Buy or Rent

BoxheadTim wrote: German programmer with an English accent .

I knew those guys were robots.

integraguy wrote: The real attraction to owning over renting? Your home becomes collateral for future loans....that "mountain" of rent you pay....just pays for a roof over your head, so to speak.

Yes. BUT.... that home also becomes a liability. Repairs and maintenance are not free. This can become a very large liability for a home owner over the course of many years.

There is also the assumption by many that their home will increase tremendously in value. While property values to increase on a national average, it is neither tremendous, nor guaranteed. Many a property fails to appreciate substantially in value, and quite a few do go down.

Most people also refuse to admit they paid hundreds of thousands of dollars in interest on their mortgages for the privilege of ownership. They buy a house for $110k, sell it five years later for $125k, and claim a $15k profit. That's false math, as they failed to deduct the roughly $40k in interest they paid. The $15k profit is actually a $25k loss. And that's before we include the many thousands of dollars of transaction fees, both in buying and selling.

There are times to own, and times to rent. When you're transient, that's generally not a good time to own. College students for example, renting a room for a few months makes more sense than buying a home.

To put it in car terms, it's not much different than flying to Hawaii for a vacation and renting a car for the few days you're there, instead of buying one. Oh, I'm sure there's someone who would insist that buying a car would indeed be wise. And if they like hanging out in MVA offices instead of snorkling reefs, I suppose it's the right choice for them. Myself, I'd rather rent a car without any worries, and drop it off when I go home.

A person does well to ignore the "meatball" phrase throwers of any type. Instead, think. Evaluate your situation and decide what is the wisest course of action for you. Renting isn't inherently bad, nor is ownership inherently good. In both cases, it depends on the situation.

I think your math is a little 'creative'.

It's not very likely that you'll pay $40k interest over 5 yrs on a $110k house.

Nonetheless, I disagree with your statement. Renting is inherently bad, and ownership is inherently good. This is the second time in as many days that I've seen this discussion, and for as long as I can recall, this never was a discussion. I wonder why that is?

Who takes a 30 yr mortgage on a $110k loan?

That's retarded (and the real problem).

zomby woof wrote: I think your math is a little 'creative'. It's not very likely that you'll pay $40k interest over 5 yrs on a $110k house.

On a new $100k note about $700 per month goes to interest. 700 x12x5 = $42,000. That's not creative, that's simply math.

Nonetheless, I disagree with your statement.

I'm sorry you find it objectionable that I stated people should think for themselves.

Who takes a 30 yr mortgage on a $110k loan? That's retarded.

1. A person who doesn't want to be house poor by maximizing their monthly payments.

2. A person who wants a safety margin. Thereby ensuring they can always make the minimal monthly payment, even during times of duress.

3. A person who prefers to keep cash reserves for emergencies. Usefull to have for emergencies.

4. A person who understands they can pay off the note early with larger payments to principle during any time they can afford it.

This is the second time in as many days that I've seen this discussion, and for as long as I can recall, this never was a discussion. I wonder why that is?

Because many people are afraid to actually think. They find it..."disagreeable". Some are just zombies, woofing out whatever they've been told to think by someone else.

By all means, when you go away for a weekend don't rent a room for the night, buy a house. For as you say, renting is always bad.

By all means, should you buy a house maximize your monthly payments to the point that you have nothing to live on. Ensure that the first financial hiccup in your life will wreck you. For as you say, it would be retarded to do otherwise.

i'm wondering how many people here who are pushing renting as the uniformly better solution are also big proponents of leasing cars?

billy3esq wrote:

Buzz Killington wrote: ... but it is an investment; you're buying an asset that may or may not increase in value. it's not as good of an investment as most people thought....

My personal view is that an investment is something that will (a) produce income and/or (b) increase in value. The only way a residence produces income is the imputed income you get when it's paid off and you don't have an ongoing rental expense. The only way a house increases in value is if you (1) win the zip code lottery or (2) don't mind a return at the rate of inflation. When you view it that way, purchasing a residence, even with a moderate mortgage, is a reasonable long term decision, but it's not an "investment" in the strict sense of the word.

i think that is semantics. i could make the same argument about the stock market; the only way and investment in the stock market will increase in value is if you win the "stock lottery."

i assume you'd agree that buying shares of a mututal fund or a given stock or a Treasury bond is an "investment," right? you expect that the asset you bought will increase in value -- and each investment has different expectations. over the period during which I plan to hold it, I would expect my 401(k) to increase in value more than a T-bill. But it might not.

the past few years have greatly distorted people's views of real estate, i think. people should not be expecting 30-60% gains over 5 years in real estate (or in any investment, really). but expecting that carefully-bought real property (there should not be any other kind) won't at least hold its value over a relatively long term isn't realistic either.

