for me on my small income and given my age)

  94. xshanex says 22 July 2007 at 03:02

    “Imagine tomorrow Microsoft says “you know, it’s just too darn expensive to operate here in greater Seattle, we’re moving our headquarters to the Ozarks.” Unlikely but certainly not unheard of…and there go 50,000 high paid jobs.”

    you mean like this? Microsoft is opening up software development centers in Canada to take advantage of their cheap skilled immigrant labor

    Microsoft: North to Canada
    http://www.internetnews.com/bus-news/article.php/3687531

    I am in the process of relocating to the western washington area and my and my girlfriend who is already there has had the same experience as the original post. Rent for $1400-1600 or buy the identical place that sells for $350-425k? When I say exact place I mean in the same neighborhood with an identical floorplan with the same upgrade packages

    For the same monthly amount I would much rather rent in a new/safe/close-to-work/well-designed neighborhood/twice the square footage/amenities with great schools versus living in a old (expensive to maintain/heat)/small house/dodgy neighborhood/commute to work/where I wouldn’t feel safe/has poor schools

  95. JSwift says 22 July 2007 at 14:52

    Buy in a buyers market, sell in a sellers market, rinse and repeat…

  96. homeinboca says 25 July 2007 at 20:09

    Oh please, Microsoft is opening an office in Vancouver for 200 people, not exactly moving their HQ there…

    I have been following this ownership vs renting thread for some time. Arguments like this are easy in this part of the cycle for Real Estate.

    I don’t see many comments regarding the intrinsic value of owning. I had many years of renting and dealing with landlords who were tyrants and bullies. Buying a home for my family 10 years ago was one of the most satisfying things I have done in addition to being a great investment. I have accelerated my payments so I will mortgage free in about 4 years. It has probably cost me more per month than renting, but it was worth it!

    Lets face it, most people who rent don’t save the difference, so owning a home is a great forced savings plan. Stop thinking short term – in 10 or 15 years, all this will be moot.

  97. Mark Eagleton says 27 July 2007 at 08:57

    My parents mortgage is $460/month in Northern California. They bought in 1980. My neighbor pays $42/month. He bought in 1960.

    The lowest rent I ever payed was $365 in 1995 for a studio in northern CA. Now I own and my mortgage is $1700. My kids will probably be paying $5k/month when they buy/rent in 15 years from now.

    Rent goes up. Fixed rate mortgages don’t. This should be factored in.

  98. Melanie says 27 July 2007 at 09:20

    You can factor in an average rent increase of 3-5% all you want, but it won’t negate the fact that most states in the US do not have any regulations governing how much a landlord can increase rent. When you rent in most of the US, you shoulder the risk that the owner of your rental can raise rent any time, to any amount. A rent increase of $20 annually might be affordable…but what if the property is sold and the new landlord must raise it $200/month to cover his new mortgage?

    Buying may not give you a nest egg or build wealth, but renting will not give you a guarantee of being able to afford where you live either.

  99. Helen says 27 July 2007 at 14:14

    Owning a home is a great path to wealth.
    Owning a mortgage is not such a great plan, simply because interest is expensive (even with the tax break).

    Buying less of a house than you can afford, in terms of your monthly cash flow, will allow you to pre-pay the principal and avoid paying LARGE amounts of interest (esp. at the beginning of the loan period). Keep making extra principal payments until your implicit rent (interest payment + prop. tax + insurance + maintenance) is “close enough” to other rentals in the area. Then your house really DOES represent “forced savings”. (Of course, you also lose the opportunity to invest that principal money elsewhere – so if you have a super low interest rate, after adjusting for the tax break – prepaying might not be the best strategy.)

  100. Kin says 28 July 2007 at 06:06

    Being in Australia brings a very different scenario to the mix. We live in severly overpriced area, with our house in a capital city selling for $150k less than what we paid for it nearly 12 months ago. The way the real estate market is going here we have made $100k in the last 3 years of buying/selling property. We have no deductions for interest in Australia and have done this through smart buying and even smarter renovations and selling.

    What this means is, when we move to a city next year for hubby’s work, and we sell this house (because rent wouldn’t even cover the interest) we can invest the money at a modest 10% (most managed funds here are averaging over 30%)and the interest alone (after tax) will pay rent in a house similar to the one we live in now, with access to greater facilities and transport than here.

    I agree that it definitely depends on the stage of the real estate cycle, the cash you have available, and your needs, but while our family is young, interest is going up (in Australia anyway, and there’s no such thing as 30 year fixed rate mortgages – the most you can get is 5 generally), and we are moving due to the nature of hubby’s work, we think renting is the best option for us at the moment. In a few years? Who knows. I plan on returning to work after seeing 3 children off to school in about 7 years, and by then buying might be worthwhile again. In the meantime I’ve freed up 50% of our family income by investing wisely and using the interest to pay our housing costs.

  101. Lynn says 31 July 2007 at 06:21

    I have benefited from renting and I live in Cali. I AM one of those people who can save and do so every month. Many people here also forget that the rental market is flexible. I rented a bedroom and bath and have made out well with this decision. Most of the posts assume that a person must rent a whole apartment. Renting has so much variety. Nowadays you see many young people renting a townhouse and splitting the expenses. That is what I did and I have over a 750K nest egg at 37. Not bad for a person who has yet to break the 100K barrier income-wise. And for those who say that a person who rents won’t invest the difference, these are the same people who probably opted for sub-prime mortgages and other such nonsense. Buying a house doesn’t make you responsible aside from what people might believe. I will be able to retire and pay for a home in cash by the time I am 50. I plan on buying a foreclosed property or in a much cheaper area, down south for example, within the next couple of years. My investments have topped my peers hands down over the past 15 years and my investments are fairly liquid. (Go with Vanguard index funds, COSTS MATTER! Yes I am a Boglehead!?) I do believe in buying, but I want to buy a home, not an investment. I plan on dying in this place, so I better love it!

  102. Mr California says 31 July 2007 at 22:42

    Financially speaking, the decision whether to rent or to buy depends on what you keep afer you have paid off your mortgage/rent, dues and taxes. This can be a fairly involved calculation because a number of factors need to be taken into account:

    1. Mortgage is composed of two parts – interest and principle. What you pay as principle can be (arguably) assumed to be savings – money that goes into your pocket.
    2. The interest portion does not constitute savings directly but gives you tax benefits (for mortgages upto $1 million). This is especially important in some of the pricier areas. Calculating tax benefits can be more challenging than you think.
    3. If you choose to rent, the down payment that you would have made towards buying can be invested in stocks, bonds, CDs etc. These returns contribute to your savings. However some of the returns may be taxable as regular income.
    4. Homeowners pay various expenses like HOA, insurance, regular maintenance etc. None of these contribute to your savings.
    5. Homeowners also pay property tax. No savings here either, but property tax is a deduction towards your income tax. Less income tax means more savings.
    6. If you rent, you are likeley to take the standard deduction (around $10,000 for Married Filing Jointly). If you want tax benefits of owning you have to itemize your deductions, and you lose the standard deduction. (This is why the conventional thinking of “I’ll get 30 – 40% of my mortgage interest back by way of tax benefits” is so misleading).
    7. You have to pay the same social security/medicare taxes regardless of whether you buy or rent. Home ownership does not reduce these. I consider these taxes “money down the drain”, so no savings here.
    8. Some renters don’t have to pay water, sewage, garbage fees. (These are included in the rent).
    9. If you put less than 20% down (common in CA), you may have to pay PMI. Alternatively you have to take a second loan at a much higher rate.
    10. There’s a 6% expense in selling a house.

    Also, not strictly related to rent vs buy, but things to keep in mind:

    11. If your home appreciates in value and you’ve lived there 3 out of 5 years the capital gains is usually tax exempt when you sell.
    12. If you cannot make your monthly mortgage payments, and your bank forgives part of the debt, you owe tax on the portion forgiven. (I heard congress was debating this)
    13. Bankruptcy laws have become stricter in recent times. Can’t “cut and run”.

    So to calculate rent vs buy you have to see how much you are saving. As a homeowner your non-equitable expenses (expenses that don’t contribute towards your savings) are:
    EXP_NEQ_OWN = Mortgage portion of your interest + federal income tax + state tax (if any) + Property Tax + FICA (social security, medicare tax) + HOA + insurance + regular maintenance + utility bills
    Your equitable expense is:
    EXP_EQ_OWN = Principal portion of your mortgage.
    There are other expenses like food, travel, kids schooling, but these do not affect the rent vs buy equation, so I’ve kept them out.
    So, your savings while owning
    SAVE_OWN = Your household income – EXP_NEQ_OWN

    If you are renting, your income goes up by the returns you make on the amount you would have put down as down payment. Your non-equitable expenses are:
    EXP_NEQ_RENT = Rent + utilities (if applicable) + federal tax + state tax (if applicable) + FICA
    Your savings while renting are:
    SAVE_RENT = Your adjusted household income – EXP_NEQ_RENT.

    The difference in savings is:
    DIFF = SAVE_RENT – SAVE_OWN

    So when does it make more financial sense to rent than to buy? The answer is when DIFF is more than the annual home price appreciation. If it is less, you are better of buying, assuming the house has already appreciated enough to cover selling costs.

    As I mentioned, the tricky part is computing your tax under rent vs buy scenarios. Don’t do this yourself – let a tax preparer handle it, or try a web based tax software. I wrote a computer program to do the taxes as well as rent vs buy calculations. The program has not been tested extensively, so I cannot vouch for the results, but it does give good estimates. I plugged in numbers from posts 18 and 45, and made up some myself. I assumed simple tax situations. I assumed about 5.4% annual return on investment if cash is invested in CDs etc, fully taxable (very conservative I must add). The calculations take into account Califoria rates and rules, but the numbers should not be hugely different for other states that tax income. Here’s what it came up with:

    ************************
    * NOT LEGAL TAX ADVICE *
    * USE AT YOUR OWN RISK *
    ************************
    House price: $800000
    Rent (monthly): $1700
    Down payment: $160000 (20%)
    Points amount: $0
    First loan: $640000, term=360 months at 6.25%
    State taxes witheld: $4595
    Number of dependent children: 1
    HOA, insurance, and other monthly homeowners’s expenses: $300
    Filing status: MARRIED FILING JOINTLY
    Calculations
    ============
    FICA, medicare, social security: monthly=667, annual=8015
    Mortgage payment: monthly=$3941, annual=$47287
    Month 1: interest=$3333 principal=$607
    Month 2: interest=$3330 principal=$610
    Month 3: interest=$3326 principal=$613
    Month 4: interest=$3323 principal=$616
    Month 5: interest=$3320 principal=$620
    Month 6: interest=$3317 principal=$623
    Month 7: interest=$3314 principal=$626
    Month 8: interest=$3310 principal=$629
    Month 9: interest=$3307 principal=$633
    Month 10: interest=$3304 principal=$636
    Month 11: interest=$3300 principal=$639
    Month 12: interest=$3297 principal=$642
    Income if owning: $150000
    Interest for 12 months=39787
    Property tax: monthly=833, annual=10000
    PMI: monthly=0, annual=0
    Home expenses: monthly=5073, annual=60887
    CA Tax while owning: monthly=382 annual=4595
    Fed Tax while owning: monthly=1212 annual=14544
    Total Tax while owning: monthly=2262, annual=27155 (17%)
    Tax+Home expenses: monthly=7336, annual=88042
    Non-equitable expenses while owning:monthly=6711, annual=80542
    Remaining money while owning: monthly=5788, annual=69457
    Income if renting: $158656
    CA Tax while renting: monthly=783 annual=9396
    Federal Tax while renting: monthly=2347 annual=28171
    Total Tax while renting: monthly=3798 annual=45583 (28%)
    Tax+Rent expenses: monthly=5498, annual=65983
    Remaining money renting: monthly=7722, annual=92672
    Tax Savings while owning: monthly=1535, annual=18428
    Difference in savings renting – owning: monthly=1934, annual=23215

    So this home would have to appreciate by about $23,000 every year for the first few years for ownership to make sense. Keep in mind, to sell the home after 1 year would require an extra 6% of (800000 + 23215) or about $49,000

    Some variations in inputs to above calculations. Assuming all else remains same,
    If household income is $100,000 then difference = $27,635
    If household income is $200,000 then difference = $21,053
    If rent is $2000 then difference = $19,615
    If down paymant is 50% ($400,000) then difference = $21,206
    If mortgage interest is 6.50% then difference = $24,304
    If return on investment is 10% ($16,000) fully taxable then difference = $27,819

    So with current housing market does it makes sense to buy? I don’t know – I guess it depends on your personal situation. And also on general economic factors like CD rates, how the stock market is doing etc. I do know there are still quite a few people out there buying. Not sure if they’ve done the math above.

  103. m1 says 01 August 2007 at 09:04

    as an owner, paying the extra costs for property tax isn’t necessarily a throw away. Owners get that back in a much larger tax return than a renter.

  104. Michael says 01 August 2007 at 09:26

    Wow, all I can say is that I’m glad to live where I do. When I went from renting a 2 bed/2 bath, 980 sq. foot apartment to buying (30-year fixed-rate) a 3 bed/2 bath 1500 sq. foot house, my monthly rent vs mortgage/tax/insurance payment went down by about $100. Granted, the tax/insurance payment has since increased, but even with maintenance costs and larger electricity costs, I’m saving over the comparable renting options for my area. I’d be saving money over renting even if I was ONLY paying interest.

  105. Shawn D. Escamilla says 01 August 2007 at 10:12

    Where I live, in an nice and (yes!) desirable area of Northeast Ohio, an 1850 sq. ft. home (chock full of hardwood floors and moldings) will set you back $75-$125K, maybe $200K for the better school districts.

  106. Ossifer says 01 August 2007 at 10:46

    Alluded to above, but also consider that you get to quit paying your mortgage. That frees up a sizable chunk of loot each month for your retirement.

    Rent you get to look forward to forever… and at escalating costs… on a fixed income (most likely, in retirement).

  107. aleck says 01 August 2007 at 13:16

    This article assumes that both seller and renter of the houses are well informed about market conditions and are maximizing their return. Which is a big assumption. The owner of the house for rent may have bought it ten years ago for $100,000. Now, he can charge much lower and competitive rent and still make money. This is logical from the house owner’s perspective, but is an abnormality, which will be corrected at some point in the future. Such rent certainly won’t hold true for the next 30 years. No rental property owner in his right mind will do that.

  108. Joe says 01 August 2007 at 17:38

    Thanks for this article! I’ve always wondered how this actually breaks down in comparison, and you’ve helped shed some light on it.

  109. S.J. says 01 August 2007 at 19:20

    So true. If you are going to own a home you must come to terms with the fact that sooner or later things will break. You can pay the pros to fix everything, or you can “man up” and take on the task yourself. You can save a fortune by doing it yourself.

    ↑ Grab this Headline Animator

  110. Doug says 01 August 2007 at 19:27

    I’m blown away by how many clueless people still want to argue that homeownership always beats renting.

    The person who wrote this article made it very clear that sometimes it is better to buy, and that sometimes it is better to rent. There is not an “always” or “golden rule.”

    The one thing that people should take away from reading this article is: DO THE MATH.

    Also, for those of you saying “but no one would rent their house out for a loss. Landlords are making money.” –> Actually, renting can be mutually beneficial to both parties. Homeownership usually pays off more the longer you own the home. It is often a bad idea to buy a home and then move in a few years. Landlords that rent out their homes can take advantage of the benefits of owning for a long time, while renters can take advantage of the benefits of short term living. It’s not a loss if the landlord has owned the house for 20 years and has a 4.5% fixed rate loan.

    Also, for those of you saying “But my house appreciated and I made tons of money by selling at a much higher price.” –> Good for you. I made a lot of money in the stock market between 1995 and 1999. That doesn’t mean *everyone* makes money in the stock market *all* the time.

    Melanie wrote “When you rent in most of the US, you shoulder the risk that the owner of your rental can raise rent any time, to any amount.” –> This is not true. Leases are legal documents that keep the price steady for the term of the lease. If you aren’t in a lease or your lease term is up, then you always have the option of moving if the rents get raised too high. Free market and all.

  111. Doug says 01 August 2007 at 19:36

    Ossifer said “you get to quit paying your mortgage. …
    Rent you get to look forward to forever… and at escalating costs… on a fixed income (most likely, in retirement).”

    It would be interesting to see how many people actually have paid-off mortgages and own all of their homes. I’m willing to bet that it is a very small percentage, considering that most people buy their first home in their thirties and do a 30 year loan. That would put them in their 60’s… and that’s assuming they never moved to a new / more expensive home at any point in their lives. Most people that I know buy a new house in their 40’s or 50’s and go right back into another 30 year mortgage, which would put them in their 70’s and 80’s by the time that is paid off. Then we must wonder, at what point will they move to a retirement home with very expensive rents?

    It seems to me that with 30 year mortgages there isn’t a lot of time to “enjoy” the benefit of the vanishing payment.

  112. Eric says 02 August 2007 at 01:11

    The article makes a reasonable argument for renting compared to paying a mortgage for 30 years to buy a house. However, if you lower your sights and buy a condo you might be able to pay off the (much smaller) mortgage far quicker, which makes a big difference.

    I’m on my second condo. In each case I paid off my mortgage (with no prepayment penalty) within 7 years.

