Is It Better to Rent or Buy?(nytimes.com) |
Is It Better to Rent or Buy?(nytimes.com) |
Leaving most of the expected growth sliders in place, and taking into account that I've shortened my mortgage with additional payments, it estimated I'd only be better renting if I could get an equivalent property for about £565. In reality, the smaller house a few doors up rents for about £1500, and Zoopla estimates the rental value of my house at £1600. So, either I live in a really good buying area, or the US calculations don't translate well.
If you lock in a super low interest rate, you only lock it in for 5 years (10 years are available as well, but you pay a premium in terms of interest rate).
https://twitter.com/driven_by_data/status/469498632027537408
The US typically doesn't have pre-payment penalties which is another benefit for US homeowners since if you get a mortgage rate of 6% and a 30 yr term and rates drop to 3%, you can simply refinance without pre-payment penalty and lock in a lower rate. You do need to pay mortgage fee with the refinance, but banks often have deals where the costs are pretty low.
That said, one has to wonder if the US mortgage rules create perverse incentives for US homebuyers.
For example with the defaults, the down payment chart is flat. This means the total cost of buying is relatively unaffected by the size of your mortgage. Felix Salmon pointed out this demonstrates the Modigliani–Miller theorem:
http://en.wikipedia.org/wiki/Modigliani–Miller_theorem
Of course, there’s still a big intangible difference between having debt and not having debt, like your ability to respond to market or income changes. And in an inefficient market, loans can be more or less expensive.
Playing with the variables and seeing slopes change from positive to negative or vice versa is interesting, too, because these suggest different optimal decisions. Like as your investment return rate goes up, the down payment slope becomes increasingly positive — meaning when stocks are doing well (and assuming mortgage rates aren’t also going up), it’s better to have a smaller down payment and put more money into investments. To a lesser degree, your marginal tax rate changes the slope of the down payment as well, by discounting the mortgage interest payments.
The magnitude of the slope also gives a sense of your risk: you can see how sensitive the equivalent rent estimate is to small changes.
Intentional or oversight?
The interaction between down payment rate and mortgage insurance rate also reveals a limitation of our user interface: On the one hand, it’s nice to have all the variables decoupled so that you can set and explore them independently. On the other hand, many of the variables are not independent. If you change one variable, you may need to change other variables to maintain a realistic scenario.
Having the mortgage insurance rate tightly coupled to the down payment would probably be too limiting, but maybe there’s a still a way to better identify when certain variables (or combination of variables) are unrealistic.
You ONLY need mortgage insurance if you invest less than 20% down. Even then, you can often take a second, higher interest mortgage loan instead of paying for mortgage insurance.
A second mortgage is better for your tax return and equity and also offers better returns for the bank, which only sees a benefit from mortgage insurance if you default. Do you really want to give your bank any incentive to help you default?
The entire point of mortgage insurance is to protect the bank in the case you foreclose. It ensures the bank receives 20% of your property value so they can afford to take their time fixing and selling your house to its next owner. They don't need this risk mitigation if they have your downpayment.
Both renters and owners need a place to live in the future, assuming they're not dead. If we exclude those who live with mommy and daddy or mooch off of other people...
Well, then whether the debt is formal with a mortgage or not makes little difference. Even renters are on the hook to come up with $1000 for the month of October 2016. It's just not in writing.
The main advantage of owning one's own residence is tax and stability (the flip side of the illiquidity problem). Owner's equivalent rent is not a taxable income. Capital appreciation works in your favor rather than against you when you rent.
In short owning one's own home is both economically and psychologically rewarding if you have long term stable income.
You also need to factor in the value of negative impacts of renting. When you have kids, school selection is driven by location -- and a lease is more ephemeral than a mortgage. You also always need to deal with landlords, who can be good or bad, and often cannot make changes to the property that you would like.
One quick suggestion: it would be great to be able to save the numbers you've punched in so you can share a URL with someone (e.g., spouse, parents) next time the rent v. buy discussion comes up.
[1] http://www.nytimes.com/interactive/business/buy-rent-calcula...
(That’s in terms of buying being cheaper than renting; if you meant making an actual profit on your home, then the equivalent rent has to drop below $0. This typically only happens when the home price growth rate is high.)
But how long you stay is far from the only independent variable. The intent of the new calculator is not just to provide a single, definitive answer — which is essentially impossible given the fundamental uncertainty in predicting the future — but to demonstrate how the variables interact with each other and give you a feel for the space of possibilities. There are many other considerations besides timing.
One small addition I'd consider adding is estimated rental income if you buy and plan to rent out a portion of the property. I am in the process of buying a home right now and plan to do just that, but this factor seems to be missing from the chart.
The flat down payment chart is a coincidence, based on the default values for interest and inflation rates, growth rates and expected returns.
Here's the problem I often run into - how valuable is this, really, compared to a good and much simpler heuristic. For instance - how well would this compare to a rule of "buy if you plan to be in the house more than [five/seven/ten] years?" One story they like to tell in operations research classes is about a couple of programmers discussing the implications of rounding when an input (viscosity) had been estimated by a field worker rubbing mud between his fingers and typing something in...
Another factor is that, in my "adult" life (adult being where I made enough money to squeak into the housing market if I so chose), housing has fluctuated wildly. I finished grad school in about 2000. Since then, housing has made a mocker of pretty much every financial decision I've made. The amount I saved was generally eclipsed by the amount San Francisco housing values increased between 2000 and 2007, dropped between 2007 and 2012, rocketed up again since then.
In spite of all that, I think that this is a very worthy tool, especially if it helps people really understand the factors that go into a decision. But considering how unpredictable everything is... do you think it really adds much as a true planning tool, beyond a vastly simpler heuristic?
Edit: Thanks!
