Is It Better to Rent or Buy?(nytimes.com)
nytimes.com
Is It Better to Rent or Buy?
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0
255 comments
Your mentioning of this made me check out the graphs again - and I noticed that the graph depicting the size of a down payment was flat. That could only mean one thing: the cost of mortgage insurance (that you will be forced to get if your down payment is lower than 20%) hasn't been included. That's a major cost on low down-payment house purchases.
Intentional or oversight?
https://en.wikipedia.org/wiki/Mortgage_insurance
Intentional or oversight?
https://en.wikipedia.org/wiki/Mortgage_insurance
We’re not currently including mortgage insurance, no. You could approximate it by increasing the mortgage rate, but the tax treatment of mortgage insurance payments may be different and so that may not be accurate. Perhaps this is something we can add in the next iteration of the calculator.
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.
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.
Maybe instead of just having reasonable defaults, you could include reasonable ranges through a background gradient on each graph (darker for more common, lighter for less common)? With that, you could manipulate the reasonable ranges through interactions between graphs, while still allowing people to set the actual number anywhere they pleased.
Also: big fan. Thanks for d3.
Also: big fan. Thanks for d3.
Definitely. We actually designed something like that, but due to time constraints weren’t able to ship it (yet). One complication is that a reasonable range for a given variable can depend on other variables. But hopefully we’ll figure it out.
And thank you!
And thank you!
I'm sure you've seen TangleJS by Bret Victor. Its performance wasn't quite good enough for the way I wanted to use it, but it looks like that level of meta-interactivity is what you're going for.
Here's my favorite demo of the concept, discovered here on HN: http://worrydream.com/#!2/LadderOfAbstraction
Here's my favorite demo of the concept, discovered here on HN: http://worrydream.com/#!2/LadderOfAbstraction
Wow, that's an impressive site, thanks for sharing.
I think I had seen the one on the future of interaction design, but I hadn't explored the site :) .
I think I had seen the one on the future of interaction design, but I hadn't explored the site :) .
"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."
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.
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
Yes, this is the first instinct. But moving all of the others down/up is in the majority of cases not what you want. Imagine you have 100 to spread out over 4 categories. Let's say you start with setting them all to 25. You set the first to 33, then you want to set the second to a desired values except oops, the first one is now no longer 33. Basically in this scenario you have to way to set them all to a precise value without trial and error until you're close enough to what you want.
Start them all at 0, and only invoke the scaling rule once the total is over 100%?
This does work for the use case where you only want to set an initial distribution, but quite often you want to play with trading one option against another afterwards, e.g. spend more on housing and less on holidays, but not less on food or car payments. Basically when developing various scenarios you set an initial distribution (the baseline) and then make scenarios, variations on that baseline. (I imagine it's quite similar for people doing serious exercises with the tool in the OP, I've also written tools to assess investment options, that is similar too).
(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.
(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.
I never paid a penny of mortgage insurance. Let's be clear. Mortgage insurance does not protect you. It protects the bank that owns the mortgage.
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.
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.
One risk associated with owning that doesn't often get mentioned but that is more relevant these days is your exposure to misgovernance of your local governments. There were a few scares in the municipal bonds markets in recent years but home buyers should recognize that they are exposed to similar risks. After all it is the taxes they pay that will be needed to pay back the municipal debt. If a city were to get into fiscal troubles police and other public services would get cut first potentially impacting property values, maybe greatly in which case there could be a downward spiral.
Unless you're somehow securing multi-year leases, that's a cost that is passing on to you as well.
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.
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.
You don't need multi year leases. If anything that would be bad. If I rent and the city I am in goes bankrupt and has to cut public services which in turn affect my quality of life and local property values, I can pick up and move and let the owner of the property deal with the double digit hit on his property value. Meanwhile I can move in to the town next door that doesn't have those problems. The costs are not passed down to me.
That's fine when you're 23. When you have a couple of kids, and chasing the lowest taxes/rents means that you're uprooting them from school and friends, there is a high cost for that.