  113. Area 51 says 02 August 2007 at 14:49

    Never thought I’d contradict this analysis but look at this:
    The Author forgot to add the appreciation he himself said was historically 4%. (I know these days, it’s “depreciation” of 2% or so)
    Assuming the house is in a normal (flat) market:
    $424,950 X 0.04/12=$1416.5/mo.
    He also forgot the principal going into his pocket which increases over the life of the loan. At a minimum it is probably $150/mo. in the early life of the loan.
    $2690-1416.5-150=
    $1123/mo. net cost.
    Neglecting inflation of course. But again his savings and investment calculations neglected inflation as well.

    There are other factors that go into the “true cost” of a mortgage as well. For example, if there is inflation or interest rates go up, you win and the bank loses since your interest rate is constant. (fixed loan) The house will appreciate with inflation but the loan principal is constant.

    So in this example, it would be a good financial decision to buy that house vs. renting.
    STILL it is not a good investment or savings plan on its own, just better than renting especially over the long haul.

    Hell, I should be a real estate agent!!!!

  114. The Tim says 03 August 2007 at 06:43

    Area 51 @ 128,

    Your comment doesn’t make any sense. Why would you subtract appreciation from the monthly costs? If you did that, you’d need to subtract the investment returns from the monthly costs, too. Maybe you should be a real estate agent, since you seem to be pretty good at selectively adding in only the details that make homebuying look appealing.

    I didn’t break down every little detail, but I did in fact figure in 4% appreciation, as well as inflation. These factors and more all went into the “over $500,000 better off after 30 years” statement. Pull up the NYTimes calculator or the Priced Out Forever spreadsheet (both linked at the end of the post) and put in the numbers to see for yourself.

  115. A.J. - IAmFacingMillions.com says 04 August 2007 at 11:41

    It is so very important to understand that this model is specific perhaps to the houses compared and is not representative to all or even most cases.

    The point and concepts and calculations are very well done and important to consider wen thinking about a house purchase.

    I am buying a town house right now and my mortgage, insurance, taxes and home owner’s association are EXACTLY equal the rent on a town house unit down the road. After 20% equity, the PMI drops out and I’m actually paying less. But my unit has 300 more square foot, 1 additional bedroom, etc. To offset that, I have maintenance I wouldn’t have with the rental.

    My model does not take into account tax deductions and my mortgage is particular attractive because of a state program I am going through (4.84% 30 year fixed) so I don’t claim my scenario is typical, but I am helping 2 other people going through conventionals where the monthly cost of ownership was close or within 10% of the cost of rent in my local market using a conventional mortgage.

    Very good article in point and concept but I think the conclusion is unsubtantiated. I think most people will not work the numbers and will buy as much house as they can afford and will end out spending more than renting, but I think if you shop wisely and take your time and compare apples to apples you will find many scenarios in many markets where buying is a smart decision.

  116. Mr California says 04 August 2007 at 17:52

    One big factor that influences rent vs. buy decision is how much returns will you get if you invest what would have gone as down payment. You could be very safe and put it in a CD, but CDs don’t have a very high rate of return and the interest is taxable. A more realistic comparison would be putting it in a low risk mutual fund. With a MF there is a small risk of losing money but you are also taking a risk when you buy a house. As an example take OAKBX. This fund has returned about 10% consistently most of the years. Nice thing about funds like this one is a large part of returns is form of long term capital gains distributions (taxed at a lower rate), or just price appreciation (not taxed since it is unrealized gains). Some of the returns are in form of qualified dividends which are not taxed at all. Using actual distribution rates of this fund from 2006 and redoing calculations from my earlier post @111 with the assumption that all of the down payment is invested in this fund while renting, gross income while renting is about $165,000. I also increased the rent to $1800 per month to be more realistic. The difference in savings while renting and owning comes to $28,368. In other words if you plan to buy and your house does not appreciate by about $28,000 every year, you are losing money. If you plan to sell after 5 years your house must be worth about $1 million to break even (factoring in 6% selling costs).

    If you invest at least part of that amount in tax advantaged retirement accounts like 401K, (Roth) IRAs etc, your savings while renting are even greater. Also (and I may be wrong about this so feel free to correct me), in the event of a financial disaster like bankruptcy, I believe your retirement accounts are protected, your house isn’t.

  117. brett says 11 August 2007 at 06:14

    This is one of the worst pieces of financial advice I have ever seen. Yes, if you want to get poor slowly, by all means rent instead of buy.

  118. SteppedUp says 13 August 2007 at 18:48

    Great article – and this is great advice for right now.

    Everything points to housing going down drastically.

    http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

    But in 2 or 3 years? Might be time to buy your house – if for no other reason than inflation.

    And do NOT think that inflation is going up at only 3% a year. That’s ridiculous – CPI has had food and gas removed out of it. Inflation is way above 3%

    http://www.shadowstats.com/cgi-bin/sgs?

    In regards to the cost of ownership – sure repairs can be expensive if you hire somone to do it. But that’s why they call it sweat equity….

    But I’m still with you – renting now makes much more sense.

    Disclosure: I’m shorting housing related stocks.

  119. lizriz says 16 August 2007 at 11:54

    It is completely inconceivable to me that anyone can save $85K for a down payment on a house. I’m 36 years old, I’ll be done paying for my graduate degree when I’m 55, I’m an executive assistant (my grad degree was in film production, so, yeah…), and my savings account has like $112 dollars in it right now. Let’s not even talk about my debt… Seriously, saving for a house is completely inconceivable. I’ll be ready to move into an old folks home before I could ever save $85K. But then, maybe I’ll need that dough for the old folks home.

  120. Karla says 19 August 2007 at 10:34

    There are 3 guarantees in life… death, taxes….. and inflation. Make no mistake about it, the government drives inflation, the government loves inflation. Inflation drives you into the AMT tax bracket. Inflation devalues your savings, and prevents all money from going into ‘black holes’ (e.g. Bill Gates… even his wealth will have evaporated after a few generations). Having said that, houses go up with inflation. Few other things do. But don’t buy now! We are in a bubble. Supply and demand will look after the current high prices.

  121. Katie says 28 August 2007 at 03:36

    I bought it when my parents said “You’ve got to have a home, renting is throwing your money away.” Now I’m trying to figure out how to get a second job that works around both my husband’s and my schedules so as to avoid having to pay for childcare. The reason? We bought a “fixer-upper” and the insurance company suddenly gave us one year to fix certain things or we would be dropped.

    We were paying $550/month to rent a house – 2 bed, 1 bath, attached garage, nice neighborhood. Now we pay: $386/month mortgage, $120/insurance, $67/month (800/yr) in taxes – for $573/month in house costs BEFORE you add in:

    The $3400 debt for fixing foundation – the $9000 for roof repairs – the $5000 for installing central air/heat (both sets of parents said “You’ve got to have it with a baby in the house….”) – the $1500 to get the kitchen from being a health hazard with holes in the floor to usable condition…

    And of course the emotional toll of living in a wreck in a bad neighborhood, the decline in standard of living from trying to pay all this debt, etcetera…

    It’s been a very expensive lesson on becoming an adult. Your natural inclination is to listen to your parents, but I’ve finally had to learn to take even their advice with a grain of salt.

  122. HomeOwner says 28 August 2007 at 07:41

    The author left out a few key factors and his article seems a bit bitter. This is not completely accurate.

    To the writers point though, renting is NOT for everyone and does NOT fit everyone’s case. For many people buying just makes more sense.

    Case in point-.. Let’s take a look at my situation and how the numbers worked out.

    I live in the pacific northwest. My rent for a 1100 square foot, 2 bedroom 2 bath apartment, was $975 month. The original price was $1,100 but was reduced because of the housing slump going on right now but I was informed as things pick up in the next few years it will go up to market rates. But rents go up anyway, so that’s a given.

    In my same complex a 3 bedroom 2 bath apartment is $1,100 month at the reduced market rental rates, and will go up in the next year or so when this slump is over. Again, a given.

    I just bought a BRAND NEW built (being finished built now) detached townhouse. (it’s beautiful by the way and all mine! :-))) Okay, it’s 1,300 square foot, 3 bedroom 2.5 bath with a 1.5 car garage. It has a 10 year warrantee on pretty much everything.

    First of all I have excellent credit. 800 credit score so that helps BIG TIME in getting an awesome, affordable rate.

    I bought the home with 100% financing — no money down. The builder is paying 3,500 toward my closing costs too!!! All it cost me to buy this beautiful, new home was the rest of the closing costs or about $2,000! That’s all it cost me out of pocket, can you believe it? It’s true.

    My mortgage payments (PITI + HOA) are $1,400 month. Now that sounds like allot, but wait until you see how the numbers work out. 😉

    I went to my employer and increased my deductions from 1 to 4. This gave me an additional $200 net from my paycheck each month to help with payments WITHOUT underpaying in taxes. It’s like I’m getting my tax refund back now, to help me out now, instead of at the end of the year.

    In one year I will pay about $12,000 in mortgage interest which is TAX DEDUCTIBLE! Plus my closing cost of $2,000 are also tax deductible.

    Just taking the $12,000 tax deduction, I will get back about $3,500 MORE from my tax return by owning my home. When you divide $3,500 by 12 months that comes out to $291 more I have per month toward payments.

    So, instead of paying $1,400 for my home, I actually pay only $1,109 per month-!! If you subtract what I pay in rent ( $975) for a smaller 2+2 apartment, from the $1,109 per month I actually pay in mortgage payments, It only cost me $134 more to own a BRAND NEW BUILT, larger, awesome home that is ALL MINE.

    These payments are fixed for 30 years, so what I spend on housing will never go up! Rents WILL go up, that is a given fact. Anyone trying to make it seem less than that is just fooling themselves. Now, when the economy gets better, my apartment will go up to market rates MORE than what I am paying in mortgage payments. And the rent will just keep on getting higher and higher year by year. I mean right now rent is almost the same as what I pay in mortgage payments!!!!

    For my $2,000 in closing costs to buy the home, I took it out of my Roth IRA, which has NO early withdraw penalties. My Roth was gaining an average interest of 9% a year. So that $2,000 sees a gain of only $180 per year.

    If my home appreciates at the nominal rate of only 4% a year, I would realize an equity increase of $7,640 per year based on my purchase price. So my $2,000 investment that I made in my home, instead of making me only $180 per year in my Roth, is making me $7,640 per year in my home.

    To me THAT’S a better investment!

    Yes it’s true it’s not a liquid asset, but so what?! It’s an asset and you gotta live someplace, right? So why not live in a place that’s making you money at the same time! It’s also a good idea to have a diversified investment portfolio anyway, not just stocks and bonds.

    Another interesting fact is this. I also have $10,000 in a traditional IRA. That particular fund, unlike the Roth, will be subject to income taxes, but NOT the customary 10% early withdraw penalty IF it is used for buying your first home-!! So if you use money from an IRA to buy a home all you pay is income tax. BUT HERE IS THE KILLER DEAL.

    Let’s say I used the $2,00 from my IRA instead of my Roth. On my tax return i would have to add the $2,000 to my income, but then in my itemized deductions, I would subtract the $2,000 from income because I used it for closing costs-!! Because it’s deductible. So in a sense it was a wash! I paid NO taxes at all on IRA withdraw. See how that works? Pretty cool huh?

    What got me off my butt and made me make the decision? Well my apartment complex went condo. So I got a notice on my door saying I had 30 days to leave because someone was buying my place. So I HAD to move. I looked back on how much I paid in rent over the course of my tenure — $15,000!!! with nothing to show for it with a landlord who basically kicked me out on the street. I just decided that I had to bite the bullet, tighten my belt, and just get over my fears and just buy my home. I HAD to figure out a way to do it. I’m so glad I did because as you can see the numbers come out to about the same as rent!

    Plus by having my own home, I don’t have to worry about cold-hearted landlords, or the kids downstairs slamming their doors rattling my apartment upstairs, or the smoker next door who wafts his second-hand smoke into my patio, under my door jams and in my apartment. (I’d wake up with headaches from that poison) Or how about the guy who parks his car so close to mine that I can never get in. I’d always pay my rent 5 days before it was due but one month the check didn’t get to the landlord because the mail got messed up. I was very friendly with the landlord, but instead of her coming to me politely asking me what had happened (after a year of perfect payment history), there was a threatening notice on my door the next day to pay or be evicted. That was just WRONG in my opinion.

    The key to my home buying success was being debt free (new car paid off and no credit cards), and having a very, very high FICO score of 800. This got me a great interest rate without having to settle for sub-prime. This allowed me to buy a bigger home than my apartment for less money per month, which in turn right now makes my rent to mortgage ratio about the same.

    In the next few years I will be paying less for MY housing than renters will be. This makes me feel good knowing I’m doing something for MY benefit, not a landlord.

    I’ve achieved the American dream and SO CAN YOU! If your mortgage payments are close to what you pay in rent after you crunch the numbers, and you can get a good loan, it makes sense to buy.

  123. Mark says 29 August 2007 at 00:43

    I can go even further than your example in comparing an apple to an apple. I live in a rather remote part of Hong Kong (i.e., it takes an hour to get to the Island) and we are renting an apartment that only came for rent because the owner couldn’t find a buyer quickly enough. The realistic selling price, if anyone wanted to buy, would be roughly $190,000 (US). The monthly rent is $825 (US). To buy this apartment, I not only would have to come up with about $55,000 (that’s the 20% downpayment plus all of the taxes and fees), but for a 20-year mortgage I’d have to pay nearly double each month what I’m currently paying– roughly $1550. That’s just the payment– that’s without considering the maintenance and the apartment management fee.

    Although of course the rent will go up over time, I don’t see how it can go up to $1550 in the near future, for there is a fairly high vacancy rates on apartments around here, and speculators keep building new places (even though old places are not selling or renting). So my reward for “throwing money away on rent” is that I have a $55,000 downpayment sitting in a diversified stock account– and I’m betting it will grow faster than the value of my apartment over the next 20 years– and I’m putting more than $700 per month into my stock account that would otherwise be going into housing.

    Aside from the money itself, there’s the flexibility. What if I decide to move– to Hong Kong Island or halfway around the world– or (taking a lesson from Hurricane Katrina) what if a natural disaster or a political disaster forces me to leave? Nice to have one’s investments, however large, take up no more space than a series of account numbers. (Thought experiment: if you were a prosperous New Orleans native whose employer was put out of business and you’d relocated to Atlanta, would you rather have a bigger brokerage account– with some cash positions included, naturally– or would you rather have a water-damaged house several hundred miles away and stalling tactics from an insurance company? Or in a better scenario, the house is intact but no one wants to buy it for what you think it’s worth).

  124. HomeOwner says 29 August 2007 at 11:01

    That is allot of money to put down. To me I would only put that much money down on a house if I knew for sure I was going to stay in the house for the life of the loan, 20 .. 30 years or whatever. Even then I would still try to get 100% financing and keep my cash in my investment accounts instead of tied up in my house.

    In my case I had such outstanding credit scores and no other debts and was able to qualify for 100% financing (that was the key for me), which produced a total monthly payment that is equal to rents. It only cost me $2,000 out of pocket. That would have been the same as first, last and security deposit at a new apartment. For my case it only made sense to buy. But everyone’s situation is different.

    Most people think when they get pre-approved for a loan now and hear the bad news, (20% down.. high interest rate.. blah, blah blah) that this is how it will be forever. THAT’S NOT TRUE. The reason for your mortgage quote now is because of your FICO score and your debt to income now. If you lower your debts to zero and build your FICO score up to 800 your situation changes astronomically in your favor. If I can do it, so you can YOU!

    See, about 11 years ago I was a foolish person. I got myself in too much debt and had to file for bankruptcy. I realized my mistake and since that time worked hard to rebuild my FICO score from bottom of the barrel to an 800! .. I went from not being able to qualify for a handshake to being able to qualify and buy pretty much anything I want.

    The way you do this is living a simple life and lower your debts. When we make more money we tend to spend more money and THAT’s what gets us into trouble. If you need to buy a new car, Instead of buying a BMW for example, get a commuter car like an entry level KIA or Honda and pay it off in 4-5 years and put the difference of what you’d spend on that expensive car in your IRA account. Stuff like that. Buying a very inexpensive car and making payments each month (not missing any) then paying it off is a great way to build your FICO score.

    Use your credit cards not for buying that expensive plasma TV, but use it for weekly groceries, but then PAY IT OFF AT THE END OF EACH MONTH. This establishes and builds a payment history with your creditors and raises your credit score over time. You can’t just have a credit card and let it sit there, you have to prove that you can use it and pay back dept. Buying simple, everyday things and paying them off monthly is the key.

    The other thing you can do is downgrade your renting. Look for the cheapest rent you can find in a good neighborhood. Don’t be concerned about living in a newer apartment complex with waterfalls and lobbies with fireplaces. That lifestyle will all come later. Just look for a clean and comfortable apartment even if it is a bit smaller and a bit cramped. Sacrificing and doing this you’ll be able lower your rental expenses probably by $300 a month. Put the savings into your IRA each month. Each time the rental lease is due, print-out about four competitive rentals in the area that are the same or lower than yours. Near the end of your lease, give this to your landlord and tell them either you beat or match these prices or you will move! If you do so, I will sign a new years lease. Most landlords want to keep you there so they are willing to match a price. If they don’t then just move and save more money. You can find apartments that are willing get you in cheap, without the last months rent and security deposit.

