Poll: Buy or rent?

Investment Analysis Clubs Macro Economic Trends and Risks
41

No, I wasn’t cutting corners or living in crappy places. I was renting exactly the type of living arrangement I preferred with the amenities I valued at the time.

Perhaps I’ve lived a charmed life and Houston, TX and Southern California are the only places in the nation where that strategy works. {{ LOL }} I do know that having the money most people have tied up in a poorly appreciating home compounding instead in the stock market for two or three decades results in a fortune – and that’s in addition to the value of my retirement accounts. Like the US healthcare system that’s bleeding the country dry, it’s a wonder to me that more people aren’t doing a rent vs. buy analysis to inform their housing decisions.

intercst

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42

I avoided all that by never having a roommate and only renting in large, professionally managed apartment complexes in good neighborhoods. I don’t know, perhaps I’ve lived a charmed life.

intercst

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43

I mean…yeah? You’re charmed, in that it sounds like you have had the sort of preferences that map well onto large professionally managed rental properties. Not everyone does. If you want to live in a single family detached home (as many people with kids do), or want to have certain kinds of pets, or need a larger than typical unit, or want (or need) to live in certain neighborhoods, or want eclectic or unusual types of fixtures or features of a unit…well, you’re probably not going to find that in a large professionally managed rental property. You’re probably going to have to rent from a mom & pop landlord, if you can find a rental at all, which brings with it the insecurity of possibly having to vacate.

I mean, that’s just the power of compounding - nothing magical about renting vs. buying. To use your example above, if one had stuck $9K in an S&P 500 index fund 40 years ago, they’d have $650K today - but that’s true no matter where the $9K came from. Whether it’s foregoing your graduation trip to Europe, not buying a new car in your youth, giving up eating out for a year…or not buying a harpsichord when you’re young. If you spend any money at all above and beyond necessities as a young person, you’re throwing away a fortune in your older age.

But sometimes, you spend money on things because it makes your life better. Honestly, getting to live in the part of town you want, living in the type of place you want, being able to make your home the way you want it without having to ask a landlord’s permission - seems kind of worth spending a little money early in your life to get those things. But diff’rent strokes, as it were.

One question for you, though - why do you suppose landlords own these units that they’re renting to you? How do the numbers work out for them? If they’re charging low enough rent that you’re getting a great deal by leasing from them and putting your money in the S&P (rather than buying the equivalent unit on the market), how can it make sense for them to own their building rather than putting their money in the S&P instead? If they sold their unit and put the proceeds in an index fund, they’d be earning vastly more return (given the market conditions you describe) - even in a very short time frame. How does that market end up in that equilibrium?

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44

These aren’t exact analogies though! A better analogy might be not buying a harpsichord and instead joining a local orchestra for a few years to see how much you will like the harpsichord first before spending tens of thousands on one. Or perhaps instead of doing the Europe trip first class and in fancy hotels for $9k, you do it in coach and in hostels for $3k. The rent versus buy isn’t denying yourself something per se, it’s just accomplishing it (“a place to live”) a different way.

THIS is the real argument. You buy a house because you believe you will enjoy life more in a house. Your family, your kids, parties, school districts, etc.

I think @intercst is showing numbers that provide evidence that it isn’t “a little money”, it ends up being A LOT of money!

There are lots of factors that go into this:

  1. Landlords have purchased the property at different times. Some purchased 40 years ago and have no mortgage on it at all, some purchased more recently. But all purchased it before they are renting it to you. So when making the decision right now, any general increase in pricing (and it tends to go up almost all the time) would be borne by YOU if you buy right now.
  2. The cost of a rental depends mostly on supply and demand, not very much on what the landlord spends on it.
  3. The tax code has EXTREMELY good treatment for rental real estate. So good that it can even shield income from other sources. We’ve discussed that here quite a bit, I think @inparadise has given much of the good information about it. So the owner of rental real estate would not necessarily earn more in an S&P500 fund. It would definitely be easier to deal with, but it wouldn’t necessarily earn them more money. That’s because of leverage. Depending on prevailing interest rates, a 5% yielding investment at 80% leverage can outperform a 9% yielding investment at 0% leverage.

It’s very important to keep in mind that we are discussing owner occupied homes right now. That’s a totally different thing than buying rental real estate as an investment. The former is an EXPENSE, the latter is an INVESTMENT. Many people confuse the two, but if you look at the cash flows over time it immediately become apparent which is which.

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45

I”m having trouble following the thread. I mean if your goal is to have a big bank account when you’re older, then first and foremost: don’t have kids.

Kids cost a ton. They require constant maintenance, food, shelter, clothing. Even educational assistance sometimes! What a waste!

Also, don’t have pets. Pets don’t need the same maintenance as kids, but there are still vet visits, daily walks, food and such. Total waste!

