Owning a home vs. renting - which is better?

Great Debates
1

From this thread, sailor makes the following statement:

Well, I always thought it was a no brainer but I can think of some cases where there are a lot of “it depends” situations. Sailor, however, seems to be weighing in strongly on one particular side of the argument, so I’d like to hear it in more detail.

As I see it, owning a home is akin to owning your own business. There are pros & cons. But I think that if I could own my own business and know that I had a reasonable chance for success, I would do it. Why don’t I? (1) I don’t have the investment capital and (2) there is a high enough in demand for my skill set that I would rather be the seller than the buyer. So I chose to work for somebody.

However, when it came to buying a home, I chose to be the boss because I had the investment capital. #2 doesn’t even factor in because my marketable skills are not an issue. My reasonable chance for success is assured as long as I continue to have marketable skills.

So to me, owning vs. renting comes down to a “be your own boss” thing. Is there some reason why I should be kicking myself for having bought my home?

2

Many finance books recommend home ownership as the best investment. In fact, I recall one that said the second-best investment was owning a second home.

Advantages (other than BYOB) include:

– You benefit from real-estate inflation (and on a leveraged basis)

– Forced saving

– Tax-deductibility of mortgage interest and property tax

Disadvantages

– Selling takes some effort and has some cost in realty fees. So, if you live there a short time, renting may be better.

– Homes can decline in value, so there’s some risk. In particular, there could be a major hidden defect not covered by insurance.

– If you rent, you can invest the down-payment money in some other investment.

IMHO ownership is generally better financially.

3

There are many more small businesses that go bust than homeowners losing money on their residential investment.

December makes some strong arguments about home ownership, but, like any entrepreneural enterprise, you need to do your homework. In other words, there is no guarantee that you’ll make money on buying anything located anywhere. I wouldn’t consider purchasing an antebellum style mansion in the middle of the Alaskan outback. Nor would I have considered a townhouse in Harlem NYC some thirty years back. The big however for that townhouse is that now is the time to buy if you can afford it. My brother-in-law built a beautiful $350,000 house in San Antonio TX only to see the market for that price range disappear in a nanosecond. He would have been able to sell it quickly if it was under $100k or over $1m at a drop of the hat. So, location, location, location is very important as well as construction quality/appropriateness, market potential, debt burden [ie: can you afford to make those monthly payments should be considered thoughtfully any time you purchase a residential property for yourself.

On the other hand: some folks have placed a high benefit on rental properties… I was looking into that possibility a couple of months ago. I talked with some friends who have some property, the local market, the necessary capital, the need for an accountant etcetcetc. I decided that rental properties investment was not for me [altho we do have a second house where my husband’s first daughter lives]. Dealing with tenants was a major facture in deciding to invest my money elsewhere.

4

There is a school of thought which I find intriguing that says looking upon home ownership as an investment is foolhardy. Which does not address the OP directly, but it is all related.

Owning a home is a money drain. You pay and you pay and you get essentially the same thing that you get if you rent: a roof over your head. So you gain equity, which allows you to either get into more debt by borrowing against it to improve the home or pay other bills, or allows you to sell it at a profit, which you will almost certainly simply turn into a bigger home.

There are also those people who are so obsessed with the tax writeoff of interest deduction that they forget the fact that all that interest does nothing for you, and it’s still money that is out of your pocket…to the governement or to the moneylender, it’s still money you ain’t got.

My partner and I had just started setting aside a few dollars in preparation to buy a home, which I definitely want to do just because I want to be the owner of my own real home…not a lodger. But we had an amazing opportunity fall into our lap to buy investment property instead, for easily half of what the property is worth. We’re doing it. It could conceivably slow down our house buying plans by sucking up the savings I was going to use for that purpose, but the chances are better that it will really speed them up and expand the possibilities by bringing us income and equity. The mortgage on the property is going to be paid by someone else, and that’s really the ticket you want to buy.

