Is it better to buy or rent?(nytimes.com) |
Is it better to buy or rent?(nytimes.com) |
20 hours ago: https://news.ycombinator.com/item?id=9739544
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1884 days ago: https://news.ycombinator.com/item?id=1283190
As a home owner, I'm going to ask someone to elucidate on this sentiment.
I would have thought that the biggest reasons were (roughly) freezing your shelter expense against inflation, and putting an upper limit on how long you pay for shelter.
i.e. If I rent a £1000PCM flat for the rest of my life, my bill for shelter will continue to be roughly £1000PCM in today's money for the rest of my life.
If I buy a house with a £1000PCM mortgage payment, it will remain roughly £1000PCM for the rest the mortgage (though current low interest rates mean that it probably won't), which, in 25 years time could be worth just over half as much as it is now. And in 25 years time, I won't have to spend on shelter any more. I will have maintenance costs to pay for, but they are unlikely to equate more than £1000PCM in today's money over my lifetime.
So, where M is homeowner maintenance costs, someone with N+M living expenses is more likely to be better off than someone with £1000+N living expenses.
Its easiest to understand the problem with specific numbers. Assume a home buyer has $120,000 that could be put into a down payment, but that the minimum required is only $20,000. What should the buyer do? Assume that the investment rate of return is 5% and the mortgage rate is 4%. Investing the $100,000 instead of using it for the down payment is essentially borrowing $100,000 at 4% and investing it at 5%. All the formulas/worksheets/programs like this one and even professional investment advisors will end up showing that is better to put down the minimum down payment and investing the $100,000. This ignores the risk between alternatives. Putting the $100,000 into the down payment produces a guaranteed, riskless, return the buyer of 4% per year (by saving him or her the mortgage interest payments on the $100,000). The 5% potential return from investing the money isn't a fair comparison. The comparison needs to be made to a riskless investment (e.g. US Treasury Bills). Currently the riskless rate of return available to investors is approximately 0%. This means that in the current environment the correct alternative is to put the $100,000 extra into the down payment (absent any liquidity concerns).
One may say that they are willing to take some risks to obtain a higher rate of return. Modern Portfolio Theory has its detractors, but as far as home buyers are concerned, its implications are still apropos. Having one component of your overall portfolio earning the equivalent of a riskless 4% (by making the larger mortgage down payment) is likely to produce better aggregate returns (on the home and additional equities etc.) at whatever risk tolerance one designs for their overall finances.
I have no formal training in finance or investing so none of what I've described here should be interpreted as advice, instead it is intended to spur discussion.
If I borrow at 4% and invest the same sum at 4%, then I'm guaranteed to lose money on the deal. How much more your investments have to yield, in order to break even on a loan-to-invest strategy depends on the degree of tax liability that your investments are subject to.
Buying houses for shorter terms is just more risky, period. The housing market can crap out in catastrophic ways. Just like the stock market. The risk aversi
It would be an unrealized loss if you were living in a house with a mortgage bigger than the value of the house, so long as you pay though, you've still got a house to live your life in.
What this does assume is that you'll live in the house long enough for the interest savings to catch up with investment gains.
If you make the minimum down payment, and the value of the house drops, you're still on the hook for the full value at the time you took out the loan.
Once you've secured your mortgage, your payment plan (and therefore debt) has nothing to do with the value of the house.
A home you live in is almost always a net cost. It's not really an investment so much as its a cost avoidance (vs renting). Buying more house than you need "because this is an investment" is almost always a bad idea if you live in the home and thus are the one footing the bigger tax bill, interest, maintenance, utilities, improvements...
Plus it "prevents" you from moving somewhere else. Or let's say, it increases the friction of moving somewhere else. Most home owners stay at the same place for the rest of their lives.
- Deep networks of friends - Strong community ties - Strong local family ties - Children with their attendant social networks - General aversion to moving frequently
Also, the idea that "most" homeowners never leave is antiquated. Nearly everyone I know who has bought a property has bought more than one before 40.
If you own it you can do all that. If you rent you have to ask permission which you might not get. Plus why spend money on somewhere you don't own?
This is also a market proof strategy -- if the market goes down, the your current house may lose value (but you're not upside down on your mortgage, because you don't have one after 5 years). But the next house will also be proportionally cheaper too. And if the market goes up, the house you just paid off has gained in value, making for a bigger down payment on the next house.
A good way of looking at this is: not owning is equivalent to having a large short position in the property market. If prices go down, you "win" by not losing money and/or your rent going down. If prices go up, you "lose" because your rent goes up and what you can buy now is less than what you could've before.
