Owning a home vs. renting - which is better?

Great Debates
21

SAILOR says:

To the extent I quarrel with your theses, this is why. Yes, sometimes trying to own is a bad idea, especially if the person cannot swing the payments (obviously). That does not mean that it is not a perfectly legitimate general rule that all other things being equal and both options being truly viable it is better to own than to rent. Similarly, the fact that “variables” are not “fixed” does not mean that it is not a perfectly legitimate general rule that “you have to live X years to make owning worth the while.”

In sum, the fact that a general rule of thumb may have myriad exceptions does not render that general rule of thumb “totally meaningless.” Just because something is not always true does not mean it is not often true and may not legitimately be relied upon as a general axiom.

22

Jodi, the “you have to live X years in the property to make it worth the purchase” is totally meaningless. It is not a matter of exceptions to the rule, it is a matter of it not being a rule of any meaning, as shown by the fact that X is a totally variable number depending on who is talking. There is just no rule of thumb that will work, you have to do the math in each case. In one case it may be 3 years, in another it may be 15. even if X were the average or the meadian it is meaningless when it comes to your specific case.

Another rule of thumb was about refinancing: If you lower your interest by 2 points and will stay in the property two years, then it is worth refinancing. This is just total crap for math illiterates. It means nothing. I can give you instances where the rule is true and instances where it is false (most of the time). The problem is the people who give you those rules don’t know how to do the math so they have to rely on general rules which are pretty meaningless. Note that in the other thread about comparing loans i still have not got a single answer. people love rules of thumb because they hate math.

If I say: If you live in Arizona, and your interest rate is such, and your taxes are such and your purchase expenses are such and your IRS deductions are such and (etc) then you would have to keep the property for 53 months to break even versus renting, that number of 53 months is totally meaningless to another person with different circumstances. For him it can be 20 months or it can be 150 months.

That is what I mean when I say these rules of thumb are meaningless. I do not mean they have exceptions, I mean they are plain wrong most of the time.

23

SAILOR –

The point is that we can make certain assumptions about what X generally is, in most cases, and then the rule makes sense. Or we can generalize X as being not a specific number but rather “several years,” in which case the rule reflects the reality that mortgage payments are almost totally interest payments for the first several years, and the rule still makes sense. Most people purchasing a primary residence (especially a first primary residence) take out 30 year mortgages. Do other types of mortgages exist? But that’s the most common type. Most people make their assigned mortgage payments with little if any added over it. Does some make double payments? Yes, but that’s not the average situation. It is a perfectly valid rule of thumb to say that a homeowner probably must live in the mortgaged home for several years before it makes sense to buy – and that if you are not settled to where you know you’ll be in one place for several years, it may make more sense to continue to rent. That is not a meaningless generalization.

Obviously every person ought to be pencilling it out in their own case; I’m not advocating relying on axioms instead of evaluating your own position and doing the math. That still doesn’t render the general rule invalid, becuase if 100 first-time homebuyers do pencil it out, the vast majority of them will find that owning only makes sense if they can stick with the house for several years – long enough to build some significant equity. Will the exact period of “several years” vary from case to case? Yes. But the rule will continue to hold for the majority of cases.

This argues that no general conclusions could be drawn ever ever ever, because even if they are true they might not apply to your specific case, which I think is silly. Just because a rule may not apply to me does not mean it is meaningless. There are certain generalities that a person ought to take into account when determining whether the time is right to buy, and those include the statement that it is more likely than not that buying will require a commitment of a number of years before the benefit of buying (equity) is realized.

That does not change the fact that a general rule of thumb may be drawn based upon the average facts of the average case – say, a 30 year fixed mortgage where the payments are made but no appreciable overage is regularly added to the principal. In that case – the most common case – it is true that you must keep the property for a several years before the investment makes sense – before you have equity to extract. This particular, almost universally true axiom simply reflects the realities of mortgage payments over time, moving from mostly interest with little principal to mostly principal with little interest. Pencil it out if you don’t believe me; you’ll find you get almost a straight slope graph over time reflecting the increse in equity in the property – and that, by extension, it makes no sense to sell the property before any significant principal payments (ie, equity building payments) have been made. The amount of taxes and deductions in the vast majority of cases will not effect this phenomenon at all, which far from being a crutch for the math impaired, is merely an acknowledgement of the statistical reality of the majority of cases.