    The money that you save living this simple life, you can stockpile in your IRA accounts and gain interest on the money while you rent. After about 5-10 years of doing this, (like I did) you will have raised your credit score very, very high AND have a nice, sizable chunk of money in your IRA or savings. By this time, 5-10 years later, your simple, little Honda or Kia, your credit cards and other debt should be paid off. You should be completely free of any debt with a FICO score in the 700-800+ range. Now you are GOLDEN! 🙂 You are the master and the ball is now in YOUR court.

    Now you will qualify for 100% financing AT A LOW INTEREST RATE, which will allow you to buy your first home with very little out of your pocket, Like I did. It only cost me $2,000 out of pocket instead of $45,000 for a 20% down payment type loan. Because your credit score will be so high, a 100% financing loan will most likely give you a lower interest rate than most people doing a regular down payment loan.

    Unless you do a split loan like a 75/25, on a 100% financing single loan, (like I did) with no money down, you have to have mortgage insurance. (MI). But that is not the deadly thing it once used to be. Now the US government allows you to write off the private mortgage insurance on your taxes, and as soon as your home’s loan to value is 80% the MI drops off, lowering your payments even more. Even with MI on my loan and Townhouse dues, it was still about the same as market rents.

    Now at this point go out and see what the market is for the size home you need. (but DON’T over buy). Then take this price and call up some mortgage brokers and just get pre-approved for 100% financing, single 30 year loan. I bet you would be surprised, as I was, because of your hard work over the years building your credit rating up and paying off all your debts, that your total housing costs are about the same or cheaper than market rents!

    All it should cost you to buy your home doing 100% financing, is your portion of the closing costs. Take that little bit of closing costs out of your IRA that you’ve been saving up over the years. You won’t have to pay the early withdraw fees because you’re using it for buying a home. You won’t have to pay taxes either because you can write closing costs off on your taxes! That money you just used for closing costs built interest over the years in your IRA, but you didn’t have to pay any taxes on it or penalties for taking it out early. Nice!

    Now you can keep that 20% down payment that you would have spent, in your IRA. You have a home with payments the same as the going rents, building equity and making you money, with your cash still in your investment fund building interest and making you money too.

    In 5 more years of making payments on your home, your credit score should be in the high 800’s! Rents would probably have grown the same or higher than your mortgage payment. Now you can rent out your house to cover your costs and do another 100% financing on a home and place you really want to live.

    Let’s say you paid $190,000 for your home and it only cost you $7,000 in closing cost to buy it. Let’s say it appreciates at a snails pace of only 3%. In 5 years your $7,000 investment would have made you $28,500! No investment fund would ever produce that fast and high rate of return. This is why it’s important to have real estate in your investment portfolio along with your stocks and bonds.

    Okay, so now you have two homes, building equity, AND cash still in your IRA building earnings. By the time you retire 20 .. 30 years later you can sell the investment home and your second home. The equity you’ve built up in both homes and including your IRA has made you allot of money. Now you can downsize your living and buy that cute little condo by the beach with CASH and put the rest of your wealth in an investment account and enjoy a great retirement.

    Okay, so here it is.. there is no such thing as making money quick. it takes hard work, smart choices, sacrifices, and dedication and most of all, time. Having a home in your investment portfolio can help you do that. BUT you have to do it the RIGHT WAY and it takes time. The people who truly have money when they retire are not the ones driving BMW’s but the smart, goal-oriented ones driving that little KIA down the highway!

  125. Mr California says 31 August 2007 at 18:43

    To HomeOwner @posts #147, 150:

    You failed to mention a few details/facts which are needed for true rent vs buy comparisons.

    What is the price of your home?

    Could you break down your PITI? What is the mortgage rate? What is the HOA? What is the Mortgage Insurance? Home insurance? Property Taxes?

    Mortgage deductions do not reduce your social security/medicare taxes. What is your tax bracket WITHOUT social security/medicare taxes and without taking into account mortgage interest deduction? (Although tax bracket is not a very accurate means of calculating tax benefits because the bracket itself can change when you go from rent to own).

    You say you will save $3,500 in taxes a year from the $12,000 interest you pay. While renting did you take the standard deduction? (about $10,000 if married filing jointly). If you did, you’re going to lose it if you want to itemize your mortgage interest. Did you factor in the loss of the standard deduction? I should mention here that switching from standard to itemized allows you to tack on a number of other deductions, like donations to charity, certain work and medical related expenses etc.

    You seem to be fairly confident that your house will appreciate in the coming years. Did you read the recent news article which basically says the housing market is in its worst slump in 16 years and likely to deepen?

    Why did the builder pay you $3,500 towards closing costs? Perhaps because they are having a tough time selling their homes? Perhaps because they or other companies are planning on more construction nearby?

    You did not like the notice your landlord sent when you missed one rent. Wonder what is the wording your mortgage company uses if you miss one payment.

    You say you did not like the old neighbor. What if your new neighbor is equally obnoxious? As you yourself hinted, it’s easy to relocate while renting. Will you sell your home because of bad neighbors?

    You talk about diversifying your investments. When you pour your life’s savings into one home, haven’t you’ve done exactly the opposite?

    You say your Roth used to gain 9% per year. You failed to mention, that gain was TAX FREE. Gains on your IRA and 401-k grow tax deferred.

    You seem to advocate cashing out your retirement accounts for purchasing a home. Presumably you are treating your home as a retirement account. Do you know if you ever happen to be at the wrong end of a lawsuit/divorce/bankruptcy, you can lose your home? But nobody can touch your IRAs and 401-K.

    You seem to advocate 100% financing. 100% financing also means you have no equity in your house. It’s like renting your own house – only worse since you are also neck deep down in debt. Also, 100% financing is no longer available to a lot of people, esp to those looking for jumbo loans.

    The Mortgage Insurance deduction is not final yet, is only for loans closed this year, and may go away in the future unless Congress renews it. It also falls steeply once your income crosses a certain threshold.

    There is one thing you mentioned that is outright incorrect. It’s something real estate advocates use frequently to sugar-coat home purchases. I’ve even heard Suzy Orman do the same faulty math on TV. You say the one time $2,000 investment is making you $7,640 per year. You’ve not factored in all ownership expenses – mortgage interest, property taxes, HOA dues, insurance, remodeling costs and other regular maintenance expenses. Let me assure you – the one time $2,000 is NOT returning $7,640 every year.

    The bottomline is buying may have been a good decision for *you*. It may not be a good decision for a lot of other people. It all depends on your individual situation, and also the overall economic outlook to a certain extent.

  126. Joseph Triplett says 04 September 2007 at 15:18

    Whereas you make a very good point, you must not forget to mention that investing in real estate is a highly local-centric issue.

    By saying this I mean that the end-result of the loan amount, and the loan payment amount (monthly) is an important variable in one’s decision to rent versus own.

    In the decision you lay out above (you must live in San Diego or Miami) the average home costs in the range of 400K a month. The amount of this property times the interest rate for said mortgage loan (averaging 6.8% a year) would result in the property buyer paying around $2500 in interest plus around $3000 in property tax. Added togther this indeed severely cuts into the amount you could make from a renter, but truth-be-told, does mirror the amount you would have to pay to rent a house for a year.

    So what you must stress to your readers is that investing in real estate entails the area in which you which to invest. Whereas a $400K house does not make sense to invest in (as an owner versus renter), an area such as Dallas (avg. house price is $180K) it is much more advantageous to OWN versus rent due the price of the house.

    So in your choice to buy vs. rent vs. rent-out-to-tenant, you’re decision is highly based on the:

    1. price of property to buy (&)
    2. property tax for the year for said property.

    I’m not discounting your story above; I’m simply adding an extra dimension of analysis to the decision to buy vs. rent.

  127. HomeOwner says 05 September 2007 at 10:53

    Mr. California.

    Well, your assumptions on MY situation are inncorrect. Perhaps the fact that you live in California where prices are so outragious that hardly anyone can own a home has made you a bit bitter about homeownership. I actually owned my own home in Califorina too and it was right for MY situation.

    Let me correct your questions…

    My loan is 6.25% 30 year fixed. That’s damn good right now for 100% finacing!

    I pay $55 for HOA… My home has a 10 year warantee that covers everything so I don’t have to worry about anything. So your assumption of repairs is null and void, at least for the first 10 years. 🙂

    The builder is giving credits toward closing. And yes I know all about the housing market. That’s why I bought now. I got in when it’s low and I plan on living here for a long time. I’m tired of not having roots anywhere. So in a way, I do have some equity in the home because I’m buying below market value. Look the housing market has always gone up and down and it always comes back. Same with the stock and bond market. It’s all realative.

    As far as my neighbors. I have detached townhome with enough room that if my neighbors smoke it won’t bother me. If they slam their doors it won’t bother me. The HOA controlls any other type of behavior. I’ve also met all my neighbors and they are GREAT! So that takes care of that issue.

    I went to several rent vrs buying calculators on the web and ALL of the data said that I WAS better off buying. Listen I can’t speak for anyone else, and I surely can’t control anyones bitterness toward buying. But for ME in MY situation it IS the right thing for me.

    I like the feeling of having roots and having a home. Sorry if that makes some people bitter and upset.

    When I was calculating my rent vrs buing I went to my tax adviser. and NO of course not I was NOT using the standard deductions!!! duh?!

    When you say 100% financing means you have no equity in the house is just foolish!! If you put 20% down of your own money, you still used your own money! So the “equity” that you gaind in your home is taken out of your pocket money. So either way you are out 20% of your money! 100% financing with LPMI, means you keep more of your own money in your own pocket because you don’t have to put the 20% down.

  128. HomeOwner says 05 September 2007 at 21:49

    Mr. California

    … also I wanted to mention that my brand new home appraised higher than I purchased it for. And YES this is due in part to the housing market right now and because THIS builder is doing something that no other builder is doing. Buiding HIGH QUALITY homes at affordable prices. Yes, other builders are building all over, but what they do is jack up the price to market value, just because they can, because of their egos, and in those cases, NO there is no equity. In my case there is!

    Where I live now housing is much cheaper and affordable anyway. so I have instant equity already. Your assumption that my 100% financing has no equity is incorrect. I have 30k in equity right now! And when the housing market goes on an upturn in the years ahead, which it will, like it always does, I will be at an advantage.

    If anytime is right for buying a home it’s NOW. When homes are below market value. As long as you know where you want to live and you want to stay in the home for awhile until the market comes back. If you’re unsure where you want to live or don’t want to put down roots now, maybe buying a home during this downturn isn’t right for you, because you might not be able to get out from under it for awhile. But for ME because I’m done renting for sure and done movng for a long time it IS an awsome deal!

    another thing…when I lived in California 3 years ago I sold my 975 SF condo for $365,000! HA! can you believe it? What a rip off california is in terms of what you get for your money. Anyway, owning it for only two years I made 75,000 in profit, because I bought at the right time and sold at the right time. I didn’t do this to get rich or anything, it just happened that way. Since I lived in the condo for two years, I qualified for homeowners exception and was able to keep the whole 75k tax free!!! I put most of it in my long-term accounts. So.. the 7,000 I took out of my ROTH IRA was actually none of my money because it was from the gain from my condo! So in effect, I actually bought this new home for none of my own money!

    Sure, I could have put the regular 20% down and got MAYBE a tiny bit lower rate but why? Why should I be house rich and cash poor? Hell, I’ll keep my 20k as a liquid asset thank you! especially when I was able to buy this new home with 100% financing LPMI at 6.25% 30 year fixed using only $7,000 of my money! Outstanding credit rating and no debts is the key!

  129. Siena says 28 September 2007 at 10:26

    I think that all new prospective homebuyers should read this article. The real question is can you really afford to buy? I know someone in the exact scenario. She was renting a 3 bedroom house for $1400/month. For four years her landlord never raised the rent. I would probably appraise the value of the house at $400,000. She bought a house for $435,000. She did not have the money for a down payment so her monthly payments are $3150/month PLUS she pays $6000 a year separate in taxes and $1800 a year in insurance. Where I lived lots of apts. were in rent control areas so landlords could only increase rent by a 3% a year so even if her landlord had decided to raise the rent the amount would be minimal. Yes, she got a $4000 bigger tax return as a homeowner, but even with the return, her housing bill increased by over $2000! Wait, I forgot she pays $100/month in HOA fees, also $75/month lawn care, $50/month in exterminator fees–her landlord paid her trash/water bill before so now she has to do it at $50/month. That’s an additional $3300/year–almost wiping out her tax benefit. That doesn’t include any potential repairs. Yes, owning a home long term does provide some security and investment, but with prices today, the question needs to be asked can people afford this investment without a large amount of savings and do they really understand the real costs of owning a house.

  130. cc says 06 October 2007 at 06:40

    Very informative article and exactly the kind of information needed to assist in the decision of whether to continue renting or to buy. At this point, renting is the way to go, at least until we have enough saved so as not to have enormous mortgage payments. The one way we would consider buying right now would be a 2 family home, so we could collect rent, helping offset mortgage payments.

    Thank you for writing clearly and succinctly regarding this important subject.

  131. Eric says 11 October 2007 at 22:54

    Good post, however you were to general in some areas. You assumption seems to be rent will never increase and you didn’t account for the income tax deductions for mortgage interest and taxes.

  132. Daniel says 14 October 2007 at 22:00

    In some areas it is virtually an astronomical undertaking to own a home. For instance here in West Los Angeles I have been in the same apartment for 10 years. 2 bedroom, dual car port, fenced in patio and central a/c which started at $800 and 10 years later is now $1100.

    A home behind us that is 925 sq feet is listed at $925,000 and sold in 2 weeks. Similar small homes sell between $850k and $950k all the time–my coworkers average mortgage is $3800-$4200 per month.

    I will happily rent and invest that other $2-3k until I move back to the midwest or another state where houses and reality are in the same ballpark. 🙂

  133. Mark says 19 October 2007 at 17:52

    Too many of these replies are based on recent historical rates of appreciation (stock market, housing market), both of which have been higher than normal.

    The name of the game is “buy low, sell high,” and use whatever information is available to determine where the market is. Fortunately, housing moves slowly, and it is easy to see that now is the wrong time to buy a house (in most metropolitan areas of the US) no matter what your plans are. Housing will depreciate in real terms for another few years, and the stock market is likely to follow.

  134. pam munro says 22 October 2007 at 15:27

    I found it very enlightening to discover that a member of my congregation was spending as much in property taxes, etc. as I was on my RENT – so perhaps my rent wasn’t being thrown away after all! I do have real estate in less inflated markets than the one I live in – but perhaps it doesn’t make total financial sense to buy anything here – altho more room would be very nice.

  135. Dennis says 23 October 2007 at 11:28

    I agree that renting can be better than buying.
    I have lived in the same apartment for 10 years and my rent has gone down every year because the management company gives me a couple months free rent every time I sign a new lease. there has never been an increase in my mothly payment. Plus when the refer went bad, a couple broken windows over the last few years , and and occasional plumbing or light fixture problem, has never cost me a dime. It cost me one weeks paycheck to pay the monthly rent so I have built up a very fat retirement account in addition to my brokerage account. When I retire I will have it made.

  136. JACK says 24 October 2007 at 16:35

    Bottom line: buy a place because you want to own AND can afford to own.

    All the rest is crap. Because there are too many variables to truly normalize the comparisons.

    I bought a place and saw my montly costs go up about 1,000 dollars. But the place is 3x the size (when you factor in the old place ridulously has 20% of the space dedicated to a closet), in an environment where I know my neighbors, have a yard, etc. I made the decision because I wanted these things and determined I could afford it. Not some brute math analysis that said buying was better for my overall bottom line.

    I could definitely have more money in the bank if I stayed renting. And I’d be an unhappier person for it.

    I think what Tim is encouraging is that people think things through. Prepare themselves for what the real costs of ownership will be. Use the numbers to help make sure their eyes aren’t bigger than their wallet. But I think where one lives has got to be a whole-life type analysis. There are just too many things to take into account.

    All that said, I’d echo Tim’s sentiment that the astronomical home value increases of recent time have warped people’s view. I’ve tried not to do that. For example, I don’t even bother including my home in net worth calculation.

  137. Eric S Doms says 01 November 2007 at 05:01

    Very good article !!! 🙂

    I think what it comes down is the following:

    Make the decision to buy / rent, and then take the responsibility for that decision.

  138. Dave says 01 November 2007 at 09:48

    Eric S Doms Says:
    …take the responsibility for that decision.

    What?!?! That’s not the American way – at least, not any more. Now, it’s always someone else’s responsibility (and fault)

    Kidding, (but only a little)
    Dave

  139. erroljr says 12 November 2007 at 11:38

    Great article. I am not in the USA, so applying this to my local housing market and comparing notes with those in the USA was very interesting. I currently pay rent of $800 and that is basically fixed because my landlord has not and historically not raised rents at all. It is not normal to raise rents in this city either.

    I was looking at purchasing a property and the mortgage was approx $1900 a month which is 2.3 times my rent. I am thinking I can use the difference and get a guaranteed return at my local bank of 7-8% a year (those are the interest rates in this city for fixed deposits) and in a small number of years pay for my home with cash and have change left over versus paying a 20-30 year mortgage.

    The rental property I live in is perfect for my needs, in a great area, very strategic for our purposes and is exactly what we need right now.