I noticed that one of the biggest factors, unsurprisingly, is Home Price Growth Rate and rent price growth rates. Do you have any sources for the rates historically? Preferably by location.
I live in London. Unfortunately, as the calculator shows, change in house prices is overwhelmingly the most important consideration in buying if you're thinking of staying for much more than 2-3 years. Admittedly growth is completely unpredictable, (and also highly inequitable), but to a large extent a decision to buy is based on expected future house prices.
For instance, I have a friend who bought three years ago - a £250k flat which would cost around £1,300 to rent. According to Rightmove and Zoopla (and the price a similar flat next door sold for recently), the monthly gain in value has been around £3,000 (!!). I also note this gain is tax free, so equates to earning more like £5,000 a month pre tax.
Unfortunately these gains are only available to those who earn enough and save enough for a deposit, or more commonly, those who receive parental assistance in purchasing property.
It's important to have it separate from the price you pay to the owner because you shouldn't include them in the resell value of the house.
Edit: I see it is just a poor labeling, explanation mentions just the portion of utilities that not covered by landlord.
If you are in your 20's and grew up in a middle class family in Vancouver, Toronto, Sydney, Melbourne or Auckland, and have a middle class job, it is virtually impossible for you to be able to afford to buy a house in the city in which you grew up. E.g., here's a New Yorker article on the impact of the global property market in Vancouver: http://www.newyorker.com/talk/financial/2014/05/26/140526ta_....
The political fallout from the intergenerational inequality over property ownership in Canada, Australia and NZ is going to be very interesting to watch...
How is the calculator ignoring this fact? If you think that increasing globalness will cause home price growth to be higher than inflation/rent growth, you can modify that parameter.
It's a separate question if it's worthwhile to buy at all, as that's dependent on geography, present and future market trends, lifestyle choices, ...
Then the owners sold the complex, and the new owners set out to remodel everything, very much against our wishes. Construction crews started entering our apartment. They came in while we were out, laying down plastic sheets and moving our furniture around. They sometimes came in while I was sleeping, and while I was getting dressed. It was humiliating: I felt stripped of my privacy and dignity.
Buying allows you to control your property, but more significant to me is what renters must endure: arbitrary changes to their home, allowing unfamiliar men to enter their homes uninvited, etc. As a homeowner, nobody enters my home uninvited, unless they have a search warrant!
Yeah it can be more expensive at times, more work definitely, but I never have to worry about someone else deciding they don't want me living here.
http://assayviaessay.blogspot.com/2014/04/rent-or-buy.html
Lots of people here describe renting as having an upside because you can remain location mobile, but that's true of owning as well. The only option at that point isn't to sell your home and then buy one somewhere else, you can also rent out your current home, and buy a second one. You can continue doing that ad nauseum, except now you've convinced other people to pay for your mortgage instead of you. In the end you'll own a few properties and all the people who rented from you will own nothing.
Something mentioned in my link but not explicitly in the OP, rent goes up, mortgage payments stay the same or can go down. Over 30 years, your housing burden goes down significantly providing you with increased monthly liquidity.
At the end of the day, you own the property at the end and for all years >30 you effectively live for "free" (minus taxes).
I urge everybody reading the OP to take a few spare hours and run the numbers themselves and see if the easy conclusion here holds out for them.
Well, these days thankfully, interest rates are relatively low. We paid a little under $200K for our home, and combined with the married standard deduction, the interest at first barely even pushed us into the itemize category. By next year, it won't suffice to even do that and we'll be back to the standard deduction.
The people who were telling us about how great the deduction is were people who all had the means to purchase much more expensive homes, and many of them bought in the past when interest rates were higher and the standard deduction lower. So it was true for them, and continues to be true for certain segments, but is not universally true.
This is a great tool. I would have to find a rental for nearly half (60%) the going rate in order for renting to make sense in my area.
And oh yeah, our downpayment on this house was covered with what we made in appreciation on our previous house, plus we payed off two cars with it.
We've already made some money on this house as well despite the housing crash. It's recovered the original value and is in the black now.
"Investment return rate" -- Only 4%? An index fund will return higher than that.
"Monthly common fees" -- Required if you are considering buying a condo. This changes the per month rent comparison dollar-for-dollar.
http://money.cnn.com/2014/05/21/investing/stock-returns-low-...
"The Shiller price to earnings ratio was designed by Nobel Prize winning economist Robert Shiller to give investors a sense of whether stocks are cheap or expensive. It compares stock prices, as measured by the S&P 500 index, with inflation-adjusted corporate earnings over the past 10 years.
"The magic number at the moment is 25. That's the current Shiller ratio, and it indicates that stocks are on the expensive side. The long-term average, going back more than 130 years, is 16.5.
"But the current level is significant for another reason. According to research by Credit Suisse, when the ratio has been between 25 and 26 in the past, stock returns over the next five years have been just 2.7%. That's after adjusting for inflation."
Just like homes will always go up?
A small (1300 sq ft) house in SF can be bought for $750K in some neighborhoods in the south of the city. The ones in between the fancy ones and the crappy ones.
I did a pretty detailed analysis of what everything would cost. Loss of investment income on the down payment, insurance, property taxes, etc. And came out to around $4100.
You can rent the same house in SF for around $3750/month, so unless you're assuming a pretty spectacular rise in home values, it doesn't make sense to purchase.
Rent control definitely favors renting in a lot of situations. If you were at the whim of your landlord, then I could see buying being more attractive, especially in a market where housing prices are going up.
The real kicker about owning a house is that housing prices never go up a nice steady 2% or 3% per year. They go up 5% one year, then down 5% the next. If you don't have control over when you sell (loss of a job, etc), that can really hammer you.
Leaving the country broadens your options considerably, but that also adds its own complications.