Kiplinger's had an article on leasing certain cars as opposed to purchasing and taking the financial hit on reselling. Caddys, Saabs because of depreciation were better to lease, and yes, I know about the mileage limits. Owning outright is always gonna be the best. Poor Hess, the HUD disaster you lived thru', I wouldn't wish that on anyone. What about co-operative building projects? Does anyone here have experience of this, I wish I could get my fellow waiters/bartenders to put down their miller lites and jamesons for a second to think about it.

Buzz Killington wrote: the past few years have greatly distorted people's views of real estate, i think. people should not be expecting 30-60% gains over 5 years in real estate (or in any investment, really). but expecting that carefully-bought real property (there should not be any other kind) won't at least hold its value over a relatively long term isn't realistic either.

You said a lot of right things, but I think this is what is making people think that buying may not be the right thing to do. Not only should people think for themselves, but they should do so with great caution.

Spreading a loan over 30 yrs is, IMO, not a wise thing to do. If the price is so high that you need to (especially at $100k), then you're either not ready to buy, or need to look somewhere else. The fact that you can get anybody to lend you that amount of money is amazing. The interest rates are fair. The problem arises when you want to take half your life to pay it off.

You may not make a lot of money on your property, but I can guarantee that if you rent, you will lose all of it.

zomby woof wrote: Spreading a loan over 30 yrs is, IMO, not a wise thing to do. If the price is so high that you need to (especially at $100k), then you're either not ready to buy, or need to look somewhere else.

that seems like a pretty arbitrary statement. by that logic one could argue that anyone who can't pay cash for a house should not be buying one (i've actually heard that argument many times, and it's nonsense). If 30 years is an unreasonably long term, what is reasonable, and why? is 15 years reasonable? 10 years? 5?

there is nothing inherently wrong with debt financing; it just needs to be used appropriately. for example, i bought a car a few years back at 0% interest. i would have been foolish to pay cash for that car or to take less than the longest repayment term possible. my student loans are fixed at 2%...you're damn right i'm not in any rush to pay them off.

foxtrapper wrote: On a new $100k note about $700 per month goes to interest. 700 x12x5 = $42,000. That's not creative, that's simply math.

Only if you are paying ~8.5% interest.

Interest rates right now are ~5% so you will be paying ~$415 a month in interest or about $24,900 over 5 years.

That's why you look at 15-year or 20-year mortgages, not 30. The payments are not that much higher per month and the amount saved in interest is phenomenal.

And then you double your principal payment every month.

We bought our first (and only) house in 1993 on a 30-year loan because we were just starting out and wanted the headroom in case money got tight. It was $145,000 and we put $25,000 down. We double-paid every principal payment since Day One. Rate was ~ 5-5/8% fixed.

Around 2003, after 10 years, we refinanced the remaining 2/3 of the original balance. Doubling the principal payments meant we were at least 1/3 paid off on the principal at the 1/3 time frame, rather than if we had followed the bank-favoring amortization schedule. The new loan was at ~ 4-5/8" fixed with a 15-year term, thus cutting 5 years off our original payment schedule, and at a $100 lower monthly payment. We also double-paid every principal payment, expecting to take 10 years to pay off that 15 year loan.

By last fall - 7 years after refinancing, and 17 years after buying the house - we were about paid off. Instead, we chose to refinance again, this time at ~ 3-5/8% for 15 years. We borrowed about what we had originally paid for the house and spent most of it doing a comprehensive renovation, including an addition, all-new kitchen and appliances, all-new high efficiency windows, siding, furnace, and water heater. Even with all that, we still have about $100,000 in equity in the house at a conservative estimate - probably more like $150,000 now that it's been renovated, even in today's conditions.

Yes, the interest we've paid is gone, but most of it only cost us 75 cents on the dollar because of the tax deduction, and it is less than half what the $200,000 or so that 17 years' worth of rent would have been... rent which is also gone down the crapper, but with nothing to show for it other than having had a dry head. No future dry head to be had in paying rent, unlike in paying mortgage interest.

We're double-paying the principal on the new loan, too, and I expect to pay it off in 10 years. At that point I'll be 10 years from retirement, I'll own the house free and clear, and I'll be at least another 10 years away from having to spend any real money on maintenance. So that paid-off house will give me at least another $180,000 to put into savings between payoff and retirement, plus then I get to live in the house for the rest of my life with only maintenance costs.