Just some random thoughts on the matter.

stoid

5

I think owning v.s. renting is always a different arguement based on each person. Some folks simply do not like the idea of having to make repairs, mow the grass, etc. For them renting is perfect. Myself, I feel like I own part of the community by owning a home. There is a huge sense of pride that comes over you when you own. I like the investment aspect also. I bought a house for $64k, a few years go by and it’s worth 72, then 80, then 98k, and so on. This seems to be a positive effect of inflation.
My parents paid $11k for a house in '66 that is now worth
$160k! In her declining years if my mother sold that house and lived in an appartment shed have a nice nest egg to live on for a while. But if she doesn’t sell, one of her kids will get it. That’s another nice thing about owning: it gives you something tangable to pass on to your heirs.
Owning is really nice when intrest rates are low. We actually pay less now to own a house than we did to rent 15 years ago because we were able to re-finance in '98 at 6.5%. The tax write off is nice too.

But there are distinct advantages to renting. This debate is kind of like a debate between owning a car and leasing. It’s all up to whats best for you, and there isn’t one right answer. It’s up to your personal situation.

6

Attrayant, don’t put words in my mouth. I never said renting was always better. What I do say is taht it is not a no-brainer, that for many people renting is a better solution, that it is an investment like any other and you need to understand what you are doing which most people do not.

“Buying is better than renting” has become one of those unquestionable maxims in spite that we all know many examples where it is obviously not true.

Yes, it is a good investment for many people but that does not mean it is a good investment for you. If you invest blindly in anything you may get lucky or you may lose your money. If you understand what you are doing you increase the odds of success dramatically.

I do not need to tell stories of cases where buying a home was a bad idea. We all know many. People who were evicted and their credit ruined because they could not keep up the mortgage payments. People who had to move unexpectedly and took a huge loss. These are the obvious cases. Then there are the not-so-obvious: people who could do better financially if the rented.

And yet, the chorus keeps repeating: “buying good, renting bad”. As soon as you make any attempt to seriously analyse the issue, people’s eyes glaze over… “buying good, renting bad” is easier to remember.

Simplified it comes down to this: You invest in buying a house and become your own landlord. You invest in a property and get as income the rent you would be paying the landlord. That’s it. You may not realize it but you are paying yourself rent every month.

I’ll give you a true example: About three years ago i knew this guy who is a financial adviser (!) and he was renting a house in Potomac, MD for about $2500/mo. He had the same thought, that he was throwing money away. The owner had offered to sell him the house for the market value which was about $600K.

Now if you do a little figuring, you’ll see why buying that house at that price is just crazy. He was paying a fair market rent and that was fair market value of the house. You could go to the neighborhood and rent a similar house for $2500/mo or buy it for $600K.

Now this guy thinks he is throwing money away on rent when, in fact, he has the best deal under the sun and he doesnt know it. He just kept going back to the “throwing money away every month”.

Now, if he invests 600K in a house which produces $30K/year in rent gross that is the lousiest investment I can think of. Not only is $30K a lousy yield but you have to deduct all maintenance and other expenses now that you are the owner.

If you can rent a house for 5% a year of its market value, and you decide to buy it, you are making a huge mistake.

As I told him, and as he finally did: take the money and invest it in something else, another property if you like, which will yield more.

This is a huge issue full of ‘ifs’, ‘ands’ and ‘buts’. You need to take many things into account. To say “buying is better, period” is pretty stupid. Buying is better if your situation meets a whole set of conditions. Renting is better if you meet another set of conditions. And in many cases it is not clear cut either way and personal preference is what counts.

7

pkbites, I think we are discussing strictly the financial aspect. The “sense of pride” and “belong to the community” part are just too subjective to measure.

Then you sort of take the tack that most people take: a vague approach… it’s too complicated… whatever you prefer.