    So it looks like renting is the way to go for me until I am ready to buy a home with CASH to live in which I should be able to do easily in less than 10 years.

    The key to this is to actually invest the money I am saving by paying rent versus buying. If I have no discipline to save, then forget it.

  140. Maura Anderson says 12 November 2007 at 20:17

    Fantastic article it describes the exact situation I’m in and I live in long island ny. Everyone told me that I was going to be throwing away money if I rent. Not to mention the maintenance of a home you definetly under estimated but you’ll know some day.

  141. Sue says 16 November 2007 at 14:25

    Very interesting. I’m now retired at 58 and wondering which way to turn. Rented when very young; owned a condo for decades and now live in an inherited house. This sounds great. But is it? I am spending more now on this house than I ever spent on the condo — yes, I have yards (tons of upkeep and no reward in my view), must handle all costs myself, i.e., new roof will be over $10K and house needs tons more work. Put in copper pipe and had place painted and all new doors — total? $30K!!! If my condo complex needed a new roof, my share would’ve been $2K tops.

    You have to decide what you want and how you want to live and not be so concerned with which way is cheaper. If you’re not happy owning (or renting) or owning a house, in particular, which is really lots more expensive than a condo/townhouse, then you have to make that choice.

    I want the freedom to go away without concern for property security, shutting off mail delivery, worrying about trash day and all the things that go with single family home ownership, plus those exhorbitant utility and other bills. I’ll put up with the occasional annoying neighbor because I’ve got worse neighbors at this house and can’t do a thing about it. At least at the condo there were rules and we had some control.

    Everyone in this neighborhood is in everyone else’s face and all know everyone’s business — it’s horrifying to me, thrilling to some others. Go figure. I’m just an apt./condo type person and will sell this old house and go back to what works best for me, despite the fact that the house/land is probably worth a lot more in dollars. My sanity is worth more to me than the dollars and believe me I am spending far more in $$$ than I ever did before just living in this house. Thanks but no thanks.

  142. Meoip says 30 December 2007 at 07:44

    Let’s not forget the probable importance of life insurance if you are buying a home.
    If the bread winner dies the widow can use the insurance money to pay off the mortgage and keep the kids in the home.
    This will add $24-$50 to ownership.

    The big problem is relator’s, mortgage companies, builders don’t include all the figures. The average buyer doesn’t know what should / could go into the mortgage and doesn’t insist on putting everything into it. Then after six months they get beat by a tax bill or insurance.
    Common in my area are builders who through in free things (basements, sun rooms, bonus rooms) which can raise the taxable value of the property over $20,000 (basement). This giveaway is great but often the sales agent will give out tax figures based on purchase price not true price. Come tax time the bill is for a house more than you payed. A co-worker built a home with a free basement and a free bonus room. This added nearly $37,00 to the value of the home. She couldn’t afford the jump in taxes so had to sell after 1.5 years.

  143. efjay says 05 January 2008 at 19:38

    renting sucks for many reason
    noisy neighbors and lack of privacy are big setbacks
    you cannot update the outside of your unit
    no guarantee that the landlord does not sell
    kids not guaranteed to stay in same neighborhood
    investing in stocks also never a guarantee and most often basic bank investments are eaten up by fees and inflation
    quality of life in a house beats that in a strata unit
    you can hire help and setup your own contingency fund for that roof replacement in 15 yr.
    freedom has its cost but what is the price of freedom $$$$
    here in Vancouver, BC it has paid off for many people.

  144. Rob Madrid says 07 January 2008 at 10:54

    If anyone is interested in a very very detailed analysis of rent vs buy go to Millionaire Mom Next Door comment nr 98

    For us living in Madrid I ran the numbers and decided owning is better because the cost of owing is soo cheap, community fee’s under 50€ including a pool are quite common and there is no property taxes.

    The main negative is house prices are insane (think west coast on Iowa wages) so were holding off buying till prices drop. I’m expecting a 30-50 percent drop in prices. For us the key is owning mortgage free. I figure we’d be spending in the 150,000 range to live an hour outside of the city

  145. Dan says 01 February 2008 at 11:18

    There are so many differing opinions on this topic that I wanted to set up a scenario that equalized as much as possible.

    Using Tim’s numbers I assume:

    – The individual’s ultimate goal is to own the 425,000 house free and clear (the outcome of a 30 year mortgage).

    – The rent vs mortgage numbers are for the exact same house (i.e. some individual owns the house and will either sell it to you for 425k or rent it to you for any length of time)

    – Inflation, rent and home value increase by 3% yearly

    So:

    A buyer would put the 85k into their down payment and then pay 2093 (just the mortgage cost) for 30 years. The additional costs (insurance, maintenance, etc) would start at 597/mo and increase by 3% each year, ending at 1407/mo in year 30 (3500/mo total cost). The result would be that the individual owns a home worth a little over $1 million.

    A renter would put the 85k into an 8%/year investment and pay 1515/mo in mortgage, inflated 3% each year. The year 30 rent would be 3570/mo. Notice that at the end of the cycle the rent is actually MORE than the cost of the mortgage and all other home costs. The example Tim set out is advantageous to the renter because the rent cost does not overtake the mortgage cost until year 28 (and even that year is basically even). Each year before 28, the renter is able to put aside the difference between the mortgage cost and the rent in a similar savings scenario as the 85k, earning 8%/year.

    The grand total of the renter’s investments would be nearly $2 million after 30 years. Buying the $1 million house at that point would leave the renter with another $1 million in cash. Alternatively, the renter’s investments catch up to the value of the house after just 17 years, allowing the renter to buy said house with cash a full 13 years before the buyer would own it.

    I’m not an accountant or anything, but I think I ran the numbers correctly. I was surprised that, in Tim’s scenario at least, renting can ultimately leave you much better off than a mortgage. I understand that Tim’s numbers come from a very inflated housing market, but I will definitely run these same types of numbers next time I’m faced with a mortgage vs rent situation.

  146. Michelle says 02 February 2008 at 12:07

    When you are renting the place where you lay your head… aren’t you renting from a homeowner? So if you are paying their note to the bank or some portion of it, if they are still paying on the property, then aren’t you helping them put themselves in a better financial situation? If you are renting, are you able to do what you want with the house, or is okay for you to always ask permission if you can paint a wall in your rented home? I believe people should do more research on what is best for them and not take somebody else’s word for it. How many renters do you know are financially independent? I think there is a difference between being cheap and looking out for your money.

    Michelle

  147. Tony Danza says 19 February 2008 at 14:37

    Great post Tim! The most important lesson that I learned from your post is that humans are inherently ignorant vis a vis personal finance. I also gather that the reading comprehension and critical thinking skills of the vast majority of persons commenting here are bordering on those of the “intellectually challenged”. Either that or we have a bunch of greater fools or RE agents trying to prop their investments/careers!

  148. Joe says 23 February 2008 at 16:25

    Lets look at the big picture! The census show’s that the “have not’s tend to rent and the have’s tend to own” Joe

  149. lui lakbayera says 26 February 2008 at 01:26

    this is quite a revelation to me! my husband and i (and children) have been renting ever since we got married. we always have been dreaming of having our own house. we’re in our mid-50s now, still working but i don’t suppose we can be given an immediate nod by the bank if we apply for a house loan. our only hope is to win a jackpot to have our own house. 🙂 i will still have to do the calculations, factoring in philippine standards. however, considering what you wrote in your blog…well, shouldn’t we save the jackpot prize for our retirement needs. thanks for this blog.

  150. Mac says 02 March 2008 at 17:40

    Whether a landlord is profiting on your rental is irrelevant. The landlord may have bought the property 25 years ago. Whether you bought a property a few years ago and have a nice unrealized gain is even more irrelevant. What IS relevant is what’s currently available. Just use the calculator at the end of the article – it is very customizable for your individual situation.

    I can’t believe some commenters are making statements like home prices go up faster than the mortgage interest rates, or that they are “guaranteed” to rise. Ridiculous given current market conditions.

    I bought a house in 1996 for $249K and sold it for $727K in 2005. Big whoop. I rented for a year, and bought another house in late ’06. What happened in my past has no bearing on the present. No matter how I run the calculator, unless I’m able to do a no-closing cost refinance for way-below-market rates, I always come out ahead renting. I wish I had kept renting.

  151. CatLoverJ says 09 March 2008 at 05:31

    Say you decide to rent, or buy – either way its an investor’s market. For profits sake, if that is what you intend to do… and that is what this forum’s debate is undisputably about. You can easily rent for 30yrs. taking into consideration inflation on the market and simply save your 78% difference (this is where self control kicks in) turn around and boom theres your profit. Else, you can buy your home, grow attached then flip it after your memories are tied to it… and make a buck. Either way you can come out in the end… Like they said buying a home is a forced savings!

    -JM

  152. Dana says 09 March 2008 at 14:12

    In the end this may just wind up like choosing to have a savings account. I have seen PF writers condemn the idea of having a savings account, even for emergency funds, because they think of it as an investment vehicle (here’s a hint: it’s not) and they think it’s better to have emergency savings in a less-liquid vehicle with a higher interest rate. Why, I have no idea.

    But emergency savings is about being able to take care of yourself if you suffer a severe financial setback. That is a benefit far beyond the supposed bottom line.

    Likewise, I think it is a mistake to think of residential real estate as an investment, unless you are a landlord. And even they need to get their heads on straight about what investing in real estate rentals really means. For instance, I suspect my landlords own the properties they do because it is part of their retirement plan. Unfortunately, it seems like all they can see is the money and they don’t see what they do to their tenants when they care more about cutting corners. I am not asking for luxury accomodations here. I am simply asking for an apartment that is not falling apart at the seams. That seems too much to ask, and my income is too low and from too unconventional a source for me to necessarily be able to move elsewhere. (It’s in the plans, I just can’t make it happen *right now.*)

    So the emotional and social aspects of home ownership are important too, maybe even more important than the profit margin. I would like a place where my daughter can play in the backyard without stepping in the poop from someone else’s dog. I would like a place where I don’t have to wait three years and counting to get the drainpipe under the kitchen sink fixed properly. (What was that about how “if the roof’s leaking I can ‘just’ call the landlord”? Hahahahaha… I want your landlord. Although mine at least replaced the roof here.) I would like a place where the floor isn’t falling apart and where the windows don’t leak because this building was built in the 1970s and still has its original windows and the seals around the panes are shrinking. And where I would be allowed to keep my cat.

    You know, that kind of thing. Can’t really put a price tag on it.

  153. Rockit says 12 March 2008 at 08:57

    Great article. Post WWII America has harped on the idea of homeownership being the pinnacle of the “American Dream”. It’s gotten to a point where it’s been ingrained through several generations that owning a home should be the goal and it’s not to be questioned. But it should be.

    I think many own a home, not for investment reasons, but status reasons and their denial is dependent upon the investment argument so their conscience can be ok with their decision to keep up with the proverbial Joneses.

    Whether it’s financially sound to rent or buy depends on the individual and the market they’re in but it’s refreshing to see more people take on the devil’s advocate role for once.

  154. karthik says 24 March 2008 at 10:15

    I lived in a junk apartment where they charged me like 800 bucks for a matchbox sized house. The gas bill usually was around 250$ which was more than for the house i bought. Couple of times they towed my car without notice. I lost so much money , peace of mind in the two apartments i lived at. After buying the house i am happy. I got back 7000$ through itemized deduction. After couple of extremely bad experiences in the apartment where they really drove me crazy i am happy that i bought a house. The kind of feeling you get when you buy a house, you will never ever get in an apartment where you cannot enjoy a home theater system without neighbours complaining. Also think of the creaks and cracks you have to hear all night when the building is brittle. If you want a better apartment you will have to shell out a lot more. From a pure month to month basis economic stand point you will always find rental cheap. But there are lot of hidden monsters. Thanks to the apartment i lived i lost a car. When i asked apartment.. we don’t know where they towed. Another time they towed just because i had a flat tire. You gotta live in one of those apartments to feel the brunt of disadvantages of living in an apartment. Previous apartment had water backing up on a daily basis. They would never come. According to them water backing up was not emergency situation. Evnetually i had to learn it myself.

  155. Marquis says 02 April 2008 at 18:53

    Dan is right. Run the numbers anyway you want, the renter still comes out ahead, at least for the first 5 to 10 years.
    In my area (Great Falls, MT), all of my friends and associates who have bought houses in the last couple years are paying around $1100/m or more. Add in property taxes, home insurance, maintenance, neighborhood fees, utilities, etc and suddenly that number jumps to well above $1500/m. I hardly ever see any of them out becuase they’re always complaining that they don’t have any extra time or income- it all goes to the house.

    My fiancee and I are paying $250/m each for a 2 bedroom apartment that fits our needs, and are saving to buy a house much later in life. Add in utilities and premium cable and it might add up to $350/m per person. And if we wanted to move, we could just pack up and go without having to deal with sales fees, closing costs, realtor commissions, or anything like that.

    You gotta look at the math behind the math. Sure, a $150K house might be worth $190k five years later (at around 5% appreciation) but how many thousands of dollars did you pay in interest during that time that you’ll never see again? How much were closing costs? What about property taxes, mortgage insurance, inspections, commissions, repairs, neighborhood association fees, etc? Thats tens of thousands of dollars that, unless you’re planning on staying in that house for AT LEAST the next 7 or 8 years, you’ll never see again.

    Or put another way, at least in my case, the question is pretty simple: do I want to pay $350 per month and have tons of money left over to invest and spend on the things I want, or do I want to pay $1500 per month to live in a big empty house requiring constant upkeep and attention?

    The choice seems pretty clear to me.

  156. Andrew says 08 April 2008 at 20:02

    As some people already said, if you’re living in California or New York city it’s probably better to rent, but if you’re living somewhere in the south (Georgia for example) buying is better by far.

  157. RebelScum says 05 May 2008 at 14:34

    ~The kind of feeling you get when you buy a house, you will never ever get in an apartment where you cannot enjoy a home theater system without neighbours complaining.~

    That’s funny. I have one. It’s great. I go to 11 and I never hear a complaint.

    Sorry bout your luck there dude 😉

  158. pam munro says 05 May 2008 at 15:46

    Note re repairs- if you are living in a low-cost rental, expect to do a certain amount of elementary repairs yourself! We re-painted and redid the floors here while it was still held under the old owners, as it hadn’t been painted for 30 years! (Paint is considered cosmetic by L.A. City standards)And we had to push to get other things fixes per the L.A. Housing code. But there is rent control, so when an apartment rented recently, it went for 2X what I pay. That’s the reason I decided just to fix up the place – get a new frig, etc.

    I only worry about the building being sold out from underneath us. (Have already found that the new landlord would be more than happy to get rid of us asap.) But there will be re-location $ – I would like to buy this unit if that’s ever possible. But until then, it’s cramped, but still home.

  159. RebelScum says 05 May 2008 at 20:48

    I rent a 950 sq. ft. 2br, 1 bath penthouse in the middle of downtown. Heat, hydro, and AC are included. It’s a corner suite on the top floor…I have 1 neighbour. On the north side I have a private 80-sq-ft balcony overlooking Yonge & Bloor. On the south side I have a private 700-sq-ft rooftop terrace with a completely unobstructed 180º view of the city. My office is in the neighbourhood so I enjoy a 5 min walk to work. Bars, restaurants, shopping, 24 hour convenience, cabs, transit, all essentially at the door. MY monthly (split with my Fiancée): $1580 flat, including heated, underground garage parking with direct building access.

    I’ll keep renting thanks 🙂

  160. teaching you for free says 12 May 2008 at 22:19

    I bought my first home in 1998 at 46 yrs of age in Kent WA. We paid $190,000 and put about 30,000 in upgrades. Being a realtor, I value this home at about $400,000 today. In 2004 we bought 2 rental homes for $170k each that are now selling for $275k in this market. I’m not selling these homes for about 5 more yrs. I’m thinking we will see another 25 to 30% in value within the next 5 years. Down fron the 50% this past 5 years. My renters are buying these homes for me.I only made 1 payment on each of my rental houses so far and I’m looking to buy another home ASAP.If you don’t buy a home in todays buyers market, your missing the boat. I’m looking at over $600k in equity in 15 years.
    For those of you who are renting, what are you going to have saved in 15 years???

    Dan @ http://www.washingtonhomebuyers.com

  161. Archlydia says 18 May 2008 at 16:45

    I don’t understand why some homeowners get so offended by the thought that some people can be financially better off renting than buying. I live in a neighborhood where the example is close to reality. I rent a $360k condo for $1350. I could move out into the suburbs and pay 200k or less for a home, but I would not have the lifestyle I enjoy – a ten minute commute and tons of restaurants and grocery stores within a couple blocks. I invest the extra $1500 per month and can also contribute 10% of my income to my 401k due to the extra cash flow. Homes in my area are depreciating due to the bubble and mortgage market. Renting is definitely working out for me. Maybe in a few years, I’ll buy. Only when it makes sense financially and I find somewhere I would want to live for at least 5 years.

  162. Rebelscum says 20 May 2008 at 10:08

    ~Being a realtor…For those of you who are renting, what are you going to have saved in 15 years???~

    Whaddya know…the realtor thinks we should all buy a place.

    In other news, a local dairy farmer says “Milk is awesome.”

