I’m not a control freak but I do enjoy being in control of my environment. That includes owning over renting. I couldn’t imagine having to wait for someone else to wait for someone else to fix/replace shit in my house.
I own a house that is a former rental and in order to make the most profit from the place, everything is just…jake. The basement was dry but the walls all stained. The windows are shiny and new but let air in like they might as well be open. The water heater and furnace have Energy Star tags on them that literally say they have the absolute least energy efficiency allowed. No air conditioning, just a whole-house fan that keeps busting its belt. No insulation. A yard full of disgusting fruit trees.
As a renter you have rights to heat and electricity and water but that doesn’t mean you’re going to get an efficient water tank or a reliable furnace or breakers that don’t trip when you plug in the vacuum cleaner.
I’m sure people who rent don’t care about that kind of stuff, or never run into it, or would rather have cheap rent than a garage door opener but I just couldn’t deal with it. I own because I am interested in making my home a good place that suits me and I don’t have to worry about someone else’s budget or schedule. Those happen to be my priorities for my time and money.
For the record, I didn’t “change” anything. I merely stated that real estate does always increase in value, just not necessarily over a short term snapshot in time. Really, nothing always goes up if you define “always” as “never, ever decreasing in value for any reason”.
[QUOTE=WhyNot]
Believe me, I’ve heard it a lot. I’ve been told many times over the years that if I just bought a house, I could “flip” it in a year and double my money. Maybe, sometimes, if you do a lot of work and research your neighborhood carefully and you’re lucky. But I’ve never seen it be the sure thing that people tend to portray it as.
[/quote]
There are a plethora (I love that word!) of shows on cable these days about people who make a living buying, rehabbing and selling homes. It’s called “flipping”. They all make it very clear that it is NOT guaranteed and you can lose a boatload of money in a hurry, even if you know what you are doing and work hard. The same can be said of any investment in the short term.
[QUOTE=WhyNot]
…that’s what so many of my friends found shocking when they wanted to sell and discovered they’d have to pay the bank a large sum of money to get out, beyond what they could sell it for…if they could find a buyer. (And none of them were jobless, actually.)
[/quote]
If they couldn’t sell but continued to pay their mortgage then they lost nothing. Chances are, depending on their location, their home values are back to at least even and probably ahead of where they were when purchased.
If renting makes sense to you, then rent. My only point is that the statement “The idea that houses always go up in value just flies in the face of logic and observation” is demostrably wrong for any reasonable (from an investment perspective) definition of “always”.
You may not be interpreting that correctly: the site says you have to give your landlord 14 days to fix the problem first (it’s part of the written communication you have to provide). I quote: “If the problem is not fixed after 14 days, you may then deduct part of the rent for each day after the 14-day deadline until the problem is fixed.”
I only mention this because deducting part of your rent is a very, very tricky thing and could possibly come back to bite you (or someone else who reads this). I’ve been a renter for 20 years, in two different states and with numerous landlords, and best practice is to never withhold/deduct rent: always pay your rent in full every month, and seek separate reimbursement.
I think the problem here is that there is no market in world, no matter how good, where people who want to buy at the top because everyone is doing it and sell at the bottom because of panic or need won’t lose money.
Arrgh!!! Since 1900 the stock market, as measured by the Dow Jones Industrial Average, has “always” gone up over time. Please see the article and chart here for one cite. From the article:
Even if you bought an index fund at the peak of the market in 1929, the day before the largest market crash the US has ever known, by 1958 you would have been back to even and by 1962 would have doubled your money. If you had bought the same DIJ index fund at every market peak prior to the year 2000 you would still have a tidy profit today. The same is true for real estate (houses).
Note that Why Not said “houses”, not “a house”. A specific house, like a specific stock, can lose value completely and permanently. To use that argument as a basis for not buying any house (or stock) would seem specious. Real estate remains the largest investment most people will ever make. The vast majority of those people will, over time, make a profit on that investment. The fact that some percentage will not make a profit is why it’s called an investment and not a sure thing.
No shit. I used to be a broker. We’re not talking about the stock market, we’re talking about individual stocks and individual houses. Perhaps you bothered to read the OP. If so, you’d understand that its author was asking about buying vs. renting a house, not buying into a Case-Shiller index.
Is your argument for equities always going up that if you invested in 1929 you’d only have had to wait 29 years to be made whole again? I don’t think you’re making your point as well as you think.
By the way, I understand you’re talking about an index fund as a synonym for an investment in the entire stock market, but are you aware that no index funds existed in 1929? It makes it sound like you don’t know what you’re talking about.
The question in the OP is “Which is better, renting a house or buying” - no specifics whatever. The financial impact of the question as stated can only be addressed on the basis of the historical returns in the real estate market as a whole. Had the OP aked “I’m looking at a house on 1234 Any Street, Wherever, WE - should I rent it or buy it” or even “Zip code 11111 USA housing - better to rent or buy?” then more specific financials could be applied.
I picked the absolute worst case scenario and showed that even then, over time, the market goes up and you want to say that didn’t prove the point that the market always goes up over time? I give up.
And if I had generically said “the market” you would have asked me “by what measure?”. Even you understood what I meant, you knew I was using a synonym, so I must know how to communicate the idea. :rolleyes:
Restating the point: real estate, in the form of housing, is the largest investment most people will ever make. Overwhelmingly, people who make that investment realize a gain over a long period. Disagree if you want, but it is a demostrable fact.
On second thought, forget it. Renting is always better.
The OP wasn’t asking a purely financial question. S/he was asking for people’s opinions about all the pluses and minuses associated with buying and renting. The responses that referenced “houses” referred to “houses that you could potentially buy or rent” not “an aggregate of all houses in the world”.