My almost 13 year old car costs me something like <$.30/mile right now and getting cheaper the older it gets. So far, I've never had a repair that cost more than $300 and gas mileage is comparable to some hybrids. It cost me $12k new and I paid it off in 2 years so my actual purchase cost was something a bit higher, but I didn't let the financer recoup even half of their expected interest off of me.
http://www.nytimes.com/2013/09/21/your-money/car-leases-grow...
http://www.nytimes.com/interactive/2013/09/21/your-money/To-...
Rates are still pretty low now, and thus I continue to rent.
The data says otherwise: "“There’s no strong correlation between interest rates and home prices,” ... The bottom line is other factors (like a stronger economy) have a bigger impact on house prices than changes in mortgage rates." [1]
[1] http://www.calculatedriskblog.com/2013/06/house-prices-and-m...
That's where the calculator is useful.
People that rent an apartment or house usually don't have the discipline to live as frugal as buyers are forced to be.
Why did they make it worse?
Rent vs Own is a boring question. Rent This vs Own That is nearly impossible to quantify.
http://www.nytimes.com/interactive/business/buy-rent-calcula...
What I'm not sure about though is how it compares to a traditional principal and interest mortgage. Obviously your interest payments fall as the mortgage amortises... So then how does total interest compare to money spent on rent in that case? That's what most people would be wondering when it comes to evaluating renting vs buying...
http://www.zoopla.co.uk/press/releases/buying-beats-renting-...
Second, the break-even point is based on the principal to interest split in your payment. That is a function of your loan term and how deep into the term you are.
I'm not sure if you get to deduct property taxes for non-homestead property on your federal return either. In my case, losing this deduction would force me to use the standard deduction instead of itemizing. So, a possible double-whammy.
edit: note this is for the US.
When you are paying for someone else's house, please do not be afraid to protect yourself with a proper, binding rental-agreement/contract.
Edit: I live in Canada incase that makes a difference.
Before buying our home, my wife and I rented and had a horrible time with our property manager.
The climax was coming home on a chilly friday night in November with NO WINDOWS in our bedroom and nice little note stating: "Be back on Monday".
The painters were supposed to paint the trim and windows and decided take them out to paint them but not to replace them for the entire weekend.
> Buying allows you to control your property
Amen
Your country (which country is it?) seems to have very substandard legislation in these matters, if such intruding is not illegal.
Of course, most places require that landlords give the tenant some amount of notice before entering the home (generally a day or so), but taping a notice to the renter's door that said "remodeling starts tomorrow and will last a month" would probably cover that.
Some states have renter's law that says something like "if your rental is unusable because of construction or damage or what have you" that you can seek "equivalent premises at the market rate" and bill your landlord, but I suspect if you do that you'd better start shopping for a new place to live and limbering up your small claims court documentation.
//edit
The bottom line in the states is that you probably have decent rental protection but will have to sue the guy you are buying a roof from if they don't voluntarily play nice.
Probably rendering the apartment inhabitable for hours every day is not legal, and I could have sued for some compensation, but living there had gotten so miserable with the construction noise and random water shutoffs that I just wanted out.
BTW, this isn't an isolated incidence. If you are renting a house in India, you will most like be subjected to the vagaries of land lord.
In the end it all turned out to be good. Now I own my house, decent mortgage and I get tax benefit as well. The net outflow (considering savings on rent and tax benefits) is very much manageable.
In India, if you can afford it, then the decision is fairly straightforward. Buy!
There's a valid point that we had to pay for these out of pocket, instead of a landlord paying. In return for these random financial hits, we get a predictable mortgage and an increased property value, which sure beats the yearly rent increases [1].
[1] CA's horrible Prop 13 limits our property tax increase to 2% a year.
Its really interesting the different things people value. I value not fundamentally worrying if there were to be an earthquake and this place would be destroyed. I value one day waking up and deciding, hey, I think I want to go try living in Portland, or just a different neighborhood here. I value not worrying about housing prices. This is just me of course, I totally accept that the other side of the equation has perfectly valid points.
You can do that when you own as well. You have to sell your house. After all you can't just get out of a lease whenever you want it goes according to a fixed time period. You have constraints as far as lease renewal, term and things like that. If you own you can decide at any point to sell (although certain times of the year are better obviously).
"I value not fundamentally worrying if there were to be an earthquake and this place would be destroyed. I"
Well first that is only a concern seriously in certain areas and second I wouldn't call that exactly something that is a common occurrence either. It's like saying "if I rent (edit fix) I don't have to worry about rebuilding if there is a fire".
"hey, I think I want to go try living in Portland, or just a different neighborhood here."
Ok so I understand your point now (but will leave the above comments for discussion). You actually are looking more to experience different things and not get tied down. Similar to the fact that some people would rather go to a different vacation spot each year rather than own a vacation home in the same place.
In that case an argument can be made that it makes sense to actually pay more to rent than to own because you are deriving some other benefit from not owning that is actually worth more (maybe that is what you are saying..)
One of my co-workers bought a condo recently and remodelled the interior. Got a great gas grill island - with it, he needed an exhaust fan above.
During the reno he got handshake approval from the board president, and ended up having a really inconspicuous grate installed above one of his windows. Long-story-short, a board member complained, they voted, and he ended up paying $5K to have it removed, and now has an exhaust fan inside that isn't hooked up to anything.
If you're going to buy, make sure you check out all this kind of stuff before-hand (especially with condos).
Ultimately we found a place without one. But all newer construction (1990 or later) we looked at had an HOA.
So if I summarize, you can't do what you want with it and you need to pay your landlord.
Why are people calling this 'owning' a house?
Disclaimer: own a house in a place people rent, so I got out of that steaming pile of poo unscathed.