  163. Rebelscum says 21 May 2008 at 14:27

    …however, to answer the question…

    At a monthly rent/cable/internet/phone rate of about $1100, I can likely sock away about $1000/month. If I just throw that into a simple 3% interest account ($1069.75/month), 15 years will net me exactly $255,000, all the while not having to repair a single leaky roof, fix a single garage door, replace a single rusty gutter, or, in the case of Condos (the only way I’d go), pay a single nickel in maintenance fees, all the while hoping against hope that my property will appreciate to the point at which I will turn a profit even with all the above expenditures.

    Obviously I’d be a fool to keep my $$ in a low-interest account such as a daily interest savings account, so this is a bare-minimum return, and considering I don;t have a particularly high income, the only way I can afford to put away a cool G every month and still party hardy marty, plus buy myself some toys like TVs and computers and go down to the caribbean for at least one week a year and chill out in NYC on occasion, is because I don’t have a monster mortgage, property taxes, maintenance fees, etc etc etc to worry about 🙂

    250k may not be a lot to some people, but it’s a HELLUVA lot to me 🙂 I’m good with it 🙂 Plus, me winning the lottery is pretty much a lock, so there’s that.

  164. Carson Ding says 21 May 2008 at 23:50

    I have talked about this renting vs buying too at my own blog. Five big reasons we should not buy house:

    One.
    Historically, stocks grows faster than real estate. And if you invest your money in an index fund, your money compounds. The house value doesn’t compound.

    Two.
    And to those who says they get so and so amount of money after selling of their house. Well, have you counted what’s your nett profit after minusing all the cost of owning? The monthly payments that goes to the bank, the taxes, the cost of maintaining the home, legal fees, etc.

    The cost of owning a house is just too much. If you have rented a cheaper place and socked away all the rest in a good investment, you would retire much earlier. So what if the rent goes up, look for a cheaper place. There are plenty around.

    Three.
    If you have bought a house, are you happier now? Or were you happier when you were renting? I definitely was happier renting. I made a mistake and bought a house after listening to all those crap about being more secured buying a house.

    You don’t yet own the house till you have finished paying the last cent to the bank that you owe in the form of a mortgage.

    I was happier then, why? I could afford to go on a holiday or two yearly because I got much more saved away. After owning a house, most of my money goes to pay for the house. My neighbour rents for $500 (my currency) but I am paying to the bank now $1325 monthly. Look how big the difference is. I could be happier with $825 saved away every month. Don’t forget all the downpayment for the home, the legal fees, the taxes, etc that I could have saved away for an earlier retirement. I could have been happier having more money to take more vacation whenever I needed it.

    Four.
    If you think buying a house is more secured than renting, think again. Buying a house doesn’t mean you own it already. It’s still the bank’s till you finish paying the mortgage. Try stopping your payment, you will be homeless and lose whatever equity you have built. For renters, no money no problem. Move to a cheaper place.

    Five.
    When your neighborhood turned bad? What do you do? I have seen a nice neighborhood turned bad because owners started to rent the place out to college kids or foreigners (the negative kind). What do you do? You will be tied to your house and don’t want to move because you have some emotional attachment. Or no one wants to buy your place. Or you still believe it’s better to keep it. Or you think you won’t have a place to live after you sell it. The house value goes down and you lose.

    Think about it.

  165. Jeffrey Austin White says 09 June 2008 at 16:29

    I have developed my own theory on this and I am interested in what you think. I call it Theory of The Three Fives on Renting vs Buying a Home.

  166. hardyandtiny says 01 July 2008 at 08:31

    What are the rental owner’s costs? Are they more than 1495?

  167. Billy says 09 July 2008 at 07:25

    I don’t think that we are comparing apples to apples here. A $425,000 house does not rent for $1,500 in a typical market. That is a 4% cap rate. That is WAY too low.

  168. Don't be a Dope says 09 July 2008 at 14:37

    Ok – so much for the stock market!

    And sure so much for the housing market!

    But – and this a Big Ugly Truth (BUT) – we’ve entered a time of high-inflation much like the 70’s.

    We know the money supply is increasing drastically based on shadowstats.com M3 computations. If that’s no enough, then sign up to receive alerts on the dollars being released by the Fed by the TAF, etc….

    That’s right, every day – millions of more dollars being put into circulation.

    You see it every day in the cost of gas, food, etc.

    So, what happens when inflation goes up?

    Existing loans (like home loans) diminish in comparison.

    Here’s a practical example. We’ve all heard stories from our aunts/ grandparents, about how an ice cream cone used to cost $1. How a movie cost 2 bits. How a house cost $10,000.

    That’s inflation my friends – and its really ramping up.

    My advice – and what I’ve done?

    Rolled 1/2 of my 401 K into gold when it was $600. Inflation adjusted it should be $2000 to match its high back in the 80’s.

    Bought SKF (might be too late for that).

    And bought a house back in 2004 for $165,000.

    My house payment with PMI and a 30 year fixed is $1,100 dollars or so.

    I have no plans on selling the house as inflation will make that $1,100 seem like $100 does today.

    And even with Social inSecurity tied to a CPI that has food and gas stripped out of it – I will easily be able to make that $1000.

  169. hardyandtiny says 09 July 2008 at 18:24

    “My house payment with PMI and a 30 year fixed is $1,100 dollars or so.”

    Yeah, that makes sense. The person renting the house is making money. That is the point. The comparison should be renter versus owner who rents.

  170. Don't be a Dope says 16 July 2008 at 23:17

    @hardyandtiny:

    I’m afraid that you’re missing the point. The article is actually about renting a house versus owning (aka making mortgage payments).

    And in times of high interest rates, home ownership really, really, really makes sense.

    This month, CPI was at 1.1%. For one month.

    Umm…if official CPI is at 1.1%, then real inflation for the month was probably 2 to 3 times that.

    Let’s just split the difference, and say that we’re cooking along at 8%/ year.

    That’s a very high inflation rate – and that means our house loans will be decreasing in relative value/ impact to our lifestyles.

  171. Krishna says 25 July 2008 at 03:12

    The article missed the point from the first calculation onwards. Even in the table showing monthly expenses for buying v/s renting, the author “forgets” that at the end of these monthly payments, the renter has nothing to show for it while the buyer has his OWN home!!

  172. Henry Paulson says 02 August 2008 at 18:05

    Krishna,

    The renter would have equity in whatever investment that they had purchased (stocks, bonds, gold, etc.) with the cash flow difference between the two alternatives (rent versus mortgage). In his example, the approximate $1000.00 difference could be invested.

    A home is just another investment, and right now, its an awful one. I would rather have my monthly check going into my balanced portfolio (bonds, equities, commodities, etc.) than get involved in this housing pyramid scheme and as of right now, I have made out considerably better.

  173. Mike says 12 August 2008 at 23:34

    Did someone really say: “The article missed the point from the first calculation onwards. Even in the table showing monthly expenses for buying v/s renting, the author “forgets” that at the end of these monthly payments, the renter has nothing to show for it while the buyer has his OWN home!!”
    _________________________

    Um… the renter has the huge nest egg that came from having invested the savings of the first 20 years (including the HUGE savings of the first few years). On what planet is a giant nest egg considered “nothing”?

    And the renter STILL doesn’t have the maintenance costs and property taxes that the owner STILL pays.

  174. Kevin says 16 August 2008 at 05:01

    People have cited home ownership expenses like property taxes, maintenance, and utilities that are often included in rent. But that’s the thing – they’re INCLUDED in the rent. You’re not avoiding paying them, they’re simply rolled into one, neat payment for you. Do you think the landlord doesn’t have to pay property taxes? Or make repairs to the property? And do you think he makes those payments from his own money, out of the kindness of his heart? Of course not – they’re rolled into your rent.

    If you rent, you’re paying your landlord’s mortgage instead of your own. He’s still paying property taxes and maintenance, but he’s making a profit too (otherwise, he’d either quit or raise the rents until he IS making a profit).

    There’s no free lunch. You’ve got to live somewhere, and over time, owning is better than renting. Your mortgage payment is inflation-protected, while your rent will go up every year. Your mortgage builds your equity, while renting does not. Your mortgage will eventually end, while your rent payment will just keep getting bigger and bigger, literally forever.

    Yes, I’m sure that there are a few small pockets of economic anomalies out there, where the real estate market has not yet crashed and renting really is cheaper than owning (for now). But those are the exceptions, rather than the rules. This article is useful for helping to figure out how to identify if your region is one of those localities, but keep in mind that in general, the long term goal should be ownership, not perpetual renting, if you want to build wealth.

    Really, what it comes down to his: “Would my monthly rent be greater than the interest component of my mortgage plus property taxes and maintenance expenses? And if not, how much would my rent have to go up to cross that break-even point?” Basically, it’s figuring out which scenario has you “throwing away” less money (rent vs. mortgage interest, taxes, and maintenance, keeping in mind that mortgage interest is tax-deductible in the US if you itemize your return).

  175. hardyandtiny says 16 August 2008 at 07:05

    What was the initial cost of the home being rented? How much profit is made off the rent? What if after ten years the new owner rents their home for profit and buys another home?

  176. Jay says 22 August 2008 at 12:43

    Kevin,

    Yes, it is included in the rent! The point is, the total rent payment is still much less. Use the noodle.

    The landlord’s NOT making money right away unless they paid cash for the property. No one would rent something expensive when they could buy it for less. The key comes in raising the rent each year (amount dictated by the market, not by what the landlord wants to raise it to). Eventually the payments received will be greater then the mortgage.

    Yes, your rent will continue forever! However, by that time, the interest made off of your investments every year will easily cover them. Duh.

    Your last statement is correct – good work.

    No one else factors in transportation by the way. If you’re stuck in a house and you move for work (say 10 miles further from your house) you’ll pay an extra $100 a month to commute. If you rent, you just move closer.

    Lastly, to speak to others’ comments. “Poor people rent, wealthy people own” is simply stupid. There is a difference between owning a house and having a mortgage. Poor people rent, the middle class struggle with a mortgage, and the rich people either rent or BUY a house – they don’t “rent” it from the bank.

  177. Darryl says 11 September 2008 at 01:17

    @Jay – I like your comment!

    Why does no one ever discuss the home owner’s time investment in maintaining a home? To me, my MOST valuable asset is my time. A home owner for nearly 10 years (2 homes), I have found the benefits of home ownership financially marginal (if not negative) and the time costs extraordinary. And in both homes – one new construction and one 40 years old when we bought it – the first 3 years we spent 10%+ of the home’s value each year in upgrades and renovations (thank you HGTV!*?) with much of the labor being our own.

    We are now entering our 40s and are seriously considering cashing out and just renting. It gives us a lot more freedom of time and place. We own two businesses, so the investment of our funds is somewhat handled.

    I think home ownership is a great place to put money if you have it and can pay for help to maintain it accordingly, but mortgage + invest your time are missing and will never see the return on life they could receive.

    Any thoughts on this?

  178. Jay says 11 September 2008 at 13:50

    Yes…you’re right. It’s odd to find a home owner who would say such things. Most yell “heresy” if anyone suggests that owning a home is not a premium investment. Don’t get me wrong, when I retire, I would love to live in some tremendous house that I can customize and work on to keep myself busy. Being the worker bee that I currently am, my off-time is far too precious to spend remodeling the kitchen, cutting / fertilizing / watering the grass, and shoveling the driveway.

    For now, I take comfort in investing a significant amount of money each month knowing that, at the pace I’ve set, I will retire at 55 or earlier at which point I can either live off the interest or simply buy a house (mortgage free).

    Thanks for the honest critique, it is refreshing.

  179. Darryl says 11 September 2008 at 17:43

    @Jay – how’s this for freedom? Not only are we going to sell our house – unprompted – my wife is looking for employment as a teacher in London for a few years so we can show our daughter Europe while working. I have my busines in the US which can be manned remotely, so without the burden of a home and its accoutrements, we will literally be on a journey to see the world at a very similar cost to what it would have been to stay rooted!! Liberating!!

  180. bennie young says 29 September 2008 at 10:29

    I think some of the factors change according to where you live. I am buying a 1500 sq ft house with payments of $490 for 12 years. The rent on a 12-1500 sq ft house in this area varies from $450-$700 a month. After 12 years, I can sell my house for less than I paid for it and still be ahead of where I would have been if renting plus I have the freedom of doing what ever I want to the house (with few restrictions).

  181. Mike R says 09 October 2008 at 13:30

    this depends 100% on where you live. i live in orange county, SoCal and good luck finding even a 1200 sq.ft. condo for under $450k. we are renting a 2 bedroom 2.5 bath 1250 sqft townhouse for under $2k a month and i am 4 miles from work and 6 miles from beautiful Laguna Beach. when looking in this area for a similar sized condo the cheapest we found was close to $550k because of the area.

    consider a $110K down payment and i will make much more money in the stock market over 30 years than i would from buying a home. its not even close.

  182. Will says 17 October 2008 at 20:25

    This is indeed a very localized market related issue. I rent a 2 bedroom apartment in Brentwood (LA) for $1650, and it’s in an extremely choice area. A similar condo would be easily $500K in this area. Sure I could drive an our from somewhere and get a condo for maybe $250K, but then I have to add in the opportunity costs of the 10 hour weekly commute, auto, gas, etc. A 30 year mortgage on 80% of $500K is going to be something like $2500 a month and that doesn’t count repairs, hoa, etc etc.

    If I lived in Tennessee like my sister, buying could easily have made far more sense. She bought and paid off a house in 7 years. Wasn’t the point of the original poster to look at the actual situation instead of blinding following conventional wisdom which is what got us all into this mess?

    I think one thing that was lacking even from the original post is the opportunity costs of fixing and maintaining your purchased home. Either you pay someone to do it which costs money or you do it yourself which costs time. That’s hard to nail down to an exact amount, but that opportunity cost can’t be ignored. I’m a software engineer and it’s clear that even in the happy days of Flip That House, I would almost certainly make more money using that time in my field than in manual labor.

    I do think that the “forced saving” angle shouldn’t be ignored though, and is a significant psychological advantage to buying. It might be a lot better to invest the money you save by renting … if you actually do it. People are much more likely to pay their mortgages than to save an additional amount on top of their rent.

  183. Shann Jones says 03 December 2008 at 17:48

    A couple of assumptions that commentators may have not considered:

    1) How long do you want to live in that home/community (US only). If you plan on living there 0-10 years, how does ownership make any sense?

    2) Home owners are assuming that their time in selecting, buying, trying to gain financing, working on, upkeeping , trying to sell, and all the other stuff associated with home ownership is worth nothing. If one were to assume that all those hours poured into those efforts were say worth $20 (very reasonable), then home ownership makes a lot less sense.

  184. joe c says 02 January 2009 at 17:02

    The only time it doesn’t make sense to own is if you don’t plan to live in the house at least 10 years or you are overpaying for the home. The latter is very hard to determine from what have seen in the housing market over the last few years. I think the key is that if you decide to buy a home, that you buy what you can afford and I would say that means that you put at least 20% down (at least 35% would be best) and that the mortgage and taxes do not consume more than 30% of your gross income. If you can’t meet those critera then you can’t afford the house.

    One other criteria would be that you have steady income. If you don’t then you need to about a 40-50% down payment.

    If you can’t save this kind of cash for the down payment then you will nenver be responsible enough to own the home.

    And if you really beleive that renting is always better than buying, think about all the people you know who rent. Now think of how much money they have socked away by renting. Home ownership teaches you to become more responsible than renting.

    One other thing, pay off your home as fast as possible. Once you but the house the mortgage needs to be paid off at some point so put all your extra money towards your mortgage and pay it off early BEFORE jumping into mutual fund and stock market investing. Forget this nonsense about getting 8 or 10% in the stock market. Pay off the house first, beleive me you will be way better off.

    I paid off my first house in 12 years. Then I bought another house for a rental and paid it in cash. Then I sold the first house and bought a larger home, at the height of the real estate boom. It will be paid off in 3 years (end of 2009). I am now looking to buy another rental in this distressed market.

    If I can do it , anyone can. I know people who make 300K a year and have nothing to show for it. I make a small fraction of that and have a 4000 sq ft house and an income generating property. The bottom line is to know what you can afford and live within your means.

    Good Luck. Joe C.

  185. Mr California says 02 January 2009 at 23:12

    I used to think the same way – not anymore. The new road to prosperity is – find a zero down, interest-only loan. Threaten to walk out, then let Ben Bernanke bail you out using taxpayer’s money. No point in stashing away cash in bank – inflation will wipe away the measly little interest you get anyway (thank you Ben – that 0% target overnight rate sooo makes me want to save).

    Honest taxpayers and homeowners lose. Greedy Wall Street execs and irresponsible homeowners win. It’s the new new economy – get used to it.

  186. Shann Jones says 08 January 2009 at 15:22

    So renters are irresponsible JoeC? Really? Nice. It is my hypothesis that home ownership is overrated. Do you enjoy cutting grass or painting the house? If I wanted to cut grass in the summer, I would take a job at a golf course. At least then I would get paid for my efforts. Anything worth doing is worth doing for money. Maintaining your own domicile simply does not pay.

  187. Jasonhouse says 09 January 2009 at 14:53

    This entire comparison is founded upon intellectually dishonest pricing. No wonder the conclusion is that owning is bad… Well, it’s easy to make renting look attractive when you cite an owner clearly willing to rent for a loss, vs a home that is likely overpriced ($230 a sqft to buy is about double my locality’s going rate, while the rental rate of $0.82 sqft per month is about right, or even a bit low)…

    Just remember this… Whatever the cost of owning is for the landlord, that’s what the rent MUST be, plus profit, else the landlord takes a loss and inevitably winds up in foreclosure. This isn’t voodoo economics, it’s financing 101.