But for the reasons given above, the one about needing to stay in a house for a number of years before it will make sense as an investment is not meaningless and is not “plain wrong most of the time.” It is correct most of the time, and the fact that “X” is a variable does not mean the premise is incorrect. Similarly, the idea that it is better to rent than to buy is not “plain wrong most of the time;” it is correct for the general case, which supposes that either is a viable option and all other things are equal.

24

>> we can make certain assumptions about what X generally is, in most cases, and then the rule makes sense.

X is quite different in every case. This would be equivalent to someone asking me “how much would a car cost me?” Any response I give is so general as to be worthless as far as making a particular decision. Yes, the average price of a car is X and the median is Y etc but that is no help whatsoever in helping you know how much a car will cost you until you know is you will buy it new or used, type of car etc. Suppose I say to you the median price paid for a car in the US (new and used sales) is $17500. I cannot see how that helps you know what a particular car will cost you.

>> Or we can generalize X as being not a specific number but rather “several years,”

Well, yes, then the rule of thumb is no longer even a rule of thumb but rather a general statement which, again, is not helpful in making a particular decision (or is much less helpful). More like general advice.

Rule of thumb: the tide rises 1/12th the first hour, 2/12 the second, 3/12 the third, 3/12 the fourth, 2/12 the fifth, 1/12 the sixth. It is not strictly accurate but it is easy to remember and close enough to the truth in every case to be useful.

Not rule of thumb: It is better to be rich and healthy than poor and sick. It’s true but I can’t find the thumb in there :slight_smile: It is more like a general statement.

25

If all these are true then it is almost sure you are better off buying:

(1) You cannot safely invest your money with a greater rate of return than the rent you would be paying for the same property
(2) You have a reasonable expectation that the property will not depreciate
(3) You can pay cash or have guaranteed steady income for mortgage payments
(4) You intend to keep the property many years
(5) You can budget and manage maintenance and other expenses

If all these are true then it is almost sure you are better off renting:

(1) You can invest your money so it will yield more than the if you invested it in your home
(2) You have a reasonable suspicion the property may depreciate
(3) You cannot pay cash and your income is not absolutely reliable
(4) You may have to move due to job, family or whatever reasons
(5) You do not want to pay or manage for maintenance and other expenses

In intermediate cases you should weigh all the factors.

26

This reminds me of the “opportunity” of buying a franchise or other similar business. What most people fail to appreciate is that all they’ve really done is “bought” themselves a job, and a job that will probably pay less and cost more in time and hassle.

Ridiculous.

stoid

27

Three things I haven’t seen covered here yet:

1 - The LOWER your down payment the greater the risk you are taking on. On the other hand, if the investment works out, your profit relative to the amount invested will be huge.
In this case, and in EVERY case where you buy a home for the typical (in the U.S.) 10-20% downpayment, you are making a highly leveraged real estate investment. If you put down 10%, then if the house appreciates 10% in the time that you own it, you will have doubled your initial investment. If it depreciates 10% before you sell, though, you’ll lose that entire investment.
2 - In many cases, renters are forced into buying because the rent increases on the place they’re renting become unaffordable. This is a big advantage to owning: the mortgage payments won’t rise, and could even fall if you can refinance later at a lower interest rate. The real estate taxes may rise, but as this expense is usually a fraction of the mortgage expense, the effect is usually easily affordable. SO if you stay in a place for a long time, chances are your income will rise enough that the mortgage payments will become a very manageable piece of your budget.
3 - The retirement piece: at the end of your career, if you plan things right, you could end up owning the place where you live free and clear. Which means you won’t have a mortgage payment to make from your retirement income, which should make your retirement a lot more comfortable.