Ever get to know a military brat? It's a hard life.
Ever get to know a military brat? It's a hard life.
[deleted]
This is super-helpful, thanks for posting!
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.
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.
The format of the old version [1] is so much better. The independent variable is how long I need to live in my house to break even, not how cheap do I need to find a place to rent.
[1] http://www.nytimes.com/interactive/business/buy-rent-calcula...
[1] http://www.nytimes.com/interactive/business/buy-rent-calcula...
If you all you care about is being cheaper than a given rent $X, then just look at the How Long Do You Plan to Stay? chart. When the equivalent rent drops below $X, then you’ve “broken even”.
(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.
(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.
This actually was more helpful, thank you.
According to the Modigliani–Miller theorem, the mix of debt (size of mortgage) and equity (down payment) is only irrelevant in a world without taxes. However, mortgage interest is tax deductible, while rent is not, so their result doesn't apply here.
The flat down payment chart is a coincidence, based on the default values for interest and inflation rates, growth rates and expected returns.
The flat down payment chart is a coincidence, based on the default values for interest and inflation rates, growth rates and expected returns.
I don’t think it’s a coincidence — those default values reflect the current market, and it’s a reflection of the market being fairly efficient. For example, if investment return rates were consistently higher, you could expect mortgage rates to rise as well. Taxes introduce some inefficiency, but I think the broader point still holds.
I found this fascinating, and fun to play with. My own academic background is in industrial engineering, and a big part of my career has been creating analytical tools (as software) for planners. So this sort of thing is right up my alley.
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?
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?
Do you have a link to Felix Salmon pointing out that this demonstrates Modigliani-Miller?
Edit: Thanks!
Edit: Thanks!
But it looks like Down Payment doesn't affect the result conditioned on holding the Mortgage Rate constant. I'm not so sure that's a good assumption. I imagine the down payment strongly affects the mortgage rate you'd get.
The M-M theorem is one of those pretty void theorems that says "in the absence of all real world factors, two abstsct models are mathematically equivalent structures".
Suggestion: When the down-payment slider goes over 50% suggest that, depending on income level and interest rates, it may make sense to buy the house on a line of credit _backed by the house itself_. I did this, and it saved me a ludicrous amount of money vs. a mortgage
How are you then able to get a mortgage if the house is already collateral on another loan?
You don't need a mortgage in this scenario, that's the beauty.
You leverage the value of the house itself to purchase the house, all made possible by the size of the down payment.
This way, you just deposit all your available funds and income into the line of credit. It's also more flexible than a mortgage in that your can both pay off as much as you want, with the ability to borrow back against it again with no penalties. This allows you to put all liquid assets against the loan with the ability to get them back out again in an emergency. I was also able to negotiate prime on mine, so the interest was very low. I did this twice, and was able to pay off the debt within 3 years each time, single income, making less than $60k/year.
By starting with a modest house, you can leapfrog up to a high-value property in a short timeframe and a minimum of interest payments
Very well done!
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 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.
Great visualisation and nice to see it properly accounts for all considations.
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.
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.
Great work! Any chance that you could publish a tax-neutral version, which could be used internationally?
How do you take into account the initial fees? (Taxes, real estate agent fees). It would be nice to have that configurable.
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.
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.
Why are Utilities listed under the category labeled as "surprising variety of expenses that renters do not directly pay"?
Edit: I see it is just a poor labeling, explanation mentions just the portion of utilities that not covered by landlord.
Edit: I see it is just a poor labeling, explanation mentions just the portion of utilities that not covered by landlord.
Your home price maxes out at $3M. That's just a small apartment in Manhattan.
Well, Central Park West maybe. You can get a nice small (Manhattan small -- a near-minimal studio) apartment for about $0.5M
[deleted]
This is a really awesome tool, and as someone in NYC currently debating renting vs buying it is very useful. I used to pass around the old NYTimes Rent V Buyer calculator often when people started thinking about the topic, I definitely will send this one out instead.
> Of course, there’s still a big intangible difference between having debt and not having debt,
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.
