Article on Renting versus Owning a Home

[Constance]

It's articles like this that make be feel that algebra is simpler than financial math.

http://realestate.yahoo.com/promo/renting-makes-more-financial-sense-than-homeownership.html

I think I understand the basic idea, but the details make my head spin.

[sd]

I read it, he is right, to a point.
(By the way, he talks like a corporate exec., he takes tons of words to say something simple...)

Inflation goes up just as fast as a homes value and therefore no profit/benefit. It is a vicious cycle and the home never really gets ahead, they always tend to stay even. Meanwhile you keep paying more than a renter and pay for repairs and upkeep.


What he failed to mention is that a home is a good investment over a long period, but unfortunately longer than most people stay in one place. You have to take into consideration how long people stay in the same house without refinancing. If you do not refinance to get your equity or "upgrade", in 15 years or so, your payments will be far lower than rent would be. Most people can't do that though so they keep paying more than most pay for rent and thereby never get ahead.

Taking advantage of your equity is a farce. It just resets the payment schedule, and if you consider that almost all of your payment in the first few years is only interest, you are not really gaining any ground. Each time you refinance or move, you are losing. Banks love it when you refi because you start over paying interest again.

[Constance]

I think I understand your comments. Thanks Leslie Ann.

I now understand why my wife is our family's CFO and I'm the IT guy. I can barely balance a checkbook. Jeez, but this stuff seems just so bleeping confusing to me.

[SusanK]

...What he failed to mention is that a home is a good investment over a long period, but unfortunately longer than most people stay in one place.

Yes and no. It all depends on the area and the difference between your purchase and selling price. A home is, as one financial advisor said recently, "renting debt." If you account for the whole cost of a home, including interest, which often is 100-200% of the home price over the mortage, insurance, taxes, improvements, maintenance (including property), etc., you'll find a home is on average a break even proposition. You trade put money in over time versus getting it all of it back later.

And over the years advisors have told me, "You can have a home or have a life.", and if you take the difference in the price and cost of a home (total cost above) and renting an apartment and then invest it, you'll earn more money renting and investing. But the trick it to do that, invest the difference.

There are plenty of examples of homes being a good investment because the market was right for the period of time they owned it, but that difference can decrease the longer you own the home because you're investing more into it than you're earning in the increased value. There is an optimum point in the mortage where you maximize the difference between the value and the total investment.

The trick is knowing when or accepting you want a house for a home and the money isn't as important and the place.

[Constance]

And over the years advisors have told me, "You can have a home or have a life.", and if you take the difference in the price and cost of a home (total cost above) and renting an apartment and then invest it, you'll earn more money renting and investing. But the trick it to do that, invest the difference.

OK, now I'm starting to understand it.

[debbie j]

well Shades O'Grey  let me put it like this to you . and maybe this will help you out more . ok lets say you rented for 5 yrs ok . and

got fed up with that . and said hey i think i like to have my own place . so i know i can never ever be kick out on the streets with no

where to go at all. but in that 5yr,s time you was able to save  eough money for a down payment on a place . lets say thats selling

for 25,000.00 ok. now you got 5,000.00 cash saved up from renting in that 5 yr,s . so you go to your back . and tell them what your

wanting to do . and that you got a good down payment. so you take the 5,000,000 and put that down as the down payment. and the

back says ok we will give you a loan for 20,000.00. and your monthly payment will be 390.00 a month . ok and you have 5 yrs to pay

back the loan of the 20,000.00. and while we are at it the bank say they will put the taxes and the house insurance into that loan

payment  of the 390.00. and then we are also going to charge you 6% interest on the loan of the 20,000.00. which means you got to

pay the bank back a grand total of 22,000.00  in 5 yr,s . and after you pay all that . then you can own your own place free and clear.

and you dont have to worry about us tossing you on the streets as long as you make the payments, . now for the renting part of it

you always have a monthly payment that never ends. and you got to do as the landlord says. and you always run the chance of the

landlord getting mad or something . and tossing you into the street. with no place to go . and not only that  your not free to fix or

make changes to the place . cause if you do  then the land lord willl kick you out into the street,s . and this is way it is way much more

better to own then rent if your able to do so . so i hope this helps you Shades O'Grey

[SusanK]

You don't save money for a down payment, you save and invest money for a life(time). Any good financial advisor will tell you, it's not how much you save, but how long you save. Five years is nothing to an investment, 20-30 years is, and that's where you will gain over buying - remember you never own the home, you're buying it - with the difference between renting and buying. Remember it's the total cost of the house and property.