No need to buy a car. Those things depreciate like crazy! Even if you buy a used one, it’s gonna be worth less the day after you buy it than the day before. Also, it requires gas & oil (*or maybe electrons), maintenance, licensing, insurance. OMG, talk about throwing your money away! Just live near public transport, or better yet, mooch off a friend with a car. Or if you are lucky you can steal a kid’s bicycle and use it for a long time. Probably best to do that in a distant part of town.

And as long as you’re not buying a car, do your grocery shopping at the food bank. Sure, you won’t have the same choice of products, but it’s still “food”. Cans of beans last practically forever, and once in a while you can get cheese.

Also, don’t pay for TV or internet. TV is free with an antenna, and stopping by your neighbor’s house and saying “My Wi-Fi is down and I’m expecting an important call, can I get on yours for just a minute?” Then just stay on it forever. Easy to do if there’s a library nearby, and speaking of, don’t ever buy a book or magazine.

There are so many ways to build your net worth. For more tips, follow my column: “A few things Intercst could learn from me”, syndicated daily in many local newspapers, which I urge you not to buy.

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46

“A place to live” isn’t a fungible commodity, though. There’s a huge difference between, say, living in a single-family neighborhood in one part of town versus living in a multifamily apartment building in another part of town. And if the former is a much better fit for your needs or preferences than the latter (as often happens for people with kids or pets or both), then you very much are giving something up to choose a different “place to live” in you can only rent in the latter and not the former.

If you’re a person lucky enough to have: i) been in a city where there were large, professionally managed apartment buildings that were available in the part of town that you wanted to live in; ii) always had an apartment building meet your needs for living arrangements; iii) never had those apartment buildings converted to condominium or otherwise sold; iv) lived in areas with relatively modest rent increases/property appreciation; and v) never had a terrible experience with the landlord…then I can see why you would wonder why everyone doesn’t just rent. But many (most?) people aren’t in that situation.

But that’s what I don’t understand - other than tax treatment, it’s basically the same thing. You’re considering whether to rent the unit or buy the unit (not the same unit, but the market equivalent unit). If it’s so unbelievably advantageous to you to rent the unit rather than buy (and invest your capital in the stock market instead), it should be similarly advantageous to your landlord to instead sell his unit and take his capital and put it in the stock market, rather than just renting it to you. Why does he keep his capital in a depreciating asset that doesn’t yield a high enough rent to outperform the stock market?

And it’s not like you as an owner-occupier don’t have some very nice tax benefits. Or the benefit of leverage as well. If you’re only putting 20% down on your house, and the value increases 10% in two years, that’s nominally underperforming the average historical return of the stock market on the asset as a whole - but you’ve earned 22% on your investment, because you took out a mortgage.

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47

Like Abe Lincoln said, other than the bullet in my head, the play was great.

48

Things can be pressured

49

But is it all about tax treatment? That the only reason that there are any professional rental properties in the United States is because of inefficiencies created by the tax code?

50

  1. Excellent description of why the economies of scale for a large landlord allow them to offer you a rental at a lower price than you could purchase the equivalent property on your own.

  2. On the use of leverage: " It would definitely be easier to deal with, but it wouldn’t necessarily earn them more money. That’s because of leverage. Depending on prevailing interest rates, a 5% yielding investment at 80% leverage can outperform a 9% yielding investment at 0% leverage."

It’s always preferable to avoid the risk of leverage if it’s not required to meet your financial goals. That’s true with the stock market or real estate.

Some of you may remember a poster named Golfwaymore who sold his half interest in a company he cofounded at the age of 30 and netted $25-$30 million in the transaction. He then retired with a mix of commercial real estate (using only 30% leverage as I remember, rather than the 80% you see in the typical mortgaged home) and a stock portfolio. All of the commercial real estate was apparently concentrated in the world’s nylon carpet capital of Dalton, GA, his hometown.

When then dot.com bubble burst shortly after he retired, the home building market suffered a large retreat along with the demand for carpeting in new homes. That caused a large increase in vacancies with his commercial properties and with it the ability to make debt payments on the loans. At the same time his stock portfolio suffered large losses and eventually, despite substantial assets on paper, that leveraged real estate caused a liquidity crisis that forced him into bankruptcy. If he just put everything into an S&P 500 index fund (or Berkshire Hathaway) and forgot the leverage real estate, he would have been fine.

Same story with that owner of a San Francisco condo I posted yesterday.

{{ The property, a two-bedroom, two-bathroom condo on 1075 Market St, a five-minute driving distance from Union Square and a three-minute driving distance from the troubled neighborhood of Tenderloin, was listed for sale on Zillow on January 18 for $695,000. After spending months on the market, it was sold on April 8 for $675,000—about half of the price commanded by the condo in late May 2019, when it was sold for $1,250,000 }}

1075 Market St #513, San Francisco, CA 94103 | MLS# 424003234 | Redfin

I bet that May 2019 purchaser wishes he did a “rent vs. buy” analysis. {{ LOL }} What’s the loss on something like that if you paid 20% down on a mortgage? The SELLER is going to be bringing about a $400,000 check to the closing. Maybe he fled to Belize? }}

intercst

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51

LOL!