That's a fine position to take but my point is that it IS a position.
You don't necessarily need to own where you live but you should own _something_. It could be in the area you plan to retire to (to hedge against rising prices), an investment property to generate income or whatever.
IMHO REITs aren't the answer here. Residential and commercial real estate are different beasts. Commercial real estate is generally a means of generating income. Residential is far more speculative.
Some people compare long term returns on property vs equities. These compare reasonably favourably.
In all those cases borrowing to buy property is far more favourable. In the US at least you can get 30 year fixed mortgages that are currently hovering about 4% for 80%+ of the purchase price. You just can't get those terms on anything else.
Even on day 1 your mortgage payment is ~30% principal at these interest rates.
Property tends to be a great hedge against inflation too and higher interest rates and higher inflation seems to be a risk with the amount of quantitative easing occurring in the developed world.
Lastly, the ability to essentially fix your housing costs is (IMHO) huge, particularly in major urban centers.
Taking out a mortgage is clearly the best investment I ever made.
(It was obligatory.)
The picture is a bit different if that $500k is all your assets or even substantially more than all your assets (a common situation for a first-time buyer with a big mortgage). Which suggests you should rent until you've built up substantial investments of other sorts, and then consider buying.
Historically, I think the variability in price of a single house hasn't been any worse than that of, say, a typical index fund. (Disclaimer: I haven't actually checked the figures.)
Of course, all the above treats houses as just another investment. This is a useful perspective, but you're going to be living in your house too, and questions like "can I redesign the bathroom?" and "if there's a flood or an earthquake, am I liable for fixing/replacing everything?" and "am I bothered by the possibility that my landlord might just throw me out one day?" and "can I get up and move somewhere else with minimal hassle?" may be just as important to you as "what is likely to leave me with more valuable assets 20 years from now?".
Your stock will have lost 20% of it's value and you'll have lost 20k and 20% of your investment in the index fund. Your house will have lost 20% of its value and now at 400k, you've lost 100k of net-worth and 100% of your investment in your house.
No different than owning $500K worth of share in a public company.
Nothing wrong with buying a house, but people should be careful not to have their net worth all tied up in a single asset (house or not). The one rule I've heard is 90 minus your age. When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement. Too risky.
It's very different to owning shares in a company. You have to either buy a house or rent. You cant opt out entirely, whereas you can with shares.
By choosing to rent, you are betting on the housing market being stagnant or falling, if house prices shoot up and you opted to rent, you will need to now pay higher rents or a bigger mortgage.
So there is risk in renting too
If you decided to rent in london instead of buying 3 years ago, you'd be tens of thousands down
That said, if you actually own your home in retirement you've significantly mitigated against the risk of getting priced out by rising rents if the regional economy heats up. That could be a problem on a fixed income.
I mean, your mileage is going to vary on location, and a generic thread like this isn't necessarily all that useful, but in my area, a mortgage payment is actually less than a rental payment for a similar place.
So even if it's a "bad investment", I can reclaim at least some of the money I put into a purchase when I sell the place (or make a profit, but no guarantees). But I get nothing when I stop renting.
With a mortgage, you're essentially leveraging around 1:5, which means you put down your 20%ish and get 100% of an asset. If the asset moves down 20%, your net equity is worth exactly 0. If the asset moves up 20%, you've made a profit of 100% (simplified, not considering the fees and other costs).
The trick to understand this is, if you put your down-payment money somewhere else, like a long-term index fund, what kinds of profits would you have expected? What about the risk, considering you're highly leveraged in a mortgage?
Thus the calculator to do the math for you.
I live in London, UK in a flat I rent for £950 pcm. This would cost me £379,000 to buy, at the very least as it's a relatively nice area.
I could scrape the deposit and get a £379,000 mortgage but the insurance, maintenance and other costs on top would result in zero disposable income.
Currently I have £1750 left over every month which is nothing but bags of freedom to do whatever I want.
If I was to drop dead on Monday, the last great event wouldn't be getting Magnet in to do my kitchen, painting the living room ceiling and sitting in all weekend eating Tesco Value food. It would be chilling next to Lake Geneva in Lausanne with my other half which is exactly what I'm doing.
Live life now before it's over.
Edit: This is based on the advice of my wife's grandparents who are just about hanging on at the age of 84 and 86 respectively. They had to cancel their cruise this year due to poor health and openly admit that they worked way too hard for a house. They have a nice £1m house in London and a pile of savings but it's worth nothing to them now because their health is gone. It's empty as the children have left and they realised the memories were more important than the bricks.