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 problem with owning is illiquidity and associated immobility. If you rent you can quickly down shift if you run into trouble. If you own the transaction cost is much higher if you need to move.
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.
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.
> The main problem with owning is illiquidity and associated immobility. If you rent you can quickly down shift if you run into trouble.
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.
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.
This is unequivocally accurate. I own three investment properties plus my own home. Each one is profitable, including the house that I live in.
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.
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.
And the only things a renter can do to reduce their monthly housing burden is downsize or move to less desirable location.
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.
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.
> rent spare rooms out, or use part of their home for a business.
Renters do this too. they have strictly more options than owners.
Renters do this too. they have strictly more options than owners.
Most rental agreements strictly forbid this. I can't compare irregular activities to irregular activities because you can always escalate it to some nonsense money making action favoring one side over another.
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.
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.
Breaking lease is far simpler and cheaper than selling. It's never taken me more than 2-3 weeks to find someone to take over the lease whereas it can take months to sell a house.
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.
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.
Depends on the country really...in Switzerland you can be on the hook for a lot more than in the states, where breaking a lease typically only loses your deposit.
>This is a manufactured debate, it's meant to appeal to twentysomethings' bohemian aspirations.
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?
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?
And yet, right now as we speak, they're out there buying up these homes for chump change, paying cash for foreclosed homes gone to auction, and then renting them back to you for what you'd have paid in mortgage, plus extra on top of that to cover expenses.
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.
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.
>I'll buy another home myself and rent it out to someone like you
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.
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've never seen a landlord go after a tenant for breaking a lease, honestly. The few I've talked to generally say they are beyond happy if the tenant is just out, and indeed, that's exactly what they say in eviction courts. They say they don't care about trying to get money out of the poor person being evicted, but that they just want the unit available to rent to someone who can pay. I think any landlord would be happier with a tenant breaking lease than doing AirBnb, for example.
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I've been using the old version of this for a few months. Making it obvious to which parameters the result is most sensitive is a huge improvement, thank you and well done!
Thanks, that’s good to hear. There’s always a risk releasing a new version of a popular tool. For those that still want to use the old one I think we’ll find a new home for it, too.
I really do like this new version as it seems easier to answer the main question at hand. I did like some aspects of the older one though (all #s more easily digestible, the big graph) so seeing it in a new home would be nice.
Huge props for including things like the Marginal Tax rate for tax deduction and closing costs, which most of my peers that I've spoken to are unaware of or fail to take into consideration properly. I just recently had a conversation with a friend about renting vs buying, and I raced through many of the factors in this calculator to demonstrate that it's not such a simple question and that there are many factors that depend on one's financial (and other) situation, but it totally went over her head bc I was going way too fast. I'll definitely use this page when explaining things to my friends in the future. Thanks so much :)
I used it to calculate if buying my house was a better deal than renting. Turns out over 30 years it was exactly the same.. down to the dollar.
Including the fact that you own the house after the 30 years?
Not sure why you're getting downvoted for this, it's actually a quite relevant point, i.e., the the side-by-side comparison should include the consideration that you get to enjoy rent-free accommodation in the home for a certain number of years (or even generations!) once it's paid for. It gets more complicated when you have to factor in a positive probability for various outlier events such as the house getting bombed in a war, the entire city going Detroit, etc;
Even more complicated:
- 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.
- 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.
> 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
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.
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.
If you decide to move, you have to do something with the house. I'm not sure about Hong Kong, but in the US, even once you own the house free-and-clear, a house is still a major expense -- insurance, property taxes, etc.
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.
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.
I currently pay $55/month for someone to worry about collecting rent, finding someone to rent, negotiating, checking credit, etc. for my rental property. It is not very profitable in terms of cash flow, but I am building equity into the house.
Yep, finding a property manager is one great solution to the problem. Did you find a good one easily? I've heard it's really hard to find a good one that actually manages the property well and keeps it rented out consistently. I haven't really looked myself, though, so all I really know about it is from stories on BiggerPockets.