But the thing everyone has to keep in mind is that, if you’re the typical home buyer, you are taking a huge risk. Don’t let the tax advantages you get (at least here in the U.S.) seduce you into thinking anything else.

28

In some states if you miss your payments, the worst the lender could do would be to foreclose the house. In other states, the lender could take the house and other assets as well, if needed to pay off the loan.

If you have extra assets, your risk is less in states where they cannot be taken by the lender. Also, in such states, when you buy a house, you could reduce your risk by choosing a smaller down payment and investing the remaining assets elsewhere.

29

pantom, I have to take issue with #3 because it is the whole point I am trying to drive here:

No, no no! If you own a house worth $500K, you are not living there for free! How many times can I say this? If you invested that money elsewhere it would be yielding income. that is what it is costing you to live in that house. that is the rent you are paying to yourself to live there. You do not have to own the house to live “free and clear”. You just need to have capital invested so it yields income. Whether you have invested in your home or in anything else is immaterial. You just need to have capital invested in the best possible way. If investing in your home is a good investment, then fine. But in many cases it may make more sense to invest elsewhere and rent a home and you are still living just as “free and clear”.

30

Mmm, I don’t know. Let me apply it to myself and see how far we get:

I bought because our landlady wanted to raise the rent by a really ridiculous amount, which is what led me to post my point #2 above. I looked at our personal finances, and decided that I could use half of our saved money as a down payment on a house, and net, after the tax deductions, be paying about the same as the rent was on the old house, BEFORE the landlady’s requested increase. So we bought. In essence, I avoided a rent increase, and was able to use the “extra” money that I didn’t have to pay in rent to do things like equip the bought house with central air.(which of course has the nice side effect of increasing the value of the house.)
Anyway, I figure that by the time I retire we will have paid down most of the mortgage. This is a huge plus to me, because this will hugely decrease my monthly “nut”. I also figure that, since I bought in a pricey suburb that looks like it will stay that way for the foreseeable future, I can probably sell this house and buy a property out in the country for less than the selling price of this house, thereby making liquid a piece of the equity at that time.
Which is the point: the equity gives you options, options you wouldn’t otherwise have.
Yes, if you liquidate and invest somewhere else, you could, maybe, make more. Then again, maybe not. One consideration I had a couple of years ago when we bought was that the stock market was really high and I couldn’t see how it could go any higher. Between that and the prospective rent increase, I figured it would be wiser to take a chunk of our savings and use it to keep our “rent” down. Given the past year or so in the stock market, that turned out to be a wise judgement.
:: Pats self on back. ::
Sorry, sometimes my ego gets in the way. Lemme boot the damn thing outta here.

31

The difference between property and other investments is that even if you don’t buy you still need somewhere to live !

Rent / home loan repayment is something you just can’t avoid - well, unless you find a partner with a house already.
Sometimes its not a good time to buy i.e. if your going to move, if you think the market is going to crash ( things go down as well as up ).
All this stuff about 'my house only cost this 40 years ago ’ is rubbish, how much were you earning 40 years ago !!
What I like is when people talk about how great it is there house has gone up in value and then complain there kids can’t afford to leave home, ha ha.

32

sailor,

Financially, you have a valid argument that owning is not always better than renting, but there is another aspect that is terribly important. When you own a home, especially with no mortgage, you OWN that home. Short of Bankruptcy, Eminant Domain, or the Apocalypse that home is yours, and nobody can take it away from you, ever.

There is no chance some wacky landlord is going to ask for a 50% increase in rent, or sell the home out from under you. There is no chance that a bad economy will change your 3000sqft home into a 1500sqft home. If your neighborhood suddenly becomes a ‘hot’ place to live, you can still live there. As long as you meet your financial commitments, there is stability in owning that you don’t have in renting.

Also, YOU have complete control and authority for what happens to that property (zoning laws, etc. notwithstanding). You want to paint the house hot pink with yellow shutters, go right ahead. You want a swingset, or a pool, or a toolshed, get a permit and go, it’s your property. This is a very valuable thing when we are talking about your home. When you rent, you are subject to the decisions of the landlord, because HE is the owner, not you.