My point is that this is not so. You can measure things with numbers. These questions have define answers measurable with decimal digits. In the other thread which originated this one I asked some concrete questions: compare loan A to loan B. Which one is better? These questions have concrete, precise, numerical answers. And yet all you get is a lot of handwaving and general rules of thimb and it depends what you prefer…

If you sit down with your spreadsheet you can measure in dollars and cents the advantage or disadvantage of buying versus renting. Then you can add the intangibles if you like.

For many people buying a property was a huge mistake which cost them dearly. If they would have done their homework beforehand many, if not most, could have saved themselves a lot of trouble. The fact that buying a home worked for millions of others does not mean it is the right thing for you. You have to do your own homework.

8

** PK **:

Keep in mind, that unless something out of the ordinary occurs, or you actually improve your property, that increased value that you are experiencing is also being experienced by eveyrone else in roughly equal measure. You aren’t going to sell your house for $25k more than you bought it down the line, and buy a house that would have been worth that much more back when you bought your original house, you’ll be able to buy a house that is now worth X, but was worth the same Y that yours was years ago - also known as a lateral move, I believe.

Either the neighborhood has to undergo some kind of change, or you have to put money into it.

9

I have owned three homes and sold the first two for about twice what I paid for them. Although I do believe that it is wise to buy rather than rent, I also know that the millions that rent aren’t all dumbies.

I am investigating the idea of retiring in Mexico. You can rent a home there for $600/700 a month that would cost you $150,000/160,000 dollars. That means that you could invest your money and make more than the rent costs. With the fact that you might not like living in Mexico added to the fact that owning property is not as safe as it is in the U.S., this is a case where renting is the no-brainer.

10

SAILOR, you example is flawed for the following reason: It presumes that the choice is between renting and making another investment comparable to gaining the equity in a house as well, or buying. It ain’t. For most people, the choice is between renting and giving $1000 a month to someone else, or buying and in effect giving $1000 a month to yourself in the form of equity. You are correct that mortgage payments, oversimplified, may be construed as “paying rent to yourself,” but it is the fact that you are paying the rent to yourself (keeping the money) that makes it almost always the better way to go if you can afford it. (Always? No. Maybe you buy and then have to sell within a year, and have no equity built-up and can’t get your money back and lose your shirt.)

No matter how you slice it, your friend paying rent of $2500 a month is getting zero back for that money – no matter how nice the house is. If the house is worth 600K and the friend can swing the house payment and buys it, he goes from giving $2500 to someone else to making a mortgage payment on his own behalf and ultimately owning an asset worth $600K. The only way it would make sense for him to continue to rent is if he can invest enough money elsewhere to equal both the the equity he otherwise would be earning and the $5,000 a year he’s paying in rent. First, most people are not in a position to do that; they can either pay rent or pay a mortgage payment, assuming the two amounts are roughly equal, they cannot rent and substantially invest in income property as well, unless they have a screaming deal on rent. Second, renting and investing elsewhere often doesn’t make as much sense as investing in yourself and real property through home ownership, since real property remains a consistently stable and valuable investment.

Under the usual circumstances, the accumulation of equity means that owning is a smarter choice. Does that mean that we can’t come up with scenarios under which renting is smarter? No. Does that mean people should invest in any long-term inventment without thinking about whether they can carry it, or whether they’ll need quick access to that money? No. But, as a general proposition and in the general case for residential property, owning is far preferable to renting. Recognizing this as a general axiom does not make one math illiterate or mean one is investing without thinking.

11

There are several benifites to doing each, but, after years of renting, I prefer a home of my own.

12

Oh, you’re right. But I was thinking more along the lines of a nest egg. For instance, if I die and my kids inherit my house and sell it, they will have over 100 grand as compared to the 64k I paid just 10 years ago. Sure, I made improvements, but also property values went up in this area while the general inflation rate did not. During the late 90’s the economy was so good alot of people were looking to buy, which raised property values. Add low intrest rates and it made it both a sellers and a buyers market. Weird, huh? Also, what I meant was, as the value of your house goes up you’re paying for it with inflated dollars. Especially if the economy produces large inflation. In 1966 my dad was making $4 an hour and bought an $11k house with a 30 year mortgage. By 1974 he was making over $13 an hour,at the same job due to inflation, but had the same payment on the house as he had in '66. Making those payments was a piece of cake. In that case, inflation had a positive effect. But man, it sured screwed everything else up.