So, sod buying a house. I'll live an irresponsible yet fulfilling life now.
It's not irresponsible to spend money on traveling and adventures. You get back much more than nice time there and couple of photos and souvenirs - you are exposed to new environment, people, culture etc. and you'll grow inside in a subtle, yet steady way. On the other hand, usual "buying stuff you don't need to impress people you don't care about" is useless, and won't even bring any long term happiness.
>Plus why spend money on somewhere you don't own?
People have this mentality that renting is throwing out money. It's not - it turns your housing into another explicit cost like food and travel. I like this, I think too many people make the biggest investment decision of their lives (often by orders of magnitude) so lightly. And anyway, when you own, the costs that would go to renting are priced in, like: taxes, upkeep, opportunity costs, and interest payments. There is no free lunch - even the home ownership tax benefits get priced into housing costs.
On this thread it's visible that people try to promote their own decisions in this topic (and we all have been into it deep down). Let me put mine - I took loan 8 years ago, in a different country, on a small appartment that when looking back, wasn't the best idea (but neither really bad). Mind you, it was in 2007 :) Surprisingly the price didn't drop below the one I paid, but the pressure to bring every month enough cash to make it through was... not nice. THe perspective to have similar setup for next 20 years was a bit sould-crushing though (it was 50m appartment, so nothing to raise your family in).
But, this pressure forced me off my lazy but, I temporarily moved to another country to earn more and pay it off asap, realized that this country is SO much better than previous one (which wasn't my home anyway), so I decided to stay. 5 years forward, probably the best decision of my life (and there were heaps of people saying I should settle where I am instead of move).
Where are all these landlords, because the ones I have experience with in Florida, Texas, and Virginia get pissed if you so much as nail a picture to the wall.
Of course selling your house and buying a new one will take a few months, so it does restrict your mobility in that way.
When you rent, sure, you can't stay forever, but you have visibility at 2 years down the road (depends on the country where you live, but where I do the owner cannot get you out for the duration of your lease, and that's usually 2 years).
I'm guessing you live in the US ? Outside people are way less mobile.
However, the risk is that you have a 60 year old, nearing retirement with 90% of his/her net worth locked up in an asset. They are counting on being able to sell and use the equity for retirement.
If you own your home outright and have a nice chunk of cash in retirement funds, then you're fine. Of course that also means you're very diversified (some cash in real estate, some cash in the market).
London is one of those crazy places where a job jump can actually get a salary boost larger than the national average salary in its entirety which is where the short term advantage is if you know how to play the market.
You always pay over the odds to rent initially but due to inflation and relative property prices it becomes good value rather quickly.
I'm not picking on you, but it's amazing how quickly Americans (not saying you're from the US) forget economic events that happened only a few years back.
There are many places in the US where housing prices haven't come close to the peak in 2007. I knew several folks who lost a ton of money ($100K+) on real estate back then. It seems like all of those concerns have evaporated in the last 8 years.
And Milwaukee is not, by a long shot, Detroit— it's still barely below its peak population. Wages have declined, however— an average young person when my parents were young would make the same amount of money as in San Francisco: http://www.theatlantic.com/business/archive/2015/02/for-grea...
(All of these numbers are nominal dollars— the house has significantly declined in real value.)
what makes you think this is the case?
for all the singularity and robot economy talk on here, if give those things have even a small chance of occurring, over 30 years that adds significant risk to real estate values across the United States
that's essentially like the factory in town going out of business across most of the country
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Why ever would I consider renting? We're still at a relatively low point in the market, and there's a pretty good chance the value of your property is going to go up, not down.
rent is a 1:1 cost:value on living space. Mortgage is leveraged.
A sketch of my argument: as we are sometimes reminded to bear in mind, prices are driven by market conditions and affordability, not costs. If prices shoot up, why will the rent increase? Is it not already set to the highest value the market can bear, or something very close to that? We'll assume it must be, because it would be silly to do anything else (and the tenancy market is liquid enough). But then, if prices are at the right level already, how will people pay for increased rent?
If salaries increase as well, then this is just ordinary inflation. House prices go up, rents have go up, salaries go up - well, people have been warning about this for years! On the other hand, if prices increase, and rents go up, and salaries don't, how are people going to be able to afford to pay for any of this? The obvious answer, of course, is that they won't.
Fairfield, IA: all maintenance as well as on-going renovations at $25/hr plus materials.