33

Although I agree that it is a case of horses for courses, in a flat market such as in much of certain regions of the UK, property values have not risen much, but rent hasbecause of the increasing requirements to meet rental property legislation.

Even if there is no financial benefit most rental properties in the range of similar monthly costs to my mortagage are in areas of town that are not at all desirable places to live.

The idea that your house has gone up in value is only worth putting into the cost/bnefit analysis if you can realise some of the equity, such as trading downward for a smaller house of less valuable one, for many the need for another house of similar quality cancels that out.

For the self-employed where perhaps the house is used as part of the business premises rent can be partly tax-deductable, it makes no sense to buy when that money could be used to invest further in the business.

I have seen a few money programs where freelance accountants not only rent their houses but most of the consumer durables in it too thereby avoiding the loss of capitol in devaluation, I’m not sure if this is because of the tax regime but the fact that consumer goods devalue incredibly quickly makes them a very poor way of tying up your money.

34

In my experience the mortgage usually turns out to be cheaper than the rent.

If for no other reason than your rent is at minimum, paying the mortgage and the taxes anyway. The only real difference is the downpayment and repairs.

FTR…Nobody in NJ would be paying $2500/month for a $600,000 home. Rent for a house like that would be somewhere between $6,000 and $7,000.

So you are talking about $72,000 - $84,000 in annual rent for that house. I don’t know if the original numbers were supposed to be real life examples, but they don’t seem realistic to me.

At 8% for 30 years you are only:) paying $4,402/month, plus taxes. Around here you are looking at around $15,000/year for a house like that. So your total is $67,824.

Of course these numbers are a little inflated. I’m doubting most of us posters are looking at $600,000 houses and pulling our hair out over whether or not we should rent or buy.

But the numbers stay similiar as you move the price down.

35

Freedom, the mortgage may be “cheaper” as you put it but that is meaningless as you are buying different things. People who compare those two numbers are making a grave mistake. A house requires mantenance and other expenses.

The numbers I gave are real but they are not representative or even common here. That was one big fluke. Initially the guy just looked for a place to rent and he found this one. After living in it for about 3 years it was offered to him to purchase. That is when we were analysing the situation. There were several factors involved but I remember I came to one conclusion (among others): higher end homes yield less when rented out. At any rate, that was his situation and it would be crazy for him to buy.

Suppose you can rent a $150,000 home for $1,500 a month. Then a $600,000 home will rent for substantially less than $6,000. That has been my experience when looking at these things. I remember telling him, if he wanted to invest in real estate, he would do better to buy two $300,000 homes as they would yield more and would sell easier.
Cheesesteak, if you own other assets they are just as yours. Yes, if you will live in the house the rest of your life that is a point in favor of buying. I have already said that. For some people this would be a negative as they may want to move.

Not only younger people may want to move for job or other reasons. I have a neighbor who is an 85 year old lady who subscribed to the idea of own your home so you an live free the rest of your days. She is old, sick going blind… I have told her many times she should move back to South Carolina to be near her relatives because here she has no one. But she is pretty much stuck here because of the house. The whole idea of selling it is too much for her. If she were renting she could move tomorrow. You just have to see both sides. But you only hear the “buying is better than renting” side. I am not saying renting is always better, I am just saying it depends on your individual circumstances and you have to do the analysis for yourself.

BTW, I own my home free and clear. I have owned it for 15 years now. I am ready to sell and move on. I am sick of maintaining this place.

36

If you don’t own your home, then you can’t get sued when somebody trips on the sidewalk out in front.

37

To expand on what Sailor said about maintenance:

Let’s take a typical example of a brand-new 2000 sq ft. house. Such a house here in Edmonton might set you back about $160,000, and with current interest rates and a typical 25-year mortgage, with 10% down, you’ll pay about $1200/mo, including interest and tax.