I went with the agent who sold me the house in the first place, and found me a rental before then. I don't know how much of it was luck and how much was by design but the rental is in a location where rent is higher than mortgage payments by quite a margin and I found a good company to manage it.
I don't think it's harder, my house is in Florida but I live in the Bay Area now. As long as you have someone that can collect the rent etc.. for you it's not a big deal if you did not stretch yourself too thin with the purchase.
You sound like me. That said I still try to buy property, just not where I live, so I look at as purely a long term investment that will hopefully be profitable in the distant future.
I think it's being downvoted because the calculator does take this scenario into account, but the commenter (and you) seem to have not looked at it very hard. It clearly recommends that you buy instead of rent in the commenter's (and your) scenario:
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.
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.
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The calculator of course takes this into account. Both contributions to principle and the appreciated value of the home.
If you're disciplined enough to have actually invested what would otherwise be the down payment, and kept it invested, and reinvested the proceeds, you'd own one house's worth of money after the 30 years and could proceed to buy a house using cash.
(Subject to the assumptions of returns and interest rates, etc etc.)
(Subject to the assumptions of returns and interest rates, etc etc.)
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Yeah it was the same for me and that made me raise an eyebrow.
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?
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?
> In reality, people don't usually save up a down payment until they've already decided to buy. So it's a false comparison.
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.)
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.)
You're choosing one part of my comment in isolation and arguing against it without context.
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.
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.
> You're choosing one part of my comment in isolation and arguing against it without context.
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.
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.
Assuming an equal start without any downpayment at all, you have to be Oracle of Omaha great with your stock investment portfolio to beat the return on investment inherent with housing since the difference between mortgage and rent in most markets will only give the renter a couple hundred dollars a month 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,
But that's also an upper bound.
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.
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.
Wow, the marginal tax rate pretty much cut the rental limit in half, the difference is that big.
why higher marginal tax rate makes buying better? I don't get it.
Higher marginal tax rates increases the $ value of mortgage interest deduction for the same amount of mortgage interest payment (since a deduction reduces taxable income, but the amount of reduction in actual tax liability is the reduction in taxable income times the marginal tax rate.)
I see, but most mortgage doesn't have interest income tax deduction here in Canada?
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.
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.
Really valuable stuff here. Thanks.
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.
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.
Thanks, that’s a good suggestion. There are additional tax considerations with second homes (and business properties), but it’d be nice to include these in the model.
This calculator ignores the fact that the market for real estate buyers is increasingly global but the rental market is local.
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...
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...
> This calculator ignores the fact that the market for real estate buyers is increasingly global but the rental market is local.
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.
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.
My point is that for young people who grew up in cities like London or Vancouver, the choice is not buy or rent, the choice is rent or move away from the city they grew up in if they want to be able to buy a house on a middle class salary.
The choice is still or rent. What you're saying is that renting is better than buying in these cities because housing prices are high. This calculator demonstrates this; if you put in an extremely high house price, you'll find that renting is better (or moving somewhere else where housing prices are cheaper of course).
Are you restricting rent to "living with roommates"? And not allowing for owning to be "rent out to others"?
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)
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)
The rents in London are depressed by foreign investors who buy up properties and rent them out. This reduces the supply of properties to buy, and increases the supply of properties to rent.
Right so the calculator will tell you that it is better to rent if you believe the foreign investors are over-optimistic about future home price increases.
(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)
(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)
My wife and I found a great apartment to rent. It was spacious, quiet location, reasonable rent. We were happy for a few years.
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!
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!
I am a renter as well but we have pretty strict rental agreement regarding these kinds of things. The owner is not even allowed to enter the property without my prior permission or a certain amount of notice.
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.
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.
> but renters must submit to arbitrary changes, allow men to enter their homes uninvited
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
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
> They sometimes came in while I was sleeping, and while I was getting dressed.
Your country (which country is it?) seems to have very substandard legislation in these matters, if such intruding is not illegal.
Your country (which country is it?) seems to have very substandard legislation in these matters, if such intruding is not illegal.