At least that's what contractor told me when I tried getting an estimate.
True that your housing costs will eventually drop to near-zero (upkeep and property taxes always exist), but renting out your place won't always help you with that. Besides, more and more people are winding up in blasted Homeowners' Associations with deed restrictions that prevent renting entirely or more than a certain, small, percentage of rentals.
Ultimately, as you said, the decision is an individual one, but the conclusion is usually far from easy.
(Even more bonus fun: Try accidentally being the landlord of someone who decides to cook meth in one of your rentals. Does your investment risk profile consider this? Remember that rentals are, fundamentally, investments, unlike your primary residence which is, first and foremost, your shelter.)
1. abandonment, they just leave without paying
2. they incessantly ask for features
3. they hoard
4. they ruin beyond the security deposit and then dont pay (pets etc)
5. they consistently pay late
6. long time unoccupied eats away at profit due to special assessments, condo fees, hoa fees, whatever costs there are in the community
7. natural disasters (california/florida yikes)
8. simple non-payment. try renting in a renter protected area like dc (here's a hint, dont).
If I bought a home in my neighborhood and rented it out tomorrow, I'd take a hit on it for maybe 4 or 5 years, about $100-200/mo. But trends show I'd match my outlays after that and within 10 years have made all my losses back plus a monthly profit plus whatever property appreciation the market has decided to give me.
TBH, being a landlord is a huge PIA for the reasons you hint at, which is why lots of people don't do it, but financially it can make easy sense if you can stomach a few years of losses till rents rise enough to exceed your outlay. Ideally you'd rent at market rates, when your mortgage and other expenses were far below market rate. That's the situation I'm in now, my monthly expenses are about 50-60% of the market rate rental price for a house like the one I live in. My wife and I have already decided that when we move, we're just going to rent this property out and use it to make money. Even with the overhead of a property management company, we'll come out in the black every month. If we stay here, we're on track to pay off the entire mortgage in 2-3 years anyway and then we'll be living for close to free (minus HOA and property taxes). We could both live comfortably on part time jobs at Target at that point.
One of the problems I see in many of the Rent vs Buy comparisons is that people who favor renting seem to think landlords are a charity of some kind who magically make all the extra costs of owning a property disappear. But nobody is in the landlord business to lose money like this, as much as the market will bear, your goal as a landlord is to pass along as many possible costs to your renter as you can and not just rely on property value appreciation to dig you out of your financial hole in 20 years this includes, but is not limited to: HOA fees, utilities, taxes, appliances, repairs and maintenance, common area service, everything.
The new owners were trying to smoke you out. They might have been able to evict you on the basis of their desire to do significant work on the apartment (again, varies by state), but they probably figured it'd be cheaper to just make you miserable. Maybe that's legal in your state.
No thank you.
You can. Property tax goes on Schedule E as a business expense, just like insurance, utilities, repairs, etc.
You can also deduct mortgage interest for rental properties.
Ever get to know a military brat? It's a hard life.
But how about bicycle-able? My town is about 5 miles square, very bike-able, and I was able to buy a townhouse at twenty-five.
My newish suburb is walkable to a movie theater, bike store, huge gym, swimming pools, Tae Kwon Do school, a couple hair salons and a barber, a full grocery, a couple clothing stores, about a dozen restaurants from fast food to high-end dining, a UPS store, an optometrist, a toy store, a ballet school, two coffee shops, a dry cleaners, a bank, a liquor store, weekly farmer's market about 3 or 4 miles of landscaped parks, about 20 miles of trail and just on the edge of walkability is a full 18 hole pro-level golf course.
They're planning on adding more stuff to it as well including a full county library and some other odds and ends.
There's a nicer development similar to mine about a 15 minute drive that offers a similar environment.
My friends live in an older neighborhood that's also just a 5 minute walk from a lively older "main street" style commercial area and likewise get all their shopping and such done that way. They live in a brand new house, but the town is a couple hundred years old and historic.
You have to hunt around for them a little, but they're definitely out there.
It's not really THAT bad.
Off the top of my head: Chicago, Portland and Philadelphia are all fairly inexpensive with good transit.
If you're willing to pay a bit more: Seattle, DC, Boston, NY outside of Brooklyn and Manhattan, the unfashionable parts of LA.
If you're willing to live in the city center or put up with infrequent buses, Minneapolis, Louisville, St. Louis, Austin and Atlanta are all possibilities.
HOAs are a plague on humanity, but they're very hard to avoid in many circumstances.
On the plus side, single family homes tend to have far less restrictive HOAs than condos.
I'm buying somewhere to hopefully live for the rest of my life. I have no idea what the current 'value' of my house is, nor will I be enquiring.
If it turns-out that the house eventually achieves negative equity, who cares? I'm still living in it and that would actually mean my property taxes decrease...
People still buy cars despite meteoric[0] devaluation.
[0] meteors plummet to the ground, you see
In San Francisco, owning is incredibly expensive. But so is renting an equivalent piece of property. So I'm not grasping why the options are limited to rent or "move away". (aside from exceptions such as renting under rent control)
(Or alternatively, you don't yet have enough saved for a down payment. In that case, wait a few years and run this calculation again. If you still won't have enough money in a few years, your rent is too high for your income)
I don't think I've ever been aware of a situation where the cost of breaking a lease was actually, in practice, more significant than the costs in time and money associated with selling real estate. Obviously if your property has gained in value in the meantime you may still come out ahead when it's all done, but on the flipside you may also lose a lot of money.
The costs of breaking a lease are much more predictable.
In most cases you can only sell your house if someone is willing to buy it. Although renting it out is an option but you'll still be tied to, and responsible for, the property.
Personally, I don't see the big deal; there are pros and cons both ways.
Whenever you want, huh? Everyone thought the same thing in 2007.
