Good explanation of “rent vs. buy”. But he kind of glossed over “phantom costs”. They tend to be substantial. That’s why there are very few places and times where an honest “rent vs. buy” calculation turns positive for buying.
intercst
4 Likes
The other thing that is always glossed over in the rent versus buy discussions is risk. There is far more risk of sudden unexpected things (expenses, inconvenience, etc) when you buy than when you rent. If you rent and something bad goes wrong, you can easily move to another rental a block or two away (don’t even have to change school zones, for example). But if you own and something bad goes wrong, you have to deal with it immediately.
3 Likes
I see some problems with this. First, the assumption that there will be a suitable rental available that meets your needs a block or two away, much less in the same school zone. Second is that word easily. Even if easy applies to finding an alternate rental, since when has moving been easy?
I just checked Zillow for rentals in the town where I live, population 29k. No matches at all for houses, eight elsewhere not too far away. Change from house to townhouse and there was one. Changed to apartments/condos/co-ops and there were 15, seven in one complex, most of the rest apartments within houses.
(I have to admit I once had an easy move, from a 2nd floor apartment over an empty store to a second floor apartment over the jewelry store next door. I had a week off for vacation, and I used to joke that it was a one-box move. Load the box, carry it to the new place, empty it and put things away, carry the empty box back, and use it again. But I was only out of college a year or two, and didn’t have much stuff.)
8 Likes
These issues exist for both your own home and a rental when something bad goes wrong. If your own home has a tree fall on it, and you have to move out for 4 months while it is being fixed, you have the same issues listed here. Of course, you still have to pay for the home AND the rental during those 4 months. If you were in a rental and it requires repairs that you have to move out for 4 months … well, you simply move out to another rental. And pay one rent each month, not two. Remember, I’m talking about risk here, not the normal process of moving when necessary, choosing school districts, etc that apply whether you are buying or renting a place to live.
1 Like
Yes, I would have to live elsewhere, but that isn’t the same as moving out.
It is absolutely true that there are risks to home ownership that are not part of renting. It is just as true that there are benefits to home ownership that are much harder to come by, if possible at all, when renting. Tradeoffs, life is full of them, and we all have to choose our own balance points. Mine won’t be the same as yours, and neither of us is likely to want what the other has chosen.
6 Likes
I don’t disagree with any of this. My only point in this thread is that when doing the rent versus buy calculation, the additional risk of owning is usually ignored. Just like the “soft” benefits of owning are usually ignored.
1 Like
Much larger risk of rent going up 20% in one year than a tree falling on the house you own.
Owning, vs renting, is a better way to control costs. Sure, taxes and insurance are likely to increase no matter what, but that will translate to both rents and mortgage payments alike. Control what you can, which means buy.
IP,
who has owned both personal residences and rentals, currently in a town where both rents and purchase prices escalate in a big way annually
4 Likes
Yet the aggregate data tells a very different story. Over the past 23 years, there has only been about 2 years (less than 10% of the time) that buying was cheaper than renting. Doing a “rent vs.buy” calculation over the past 30 years has probably netted me more money than owning DELL computer stock. See link:
The rent vs. buy calculation didn’t turn positive for “buying” until 2012 for me, matching the low point on the chart. Saying that owning is the “safest” choice is a lot like saying active mutual fund managers beat the S&P 500 90% of the time, the truth is 10% or less.
intercst
A quote from that link:
The median asking renting rent in August was $2,052, according to Redfin RDFN, -3.78%. The company estimated the median monthly mortgage payment to be $2,632 in September.
They compare median rent payments to median mortgage payments. How simple minded can it get? Nothing about what you are getting for your money? From everything I know the typical rental gets you an apartment, while the typical mortgage gets you a house. I’m willing to bet that my typical and their median are pretty similar. I wonder how a comparison would go if the specifications are 1800 to 2000 square feet, with three bedrooms, 1.5 to 2 baths, a dining room, and a two car garage?
1 Like
They are comparing similar properties in an area (type, square footage, amenities, etc.) As you point out, comparing a 600 SF condo apartment with a 2,500 SF single family home would make no sense.
In the video that starts the thread. Our Guru points out that he rented a condo in New York for a few years in a building with several identical units for sale. Renting was typically about half the cost of owning. Crazy I know, but that’s just how strong the Kool-aid is for buying.
I read an article last month about a random $2 MM home in San Diego offered for rent at $5,000/month. Owner bought it the year before for $1.85 MM in cash, property taxes were $17,000/yr, plus he has insurance. maintenance, etc.
Who do you imagine is getting the better part of that deal? The renter paying $60,000/yr to live there, or the guy who has nearly $2 MM tied up in an “investment” with a less than 2% return. The Kool-aid is strong.
intercst
2 Likes
Oh come on, that was just an example. How about much larger risk of having to put a new roof on a property when owning than when renting. Or how about much larger risk of having to pay for hurricane damage when owning than when renting. Or the risk of needing to replace a hot water heater NOW. Etc. The “risk” here is a sudden large inconvenience or a sudden large expense (or both at the same time). That risk (sudden things) is far more prevalent for home owners than for home renters. Renters, as you mentioned, have other things that can happen to them, but they are usually more predictable, at least to some extent. For example, regular rent increases. If taxes in the area are going up dramatically, then rents will almost surely follow with an increase. If the area is becoming popular and has improving schools, then the rent is likely to increase faster than in other places.