But the maintenance can really add up. Let’s look at some big items -
[ul]
[li]New shingles every 20 years, at $10,000.[/li][li]New carpet every 10 years, at $10,000.[/li][li]New Fence in 10 years, at $2000[/li][li]New Paint every 10 years, at $3000[/li][li]New Appliances every 10 years, at $5,000[/li][li]Budget at least $1000/yr for renovations to retain the house’s value. More like $2000/yr. For example, most houses 20 years old or older need kitchen renovations to maintain a modern look.[/li][li]You should budget at least $200/mo for incidentals and major repairs. One day you’ll find your driveway sunken, and you’ll have to mud-jack it or re-pour it, for several thousand dollars. Windows break, plumbing fails and damages walls and carpet, etc. If you live in the south, you’ll also have to pay for exterminators.[/li][/ul]

The house we just sold was 10 years old, and it needed new carpets, new shingles (the builder must have put on defective ones), paint, and some repairs. Within 5 years it would have needed a new driveway as well, as it was starting to crack and crumble. All of that would have cost us at least $15,000, and wouldn’t have added to the value of the house by nearly that much. So we decided to sell.

This was a new house. If you decide to buy an older house, 30 or more years old, be prepared to spend a LOT of money. These things can be incredible sinks of your time and income.

And don’t forget the opportunity cost lost with your down payment. If you put 25% down on a $200,000 home, that’s $50,000. If that money invested and earning 10% a year, that’s $5,000 a year in lost income.

But still… the advantages of owning for us FAR outweigh the advantages of renting.

38

I had to replace all the water pipes just a few years back. Yup, maintenance costs money. You also have to buy your own insurance, pay taxes etc.

My neighbor, the 85 year old lady has the same problem: she needs to replace the old steel pipes but she just can’t afford it… the house is crumbling on her… She ends up paying for patchy repairs which in the long run cost her more than a good replacement job… The problem with her is not only that she doesn’t have the moeny, which she doesn’t, it is also that because of her age and general mental capacity she is not capable of taking good care of herself, much less the house. She is the textbook example of the victim for boilerroom telemarketers. She would be much better off renting or living in an old folks home.

39

I do indeed see rent and interest payments to a mortgage as equivalents. I have an interest only mortgage for this very reason - my excess investments are my own business and I choose to diversify rather than invest in my property. However from my point of view the mortgage is financially far preferable for two large reasons:

  1. The interest payments are significantly cheaper than the rent would be. We would have to pay about £500 (or $800) per month more to live in the same house if we were renting.

  2. (Assuming fixed rate mortgage) my interest payments are not going to increase. Ever. Assuming rental inflation of 4% per annum, the rent will be 50% more in ten years than it is now. The interest payments will still be the same.

I also note that I have done very well out of property investment living in the house I’m about to move out of. I invested a deposit of £6,700 and various fees of about £2,000 on purchase with two other guys. That was 10% deposity on a house costing £202,000. Eighteen months on the house is worth £235,000 and I’m taking my share - £18,800 after my part of the mortgage is paid off. That means after expenses I’ve made a return of 116% in eighteen months. All hail heavily geared investment. That’s on top of savings due to cheap “rent” in the form of interest payments.

Buying can indeed be a very good thing if you know what you’re doing.

pan

40

kabbes:

I think this is the biggest advantage of home ownership. Rents will rise with inflation, but having a mortgage essentially fixes your “rent” payment at an amount that will not increase over the years. When the mortgage is paid, your “rent” will drop even more.

Sam Stone makes a good point about the costs of maintaining a home. However, a homeowner can reduce those costs drastically by doing most of the work himself. Obviously, not everyone is able or willing to do that work, but some of us find it enjoyable. A person who hates yardwork (for example) should consider every hour spent doing yardwork as a cost of homeowning. A person who enjoys it will consider yardwork as a benefit of homeowning.

Renting does not exempt you from the cost of maintenance, though. A portion of your rent covers maintenance costs as well as offsets the cost to your landlord of vacancies, taxes, advertising, etc. As a tenant, though, you usually don’t have the option of substituting labor for cash.