Are people honestly trying to argue that owning a home leaves you more mobile than renting? Preposterous.
When you need to get out of a rental lease (of which I've never seen go beyond 12 months, but I'm sure they do), the landlord is obligated to make every effort to mitigate his losses and replace you as a tenant. You aren't "stuck".
edit: Just check interweb, only mortgage that being used to invest for more incomes are eligible for tax reduction in Canada, thus more trouble to convert a house mortgage to investment mortgage.
Where are you getting these lease-free rental units?
True, you're less on the hook with a 12 month lease, and the liability is lower than a 30 year mortgage...
But this is a very mild difference. That job's not going to wait for you to sell your house or for your lease to end.
> If you own the transaction cost is much higher if you need to move.
If you own, then eventually you're not paying anything at all for a place to live. And don't bother to mention property tax... you're paying that if you rent, too, it's just hidden.
This is a manufactured debate, it's meant to appeal to twentysomethings' bohemian aspirations. Someone wants them mobile so they can herd them around like migrant workers.
It seems to me that the majority of this argument is that rents will not increase. That is a fallacy. All else being equal, each time you move from a place, you will likely be paying more rent because of the inevitable march of time.
A homeowner's monthly burden is either static or reducing (if they're paying down the principle early), and they have all kinds of things they can use to offset that monthly housing burden, like rent spare rooms out, or use part of their home for a business.
Because of this ease whenever I move jobs I always move house to be closer to work (after passing probation) because in my area changing jobs can easily add an hour a day to your commute.
The actual "manufactured debate" is the one manufactured by the massive housing complex that tries to tell people that rent is throwing away money and it's always better to buy. Buy now! If you don't like your home, you can always sell it for more, later!
This tale has been empowered by the fact that we just went through a global, disproportionate, 20 year rise in house prices and extremely low interest rates that created much wealth for one of the largest cohorts in history. Everyone under 40 (at least) is skewed by this happenstance. Some have even managed to become wealthy from it.
The fact is, in an economically efficient world people would be indifferent between buying and renting. So there are many individual factors to consider, many of which are covered by this calculator.
TISNTAFL. Buying a home isn't free wealth (nor is renting). There are always tradeoffs.
>Someone wants them mobile so they can herd them around like migrant workers.
And maybe someone wants them to buy homes so they can't easily switch jobs or relocate, and are pinned down like wage-slaves?
You'll always be a sharecropper, now that you've been taught to believe that anything else is foolish.
Once I can afford enough to do it, I'll buy another home myself and rent it out to someone like you. And I'll stand there with a sheepish grin while he laughs that he got one over on me, hoping that he never realizes otherwise.
- owning a house may make it harder for you to decide to move and accept a job/opportunity elsewhere, or to travel -- the impact of which is unquantifiable
- for some people, by the time they'd finish paying off a house they'd already reasonably expect their parent's to have passed on and left wealth/property; for these people, particularly entrepreneurs, having free capital in the intervening period would turn out to be more rewarding so rental is a very sensible option
- not everybody is born where they want to end up; I've moved between 3 cities and 2 countries in my 12 years as an adult (each time increasing my earnings, opportunities and life experience significantly, like climbing rungs on a ladder), and I'm hoping to move a 4th time so that I can finally have access to the top-rung opportunities other people born in major cities and 1st world countries take for granted -- the idea of owning houses in each of these cities and somehow managing to rent them out as some propose here is absurd to me, I barely have enough time to take care of my basic needs, nevermind run a multi-national property empire, and besides which there a
Ultimately as nice as this calculator is, this is a very personal decision.
How Long Do You Plan to Stay: Max this.
Investment Rate of Return: Zero this. Because you seem to assume that the renter isn't investing the downpayment, principle payments and any other net savings and won't be able to trade the proceeds for 100% ownership in the home at the end of what would have been the mortgage period. Or set it to -10% (the max negative the calculator allows) if you assume the renter will squander rather than invest the money, with no commensurate happiness return.
The result with be buying is better than renting unless you can rent that home at an impossibly low price.
(Subject to the assumptions of returns and interest rates, etc etc.)
At the end of 30 years I will own my home. At the end of 30 years of renting I'd be in the exact same boat I'd be in day 1 renting.
The calculator makes a major assumption that if you rent you take your down payment money and invest it. Obviously the investment will be worth a lot after 30 years of interest. But this assumption is based on the false premise that you are sitting there with your down payment ready and it's just a choice of where to put it.
In reality, people don't usually save up a down payment until they've already decided to buy. So it's a false comparison.
It's also assuming that homes like the one you would buy are available to rent, so "everything else" is equal. Which is also a false assumption.
Basically this calculator is set up to make you feel good about paying a rent that's more than a mortgage payment would be.
Choosing to rent or buy shouldn't just be a purely financial decision. The real question is are you ready for the responsibility of being a home owner? Do you look forward to the prospect of having a permanent home and investing in it? Or do you just want a place to live and have someone else be responsible for maintenance?
Even given the first sentence is true, its not a false comparison, given the assumption the reason that people don't save up the money (or just invest it gradually, same thing) is that they have something more valuable than investing to do with the money (i.e., that the decision not to do so unless they are planning to buy a house is rational). If so, the investment value is the correct lower bound on useful use of the money to compare a home purchase to, because what they'd actually do is something else that has greater expected utility (even if that utility isn't in the form of a cash payout in the future.)
My point was that there's more to the decision than the simple "Will I make more money by investing in stocks than in real estate?" equation that pro-renting people usually point to. Of course stocks are a better return on your investment than real estate from a pure investment perspective.
There's more to choosing to buy than simply the pure financial motivation. If your motivation is purely financial then you shouldn't buy a house to live in but buy a house to rent out.