Net net, in theory at least, over the long term, owning should be less expensive than renting (equivalent space, of course). That’s because owners of the rental property need to cover their costs AND their profit, whatever that is. If the cost of a property is $X, nobody will rent it to you for $X, they will want $X + 10% (or whatever).
The article that you are linking to does not appear do a true ‘rent vs. buy’ calculation. It’s using the entire mortgage payment cost, and not accounting for the principal paydown. It also doesn’t appear to account for any appreciation. While that appreciation may be negative now, if you use a long term historical basis (like with stocks), it tends positive. It also is only comparing a single point in time, and not looking at rental inflation compared to decreasing interest costs on a fixed rate mortgage, nor does it account for the ability to refinance a mortgage when rates drop.
AJ
6 Likes
Is the data collected really addressing the questions asked? Home ownership is about individual properties and specific locations. Looking at generic mass data is not terribly helpful. Data can be massaged to support just about any generic bias, telling you very little about specific situations.
The money you make on a real estate purchase depends on the price you pay for it. If you pay attention to location, (I would have never bought in TX either, and refused to buy in NJ, chose to remain in corporate housing rather than buy in the USVI,) avoid fatal flaws in a property, (flaws that cannot be easily fixed, like location and flow,) and avoid not being able to chose your exit point, it’s not that hard to do well. Additionally, plan for a fall back position, like renting it out, if the sales market is not where you want it when you want to leave it. As long as you lived in it the first 2 out of the last 5 years, capital gains exclusion is still on the table if you rent it for less than 3 years before selling. I do a 10 year profit projection spreadsheet on any property I buy, to analyze that fall back position, even if I have zero plans to rent it out when I buy.
Though the internet has improved pricing efficiency in the real estate market, there are still improperly priced buying opportunities, particularly if you are willing to put some work into it. Our current residence, which hits the market next month, was one of those inefficiently priced properties, where the listing agent failed to price in a lot premium for the lake it is on, and we stand to net about $400K in tax free profit for the 4 years we have lived here. We are increasingly wanting just to play, and have been liquidating real estate holdings, but real estate has been very good to us, considering both financial and personal satisfaction.
This quote just shows your lack of understanding of the factors surrounding own v buy. The two examples you give are nothing alike, just as average housing data generalized nationwide has nothing to do with specific properties in local markets. Sometimes buying has more to do with retaining more control over your choices. Sure, insurance and taxes you have little control over, but locking in a 30 year fixed mortgage gives you more control on monthly payment than paying rent…which goes up with rising insurance and taxes as well. Pre-Covid, rents here would go up 10% per year. Rents bumped up to 20-30%/year increases when Covid hit. There was little inventory to move to if you didn’t like the rent increase, and of course one has to factor in moving costs and coming up with the 3 months rent needed to go to a different place, (first, last, and security.) I prefer my 10-20% annual price appreciation, even with the small increases in mortgage payment from those increasing expenses. Add personal preferences onto that, like pets, color choices, smoking. My home is my castle. My rentals, my rules are followed, or there are consequences.
Of the 5 properties we have sold, we only lost money on 1, being forced to sell during a local recession while it was still in less than fabulous shape. Two years later it sold for double the price, as the local economy improved. I have learned a lot since then, adding $$$ to our bottom line via Federally untaxed capital gains. Not bad for a bond proxy, which is the part of my portfolio that real estate investments hold.
That said, we are moving towards an even freer version of renting with short term furnished rentals and near full time travel, keeping one residence we expect to return to a few months a year. If we really like an area we travel to, we may buy places to put on the 30+ day rental market in those areas. For now though, we like the flexibility of furnished rentals, but we have to at some point start spending the money we have made. There is a time and a place for everything.
IP,
no longer in the accumulation phase, unless of course you are talking about experiences and memories
2 Likes
One can mitigate many of these risks through proper pre-purchase inspection, site selection, and maintenance. We have indeed had to replace a $25,000 roof after a hail storm, with our cost being our $1,000 insurance deductible…something that the roofer offered to eliminate and charge a higher amount to the insurance co, which we declined.
We had to repair a water heater, going to You Tube when we could simply not get a plumber to come out. Frankly, if you don’t have the $1500 for a new water heater, you shouldn’t own. Happily it turned out we did the job for about $30, which is probably why we couldn’t get a plumber.