Most of the talk of “houses” above was not about the US housing market’s aggregate return. The people you responded to have made this pretty clear.
Loss on what? Renting isn’t investing capital, it’s purchasing shelter on a continuous basis. That 8.73% annualized is lower as you’ve already noted, but most important it’s lower than the broad market over that 55 year period by a good bit (enough to be talking about real money.)
Whether average monthly rents are higher than typical mortgages in an area varies with the market, but even if they’re just close (and they often are), renting can actually represent a dramatic increase in ability to invest capital and earn return on that capital.
I should say now I’m a real estate developer, just so one doesn’t think I put my money where my mouth is.
When I buy property (or when my partnership does anyway), we are now entitled to the appreciated value of that property, we’re entitled to rents on that property if we rent it out and all other manner of things. But we’re also required to maintain that property if we rent it out, we’re typically going to at least need to maintain it even if we don’t rent it out or it actually loses value and becomes difficult to sell later on.
People make money on real estate, I certainly have, but you can lose money on real estate too. Buying and hold on real estate is a terrible investment strategy because on average real estate long run only actually appreciates at a little bit better than inflation. People don’t often believe that, but the numbers, in aggregate, bear it out. Everyone can point to explosive local real estate markets, but again, in aggregate real estate barely beats inflation as an investment.
So why am I in the real estate business? Not because of passive capital appreciation, but because a savvy real estate developer can buy land or buildings worth x develop that asset through active management and improvement of it and render it into something worth x+y.
Can an individual homeowner do that? Absolutely, but it requires pouring money in, and then there’s always a gamble that whatever money you pour in you never turn a profit. We’ve lost money on properties, that’s why we’ve never put all of our eggs in one basket–which is mostly what people who own homes are doing.
That’s why the only way owning a home makes sense as an investment is when it’s being done to solve a specific problem–namely “I need a roof over my head.” For solving that problem, it’s a perfectly valid and often good option. But if you’re expecting it to be an investment vehicle it’s probably the riskiest, most undiversified investment you will ever own. It will demand more and more money to maintain its asset value or even just to keep its pace with inflation. At the end of living in it you may, based on the vagaries of the market, realize a true return on invested capital, this is true. But it can be a much closer thing that many people understand, and sometimes you do actually reap less than what you’ve sown when you fully weigh the true cost basis of your “investment.”
My life story is I was career military and when I retired after over 20 years I had enough cash to buy my first home outright. This happened because I rented the entire time (sometimes I lived on base, too) and I invested a portion of my money in a brokerage account during my time in the military. I invested in a mix of mutual funds and individual blue chips stocks. (Annualized return was 13% btw, and aside from taxes on dividends and capital gains there were no strange outlays of capital to keep my investments solvent.)
I would actually argue that renting makes such a thing possible while owning a home may not. For the simple reason that renting provides a very smooth money in/money out situation. During my time in the Army I never once had to worry about a $5,000 furnace replacement (this is how much it cost for me to replacement the furnace in my elderly mother’s house last year), or an $800 plumbing bill (this happened to me last month when roots grew through some pipes.)
Not everyone will be able to set aside money like I did, but those people probably won’t be able to while renting or while owning–and if they truly can’t set aside money then how are they paying for major home repairs? Probably by going deeper into debt if I had to guess.
So I would have been wise to put 100% of my money in Enron since the stock market also always goes up?
The point missing from your comment is that the broad market may go up, but individual stocks–and individual properties, may not. While the greater Richmond Area is (at least in my opinion) a nicer one compared to some cities like Detroit, I can show you houses here that have a selling price of $20k and are 60 years old or older. I would almost be certain that whatever the selling price 60 years ago, its current price has not kept up with inflation. Why is this? Because it’s a nearly-condemned, nearly collapsed house that hasn’t been maintained in 25 years and is in a crime ridden, horrible neighborhood with bad schools.
This can happen to any house. Even a house in a nice neighborhood that stays nice (many of the bad neighborhoods were once middle class FWIW), if it has truly derelict owners that let it fall apart that house will absolutely not keep pace with inflation. Unlike shares of General Electric real estate requires continual investment to maintain its value, at least when we are talking about houses or other buildings. Land not as much (although say, already developed farmland may be more valuable than uncleared land, depending on what is on it and whether a timber company would be interested in clearing it.) But unless we’re strictly talking about land, any type of real estate investment requires continual investment to maintain and grow its value, and any individual parcel can lose money even over the long term.
I inherited a 1/9th interest in some land in Florida (grandmother died, my father had predeceased her so my father’s two siblings inherited 1/3rd, and then I inherited a portion of the 1/3rd that would have gone to my father), that was originally set out to be part of an early suburb. My grandparents had owned it for years but never built on it, and eventually that land was declared some sort of environmental protection area by the EPA and we weren’t able to sell the land at all because there was no way to build on it any longer. We eventually donated it to a charitable foundation. So even land itself can be a losing investment when talking individual parcels.
Even if the rundown house I mentioned was well maintained I’d guess it’d only sell for maybe $45-60k, and that’d be to someone looking to rent it out to low income residents. It wouldn’t sell for more because of location, location, location–a factor the owner of that house could not control.
I’m in real estate professionally and I know tons of people that think this way. I know people that have actually made tons of money flipping houses and I know people who have lost money on several flips and bankrupted themselves. House flipping is a crazy game and it attracts a lot of people with crazy ideas.
I’m also a residential developer (after a couple years off), and I know a few people who have caught lightning in a bottle flipping. Most were prior to '08, but I know more people who have done well will the slow and smart approach.
I agree wholeheartedly with the post you wrote earlier. It’s funny how every real estate professional I know will be quick to tell you that renting isn’t throwing money away.