Also: big fan. Thanks for d3.
And thank you!
Here's my favorite demo of the concept, discovered here on HN: http://worrydream.com/#!2/LadderOfAbstraction
Well I'm not sure I'd call this a 'limitation' of your UI. This is actually a very common issue when designing user interfaces for models (I have been doing this for a living for almost 15 years). There is a continual tradeoff between the positives of the software ensuring internally consistent, and realistic, values - and allowing the user flexibility for edge case exploration. And then there are issues like discoverability, speed of use, technical limitations, etc. - as always.
One of my favorite mental toys in this area is: devise a way for a user to assign a fixed amount (call it a 'budget') to several categories. For a simple example, consider a budget of $100 over 5 expense categories. But it should also work for allocating a road maintenance budget across 25 districts, or for assigning a weighting to the importance of policy objectives (ecology, health, economic growth for example).
In the vast majority of cases, after several meetings about this, clients say 'fuck it, let them copy/paste their own values from Excel' (at this point I come in and broker a truce between the warring factions of several solutions and implement a meet-everybody-halfway solution :) ) It's one of those 'how hard can it be?' <2 weeks later> 'oops yeah pretty hard' things.
devise a way for a user to assign a fixed amount to several categories
Historical reasons? Delusions? Sales tactics?
Even the city state kings of the first communities needed to provide defense and such, taxation is the obvious way to do that. Taxation of property is quite reasonable compared to head taxes.
Ok, yes, you are right...70 years, not 99; though there is some suspicion/optimism that the government will extend the leases indefinitely. The property tax in CQ/SH is only on second properties and easily avoided right now through transfers or sham divorces. It will be interesting to see if the gov is really serious about property taxes.
If I buy a computer, I own it.
Far from a 'situation that basically no-one is in' I would say. I suppose what you meant is that basically no one really own their house. Well if it's the case, why use the word anyway?
Words have meaning. You can't just decide to apply a word to a situation where it doesn't apply and call it a day.
Taxes too are orthogonal to ownership; where I live people treat the local government tax as another utility bill, like water or electricity (so when renting sometimes the landlord pays or sometimes the tenant does). If I owned a car I'd pay tax on it - but if I leased a car I'd also pay tax on it in the same way.
Words have meanings but are necessarily simplifications (just as a map cannot capture every detail of the territory). In legalese I lease my flat - but in English I own it, because how I use it and what I can and can't do with it has much more in common with something that I own than with something that I rent or lease.
Except I own my home...
I love people who have determined that they've found some trick to beat the market. "Oversized asset returns! All you need to do is buy real estate!". How many late-night TV seminars did you attend to to obtain this knowledge?
One day the cheap money will disappear, and the speculators (like you) will go bankrupt. Then they'll stiff their creditors, blame the banks, and the public will pick up the tab...again.
I think I had seen the one on the future of interaction design, but I hadn't explored the site :) .
No, I'm not, I'm just excerpting the part that's most clear in explaining the focus of the response; we're in a medium where the whole context is preserved and directly accessible, so there is no reason to include the whole thing -- its already right here and available the reader.
> There's more to choosing to buy than simply the pure financial motivation.
That's true, and not a part of your comment that I have an issue with; its quite correct that looking only at the financials -- and even within the financials only the expected returns and not, e.g., the particular risks involved, since the disutility associated with risk is not consistent among individuals -- potentially understates the value of buying (but, that's true of renting, too). But that's irrelevant to the question of whether comparison to investing as an alternative is a false comparison based on the observation that people who aren't purchasing wouldn't often have the downpayment available immediately to invest.
In the end, the owner will likely recoup every dollar of principle they pay in the long term, while the renter has to find an investment opportunity that will not only return all of their loss (the rent they've thrown away) but then beat the increased valuation the housing market will provide the owner.
From here - http://assayviaessay.blogspot.com/2014/04/rent-or-buy.html
What about stocks? Stocks are a medium to high risk investment with no guaranteed return on investment. It's actually pretty hard to make an educated guess what the return would be. But we can give it a go. According to this analysis,
the nominal compound annual return of the Dow from
year-end 1900 to year-end 2011, excluding dividends,
was 4.75%.
But that's also an upper bound.
However, the real compound annual growth was only
1.6%. That is, when we use constant dollars, we
discover that the purchasing power has only
increased 1.6% per year.
Let's get crazy, let's say I'm a fantastic stock picker and I can beat all this and I'm making about 12% per year. Running the compound interest calculator, I get $650,000. That's pretty amazing, but I still have about a million dollars to go to break even. I actually have to hit 16.5% every year, for 30 years, to break even.
This site lets us run another kind of calculation, the average rate of return for the S&P 500 over some date range. I picked the last 30 years and got 12.67% not adjusted for inflation and only 9.57% adjusted. Professional fund managers struggle to beat the S&P. So realistically, you aren't going to either over the long run.
This is so incredibly wrong. Selling a house can be a massive and expensive undertaking. Assuming agents are involved, you can expect to pay 6-9% of the value of the house in costs (agent fees, closing costs, etc), assuming the buyer doesn't find something that is against code or something that is starting to fail (furnace, roof, etc).
You buy a house tomorrow for $200k and want to sell it in 18 months because of a job opportunity or family emergency? You better hope the house value went up... Otherwise you're taking a $12,000-18,000 hit when you sell it. Sometimes, house values go DOWN-- and then you are under water.
Well it goes without saying (and this is always true for anything you read on the web, right?) that the specifics of each persons circumstances need to be taken into account.
Along those lines there are people that:
a) Own their own business so they aren't employed by anyone and don't have a job opportunity to consider.
b) Those in "a" have businesses that they intend to stick with and further may be tied down by either family or their wife's occupation (or children)
c) Have considerable assets or family they wouldn't have to bail out.