If you don't believe it, crunch the numbers over 20-30 years and an investment will out pace and gain a house. Maybe not all the homes, but in the intervening years you'll be putting money in the house and property that won't show up in the value of it. Take the value of the house and then subtract the total of all the costs over the same period, especially principle, interest, taxes, insurance and improvements, and you'll find you might break even, if lucky gain a little, and if really lucky, a lot more (like California a few years ago).

Don't forget to use the buying logic on all those families facing foreclosure this year and losing their entire home investment. it's gone and all they have are the receipts, not unlike renting. And despite what you think of landlords, you can always move in a month. Try that with a house and not have to write a lot of checks. Renting is also about the freedom to live anywhere anytime you want. And if you don't want to pay rent, buy a camper or RV and travel, or park it (cheaply) in a park. In the end, it's all a trade-off with your money and your life between life now or when (future).

[MarySue]

There are a few other advantages to owning a home, such as being able to have pets, not having to listen to my neighbors' TV sets, and not having them complain if I play music at midnight.

I purchased a home in suburbia a number of years ago, and all in all, it's been as good an investment as anything else I've made. However, I put more than 20% down, I didn't "raid my equity", and I paid more than the monthly minimum whenever I could. The result was I paid off the mortage in about 15 years. So at this point, I'm only paying property tax. And although I'm in a high property tax state, my current tax is about the same as the rent I was paying on my apartment -- 20+ years ago.

My take is as an investment, a house is okay. Not great, but okay. But you should buy a house because you want to live in a house rather than an apartment. You shouldn't buy a house JUST as an investment.

[Nikki]

Disclaimer: EVERY number in this thread assumes you are good at managing and SAVING your money. If you struggle to save money instead of blow it on discretionary spending ignore every piece of advice in this thread except MarySue's. Buy a house and pay it off as fast as you can afford to without touching your equity.

Here's my numbers I'm buying my house at a nice discount under it's market value which by itself makes buying it a good investment. However comparing cost of renting or owning estimating the value of the house around 50k. First I should note when the article said 7% from the stock market he was talking inflation adjusted which meant he was taking 3% off his return.

Current apartment rent: US$3948/year

If I invested that $50000 and got a 10%(not inflation adjusted) return: US$5000
This is the opportunity cost of owning the house.
Add direct costs.
Property taxes: US$452/year
Home Owners Insurance: US$434/year
Upkeep lets estimate that at US$500
Total Cost US$6386/year

To compare apples and apples the neighbor rents an almost identical house at US$500/mo
500*12=US$6000

Renting an apartment is certainly cheaper than a house, even if I paid an extra fee so I could have a cat. Renting a house is cheaper than owning based on these numbers. But MarySue is wrong about one thing. Paying off your mortgage/not taking a home equity loan is a bad thing not a good thing.

My numbers above are based on the opportunity/direct costs of owning a home 100% paid off no mortgage. Let's recheck the ownership numbers based on a 20% down 30 year mortgage at 6%.

Opportunity Cost:
US$10000 downpayment that could have been invested for a return of: US$1000
Add direct costs.
Mortgage Payment: US$2878/year
Property taxes: US$452/year
Home Owners Insurance: US$434/year
Upkeep lets estimate that at US$500
Total Cost US$5264/year

Mortgages make owning cheaper not more expensive. In this case it actually makes owning the house cheaper than renting the house(although it could be argued you are renting directly from the bank so still renting but saving money by cutting out the middleman landlord/lady)

A few notes:

If you wait for 30 years to take out your equity instead of using refinancing or home equity loans to keep taking it out the value of your accumulated equity will be negligible to the equation.

Actual cost of owning is still higher than these numbers because they exclude the value of time spent on upkeep that the landlord would manage for you. This depends mostly on the value of your time and can't be included in this generalization.

There is no across the board rent or own is better in all situations. It depends on your financial habits/situation and the cost of the house compared to the cost of renting in your area. Generalizations like this can provide insight/guidelines but can't tell you what to do. You have to crunch your own numbers or have a financial adviser help you.