I think Martin has made the kind of point that Fry should be considering. You can invest money in other ways that will provide the same kind of return as long term home ownership. My impression of the OP is that he is the coldly logical sort, and isn’t going to buy a house on impulse or for emotional satisfaction. I’d tell most people buying a house is an excellent idea for many reasons, but seeing someone carefully analyzing their needs and expectations is kind of refreshing. Had more people done that 10 years ago we may have avoided some serious economic implications.
Whatever decision you make Fry, best of luck in the results.
In our neck of the woods, it is actually impossible to rent a house. There are a few here and there geared toward students (in other words, in bad neighbourhoods and in bad shape) but otherwise if you want to rent, you will be renting an apartment.
So, for us, it wasn’t about a financial decision, it was about having a home where our kids could have their own bedrooms (since they are opposite sex, I think this is reasonable) and where they can actually have bikes (since most apartment complexes don’t have storage for such).
We bought the cheapest house we could that met our minimum standards and went from there. We are actually paying about 100 dollars more for our property tax/mortgage/condo fees than we were in rent. However, that was rent for a 1-br apartment as opposed to a 3-br townhouse.
We have also put about 15,000 dollars into the house over 7 years. It is certainly more expensive but we wanted to have kids.
Aside: our house has gone up in value by about $50,000 in that time but I don’t really consider that since it really doesn’t matter how much it is worth. We will live here anyway.
Of course it’s not true everywhere at every time. But generally, it is. So, I suppose I could have thrown in a few more caveats about geography and credit worthiness, but the point obtains. More importantly, with historically low interest rates, and fairly low housing prices, it makes the math skew a good amount towards home ownership. Even now, Fannie is selling houses with as little as 3% down with no points. There are lots of programs out there to make buying a home even more advantageous.
And when that happens, what makes you think stocks and funds will be immune to those fluctuations?
That true. That’s one reason my scenario had a 5% yearly increase, not 7%. Even so, using an average is a perfectly valid way of doing the math. While you may not get hit year after year, only a stupid landlord would not raise rent on a 2-3 year basis. On condos, rent increases are generally expected on a year to year basis as the condo fees typically go up.
Those are the ACTUAL taxes. Doesn’t matter what you think of them, or what they are relative to other places. Second, where would a home that sells for 350k have $8,400 in property taxes? What was it assessed at? I suppose that is possible in NJ or some place like that, but even if that is true, it doesn’t really matter as taxes are inevitably passed on to renters.
Fair point, but please notice that benefit wasn’t included in the numbers.
It’s not picked at random. Most smart people pick houses that are likely to have more upside, they get them inspected, etc. It’s not as if one is ever forced to buy a house at random. As I said, 11% or so is not unheard of, but it’s not a easy task either. Madoff was generally promising returns of 10-15%. Many people took that deal because those are great returns with seemingly little risk.
The real harm is that by renting, your standard of living will inevitably go down as rents go up, and your future disposable income will then go towards rent increases instead of investing. If you are renting a 2bd condo now, 15 years from now, you likely will not be able to afford a similar place at anywhere near that price. Look at the scenario I outline above. If your income remains fairly static, we can assume you will have 2k/month savings. Rent increases reduce your future invest-able income. So even if you lose out slightly in the short run, in the long run, you will have more money to invest, and more predictable outlays. I can tell you what my mortgage will be in 2020 with about 100% certainty. Can a guy renting tell me what his rent will at that time with such clarity?
Yes, you have said this. I value diversification as much as the next guy, but diversification will not protect you against the broad-based financial downturn that we just had. In short, most events that will dramatically reduce or stall home price growth will affect stocks and bonds as well without much regard to the diversity of one’s portfolio. Diversity, in our current environment, doesn’t beat out having increased leverage (in addition the other things listed).
Second, in many cases single homes have done far better than the market. There are entire regions that have seen such growth. The house I randomly picked above had a 54% annual return since 1999. That is not an accident. Home prices in that area, and many others are doing great over the long run.
Third, you ignored my question about what make your specific situation so different? It seems kinda for a home owner to be telling people not to buy a house even though it makes sense for him to do it. Plus, why do you think most rich people buy one or more houses? These are often people who can invest in a far more lucrative ways than most can. Why would they buy houses if the math doesn’t work out?