  188. Will says 11 January 2009 at 16:54

    Jasonhouse, again the point is, it’s the actual situation that matters. Blindly believing that buying is always the best idea is one of the things that got us into this mess.

    “Just remember this… Whatever the cost of owning is for the landlord, that’s what the rent MUST be, plus profit, else the landlord takes a loss and inevitably winds up in foreclosure. This isn’t voodoo economics, it’s financing 101.”

    This is not financing 101, it’s misleading and not really correct. There has to be a balance of renters versus owners. Not everybody can buy and rent to someone else, it just doesn’t make sense, so at some point it as to even out.

    Secondly, there are a lot of rentals out there. A landlord that bought in 1995 can charge a *much* lower rent than one who bought in 2005 and still easily earn enough to pay their loans.

    Thirdly, “else the landlord takes a loss and inevitably winds up in foreclosure” (if their rent income is less than their loans). Yep, that’s what we are seeing all over the place, although it’s still not entirely accurate since it is an investment for them and they may be able to eat a loss on it for a long time if they have other capital or investments that can counter those losses. Just with houses, they may have one in one area that is losing, but one they bought five years earlier might be doing well.

    joe c Says: “And if you really beleive that renting is always better than buying, think about all the people you know who rent. Now think of how much money they have socked away by renting. Home ownership teaches you to become more responsible than renting.”

    I know lots of college aged kids that rent, and a CPA that sold his house 3 years ago and started renting since he saw what was coming. I’ve been renting a long time, and am a software engineer that gets very highly paid, and to me it was like, no freaking way am I paying those prices when I can rent for 1/3 without obligation. (Again, depends on your market, right?) I’m particularly paranoid of debt, have none (use credit cards for convenience but pay them off every month), so my net worth is quite positive and completely objective. (No house of unknown value in there).

    So house buying (also known as ‘taking out a gigantic mortgage’) teaches you to be better with money? Then why the endless foreclosures and home equity lines of credit (a totally insane concept for most people). Although in a way I guess this is going to teach a lot of people to be better with money in the future as they either default or shoulder under heavy loans for years.

    Mr. California: Yes, sadly that is true. I was long against bailouts until, like, uh, the crap started really hitting the fan and it looked like everything was *really* going to implode, so now I’m much more bailout friendly.

  189. Myself says 23 February 2009 at 12:37

    A thought about renting vs buying.

    I know for fact that this is a completely local issue.

    We bought a house in an area for almost 1/2 of what it could easily sell for in the current market (Jan. 2009) 9 years later. The CAGR is 7.23% on my house.

    It was brand new construction, and while we did paint most of the inside of the house, and finish the basement ourselves, we still have to not had ANY major problem with the house (knock on wood).

    And as for the investment and comparing the value my house has gone up since we bought it in 2000, vs how much I would have lost in the market.

    According to BigCharts.com, using the DJIA as the scale, 1/1/2000 it was at about $10,000. And now (9 years later), it is at about $7,146. The CAGR here is: -3.66%.

    Unless you moved your funds around enough (and paid all associated fees to move it around) in that timeframe, you’re sitting on a pile of crap. And of course, I didn’t have to pay to move my house around.

    How’s that for a comparison?

    FWIW, I do know that this is NOT the same in ALL markets (housing or stock).

  190. Andrew says 28 February 2009 at 10:48

    The simple analysis provided seems misleading. First, there is no estimate for the income of the family/individual deciding between renting or buying which could make the tax savings estimated significantly higher or lower.

    Second, there is no provision on the renter’s side of the column for the additional tax liability he incurs by not being able to deduct anything for the rent he is paying.

    The comments relating a mortgage to “renting a house from a bank” are correct. However, the difference is that that rent is classified as a deduction for income tax purposes, a huge benefit not given to renters. At a minimum the tax savings under home ownership should be added to the renter’s expenses.

    Third, there is no opportunity cost of a down payment to the home buyer for their 20% down payment.

    Fourth, principal and interest payments on a mortgage need to be separated since principal payments are in effect paying yourself back.

    Fifth, annual appreciation of even 3% on a home valued at $424,000 amounts to over $12,000 a year or $1,000 a month of “income”. (in quotations because you don’t realize it until you sell). Additionally, under the current tax laws the first $250,000 for single filers or $500,000 for joint filers is completely tax free capital gains).

    Bottom line, this is a hugely flawed analysis and for the majority of people, owning a house is a wise investment. I’m not against renting, it certainly serves a purpose and I’ve been a renter, homeowner and landlord. The real analysis should determine the rent equivalent of any mortgage for whatever desirable characteristics you want (good schools, or access to restaurants and cultural institutions) and then compare the prevailing rents and mortgage terms to find the best deal. As long as your mortgage is less than the rent equivalent (not hard to do when factoring in things like annual appreciation for example) you are coming ahead. Hope this comment is helpful.

  191. Mr California says 28 February 2009 at 11:34

    I factored all these in my calculations in post# 111 (click on “older comments” link)

  192. Will says 28 February 2009 at 19:15

    “As long as your mortgage is less than the rent equivalent (not hard to do when factoring in things like annual appreciation for example) you are coming ahead.”

    Depends on how you factor in -20% or greater yearly appreciation, doesn’t it?

  193. TNK says 30 March 2009 at 08:43

    Very interesting posts. The rate of increase in home values is highly dependent on the market and area. Currently we have seen a 20% DROP in home prices, and its expected to drop in the next few years. These rates of 4-5% increases I see in these posts are bogus.

    Next, people are claiming the tax break of homeownership. However, if you actually GET anything back is variable. Most people I know never really see any additional benefit of those tax breaks. Sure they deduct it off their income, but they don’t ever get the entire amount back or even the 28% back that they get to claim. Its a hit or miss.

    Homeownership is expensive. People don’t consider the little out of pocket expenses that occur from day to day. When you look at the average lifespan of things like furnaces, water heaters, etc. one can see that the cost of homeownership adds up. When someone has to replace a roof for instance, a lot of them take out a loan (which then accumulates more interest and cost).

    A renter who pays out a deposit of $900, Rents for $900 with regular increases in rent, pays for renters insurance, will effectively pay out 375k over 30 years.

    The homeowner who purchases a newly constructed home at 150k, 10k downpayment 30 years @5%, will end up paying out 494k over those same 30 years on interest, major and minor repairs, property taxes, insurance, etc.

    Although as the previous poster pointed out, in new construction you are often doing things like painting the interior the color you want, finishing the basement, putting in fences, and putting in a lawn of some sort. I didn’t even include those things in that $494k figure.

    The renter actually saves 119k, or $330 a month. If that renter puts his $10,000 in a good investment, puts $330 a month away religiously, and makes about 6% compounded monthly, they will end up with 383,000 at the end of the 30 years.

    In order to break even the homeowner will have to 1. keep up and maintain their home 2. update as necessary 3. SELL THEIR HOME for at least $494k to JUST break even.

    “while we did paint most of the inside of the house, and finish the basement ourselves, we still have to not had ANY major problem with the house”

    .. and you shouldn’t. However the 10 year mark is coming up and granted things WILL start going wrong. You also sound like you are not considering the cost of your finished basement and painting. How about your yard?

    Our home we live in sold for 175k in 2001. The Fence is $5000, yard $6000, blinds were $500, if the basement was finished by non-contractors $15,000. That makes the initial cost of our home $201,500.

    You have been paying 80% interest towards your home. You haven’t made anything.

  194. Myself says 02 April 2009 at 09:23

    I believe you were quoting me with regards to the “ANY major problem with the house” comment, and your comment “You have been paying 80% interest towards your home. You haven’t made anything.”.

    First off, at a 5% APR mortgage for 30 years, you’re actually paying 77.617% of your first payment toward the mortgage.

    I know for a fact that I haven’t been paying 80% interest on my house since we refinanced to a shorter term mortgage. Our current mortgage is for 15 years at 4.625%. From the very first payment we were paying more than 50% (50.037% to be exact) toward the principle. The amount borrowed is irrelevant as long as it’s a fixed rate mortgage which ours is.
    This month’s payment is putting 52.4% of our payment towards the balance, and it is the 13th payment.

    And if you want to believe that paying 80% interest on the house for the monthly payment is better than paying 100% of the cost of the house (including not only the mortgage payments for the landlord, but also property taxes and insurance), then feel free to do so. The landlord may have a much lower mortgage if they bought it quite a while ago, or simply got it for a very low price (as in the current economic situation in early 2009).

    Keep in mind I’m not saying that you should ONLY buy a house. I did rent for quite some time in my youth. Which gave me much more flexibility to move closer to my work/girlfriend/etc. And I am not sorry that I did that as it was in my best interest at the time.

    And I don’t believe I’ve “made anything” on the house until it is sold. However, my monthly payments for housing will drop precipitously once the mortgage is paid off (in another 13 years & 11 months).

    This does NOT discount the fact that I am currently putting aside over 8% of my paycheck into retirement savings either. So, I’m not working just on an either/or situation, but BOTH angles which is what you would be doing if you are renting and investing as you suggested.

    Likewise, if I were to rent in my area, it would be $120/month less than what my 15 year mortgage currently costs me. Again, I know this is a very local issue.

    What I wanted to point out with this last statement (following), is that just because it is only 2 miles away, often doesn’t mean anything.
    In the case of NJ (highest property tax state in the nation), if you go 2 miles you can easily end up in different situations altogether.
    My in-laws are a prime example (and they live in our township). They live less than 1 mile from a neighboring township. The rents are on average about $100/month less than they are in our township. But there are 2 VERY distinct differences. The neighboring township schools are not quite as well equipped as our schools to properly educate the children, and the second BUT VERY IMPORTANT difference is that their property taxes are 80% of what our property taxes are because they have more commercial properties than we do.
    So, what is happening is that the landlords in the neighboring township are actually making at least 10% more than they are in our township due to property taxes being so much less than ours.

  195. FerrariFan77 says 06 April 2009 at 08:30

    Here is the Dallas scenario for me
    Rent – $1100
    If I buy a $300k house (wife will accept a modest rented apartment but NOT a modest starter house) – Mortgage ($2372), Taxes ($692), Insurance ($40), Maintenance ($150) Increased Heating/Cooling/Water costs ($100)…so overall $3372.
    Thats a staggering $2272 increase over my rent every month. Now consider that Dallas property prices do not increase much. If I move in next 5-6 years then I actually don’t make ANY money …i.e. I RENTED for $3372 Wow!!!
    Even if I survive 15 years in the house and pay off the loan, after that I do have to live with $1000 per month in non-mortgage related expenses (taxes, maint, HOA etc.) that’s almost like renting for the rest of the life!!! 🙁
    Buying for me will surely only be an EMOTIONAl decision 🙂

  196. Myself says 07 April 2009 at 06:38

    Well, I completely agree with your statement about the 15 year note on a $300k house.
    A few points to note although it still wouldn’t chnage your specific scenario or choice:
    1) If you put $20,000 down, then your payments actually drop to $2,214. If you put down 20%, then the payments would drop to $1,898.
    2) On a 15 term mortgage, in 5 years (and 20% downpayment), you would owe $177,785 or so (using the 5% rate it seems you were using).
    3) That’s almost $123,000 in equity, as long as the market doesn’t change at all over the next 5 years.

    Personally, I would probably rent though given your current scenario.

  197. Mr California says 28 April 2009 at 10:41

    Check out this article. As usual, the economist does a thorough job..

    http://www.economist.com/finance/displaystory.cfm?story_id=13491933

  198. Will says 28 April 2009 at 13:20

    Good article but kind of late. Putting aside the social aspects of home ownership, anyone familiar with very basic economics knows that there can’t be a direct economic advantage of buying versus renting because any such advantages (such as tax incentives and leverage) are factored into the price. Any examples people run are anecdotal and meaningless. If you find a good deal, you find a good deal, either way.

  199. Tunesmith says 20 June 2009 at 16:34

    I read the first twenty or comments or so, and didn’t see this obvious point being made – the 4% appreciation is 4% of the *value of the house*, meaning $426,500. Not 4% of the $85,000. I tried to mimic your calculations with this in mind, including the “savings” per/month from the renter as a monthly payment, and came out way, way, way, way ahead for the home buyer (almost double).

  200. Mac says 16 July 2009 at 15:45
  201. Chris says 27 July 2009 at 20:27

    One thing that folks like Chance (or was it Chase) was saying. That someone couldn’t rent a $425k hour for $1,500/month.
    An assumption there is that the person has a large mortgage on the property. If we ever bought another house, we might actually keep this house around and rent it out. Of course, we’ve only got 13 years (and 8 months) on a 15 year mortgage @ 4.625%.

  202. Paul says 17 August 2009 at 19:54

    I read this article with much interest. Seeing that the blogging started in 2007 with people in denial on real estate values potential to drop. 2009 and the carnage that took place in the US was astounding to me. I’m Canadian, living in Toronto. In Canada, there is no capital gains tax on the selling of your primary residence. For many years you could not get a more with an amortization more the 25 yrs, and you needed 25% down to avoid mortgage insurance. Because of price appreciate and in interest in getting more people into the market, 20% is required for no mortgage insurance, and 5% down is allowed with mortgage insurance, and the amortization has moved up to 35 years.

    In general, Canadians are more risk averse and conservative. The average married couple tries like hell to pay off their non tax-deductible mortgage asap, and reap the benefits of no capital gains tax on sale of their primary residence if they choose to move up, or save big money for the mortgage-free years of their lives until retirement where they typically downsize and bank a good chunk of money. Add to that the possiblity of having saved money in RRSPs, and savings/investment accounts, company pensions, and gov’t pensions and you got yourself a decent retirement.

  203. STEVEN BEYER says 17 August 2009 at 21:02

    I purchased a house that I can afford so that I do not have to comply with the whims of a landlord. I get the greatest satisfaction every single day from making this house my home; upgrading and modifying it to meet my needs and desires.

    I am much more satisfied living in the home I own and am building equity in than I would be renting the same house even if it cost 1/3 less to do so.

    Possible economic gain is not the reason to by a home. Pay what you can afford and save till you can put 20% down. If buyers had not accepted stupid loans the with no equity the housing market would not have become unaffordable and therefore would not have crashed.

  204. CaramelSmoothie says 20 August 2009 at 07:52

    I look at a house as a place to live, nothing more nothing less. The payments never stop, of course, the maintenance, taxes and insurance must always be paid. Financially, I would come out on top renting. Mentally, I come out ahead owning because of the privacy that it brings. When I say own, I mean an actual DETACHED home, not a condo.

  205. Gene Miller says 23 August 2009 at 10:53

    Sorry I haven’t read all the comments, so this may be covered by other writers, but…

    You math only begins to get at the real costs of home-ownership. To build a more accurate picture, start to factor in all the “externalities” like the garden make-over, the ‘smart’ controls, the total kitchen renovation, all the new furniture and new fixtures and appliances that you simply must have. And many of these will be recurring expenses over a 25-year period as tastes, appetites, use of space, etc. change. Few if any of them will get you one extra dollar when and if you sell.

    Add up all of this, and you know it comes to additional hundreds of thousands on the expense side, only a tiny fraction of which would be spent in a rental scenario.

  206. Heather says 01 September 2009 at 18:37

    We rented for $600 a month and then bought a $150,000 (3 bed, 2 bath in an excellent school district) house with a monthly payment of $1000 (that includes real estate taxes.) The house is 4 times bigger than the apartment.
    I think rent would be around $1000 for a house our size in the area we live (Ohio)… We got a 15 year mortgage too… I think you should calculate the expense of renting vs. buying for me! I bet you would get a different picture than the one listed. My situation would make the picture you’ve written about go the other way and show a different side of the whole thing.

    BTW, my house is probably worth what we paid for it in 2002, kind of sad, but I feel thankful we have not lost money like so many others.

  207. Slackerjo says 02 September 2009 at 05:01

    Rent vs buy? Ah, what are my choices? Well there is rent or rent? I rent cause I have no other choice. I can’t even buy a mobile home where I live.

    Once again another post GRS post that reaks of higher income arrogance.

  208. Myself says 03 September 2009 at 09:18

    Gene, of course you could have the “renter’s mentality” when it comes to your own house too.
    You could not paint it when it needs it. Not do larger landscaping projects on it. Etc.

    As I stated to my wife the other day. We could sell our house, pay off our one and only mortgage, and pay cash for a house in the area that she grew up in, not to mention we would be able to do the landscaping you mentioned, etc. However, it’s not the best of areas (although it’s also far from the worst of areas too), and it’s not where we would like to raise our children either. We also didn’t paint anything in the house for the first 2 years after moving in (and it was builder’s grade paint). We also didn’t get more or updated furniture for the first 4 years that we were there. We did however choose to save our money up for those particular items and pay cash for them.
    You see, having the want/desire for something doesn’t mean that it will become a need if one has better fiscal controls than a lot of people have.