We're not even close to being upside-down, because we bought a modest house with enough money down, we've never failed to pay extra principal back early, and we keep our credit good so that we get attractive rates when we do need to borrow money.

Renting is not always bad, and owning is not always good. But just like car leasing, there is a very narrow set of circumstances that makes renting the better option, and many people don't fit those circumstances... they just see a lower monthly $ sign in the short term and lose money in the long term.

Also, the interest calculated on the actual balance of the loan each month, so the interest to principal ratio changes as you pay down the principal. 100K at 5% would have a scheduled payment of 536.82/mo. On day-one, 416.67 to interest and 120.15 to principal. After 5 years, the ratio is 363.26 and 153.56.

Even that is a bit simplistic as in reality it depends on how your bank processes the payment and interest. Mine calculates the interest once a month based on the average daily balance for the billing cycle. With this in mind, I always make my payment as soon as the paycheck I've allocated for the mortgage hits my account, regardless of when the actual due-date is. Doing this lowers the average balance for the cycle slightly before they apply the interest. It's not much, but it saves few $ and over the length of a mortgage it adds up.

It also helps a lot ot pay a little extra towards the mortage principal if and when you can - especially early in the loan. I have a 15 yr mortgage, but by putting a little extra towards the principal, I've managed to reduce the pay-off time by almost 3 years to date. By my rough calculations, my house will be paid for sometime in 2013.

zomby woof wrote: Nonetheless, I disagree with your statement. Renting is inherently bad, and ownership is inherently good. This is the second time in as many days that I've seen this discussion, and for as long as I can recall, this never was a discussion. I wonder why that is?

Well, I disagree with your assertion. From an overall economics perspective, renting can be very good and owning very bad. Owning - especially in the current market, with a lot of people who will be upside down for a long time - reduces workforce mobility. That hurts the overall economy simply because people cannot easily move to where the jobs are if they can't unload the "brilliant investment" (sarcasm alert) they bought. Labeling the housing market as a Ponzi scheme It's also not quite as far fetched as people would like to believe.

I'm not opposed to owning by a long shot but the parroted "renting bad, owning good" statement isn't quite as true as people would like it to be.

Buzz Killington wrote:

billy3esq wrote: My personal view is that an investment is something that will (a) produce income and/or (b) increase in value. The only way a residence produces income is the imputed income you get when it's paid off and you don't have an ongoing rental expense. The only way a house increases in value is if you (1) win the zip code lottery or (2) don't mind a return at the rate of inflation. When you view it that way, purchasing a residence, even with a moderate mortgage, is a reasonable long term decision, but it's not an "investment" in the strict sense of the word.

i think that is semantics. i could make the same argument about the stock market; the only way and investment in the stock market will increase in value is if you win the "stock lottery."

Not really, although you and I both know everything is semantics.

If you look at the aggregate value of real estate it goes up at roughly the rate of inflation. Some parcels more, some less, but in aggregate it'll return roughly the rate of inflation. OTOH, the aggregate value of the stock market goes up at a substantially higher rate (except for the least 10 years). The difference is, I can purchase a mutual fund that will approximate the performance of the total aggregate stock market. You can't do that when buying a house, and even if you could, you wouldn't necessarily want to.

Otherwise, I agree with your point about expected return, etc., but the fact of the matter is that while a residence has some investment-like qualities, it's not primarily an investment. It's primarily shelter. You select your residence based on a whole lot of other factors than its suitability as an investment.

Case in point: I live in outer suburbia because it's five minutes from my office. "Investing" in a house out here for either price appreciation or rental income would be silly because the supply already substantially exceeds the demand. Nonetheless I own my house (1) because it's convenient and otherwise meets my family's needs and wants for shelter and (2) over the long term will cost me less than renting a comparable property.

billy3esq wrote:

Buzz Killington wrote: i think that is semantics. i could make the same argument about the stock market; the only way and investment in the stock market will increase in value is if you win the "stock lottery."

Not really, although you and I both know everything is semantics.

indeed, and thank god for that.

billy3esq wrote: over the long term [owning] will cost me less than renting a comparable property.

alternatively you could rent for presumably less short-term money and do something else with the difference, like put it into a mutual fund. but instead you're choosing to buy a home, at least in part b/c that will provide a better financial return over time than the rent/mutual fund option.

i see your point and agree with it; we're just defining "investment" differently.