Classic goofyhoofy rip of a style from long ago.

I agree with everybody on this thread. Rent or buy can both make sense, but it all depends. Also, knowing our denizens, renting or buying so as to minimize the skim while being a cunning shopper seems built into METARite DNA.

d fb

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52

I forgot to address this earlier. The vast, VAST majority of people get no tax benefit at all from owning a home with a mortgage anymore due to the TCJA tax law changes. At this point, almost everyone (probably close to 90%) takes the standard deduction, so mortgage interest and property taxes have no bearing at all on their ultimate income tax liability. And even people who do still itemize deductions, their mortgage interest deduction is limited to something like a $750k mortgage and their property/sales taxes are limited to a $10k deduction. So, no, normal people see no tax benefit from owning their home with a mortgage.

No, it’s not only about the tax code. And it’s not an “inefficiency”, it was specifically written that way. If tax code didn’t have such features, there would hardly be any rental housing available and government would have to build millions of residences to rent to people who need them.

There are many reasons why rentals exist. Think of the guy/company that owns a building or two with 100 units total. When they need to replace the dishwasher, they contract with a supplier and buy 50 of them and have them delivered 10 a week to be installed in the units. Then a few years later they buy another 50 and replace the other half of the units. They get a much better price for 50 dishwashers than any of us could get on a dishwasher or two. Same for labor, they contract with the installer to do 50 at once and the installer doesn’t have to drive back and forth from location to location, and doesn’t have to find random parking nearby, and can do a few a day pretty easily. And each install is roughly the same, so while the first one might take an hour due to figuring out some trickiness behind the cabinet, the second through 50th might take only 15 minutes each. Not so in an individual unit/home where the kitchen remodeler a few years back did weird things behind the cabinets.

Same applies to replacing the roof/roofs. And same for HVAC units. Add it all up and the multi-unit (whether 100 apartments in a building or two, or 100 single-family homes in a subdivision) owner gets very large economies of scale on almost everything.

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53

Fair enough, though you still have the same opportunity for leverage.

But my larger question still stands - if having your capital in residential real estate is such a terrible proposition relative to stock markets, why are there rental properties? Someone is choosing to keep an awful lot of capital tied up in residential real estate, and it seems odd that the professionals on the other side of the equation would be setting rents so low that it’s such a no-brainer to take that deal rather than buy comparable units instead.

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54

Nobody says that “having capital in residential real estate” is so terrible. There are some huge fortunes out there that came from large portfolios of rental residential real estate. And see above for explanations about why and how the rental property market exists.

The only assertion by some (mainly @intercst) is that having too much capital in the home you live in isn’t really an “investment”, instead it is an “expense”. Too many people think of it as an investment, when really it is more of a forced savings plan with yields similar to treasury bills or TIPS at best.

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55

Of course. The reason I ask these questions is to kind of tease out what I think is really going on here.

Most people live in single-family detached homes - for which there often isn’t a “rent vs. buy” option, since SFR rentals are rare in most areas. Even where it’s available, it’s often limited and comes with significant downsides (mom & pop landlords, no maintenance on-site, etc.).

Where lots of rental choices abound are (typically) multi-family apartment buildings in urban metros. Which is also where you see the most investment in holding residential real estate by professional companies (not surprisingly - those are two sides of the same coin). Since sophisticated real estate investors are perfectly happy with the returns they get on investing in residential property in those specific areas, it may very well be that those types of rent vs. own decisions are more in parity.

IOW, people “overpay” by buying rather than renting in the specific housing type (SFR) that clearly reflects consumption of a preferred way of life rather than merely getting a place to live, and perhaps don’t overpay when they make those choices in urban multifamily settings. The anecdotes of a few people overpaying at the peak of pre-pandemic San Francisco bubbly housing prices notwithstanding.

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56

I rent. The biggest downside to renting is, answering people why don’t you buy a house. Especially when our siblings each own multiple houses. The pressure is relentless.

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57

If I may, are you renting an actual house from some guy who owns one or several? Or do you livve in an apartment complex?

58

It is an apartment/ Condo (1600 + Sqft), I need a bulb changed I call the maintenance :slight_smile: I like that convenience. Of course it comes with a pretty hefty bill :joy: :joy:

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59

HA, I’m sure. I am considering moving into something like that but I think it’s still a little early. I visited a place last Summer though just to get an idea.

60

Yes. Own one we bought with cash, have another we financed at 2% 30 year FRM, and are traveling extensively doing 30 day + rentals. Almost sold the house with a mortgage, but with inflation being what it is and the low rate, it seemed an insane thing to do. Our area is booming and our property value has almost doubled in the 4 years we have owned it. Obviously, we like owning.

IP,
unable to add to the poll numbers