  209. RM says 18 September 2009 at 07:48

    The issue here is that not every market is Seattle. I live in Pittsburgh. I bought a 2 bed 2 bath condo with about 1100sq ft when I was 23 years old for $95,000 in 2007. I put 10% down since my credit score qualified me for a ridiculously low MI payment. My mortgage payment was $515 per month (adding in HOA dues, MI, insurance, and taxes the total was about $875). The HOA dues took care of lawn maintenance, and also paid my water, trash and sewer bills. It needed some work and TLC, which I had money to do since I put a lower down payment. I like to fix things and remodel, so it was fun for me as well. My house is now worth $10K more and is under contract to sell.

    A comparable 2 br/2 ba was just rented in my complex for $850 a month. So I spent $25 more per month, had the gratification of remodeling a bath by myself and shopping for discounted When all is said and done I will get a check which is 1.5x more than what I’ve put into it, which will fund the 20% downpayment of my next home (another fixer upper).

    It is all relative to where you live. I suppose I “threw away” money since I paid about $550 in interest and taxes per month that essentially went towards nothing, but that is much less than what I would’ve “thrown away” in rent. In Pittsburgh it makes absolutely no sense to rent because housing prices are so affordable.

    Another random note: A yearly home warranty costs about $400. It is essentially insurance against anything major going wrong in your home. If your A/C unit breaks, you pay a $50 deductible and they replace for you, which saves thousands. So the homeowner can buy this insurance policy against mechanicals, have a regular insurance policy (which are typically dirt cheap- my condo insurance was $18 per month) and pretty much live worry-free.

  210. TNK says 12 October 2009 at 11:50

    165,000 house… 154,000 in interest payments. Essentially for the next 30 years you are renting your house from the bank. That is money you will NEVER recover. That is an additional $472 you pay out every month to have the ability to paint your walls, perform maintenance (more costs), pay property taxes (more costs), and higher insurance rates (more costs). That of course is if you stay in that house for the next 30 years.

    That 165,000 house just cost you $319,000, not including anything else.

  211. Myself says 16 October 2009 at 04:44

    TNK, the property taxes argument is moot, along with insurance rates and basic maintenance costs. You may not directly pay the property taxes, but your landlord is. Likewise, they are also paying insurance on the place, and they are just passing that cost on to you via any increased rent.
    Of course if they are doing their due diligence, when they are just starting to rent a place out, there is still a decent buffer between what it costs them to keep a place (i.e. pay mortgage … if any, property taxes, any utilities that are agreed on in the rent, and the insurance to cover the bank’s interest in the property, and provide a certain level of maintenance on the place).

    You are accurate on the being able to paint the walls part (although my old landlord did allow me to do that if I wanted … as long as it was a flat “bone” color when I left). And perform extra maintenance on teh place.

  212. Robert Rockford says 14 November 2009 at 12:08

    I used to live in SF/Bay Area where most hi-tech peons dont make enough to qualify for a loan to be able to (Even with 80K down) afford to buy, so what did they do with the 80K that mommy and daddy gave him/her after college for a down payment on a home? They didnt invest it. They bought a $75,000 Range Rover and a Rolex watch and go out every night spending all of their money living paycheck to paycheck partying it up. (I know some of those people were my friends) There are so many variables here that either or can make sense depending on ones earning and spending habits. If I had to rent the house I currently live in (Portland OR)I would pay just about as much in rent as I would what my mortgage is. Rent here isnt cheap (Which surprised me) This is only after 10% down, so you dont need to cough up 20% or more just to own a home and pay a nominal amount of mortgage vs. renting that is easily around the same price here. If I die in my home after its been paid off at least I didnt have rent to deal with or landlords that might need to kick me out for whatever reason. and what about if the landlord decides to sell? You are always at the mercy of what a landlord will or wont do. Toilet broke? Call the landlord, maybe he’ll fix it when he gets around to it. No matter what, you are always stuck with the same way the house is when you moved into it 10, 15, 20 years later because you know as well as I do that the landlord will not do any remodels nor will you since you dont own the home. If you can live with that 1950’s, 60′, 70’s or 80’s carpeting and fixtures, and ineficient appliances (You pay more in heating and electrical bills – throwing more money away) more power to you! Moving sucks and being a renter pretty much guarantees that you will be forced to move several times not to your own doing. Renting blows unless you are single and live in manhatten where most people cant afford to buy anyhow. If you have a family its soooo different. Kids do kooky stuff, and you will be paying for maintainance on a rented home so dont forget that either. There are just way too many varibales and scenarios on ones habits, family living situations etc. to say that buying or renting as better than one another. This article is just plain stupid ignorant to say such a thing.

  213. Dan says 06 December 2009 at 14:14

    So do all the lettings lose money in your area? Since the mortgage payments are $600 more for the same house, the poor sod who owns it to let to you – and presumably has to pay the same property taxes and maintenance – must be going bankrupt pretty soon…

  214. Alice Matthews says 07 December 2009 at 08:03

    Hi! Great Article, You point out many of the facts which landlords do not point out when selling a rent to buy scheme, which I think buyers need to know! But have you considered the fact that when owning your own home you are given a bit more freedom when it comes to ‘personalizing’ your home, and also there is no worry about being kicked out of your home, the landlord selling up, etc. I would want to know bringing up a family that I am not going to be suddenly told I have 2 months to move!

  215. Joel says 08 December 2009 at 23:26

    It really just depends on where you live.

    I went from $685 a month (rent) to $674.65 a month (mortgage including property tax) while increasing from 1200 square feet to 1500 square feet. This is a 15 year mortgage at 4 3/8%.

    I now get to pay less per month to have more space and not worry about noise complaints from downstairs neighbors. I do not have to deal with the apartment management telling me the A.C. is functioning as expected on a hot 102 degree summer day when it only cools down to 92 degrees inside!

    I am sure a lot of places the demand for a house drives price up higher than renting.

  216. Jeff says 05 January 2010 at 12:15

    I have owned and in my experience, here are the many problems with buying. Almost everyone has money wrapped up in the home that cannot be touched without interest and closing costs. Buying a home always results in closing costs including usually transfer taxes (and you can ignore them all you want but you do not get them back). Over the years the maintenance costs add up significantly. Many people overestimate what they think they made when they sell not to mention why buy and live there and then move ?? Where are you going now? Moving in and out of homes (with all of the closing costs, moving costs, time in between etc… involved rarely pays off). And staying put means your initial costs just sit there in the home. With all of the various expenses, even buying cheaply means about a 1-3 percent per year increase (eventually maybe) which is not nearly as good as 7-10 percent per year if invested wisely in the stock market which can be bought and sold as needed with a simple click of a mouse. Oh, and I don’t need to put a new roof on the mutual fund.
    Finally the so-called tax advantages of buying are VERY overstated. You can NOT add in your standard dedeuction if compared to renting (means over 7,000 lost for single and over 10,000 lost for married couples) before you see any advantage to buying not to mention you only get back avg. about 27 perecent of that. Many cannot use any at all because they don’t exceed the standard deduction a renter gets anyway.
    Do not look at the “great” sounding scenarios, look at the averages. And don’t forget real estate taxes keep going up. Living in your home is usually never free.
    And if something happens “bad” for you and where you are living it is a lot easier to move from a rental than from something you own.

  217. Pa says 10 January 2010 at 18:54

    Very interesting topic and I enjoy reading almost all the comment. Renting has it’s ups and down and buying has it’s up and down. I’m 22 years old right now and I am planning to buy a house when I’m 23 or 24. I don’t have much experience on how thing works but here’s what I think. I feel that in the long run, buying a house will benifit you more than renting a house. Yes renting is like throwing your money out the window. That’s the bottom line. I will not go into detail but that’s the fact. Buying a house vs. renting…. buying wins… period.

  218. Will says 11 January 2010 at 14:03

    “Yes renting is like throwing your money out the window. That’s the bottom line. I will not go into detail but that’s the fact. Buying a house vs. renting…. buying wins… period.”

    I saved $300k to $400k to $500k CONSERVATIVELY over the last 8 years by renting instead of buying…. I saved $200K + in just interest even at an impossibly low 5% interest-only rate. I would have thrown twice as much “money out the window” buying versus renting just on interest versus rent payments.

    In terms of house value, if I bought now I would save at least $200k to $300k on the purchase price.

    If one wants to talk about possible equity if I had paid more, that factors out because whatever I would have put in I still have.

  219. ES says 29 January 2010 at 07:54

    So far no one has mentioned the possibility of saving most of your money for 5-10 years (the difference between renting and buying) and buying a home outright with cash. For some this may be the best of both worlds as you can buy a house closing to present day prices and still avoid the disadvantages of buying a home (the interest payments). Some may argue with the risks of such a large cash investment, but it may be a viable option. Don’t think it is possible? Crystal at moneysavingmom.com has done just that. She has a few posts on her family’s accomplishments and they really are quire inspiring.

  220. Chris says 29 January 2010 at 09:53

    ES,
    I thought I had mentioned something like that in one of my previous posts (although I could easily be wrong).

    I know of 2 people that saved up $92,000 and $115,000 and paid cash for a house that they love. And they did it while they were renting (and the $92k house couple had 2 children while they were renting).

    All in all, you are correct. There’s no reason that they can’t save up a large chunk of money to put down or pay in full for a house.

    Sometimes it depends upon the person’s wants aside from their obvious needs (roof over their head). Some people choose to lease a vehicle, I however choose to buy mine (and run them into the ground … or at least into the junkyard to get $200-$400 for them after 10+ years of use).

  221. Rob in busted bubbleland says 06 February 2010 at 15:47

    ‘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’

    In many places in the country the numbers would be reversed. A house is a place to live not an investment.

  222. RRR says 07 February 2010 at 17:47

    I bought my home in 1992 when I was 25. I put down 30 percent because I couldn’t qualify for anything less. I worked really hard for years cleaning houses while I saved up for the down payment instead of going to college. (I don’t clean houses anymore, I just did that while I was very young because it paid good money!) I wanted a home because I believed it was a great investment. My grandfather kept telling me that.

    Fast forward to 2010: My mortgage payment was only $485 this month. I live in a beautiful neighborhood! All my friends who went to college first have a small home and are paying $2,500 a month on their mortgage or more. My home is nicer, btw! 🙂 I went back to college a few years ago. Now tell me, who got the better deal? My home is 80 percent paid off, and I have about 200k equity in it. I dunno about you, but as silly as it sounds, I think I did something right. In Florida, property taxes don’t go up go up very much if you lock in early. So my neighbor might be paying 7 or 8k a year in property taxes because he bought his house about 5 years ago, but I’m only paying 2.2k a year. Go figure. I even took in a roommate over the last 15 yrs., so whatever I made from them (sometimes I had a few people living here), I used it toward the mortgage or went on vacation, etc. It worked out great because I had a babysitter every time I went somewhere and I never had to dish out any money toward a mortgage payment! I hope this piece of wisdom helps those who are considering buying a home. In 15 years from now, homes and rent could be much more. That’s what I kept thinking to myself as a teenager, so I started saving up right there and then. A few ignorant people tried to talk me out of buying a home at such a young age, but I didn’t listen. I was adamant about buying a home when I was a teenager! In fact, my grandfather forced me to save up money when I was a teenager so I could own my own home and car when I got older. I have to admit I was upset he was charging me money to live with him (he wasn’t poor), but he told me one day he would return it. He just wanted to teach me how to save money and invest it wisely, so I could have something in life. I’m glad I took his advice! 🙂

    I don’t think buying a home during the housing bubble was a great idea though. My neighbors across the street who purchased their home for 440k during the bubble have a home that is only worth approximately 250-275k at the moment. From 2005 to about 2008 was a terrible time to buy a home, but that’s not the norm. If you can buy a home and don’t get a loan that is interest only, get a fixed rate and put at least 25 or 30 percent down, you will be better off! Take in roommates. I’m telling you for the first 15 years I lived here I never paid any mortgage!.And I have hundreds of thousands of dollars in equity to my name! You can’t beat that, unless, of course, you win the lotto!

    I just happen to have had this crazy idea to get a home when I was really young, and it paid off!

  223. Irene says 24 February 2010 at 17:53

    That may have been true over 2 years ago when this article was written, but not today.

    Hubby and I are buying a house for $185K (foreclosure) in Long Island, NY. The house has been appraised for $250K. Our monthly mortgage (including taxes and insurance) will be $1300 for a 3br/2ba house with a large yard. If we were to rent a similar sized place in a similar area, it would run us at least $1800, plus utilities.

    We are so happy not to have bought a home during the high market…it’s been a disaster. We waited until we could afford something on my husband’s salary only. Now I will be working and my salary will be dispensable. Tell me there isn’t any value in that.

  224. Thomson says 27 February 2010 at 22:41

    I went through the same experience, house shopping over the last year. How much will the mortgage be, plus all of the hidden expenses and savings? In order to break through all of the complexities of paying a mortgage, I wrote TrueCost. TrueCost is an iPhone app that gives you a single value – the adjusted monthly cost of owning a home as compared to renting. I really think it cuts out a huge amount of uncertainty in the mortgaging process.

    BTW we ended up renting a house on 2.4 acres listed for $360k for $1250/mo. Much better than the mortgage, much better than we could have found anywhere in the same metro area. It obviously wasn’t our time yet to buy a place. 🙂

    Unfortunately the fantasy that putting your money into a nice little 7%/yr investment has dried up along with the housing bubble. If you want a nest-egg to retire on, better get to work innovating!

    TrueCost: http://itunes.apple.com/us/app/truecost-mortgage/id358060578?mt=8

  225. Rob in busted bubbleland says 02 March 2010 at 14:28

    Irene you very well explain why it’s so important to run the numbers, by doing that you waited (something that I’ve been encouraging my nephew to do as Canada has a housing bubble bigger than the States) and got a much better deal on a house than if you’d one the emotional thing and just bought one.

  226. annette says 04 March 2010 at 14:19

    i wish i’d seen this article when I was thinking about buying– I own two houses, rent one, live in the other and ..between headache of maintainance (sp?), taxes, finding good tenant bla bla UNLESS you buy a place that is really cheap that you can rent easily and you actually LIKE doing work on the house (there are folks that do)
    I was tired of rent going up EVERY year…now taxes go up every year…but not the rent.

  227. Jen says 09 March 2010 at 02:50

    Lesson learned the hard way. We bought an expensive home in a high priced market in 2005. We’re renting it out for $500 less than the mortgage, have repair costs and lawn care costs. IF we could go back in time to 2005 and I could have read this article, I would have chosen to rent a home and we would have benefited from
    1) more free time
    2) savings on repairs, taxes, interest
    3) less stress
    I have told friends wanting to buy about this article. I can’t wait to sell our home and be done with it. The people we bought it from weren’t upfront about a flood they had had in the basement. We didn’t seek legal action but now we will have to disclose a crack in the foundation which will likely bring the value down. HOME OWNERSHIP is very time consuming, stressful and expensive. I’d rather be free to travel, have more time for other pursuits and put my money elsewhere.
    RENTING IS THE BEST!!

  228. Dale says 26 March 2010 at 02:05

    In my experience whether or not you make a profit selling your home is mostly based on whether or not you made a good deal when you bought it.

    Like many investments your best hope of making a profit rides on the wisdom of your initial purchase.

    Buy right and you will make a profit when you sell.

  229. Cory says 15 May 2010 at 08:39

    I see a lot of comments from home owners who dislike this article, and quote how home buying is better because their own mortgage is equal to the amount they would be paying if they were renting.
    In my opinion, if you can get a mortgage in an area you want to live that is similar to a rental price in the same area, then go ahead and buy. But I think these examples are in the small minority and you have to live in the boonies to make it happen. The simple fact is, in most cities and suburbs, a mortgage is going to be at least twice as much as rent unless you have been diligent enough to save up and put a large down payment towards a house.

    I don’t know about you, but I would rather rent at half the price of a mortgage and invest the rest. If you put 1800 per month into a mutual fund, in 15 years you will be a millionaire. You can buy your own house at that point. Now are you going to tell me you can get that kind of return on that 1800 extra per month in a home mortgage? Doubtful.

  230. Chris says 16 May 2010 at 19:04

    Cory, that is at least partially incorrect.
    $1,800/month * 12 months is $21,600/yr.
    $21,600/yr for 15 years compounded annually at 10%/yr is $508,565 at the end of 15 years.
    Surely not chump change, but a far cry from being a “millionaire”.

    Oh, and you make it seem simple to put aside $21,600/yr, while paying $900/month for rent.

    So, while you’re able to put out $2,700/month for rent and investments. The majority of Americans cannot set aside $32,400 for a roof over their head, and investment, and ignore other such things as vehicle, insurance, gas, heat, electric, food, and some form of entertainment.

  231. Dmitri says 31 May 2010 at 14:08

    Instead of renting or buying a home I chose the third option.

    I have saved up some money, quit my job, and bought a beautiful 3 acre piece of land on the southern coast of Georgian Bay. Yes, I’m Canadian and the price of homes in Toronto is over $500,000 in most cases.

    The land have cost me $90,000 most of which I was able to save up.

    I have planted some trees, shrubs and herbs, which need very little care, but supply most of my family’s nutritional needs. A little vegi guarden and a stock of chicken and gees take an everage of 2 hours a day to sustain, while providing the rest of nutrition.

    Our monthly expances are around $400 a month, and with the $2,000 I’m making now with my own Lighting business, I can sustain my family and save money, while my wife take care of our baby.