13

Yes, but if you take a typical 25 or 40 year mortage, the equity you build up in the first 10 years will be almost nothing. Most of your payments go towards interest.

But the decision has many complicating factors. Every area has a different rental market, and a different home market. Interest rates vary from time to time. Inflation changes.

So yeah, purchasing a home is *usually a better financial choice than renting, but not always.

But there are other concerns than financial. For one thing, owning a home gives you stability. If you have children, it’s very hard on them if you should be evicted from your rental property for any reason. Owning a home gives you control over where you live. It also gives you a good credit rating. It gives you a stake in the community. When you own your home, you can modify it and improve it with your own sweat equity and increase its value.

A lot is going to depend on how long you expect to live in one place, because the costs of purchasing and selling a home are very high. We just bought a new home, and the transaction costs between selling the old one and buying the new one ran over $10,000. If we only live here 5 years, we’ll probably never get that investment back.

14

I can think of one obvious reason to rent over buying. Truly great locations cannot simply be bought by mere mortals. Somebody smarter than you already owns it.

I pay a pretty exhorbitant rent for a WWII-era apartment that wouldn’t fetch $500 a month were it located anywhere but where it is. Because my job gives me a transportation subsidy, my yearly costs are under $300 a year. True story: I’ve gone from the door of my home in Arlington, VA, to Vancouver, Canada via Seattle and Victoria without ever once stepping into a private car or even a taxi.

I pay no maintenance outside of what is factored into my rent, nor do I pay extra for gas, heat, water, trash, or recycling. I get two easily manageable bills a month: phone/internet and electricity. Total monthly outlay, including basic transportation, is slightly more than $1000, about 50% of my monthly take-home.

It’s at the limit of affordability for me, but the unquantifiables that I receive in return are valuable in the extreme. Among them are the hour-and a half that I gain daily by not trying to commute from outside the Beltway, and the absence of the stress that accompanies such a commute; walking access to three malls, two excellent party strips, dozens of good bars and restaurants, ten free museums, countless monuments; hiking, boating and good fishing; not to mention complete safety and peace of mind. That all counts for a lot in my book.

You can say I’m still losing financially, but if I wanted to buy such convenience, my monthly outlay would easily double–these places are expensive. That means I’d have to be making at least half again what I make now, just to live as I do now. That just ain’t in the crystal ball right now.

15

That was a verbatim quote, and if I twisted it into something different then it was not intentional. I simply read your statement as suggesting that you were more in favor of renting v. owning, all other things being equal.

Agreeing with you (and everybody else), owning is not always better (your original statement) but that comes with a big IF. IF you move around a lot or IF you don’t plan on staying in your home more than 8-10 years then renting is probably the smarter move.

Under what circumstances are you most likely to get evicted? Because you can’t pay the rent. If you can’t pay the rent, you wouldn’t be able to pay a mortgage either. For home owners, the word “eviction” becomes “foreclosure”. In fact, a foreclosure on your credit rating is probably much worse than an eviction (does an eviction even go on your CR?), so the consequences of being a failed home owner are more severe than being a failed renter.

Wait- which side was I on again?

16

40 years:eek:

I’ve never seen a 40 year mortgage. Holy smoke. That’s too long! Does anyone really have a 40 year? How many people live to pay that off?

17

Attrayant, this is a side issue you bring up but an interesting one, about investing in a business.

Many employees have money to invest and yet they do not invest it in the company they work for, they invest it where ever they can get the best return. When thinking of investing in a home you should think the same way: separate the investor aspect from the consumer aspect. Measure precisely in terms of $ the yield of your investment.