In any case along the lines of "family emergency" how would thinking of that situation allow anyone to ever take a chance or buy a house?
What about having a startup (as only one example) and then having a "family emergency"?
"Otherwise you're taking a $12,000-18,000 hit when you sell it"
The main problem that I had with this article's slant is that it tried to quantify things in a way that made you think that all that mattered were dollars. Not everyone thinks like that. Or cares if they were to lose 12 to 18k they'd rather be a homeowner and live in a community as a homeowner rather than a renter in either an apartment building (with more transient residents) or as a renter in a condo or even as a renter in a neighborhood. And they are willing to part with money in order to do that. Same way some people might decide to spend $5000 on a vacation or $50,000 for an airplane (when flying the airlines obviously is cheaper in most cases).
The vast majority of folks (americans, anyways) AREN'T in good financial shape, however, and often overestimate the permanence of their current situation. If you have to sell your house inside 5 years, you're in iffy shape. It can be financially catastrophic if you have to move during a down market. About 30% of folks are out of the house by the end of their 6th year, when they probably thought it was going to be their home for decades (source: http://www.nahb.org/generic.aspx?genericContentID=110770&cha... ).
I'll just buy another house at my new location. In the end I'll now own two houses I do whatever I want with and my renter will own nothing.
Uh, you realize that when you buy a house, you end up paying tens, sometimes hundreds of thousands of dollars in interest beyond the value of the home?
That's what the renter owns: money, in his pocket, compounding interest for decades.
This is the reason why there's an economic calculation to be made. If you're paying the $1000 per month to rent a place that you could buy for a monthly mortgage, maintenance and tax cost of $1000, then, yes, you're an idiot for renting. But this doesn't happen in the real world, outside of the recent history of extremely fast-rising house prices and low interest rates.
On the renting side, terminating a lease early is generally trivial. I've terminated several of the leases I've signed over the years mid-term by finding a new tenant for the landlord beforehand and having that person take over or sign a new lease. Landlords are usually happy to do so since they can increase the rent without losing any income.
I purchased our offices and wanted to install a door and just did it. I want to put in an alarm system I know it potentially adds to the property value. New carpets? Sure since even if we move it has value to a new owner (not 20 years later of course...) I didn't have to clear it with anyone and I didn't have to think about all the fine print in a lease or anything else.
But I do see your point.
The concern about the place being damaged/destroyed by an earthquake is a big one in California. Unlike fires, earthquakes are not covered by standard home insurance. And standalone earthquake insurance is prohibitively expensive for many (less than 1/5th of CA homeowners have it). Add to that the fact that (again, unlike a fire) an earthquake is likely to damage many homes in the same area at the same time which will inflate the cost to rebuild in a timely manner and you start to see the large amount of risk many owners are exposed to here.
Yup, I think you've come up with a really helpful analogy, that's definitely how I feel. Like the OP, I wanted to show that there were some things I valued that would make me want to rent even if it proved to be more expensive in the long run.
Your point re: renting (and my point) as I pointed out in a reply in my other comment is really the gist of what I didn't like about this article. It reduced everything down to a dollar amount when the decision for everyone is much more complicated. It's actually one of the things I don't like about "Internet advice" it's really hard to come up with a comprehensive analysis of all the reasons people make certain decisions.
Edit: Here the question isn't whether you should buy a house, but whether you should live in the house you buy?
Renters do this too. they have strictly more options than owners.
But supposing your agreement explicitly allows sub let's without landlord arbitrary approval, the owner is still coming out on top because the activity is simply reducing their monthly outlay while still building equity, the renter is only reducing outlay, but still has zero equity at the end of the day.
More importantly, my mortgage payment will stay the same, fixed in dollars at the year I borrowed the money (in my case 2006 dollars). While rents will continue to increase. For example, at some point in the future, I'll theoretically even be able to rent a single bedroom out that will cover my entire mortgage payment simply because of this simple truth. I'll live "for free". But your base rent price will continue increasing such that you're monthly burden will stay a significant part of your monthly income. Even if you pass along as much as you can to a subletter, that percentage won't change much while mine will continuously reduce.
(The above is a simple example of a personal budget which I always use to illustrate the point, my actual use case is usually something like 'spend more on nature protection and less on road maintenance, but don't change expenditure on social security'. It's easy to see how various political persuasions have some sliders they don't want to budge on, some they want to minimize, and others to maximize).
Usually you need some form of 'reserve' account in your UI; i.e., you're 'spending' from a certain total, and as you increase/decrease some items, that amount is taken from / added back to the reserve. But then how do you guarantee people always spend everything (in some cases that is needed) without introducing modality (i.e., a dialog that says 'you need to spend everything' when you click 'next' or whatever). And sometimes you need a way to move units between accounts, without using the reserve as an intermediate store; plus you usually need a way to move exact amounts, which is hard to do with sliders.
Another approach is something where you stick with the sliders you proposed, and add functionality to 'fix' certain ones, and optionally a way to indicate how much to increase/decrease the others. E.g., proportional to their current values, or distribute the amount equally, or something else, ... The problem with this approach is that it is natural for nerds, but almost instantly becomes unwieldy for 'normal' users. And in that case, the 'fuck it, let's do it in Excel' is better.
If you're interested in this sort of things, I'd love to hear your thoughts or see mockups on other ways you think this could be done. I have talked about this numerous times but usually not with people who know something about UX or even care, beyond their project in front of them.
Why is it harder? Not sarcastic at all, by the way : it's just that I am in Hong Kong and it's actually quite common for expats here to buy a house, give it out for rent, and never come back to Hong Kong again! In fact, I know of some cases where people have bought flats without even looking at them! (In both cases, someone they know manages rent collection + maintenance, presumably for a small fees?). So I was wondering what is different about the US / wherever you are right now.