    All in all, with just one person in the family working, we are able to save money to build a new off greed home on our land, enjoy home grown organic food, that by the way tastes amaizing, and enjoy our life like never before. Hiking, sweeming in the lake. We can actually see the stars from here. I also like to think that with each passing generation, if my kids choose to stay on the land, the place will become better and better. We already start to recieve fruits from many of our trees, but some take longer than few year to grow to their full size and start fruiting.

    I have long believed that whether you are renting or buying you are getting screwd because you own nothing. If you rent the rental company or the owner ownes the house, if you buy, the bank ownes it, you just own the risk and the interest. On the other hand, if you truly own a peace of land, it makes it much easier and more senseble to plan for the future.

    Cheers.

  232. Maura says 14 June 2010 at 14:18

    I bought my house in 1990 in a high-priced area in California. It is only a 1150 sq ft house, not a mansion, and I paid $230,000 for it. It is now worth over twice what I paid for it (yes it was worth $100,000 more three years ago, but that is just on paper).

    I am six years away from paying off my house. I would have gotten it paid off earlier if I have learned about frugal living sooner!

    But the point is that because I bought my house, I am going to be able to retire fairly comfortably at 65, or maybe sooner. My housing costs including maintenance, property taxes, and insurance, will be about $650 per month. A similar house in this area rents for $1800-$2000 per month. My friend who is not a homeowner says she has to work until she is 67, and then they will be forced to move to a lower cost area. And she will be paying rent for the rest of her life. Enough said.

  233. Maura says 14 June 2010 at 19:27

    In reality, very few renters invest the difference between the rent they are paying and the amount they would pay if they bought a house. They spend the money on dining out, SUVs, and vacations.

  234. Rob in bubble busted land Madrid says 18 June 2010 at 10:26

    Muria while you do make a good point part of the reason for your sucess is that you bought at a good time, would the story be the same if you paid 600 or 700 grand?

  235. Realtor Agent says 29 September 2010 at 01:26

    Renting versus owning is really a personal decision, Renting or Buying is all good depending on your financial situation.

  236. Maureen Thomson says 05 October 2010 at 08:41

    I sold my house this year and became a non-homeowner for the first time in 25 years. I can’t tell you how liberating it feels to be “just” a renter!

  237. Vince says 13 November 2010 at 12:24

    What a difference a few years make! Now that the housing crisis is still in full swing, there are so many more reasons to be a buyer! I’m renting now and, like most renters I know in my city, they are paying the crazy rental fees to homeowners who have homes that are underwater. The 3Bd/1.5 bath, 1600 sqft place I live in is $825 with all the amenities. The same places in our city go for $75K-100K! The monthly payment with a 15yr fixed would be about $650 with taxes and insurance.

    The changes in the market present an entirely new context, which this article does not address, that is: what happens when everyone is upside down and needs to rent places with high price tags just to keep their homes – and – why rent when you can buy awesome places that are back to being affordable??

  238. Jen says 18 January 2011 at 11:00

    We like the flexibility of renting. If we don’t like my apartment anymore (for whatever reason – leaky roof, noisy neighbors, etc) or my landlord, we can move. Right now we’re even in a month-to-month set-up, so we can leave at any time and not even wait for the lease to expire.

    We don’t have to do major repairs (garbage disposal was broken, landlord fixed it – toilet wouldn’t stop leaking, landlord fixed it).

    If we want to move across the country, we can find a place to rent there, give the landlord 1 month notice, and move. We don’t have to coordinate selling my house with buying another one, or deal with mortgage servicers, or anything.

    We have enough money to put a down payment on a unit like ours (one is for sale in the same complex), but why do it? Why lock ourselves into more debt for another 15-20 years (we’re paying off a nearly mortgage-sized equivalent of student loan debt)?

    Renting is so much easier – and although we would pay a slightly less out in cash every month if we owned an equivalent unit, it is worth it to avoid repairs and to have convenience (since the cash cost per month doesn’t include future repairs and maintenance)!

  239. White Lotus says 29 March 2011 at 18:10

    Lots of people are dis-illusioned with the realities of home ownership. They think because values of their home increase that it’s a reason for home ownership. The only time you benefit from increased value of your home is when you sell that home and move to a place where home values have not increased at the same rate. If you buy house in Atlanta and the value of your house goes up and you move to a place in Charlotte, NC where values have not increased as much, then yea I guess you could say you’ve made out pretty good.

    Generally speaking, areas where home values have skyrocketed are more desirable places to live, hence the reason for the skyrocketing home values. The San Francisco Bay Area is a great example of this, everybody wants to live there and it’s caused home values to skyrocket. I suppose one could sell their home in San Francisco and move to Charlotte, NC and live like a king, but it wouldn’t be considered as desirable to most.

    My Dad is typical, thinks home ownership is a great investment. He’s dead wrong. He talks about how the value of his home in Foster City has tripled to nearly $1 million. He doesn’t take into account that all the other homes in Foster City have increased in value at roughly the same rate. If he wants to stay in Foster City, he’s going to get a lot of money for his current house, but he’s going to pay through the nose if he wants to buy another home there.

    Another example of how dis-illusioned people are about home ownership: Home ownership requires you to have a good paying, stable job with minimal or no lapses in employment. With our current economic crisis, lots of good people have lost their jobs as victims of this crisis. Unemployment numbers are high, and it’s contributing to the foreclosure numbers and ruining the credits of these people forever. Buying a home is extremely expensive and if you don’t have the monies to pay for it, can ruin you for the rest of your life.

    I’m a Dental Hygienist and when I graduated one of my classmates moved to Stockton and purchased a house immediately in 2006. Her house has depreciated considerably since her purchase and she owes more on the house than it’s currently worth. She is able to pay monthly payments, but due to the fact that patients have been cancelling, her boss cut her days down from 4 days/week to 3 days/week, making it more difficult to make the monthly payment. Jobs are very scarce in the Stockton area at the moment.

    Lots of people are facing pay cuts or having their jobs eliminated all together. Just because you guys have been lucky enough to have a stable job, doesn’t mean everyone else is in the same boat. Renting affords you the ability to move around at will, quickly and easily, to where jobs are plentiful. You can’t do that with home ownership.

    For all the people who are saying the Pacific Northwest is expensive STOP IT!!! The Pacific Northwest is not expensive. The San Francisco Bay Area, where 3 BR homes are going for $800k+ is expensive! I’m not that familiar with Southern California either, but even if you don’t live in a major city, CA has the highest sales tax rate in the country, not to mention you’re getting taxed up the wazoo for State Income Tax, .02 cents for every bottled water, $15 disposal fee for buying a computer monitor, there’s a fee for this and a tax for that every time you buy something in California.

    Sorry for my rant, getting back to the point: Even if you work in Bellevue, you can live in Tacoma or Auburn where the price of a 3BR house is downright cheap and it’s not that long of a commute either. Not to mention Washington has no State Income Tax. Homes in Boise, ID are still priced reasonably and affordable housing can be found in Oregon as well.

    One of the reasons why so many people flock to the Pac NW is because the cost of living is cheaper. I read somewhere that 40-50% of WA State’s population increase is due to people from Ca moving here.

  240. David says 21 August 2011 at 03:33

    Renting vs. buying. I have lived in an apartment for over 15 years. Have to be quiet and not disturb the neighbors (I can be out of town and make too much noise ??). The apartment building just got sold and my rent is going up. (still not sure by how much, but based on what I heard the new neighbors are paying alot)
    If I bought my own place, its just less headaches and I know what my payment will be each month.

  241. TNKs says 23 August 2011 at 11:10

    Interesting perspectives by everyone!! I think that the bottom line is each person has to do what is best for their situation. As a renter, there are things that I enjoy about “NOT” being a homeowner. I do not have to worry about maintenance, which to me is worth every dime spent. I also have enjoyed the freedom of being able to move about, not being tied down to one house waiting and hoping for it to sell so I can move on to something else. My children and I started out in a small 2 bedroom apartment and have been able to move into a single family home I could NEVER afford to buy and maintain. Just being in a nicer neighborhood has afforded my children a “leg up” in life that they would otherwise not have received had I bought my home. There are perks to renting that are often overlooked, such as the one I just mentioned. When my kids are older (moving into their own lives, hopefully.. ha ha) I will be able to focus on downsizing and getting into my permanent retirement forever home. One that will hopefully suit my needs for the rest of my life. I have watched many of my neighbors who are stuck in their houses, while their jobs have moved elsewhere in this economic downturn and they have either had to give up their homes completely or spend enormous amounts of money commuting to work everyday (long distances, and spending HOURS doing it).

  242. Ioan says 20 October 2011 at 13:00

    Something is really wrong with your data calculations. If your calculations are correct, it means that owner of the house that is renting for $1500 is losing a lot of $$$ since he is a owner and theoretically should have similar costs as any owner. And I seriously doubt that the landlord/owner is running a business that loses money.
    You save on renting vs buying only if you rent a cheaper house. In rest, renting vs buying is not that much different from money perspective, is just a matter of lifestyle preference. The most important financial aspect for both options is to rent/buy only what you can afford

  243. Bails says 26 October 2011 at 10:43

    To all those commenters who bought a house and then sold it at much higher prices and think buying is always better than renting…

    In 1994, I had $50,000 saved up and had a choice to use it towards buying a home or continue renting. I decided to keep renting and put it all of my savings into an S&P 500 index fund. I sold it 6 years later and tripled my money, therefore renting is better!

    See what I did there? I could also re-write this story to say I bought $50,000 worth of lottery tickets and hit the jackpot, therefore playing the lottery is better than buying a house.

  244. Stuart says 23 November 2011 at 08:23

    Interesting article. Everyone certainly needs to determine what is best for them. However, investing at an 8% return would be great in the real world. Yes, the first 10 – 12 years of a mortgage is mainly interest only, with a very small portion going towards principle. However, with interest deductions and minimal principle payments, the end result is financially brighter. Also, who wants to have a rent / mtg. payment at retirement? Paying off your home “buys” security for old age. If you accurately put the numbers on paper, clearly you will see the advantages of owning. Would you want to pay rent for 30 years and own nothing? or would you rather pay a mortgage for 30 years and own a home? Not to difficult of a decision.

    • Julie says 09 April 2013 at 13:18

      I also thought of that scenario. However even after your home is free and clear (no mortgage payment) you would still have to pay Insurance / Condo Fees (if you own a condo) / Taxes…and those still will go up. You will never have a no payment situation no matter how you look at it. Also at retirement you would have more money if you rent and invest the difference in a good solid mutual fund. I am 30 years old. I always rented cheap and lived well. I have an okay job bringing average income, but i have the freedom to move and a retirement savings of already 100K that I didn’t waste on buying a home that will just keep growing at 8% per year and If i have broken equipment I call my landlord and she takes care of it. So in a way I feel freer to rent as I have a great place to live that I love in a neighborhood that I love and I have a substantial savings that I have not parted with…for me its a win win

  245. John Keene says 25 March 2012 at 14:06

    Wow, how times have changed. A recent Trulia.com study showed that out of the top 100 largest cities in America, it’s only cheaper to rent than own in two of them.

    Owning has been beating renting in Denver for a couple of years now, and I recently purchased a home and cut my monthly housing costs by about $700.

    It also helped that I used my VA loan, which allowed me to avoid draining my bank account for the down payment but I’m still avoiding PMI.

  246. Susan Wentworth says 25 June 2012 at 12:55

    How interesting it is to read these posts from July of 2007. That is the time I sold our home, Lucky us at the top of the market! I now own a home outright. Such bliss! My first home was purhased in 1977 (a two-storey, three bedroom, two bath, cape cod with detached garage and breezeway, fenced with undergrownd sprinkler) for $22,000. Amazing isn’t it? Six houses (and 30 years and five college educated kids later), I had $325,000 in home equity. (Those were the days). Things change through the years. Safe havens change. Start and keep saving. Cost averaging is the answer and you too can retire debt free at age 58 or YOUNGER!!!

  247. Andy says 11 January 2013 at 16:49

    GREAT post. There are a lot of misconceptions about renting vs. owning. This is exactly the kind of information we are trying to provide for our users over at Rooof.com, our new landlord/tenant site (still in beta, but active). Thanks for the posts and if you have an opportunity, take look at Rooof. I would love to hear your professional opinion. – Andy

  248. Margherita says 19 January 2013 at 14:26

    Love it!
    Thanks!

  249. Homes for Sale in Springfield MO says 05 March 2013 at 09:26

    You got a point right there. I’m a realtor, but I also agree with your point. House-buying isn’t always an investment… especially when you don’t know the right timing and the right property to buy. If you’re an average earner and if you’re planning to buy a house, your reason should be “you wanted to have a permanent place to live in…. and yes, NOT TO GET RICH. 🙂 Thanks for sharing this by the way.

  250. Michelle Schultz says 11 April 2013 at 23:57

    Renting comes with very little extra costs. All that must be figured in. Just because you can make the payment doesn’t mean you can afford a home.

  251. Jason says 30 May 2013 at 06:15

    Owning is always better than renting, you rent a flat for 10 years and what do you have at the end of it?

    • Chris says 31 May 2013 at 07:23

      I couldn’t disagree more Jason.

      What if you plan on moving within a short period of time? Then you have to wait until the flat sells, plus associated costs to sell it and possibly buy another one. This would be an example of liquidity – you could leave either when your lease is up or sooner if you choose.
      What if you bought during a bubble and the flat is now worth a lot less than when you started, and you are forced to move due to work being moved, or you acquiring a position someplace else?
      What if renting for a price below what it costs to purchase a flat is a viable option? Along with this, what if that allows you to save 25%-50% of your paycheck while having a roof over your head?

      Do these things happen? Absolutely. They are however on a case-by-case basis, since everyone’s situation is different.

      For my wife and I, no buying made the most sense because we knew exactly what we wanted and bought it at a reasonable price, and plan on staying here until our kids are grown and out of the house. But if you are single or just want to travel across the globe absorbing everything that the world has to offer, more power to you! 🙂

  252. michelle says 24 October 2013 at 22:37

    The main reason I would like to own a home is to leave something behind to my children when I pass away, You could say “just save up” but it would be very hard to save around $100,000 for each child. Also you never know when you might be thrown out of a rented house and have to keep moving – That would add a lot of stress and lastly as a person who grew up in a family owned house and never moved there’s nothing more comforting than knowing that you will always have a home. That outweighs the money issue.

  253. lorin says 01 November 2013 at 07:14

    All rent versus buy comparisons assumes that rent prices will go up and homes prices will also go up. But we do not know the future ahead of us. I have heard from several people in the industry that there will likely be another re market crash. While we lost half of our purchase price in our condo our friends rented and kept the same rent price for the last 8 years. Many banks are hoarding their foreclosures bc they know if they put them on the market too quickly the market will fall. Interest rates are going up. And the world is not the same economically speaking as it was in previous generations. I would like to rent for a while…

  254. lorin says 01 November 2013 at 07:17

    We can rent a home worth 750K for 3000/mo. Or we can buy a home worth 420K for 3000/mo. I think if the rental prices are much lower than the mortgage… then there is a bubble happening again.

  255. Patrick says 14 January 2014 at 11:11

    1. You need to calculate how much principal will go to pay the loan down every month.

    2. repairs and maintenance cost nee to be calculated in. Which is 1-3% of the value of the home. Or $1-$3 per square foot per year.

    3. How much will rents increase each year.

  256. Tal says 20 January 2014 at 11:05

    Mortgage rates are the most important factor.
    The higher the rate, the less it makes sense to buy.
    Feel free to use an excel worksheet I made when I looked for an apartment. http://www.otprj.com/buy_vs_rent.php

  257. real estate attorney West Des Moines IA says 10 April 2014 at 14:54

    Given that fact, in my opinion, in the long run owning a house would do more financial good than renting. Unlike with rentals where you money will vanish by paying monthly rents.

    • Chris says 13 April 2014 at 16:52

      I can’t wholeheartedly agree with that. Perhaps 80%-85% of the time that could be valid, however take for instance, Detroit prior to the booming industry and substantial decline after the major industry fell apart (or was overly controlled by several opposing forces).

  258. vt says 28 April 2014 at 17:30

    I have been reading most of the views. Well I do not have any flashy data/calculations to share. However I will support “renting”. This is because in expensive city like Auckland, having low-med income, I could always afford to stay near school, public transport and city CBD and that too in big houses! If I go for buying those houses I will never get loan for it and no way I can afford mortgage. On top of that I have freedom to move to smaller houses when kids move out. The deposit I enjoy for myself meeting family overseas!

  259. Domenick Pucillo says 15 May 2014 at 11:09

    Unless you are in rent stabilizing housing, I really feel buying is the way to go. With rent leases going up from a margin of 2%-7% per year you are throwing away your money if you plan on living there for the long term. A rental should be a short term plan. Any thoughts?

  260. Roberto says 08 May 2015 at 07:52

    Good morning, all the renters prefer making the comparison with mortgage, of course it will cost a lot less. But you should evaluate that there are people who buy WITHOUT mortgage. Those costs could be reduced in various thousands less and if there’s problems of liquidity, you could think in renting your OWN house for some short time, and rent something that could help you increase your cash flow. You don’t have to sell.

    Now, most of you could say “invest that amount in other investment”. That could be a reality, but you could think in the benefits of that investment for your children fir their future, or a possibility of buying without mortgage, investing in real estate for rentals, so you could have an aditional income!!!

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