Buzz Killington wrote: i see your point and agree with it; we're just defining "investment" differently.

True, but I think it's a bit strange to call something an investment that:
1. Will not generate actual positive cash flow (post-mortgage imputed income notwithstanding); 2. Is unlikely to generate a real capital return (i.e., more than inflation); and 3. Is selected for purchase based primarily on considerations other than economic return.

Otherwise, the '96 Miata I drive instead of having a car note on a new M3 is an investment.

In other words, an investment is something bought solely for its financial return. Other things (residences, artwork, classic cars) may have investment-like qualities, but they're not--strictly speaking--investments.

Of course, you can be your own lexicographer.

I would have to say buying or renting depends on you. If you are a wandering soul, you probably ought to rent. If you root like a tree, buying is probably best. Personally I tend to stay put so I buy.

I have been in my current house 23 years. The wife and I bought it about a year after we got married. I grew up about three miles from it. Renting for me seemed to be a waste of money. I paid 48K for it. My total payments on it were 74K. I have probably spent around 3-5K on maintenance. Round that up and call it 80K. Add in taxes gets you to 90K. Current value from looking at what houses around me are selling for is in the 200-250K range. That's down from a high in the 300K range. Makes good sense for me to buy looking at those numbers.

If I had rented the house my payment would have started in the 500/month range. Currently the house next door is rented at 1300/month. Average that out and you get 900/month. Times 276 months gives you $248400.00. Looking at those numbers it still makes sense for me to buy. I could have bought the house, lived in it for 10 years and given it away and still come out better than renting.

All that changes if you aren't going to stay put. Time is your friend when it come to buying a house. When the prices are going up like a rocket you can afford to buy every few years and come out smelling like a rose. Now, if you aren't planning on living in the house long term the odds are fair you may get burned. You may just loose money on your "investment". If you are going to move every year or two, rent. If you don't see yourself moving any time soon, buy.

Toyman01 wrote: I would have to say buying or renting depends on you. If you are a wandering soul, you probably ought to rent. If you root like a tree, buying is probably best.

End Thread...

foxtrapper wrote: Most people also refuse to admit they paid hundreds of thousands of dollars in interest on their mortgages for the privilege of ownership. They buy a house for $110k, sell it five years later for $125k, and claim a $15k profit. That's false math, as they failed to deduct the roughly $40k in interest they paid. The $15k profit is actually a $25k loss. And that's before we include the many thousands of dollars of transaction fees, both in buying and selling.

Interesting math. From my overly-simple mind, there's a 15k profit there, minus the various fees/taxes (which, you're right, probably take a big chunk out of that. The only "loss" I can see is the money paid to the mortgage company over the term of ownership...which, when compared to rent for that same period should be similar.

In other words, who cares if all you pay is interest and zero goes to the principal/building equity - that's exactly what happens when you rent.

For me this example just proves the point that owning provides a greater upside - at the end of whatever term of owning/renting, the person that bought the house has 15k more than the person that rented it. Who cares that they put money into interest - it's money that would have been spent anyway in the form of rent.

Another thing people ignore - rent goes up with the market, house payments stay the same. Even if it's a slightly worse deal to buy compared to rent for the first few years of a mortgage, by year 10 or 15 when you're paying half what the place would cost to rent every month, you're going to be pretty happy you own. The equity is just gravy.

Josh wrote: Another thing people ignore - rent goes up with the market, house payments stay the same. Even if it's a slightly worse deal to buy compared to rent for the first few years of a mortgage, by year 10 or 15 when you're paying half what the place would cost to rent every month, you're going to be pretty happy you own. The equity is just gravy.

A mortgage can go up a bit as well through increases in property taxes, homeowners insurance, HOA fee's, etc.

But over 10-15yrs its still going to be less that increases in rent would cost as you said.

It seems most of the rent vs. buy debates are financially rooted in the assumption that renting is significantly cheaper month to month than buying. I'm sure thats true in some areas (like the San Francisco bay area) but here in Orlando it doesn't seem to work out that way. The difference between rent on my 1 bedroom, 740sq/ft apartment with a one car garage, and the mortgage on my 1,500sq/ft house with a two car garage is about $100 a month.

Jason

There are so many angles it's not possible to cover them all, like leasing a car. The only time leasing makes good financial sense is if you really need a new car pretty much all the time (think real estate agents etc) and you can write the lease off as a business expense. For the average goober, leasing just makes no sense because you have nothing at the end of the lease.

To me, renting a place to live is the same way. At some point I'll pay it off and be living rent free. That's a good thing.