Another thought: I have seen hundreds of small businesses which were lousy businesses and lousy investments. The owner is there and keeps going because he is so deep in the shit he has no clue. I’ll give you an example:

This guy I know has a small business. A large shop to repair motors and do mechanical work, 4-6 employees… I have a fair idea of what the business grosses… Now this guy may think he is not doing too bad as he takes home a fair chunk each year but let’s look at it more closely.

He has a substantial financial investment. If you discount what that would yield invested elsewhere then the rest is what he gets for his work. Seeing how he is often working 10 -12 hr days, he is not even making minimum wage and he is making less than his own employees. He gets the headaches and he is actually working for his employees. (Of course, his employees don’t see that at all.)

The situation is crazy. If I were him I’d sell the business, invest the money somewhere and get a job at McDonalds. He would be much better off, but he can’t see it because he is up to his ears in work (I’ve been chasing him for over two weeks now) and has no time to analyze these things. There are thousands of small businesses like this out there. They would be better off if they closed the store and went home. They just don’t see it.

I’m so busy pondering I got no time to think.

18

Next year, I’ll be moving somewhere for either 3 or 5 years, so I’ve been thinking about this. Here’s how I see it:

Cost of renting:
monthly rent * # of months rented

Cost of buying:
Fixed costs (realtor, etc.) + maintenance costs + property taxes + interest paid on loan - appreciation of the property

There are enough variables in that equation (not to mention the ones I’m sure I’m leaving out) to make it possible to go either way. I don’t know how long you have to live somewhere to overcome the fixed costs–I had always heard 5 years, someone else said 8-10 years, but some of my classmates have bought a house for just 1-2 years.

I don’t see it as an easy question to answer.

Dr. J

19

You have to be a bit more rigorous than most people are:

Real property always increases in value. Well, not really. If you discount inflation then you have taken away most of what people consider appreciation. Then real estate can and does fall in value. But we seem to always look for the cases which support out maxims and consider the ones that don’t flukes.

You are investing in something with a very well defined yield: the fair market rent. That is what you get. If you can get a better yield elsewhere, then this is not a good investment.

This is not a common situation but in some cases you can find very low rents and then you are better off renting. Let the ladlord be the bad investor.

If you might move in the next few years, if your income is not stable and assured… there are many reasons which may make renting a better option than buying.

You dismiss those cases like “yeah, there are a few exceptions”. No, there is a very big chunk of the population who falls into this category and many make the mistake of buying just because that is what they hear.

My next door neighbor was foreclosed and evicted about three years ago. She just was not ready to own a house. She had no idea maintaing a house costs money. She had no budget for maintenance and I have found most people who buy are over their heads in planning these things. They think buying is like renting except you own the place.

Over the years i have come across many people with bad credit. At some point in their lives they messed up royally. Their attitude is always “It wasn’t my fault, i didn’t know”. well, no, sorry, you are responsible for your acts and you are supposed to know.

Homes are been foreclosed on every day. Clearly most of these are people who should never have bought a home.

Right now I have my home in the market (I just rejected an offer this morning). A neighbor has told me several times he wants to buy the place if I’ll take back a mortgage. I always say to him the same thing. If the bank, who is in the business of lending money, will not lend him… why would I? If the bank will not take the risk, neither should I. Maybe he is better off renting and he just does not know it.

20

DoctorJ, the “you have to live X years to make it worth the while” rules of thumb are totally meaningless because they assume all the other variables are fixed at arbitrary values.

I might point out to you the financial cost of owning the property is not only the interest you pay the lender for the money he lent you, it is also the interest you could be getting for the money you have put already into the house.

I own my home free and clear. Does that mean there is no financial cost? Of course not! I could take the money and invest it so I am losing that revenue.

Then, of course there are a lot of tax issues to consider. Tax codes tend to favor owners.