San Francisco, CA: interior paint, garden, chicken coop, converted garage into bedroom.
Portland, OR: extensive tear out and renovation, removed walls, renovated kitchen, new wiring and lighting, converted attic into bedroom, finished basement and added bedroom -- all on the owner's dime. Also, we built a kiln and a giant skate ramp in the backyard.
So it is possible. Although admittedly, I do have a knack for finding laid back landlords.
1. People think they can afford to buy a place at $X
2. People find a place at $X+Y and say "it'll be tough, but I love this place"
3. People find out actually owning a house costs $X+$Y+$Z and they can barely make their house payments and supporting costs
4. Eventually (after enough mortgage payments) your principal payments become large enough to take on the form of "forced savings"
I think this might work for some, but there are plenty of examples where people lose their homes because they underestimated the costs. Someone get sicks and goes on LT disability at 60% of their salary and end up missing mortgage payments.
I anticipate the objection that the financial crisis proves me wrong. Well, even at the worst of the crisis, annual foreclosure rates were under 10% (i.e. 90+% of mortgages were stable). And, banks have certainly further tightened up their underwriting since then.
Based on cursory look into Redfin data, homes in the Bay Area are vanishing in 5-12 days, selling at 100-300K above the listed price.
[1] I hope we don’t cite recession here.
Across much of the US? Probably not. Don't forget the average cost of selling a house is 6%. Buy a place for $500K and if the value of the house doesn't go up by at least 6% you've lost money.
That doesn't include all the other costs associated with buying a new house (moving costs, etc).
There are places where this doesn't make sense, and there are times where it absolutely doesn't make sense, but present day is a lot different. My anecdote of paying less (or slightly more) in mortgage + associated versus rent is not all that uncommon these days.
The real hidden cost, if you ask me, is the way it changes your sense of mobility.
Ref - transaction costs. You have to figure it will cost you around ~8% of the value of a property to both get into and out of it. This does not include the cost of movers. With a rental your transaction costs might be $50 for the apartment application fee.
They presumably spend the money on things they want. Forced savings means forced forgone consumption.
Every marginal dollar into savings isn't always a net positive. It depends on a lot of different factors including: life expectancy, whether or not you have dependents, how much you already have saved, your income, your alternatives, and not least of all your intertemporal discount rate.
There seems to be some sort of savings fundamentalism backlash against a culturally low savings rate. In a sound bite situation there may be no choice but to pick a simple message and go with it, but in a longer form discussion there's room for more nuance.
No doubt you can make money on property though, plenty of shows about flipping houses are popular. I was just curious about your math.
I bought a condo in an area that has exploded with gentrification but still after we sell in s couple of months were not expecting a huge profit. We're going to rent and let somebody else deal with all the hassles for a while.
I'd have to look at a lot of paperwork I can't bother myself with for an HN comment to get you an exact number, but after the sale of that place, and the purchase of a new place (I moved to get a larger place, wasn't really aiming to make money specifically.), I ended up with about the same amount of money put in towards the new place as I had paid into the old one, and an extra ten grand in my savings.
I'm not trying to say "buying is always better", and you have to do your research on the value of your property, properties in the area, where the housing market is at the time, how the rental market is going. There's no way anyone on this site can conclusively tell you that buying or renting is "better" nationwide.
But it's hard to understand why one would rent in a lot of cases, where you have no chance of getting that money back out.
I have enjoyed having our own place to do with as we pleased, but I'm looking forward to renting for a while!
I'm really considering a mortgage, but don't have money for the downpayment. Our mortgage payments would be actually less than what we pay for rent now.
On the other hand, it is hard to believe you can rent a 200k€ place for 500€/m. In Warsaw, a 2-room 40-50 m² apartment in the city center costs about 400-500€/m to rent, but if you wanted to buy it, offer prices start below 100k€.
On the other hand, it is hard to believe you can rent a
200k€ place for 500€/m. In Warsaw, a 2-room 40-50 m²
apartment in the city center costs about 400-500€/m to
rent, but if you wanted to buy it, offer prices start
below 100k€.
There are places that are unusual (like Mitte - the center of the city), but for ~90%+ of Berlin the pattern I described above more or less holds.
Even if you saved that 100-150 euro every month,
you'd not afford buying it after 30 years, assuming
it stayed at the same price-point.
If you're in a position where you have extra money and you can choose whether to invest it in the stock-market, buy a nice car, or put a down-payment+mortgage on a place to live it's a different consideration.