Lastly, there are several intangible benefits of home ownership like increased credit worthiness, stability, predictability, increased home choice, etc. All those thing matter as well.
Perhaps because you work in commercial real estate you are forgetting the power of leveraging. In 15 years my house value went from $350 K to $700K, even after the downturn. But we put $150K down on it, so my actual gains are a lot bigger. This being California, my property taxes are just over $400 a month, and with refinancing we pay about $1,000 a month (a bit less, actually) in interest and principal for a 2300 sq ft house with a reasonably big yard in an excellent neighborhood. You are not going to be able to rent for anywhere near that.
But if someone plans to move reasonably frequently, then renting is probably a good option, since you don’t get most of the benefits I mentioned.
Sure you can lose, but you can lose with just about any investment. The upside is pretty good, so long as you don’t buy at the top of a bubble and don’t over-leverage by taking money out of unrealized gains never thinking about cash flow.
If you pay the rent on the first, come the last day of the month, you have** nothing**. When the time is gone, the money is gone. Pay up again, or hit the streets.
I was able to pay my house off. Even if I had to sell it for a 1/4 of what it is worth (or what I’ve put into it, for that matter), I’d still be ahead, because I would have had to pay the same to live somewhere during all the time I was paying a mortgage.
It’s a “no-brainer” in my book. But I do loves me some renters! Thems how I makes my livin’!
That’s essentially how I feel. When I bought my house years ago, I paid more monthly in mortgage than I previously did in rent.
Within a few years, rents in the area had increased to the point where I was now paying less every month in mortgage than I would have if I had continued to rent. So I was saving money every single month.
A few years later I managed to pay off my mortgage entirely, so I have no monthly payment at all. The savings are enormous, and I could never have been able to do that if I was still paying rent.
Obviously they aren’t, of course that is why you convert a retirement nest egg into extremely stable bond funds and such near retirement age. But keep in mind my alternative to home ownership isn’t a big 401k, but rather a separate taxable brokerage account that you build up over a life time.
Right…7% is the actual average as per an earlier post of yours, but the reality is most land lords I know are lenient on current residential tenants. With commercial tenants things are very different (as a commercial land lord our business actually gets a portion of our tenants sales over a certain amount, so it almost self-adjusts for inflation.)
Dublin, OH, is actually where I personally know someone who lives in a ~$350k house who pays $700/mo in property taxes. The house may be more like $380k, I don’t want to link to the Franklin County Assessor’s page for his particular house, but I suspect you could browse that page to find similar listings.
I was not debating those were the actual taxes, just saying…most of the world doesn’t live in DC, and some of those other places have very high property taxes.
I don’t know about this. I’m not saying it isn’t true because I don’t know, but you’re making a presumption that most people are smart when buying a house. That does sort of go against my personal experience with individuals when buying things.
Maybe so…I had a long career in the Army, a brief career in State government and then I entered business myself. With my two government jobs we had regular cost of living increases that kept pace with inflation. I retired as an O-6 from the Army with over 20 years of service and went in before 1980 (meaning I had the benefit of the “Final Pay” calculation for pension), so even my Army pension gets adjusted for inflation continuously. So if I was renting it wouldn’t necessarily be a consistent decrease in my standard of living. How common are COLA increases in private industry?
Debatable, the stock market never stays down.
Certainly. If I had bought $100,000 in Google stock in 1999 I’d be on the Forbes rich list right now too, though.
To be honest because 1) I’m not middle class right now (I’m in the top tax bracket from my business earnings and I have a very decent pension from being retired from the Army), 2) I was able to retire as an O-6 with over 20 years of service…that essentially guarantees me a life long middle class income, I never have to move, and I never have to worry about getting trapped in a house. My absolute worst case scenario is I lose 100% of my business investments (that was a risk early on but I’ve moved some of my gains to annuities and such thus locking in a certain income) and end up with a guaranteed middle class income that will never go away. How many Americans in their 50s can say this?
Sure, there are intangible negatives, too.
I’m not against home ownership. And to be honest I don’t think me and you actually materially agree on both things. I just think it’s worth mentioning home ownership has its downsides, and I think for some people they’d be better off renting.