Yes, it's a very personal decision, those were the exact words I was looking for! I suppose hardcore economists would say that the Utility Function is very personal.
You can sell it or rent it to cover those costs, but both of those options take time and effort. To sell it, you need to market it, negotiate with a buyer, etc. To rent it, you need to market it, pick a good tenant, collect rent, do maintenance and repairs, probably deal with legal matters like eviction, etc.
I guess you could just give it away (but doesn't that still involve a bunch of title transfer fees?) or just stop paying taxes and let it get repossessed (but doesn't that destroy your credit?).
If you rent, you can just pack up and leave -- the only limits are any terms stated in the lease.
All of that said, I'm doing exactly what you mentioned -- I bought a house instead of renting, even though I don't plan to stay here very long (I'm actually thinking of moving again in a few months, once I've been here for a year). But I did it with the explicit intention of renting the house to make a profit once I move -- and I plan to do that with my next place, as well.
(And as an aside, from what I have seen, the lowest rent on the least viable living space does not save enough to be worth the other costs in comfort, location, etc. to be worth it.)
Renting not give me an extra $1000/mo to invest and compound for decades. That is THE amount a month I must pay to live, somewhere.
And from what I have seen in the high-cost areas like SF or NYC, one is still paying out a substantial amount of monthly income just to live, somewhere, with no room to invest a difference.
To my mind, if you can't afford to buy, you're screwed.
"buying is almost always better"
"This nyt analysis isnt correct"
I think the point of what you are saying simply is if you find the correct set of circumstances in terms of the rent you are able to get for the house as well as the market conditions, cost, interest etc. it makes sense to find a renter (taking a whole host of other specifics into account as well) and, assuming housing continues to increase in price it's a strategy to have an asset many years later (could be 15 to 25) that you have no mortgage on and you are collecting rent.
This is a pattern that I have seen many people do and, once again, given the specifics of what you are buying (and when) is something that seems to make sense in many cases.
Oh, one other important thing that I don't feel people are taking into account.
When you use your strategy you also have a form of forced savings because your money is tied up. So when you wake up 20 years later with a paid off asset you have that asset and haven't spent the money on other things.
Here is another example of forced savings.
You own a business and that business has a value at the end of 10 or 20 years and you can sell it. Vs. you are a consultant and have no asset value to your business but make more money than the business owner does.
The consultant could of course take a part of his earned income every year and sock it away. But many if not most people aren't disciplined enough to do that. So making less and building an asset is a form of forced savings.
People can do all the math they want to justify any decision of course but taking psychology into account and people's spending habits (given money in their bank account) is also important as well.
You're right, the numbers don't lie. And the "numbers" say that buying and renting homes doesn't provide outsized capital returns in relation to other investments over the long-run. Period.
This isn't rocket science; the buy/rent decision must be based on many individual factors, most of which relate to the individual housing markets, individual countries (outside of the US, the rest of the world can't write-off their mortgage interest, nor do they have 30 year fixed terms at historically low rates), and the current and expected price of money.
A house sale is also a negotiation. Price matters. There is no "always better to buy", for in that case the "seller" would always be losing. Oh, unless house prices go up, always and forever.
Why are banks or other financiers lending to you at 3.5%, when they can just buy up property and rent it out for whatever returns you believe you are able to obtain? Blackstone and others are attempting to do this as we speak. The outcome is unknown. What is your competitive advantage?
Again, there is no free lunch. The world is filled with people who think they've found a way to "beat" the market. Maybe you have, but I doubt it. Some people can make a living buying properties and renting them out; others will lose their shirts. A catch-all "X is better than Y" does not exist. Putting 200k into a house should provide you with a risk-adjusted return similar to putting 200k into the S&P, including imputed rent.
There are cases where renting makes more sense. But they're usually in very short term situations, 1-2 year domiciles or in freakishly weird markets, weirder than SF or NYC markets to be honest.
It can't be said enough in this discussion also, the notion that a renter will have all this extra money that they can invest highly liquid, better than housing, investment options just doesn't work out in general. The post I linked to elsewhere in here goes into that in some depth, even goes over a couple scenarios.
Business property I don't think is a good proxy for housing. Business value can swing wildly up and down and there's far less of a guarantee that your business will even be worth what you put into it than in housing. You can literally pour tens of millions of dollars into a business year after year and have it be worth $0, but I can almost guarantee that I'll be able to sell my house after 30 years for at least what I paid into it (the principle, I agree that interest is harder to recoup). More likely, I'll be able to sell it for something far in excess. Even people who bought at the very peak of the property bubble will likely make a small profit.
But I also do agree that it's not a very liquid asset. It's hard to get money out of your house, but not impossible:
- After it's paid off, all the money you were paying is now liquid
- You can rent out parts of your house, in sometimes non-traditional ways, I know one guy who rents out parts of his unfinished basement as temporary storage for people doing overseas employment. Another rents her property as horse grazing pasture. Another uses their very nicely decorate home as a shoot location for local photographers and charges a small site fee. The list goes on. Not all of these are impossible for renters, but a great many of them are.
- You can use equity in your home for personal loans. It's not the same as liquid capital, but being able to raise a few hundred thousand dollars quickly can be useful and something renters can't do at all.
- if you have lots of land, sometimes you can sell off parcels for other people to build on, or you can repurpose it into business use
- you can sell it outright. One thing my wife and I are considering is retiring to a place with very cheap rent and just converting our home value into a long retirement in Spain or Italy. Basically our mortgage payment will get used twice.
No matter what, after any period of time, the renter still has lost every single dollar they put into their housing. Which typically represents the single largest expense for most people, consuming usually between 30-50% of their net income.