We are somewhat exposed to flooding at our riverfront vacation home, but property selection included mitigating that risk by considering where the house sit on the lot and how the lots surrounding the property could influence a raging river. Hurricanes? Yup. 8 years of corporate living in the Caribbean because we felt this was too high a risk, and why we will never again have anything other than a vacation in a hurricane area. I don’t view hurricanes as a good component to LOCATION, LOCATION, LOCATION. And if you are renting in a hurricane area, there is an exponentially large possibility that you will simply be told to move on and have no options to move to, while the contents of your rental putrefy in the sodden property. Hope you had tenants insurance.
There are risks for both parties. We just mitigated the risk on our heating system by proactively replacing the burners during a check up, which should extend the life of the system. We also clean the air filters of the hot air system regularly, something we also did on our rentals, if only to get eyes inside twice a year, which mitigated entrenched problems with tenants. Further insurance we used in tenant selection was to insist on a higher than typical credit rating. We wanted them to have something to lose, as well as evidence of a fiscally good track record.
When you own, you have more ways in which you can mitigate risk, than if you have to accept what the landlord does for you. As a landlord, our biggest challenge was when a mortgage was cheaper than what we charged to rent our property. Given we insisted on great credit, the next move for most of our tenants was to their own home. Given we provided an excellent product in an excellent location, the fact that they moved on to buy their own place is a great datum in favor of buying vs renting.
IP,
who only had a problem tenant once, prior to insisting on a 700 min credit rating
2 Likes
I’m making my rent vs. buy decision at a single point in time. At the end of a one-year lease, I’ll revisit the calculation if the input variables have changed. As long as I’m investing the savings from renting in the stock market, I’m pretty sure I can exceed the return on having the money tied up in a single family home. At least that’s how it’s worked for me over the past 30 years – and if you believe Shiller’s data, the last 100 years.
intercst
I go over my decision to buy vs rent almost everyday since I bought my first house 34+ years ago. Every time I look back and am so happy I bought instead of still renting.
It’s a personal decision weather to buy or rent. Myself and my family have benefited greatly from owning our home(s). I use money to get what I want, make life better for us, and that’s what we did.
zoro
8 Likes
Exactly!
When I buy a home, I’m not getting a “Housing Index Fund” that guarantees me Shiller’s 4% price appreciation over the past 100 years. Half of homeowners are getting less than 4%. And I suspect that maybe 1% of homeowners are getting the 10.7% annual return of the S&P 500.
Maybe you are able to identify those 1% of properties that will yield an S&P 500 like return. But over my working career I didn’t happen to be living any place that had a good prospect of delivering a stock market investment return on a home purchase, so I rented and invested my money elsewhere. It just arithmetic that many people fail to do. When the calculation changed at the tail end of the 2008 housing meltdown, I bought a home in 2012 for 70%-off its 2008 value. It’s since delivered price appreciation slightly in excess of the S&P 500 over the past 11 years, nearly quadrupling in price. Absent that opportunity, I’d still be happily and profitably renting, and putting my money elsewhere.
intercst
1 Like
This is odd. Extremely odd. When we do the safe withdrawal rate calculations, we look at windowed 30-year periods. ALL of them. Then we go with the statistically most likely “good” solution. Why wouldn’t you do so for the rent versus buy calculation? I suspect the results would skew towards beginning a 30-year (or however long) period of renting at times in which the instantaneous rent versus buy calculation is heavily tilted towards renting (like now for example), and vice versa would skew towards buying when the instantaneous chart is heavily tilted towards buying. But that, obviously, is just a guess. The windowed periods (10-year, 20-year, 30-year, whatever you choose) would show the relative values (in dollar terms) of renting versus buying over the period. And that would be much more valuable information to make an informed choice.
It’s not magical, just applying real estate investment principals and being disciplined and patient.
Part of my 10 year profit projection spreadsheet looks at the alternative value of the cash needed to buy the investment. It’s the primary reason why we never did a vacation rental, though we use them quite a bit. The amount of cash you had to invest, and the uncertainty of the amount of income you would collect, were not favorable compared to investing in the market. I am not doing work I won’t get paid well for.
There are no guarantees in life. At least one also gets to live in this investment, unlike an S+P 500 fund.
IP,
who learned early on that her engineer understood spreadsheet language the best when it came to buying real estate
Apples and oranges. When I do an SWR calculation, I’m using a market index fund (i.e, an average of the whole stock market like the S&P 500) When I purchase a home, it’s like buying an individual stock. There’s no way to guarantee that I’ll get a “housing market return” on my investment. I may be one of those 50% of homeowners who got less than Shiller’s 4% average housing market return.
What I can look at is that the stock market delivers 10.7% vs. 4% for the average home over the past 100 years. So it’s going to be a very unusual time and place where housing out performs the stock market. For example, when I bought my current home in 2012 for 70%-off 2008 value, monthly rents in the area were 1.2% of my purchase price (i.e., 20% higher than the benchmark “fair monthly rent is 1% of the properties market value.” A clear signal that buying was better than renting.
Obviously, many people like owning a home even if it’s a sub par investment, kind of like Sethi’s $9,000 vicuna sweater.
intercst
2 Likes