Which country was this in? I find it incredible...is it everywhere like this?
Certainly in most (all) of Europe (even in places with relatively weak, by European standards, tenancy agreements like the UK!) nobody except the tenant can enter the property unless advance notice is given or in case of emergency (e.g., if a pipe bursts, the landlord is entitled to repair it without having to give advance notice).
If you are in the states and are not in a place with an extremely well established rental market run by professional landlords, it is probably like that.
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.
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.
This was in the USA, where the law states that landlords and their hired contractors may enter during "reasonable hours" for "improvements."
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.
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.
The law varies by state. The states I'm familiar with have a tenants' right to "peaceable enjoyment" of their rented premises.
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.
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.
I don't think a court would have found those hours to be very reasonable if you were asleep or still getting dressed.
This is why I was forced to buy a home, in India. Two months into new rental place the landlord casually said he's going to sell the place and that I will have to abide by whatever the new owner says, worst case being vacate the place with 2 months notice that had taken us a good one month to find and settle into.
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!
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!
Is the argument here that there is never inconvenience or downside to home ownership? That sounds rather naïve and one-sided. The flip side of all this is that as an owner, any sort of problem is YOUR problem. And there are a lot of potential problems with a building.
Absolutely, owning a home is more work. However, IME it is less inconvenient, because we are able to better control the timing of that work. For example, when our roof leaked one night, we were able to get it fixed the very next day. When we needed electrical work done, we scheduled it for when we would be gone, so as not to disrupt our lives.
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.
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.
Kind of prefer that landlords take care of all that, personally. As a renter, if something is broken I'm calling the landlord and going to work. Sure ain't my job. Couldn't really care less if someone else is inside.
Buying a home is not an investment, it's a quality of life improvement. Something that I usually don't see mentioned in rent-vs-buy arguments is that the housing stock that's available for sale can be very different from what's available on the rental market. The two markets are similar only at the low end. If you want something nicer, the chance that you are going to find exactly what you want is very slim. Even "luxury" apartments for example typically have beige carpet, cheap appliances, cheap bathroom fixtures, etc. For a private landlord it doesn't make sense to upgrade the property above the bare minimum either. It's just not cost effective. And if you are looking to rent a single family house your choice will be even more limited. Now, if you buy your home, with some reasonably priced improvements you can improve your level of comfort significantly. Of course, not everybody cares about these things. If you don't care too much about where you live then renting makes perfect sense.
Depends on what you consider quality of life. Mine mostly depends on short commute time and I don't really care about interior decor beyond there being WiFi, a shower, and a bed. End result is that renting is a much higher quality of life because you have more choice of where to rent and can rent the minimum travel distance to work.
I will tell you my reason to own a home, large at that, even though I am single. I have seen friends/coworkers have to move after leases were not renewed. I have seen friends/coworkers lose put up with stuff about their rentals I would not tolerate as an owner. Sure it go fixed, but damn. I have also seen them held hostage to rising rents just to renew.
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.
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.
Absolutely. I guess lots of people, myself included, choose renting over buying for the main reason that they might find themselves not living in their current location in a couple of years. For me at least, that is the price to pay for the freedom of where I live. I know that once I find a place to settle down I will consider buying, but until then I will rent.
Doesn't have the fancy d3 visualization, but here's a better analysis over the long run (30 years). It even stacks the deck against owning at the start by assuming 100% financing. There's a few missing components (mortgage insurance etc.) but even if you add those numbers into this rather detailed analysis, the conclusion doesn't change. It's actually a good enough analysis that you can just added or subtract a few other scenarios from it yourself and until you're describing some very bizarre circumstances, the basic conclusion holds. All the calculations and reasoning are provided here. Buying is unambiguously a better use of your money over the long term. It's not even close.
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.
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.
That only works if a few things are true, primarily that you can rent your properties for more than their carrying costs. If you bought and then the bottom drops out--which, potentially, causes you to need to move for work so you have to sell low--then this isn't as feasible. Second, you also take on the risk of being a landlord, so you're now responsible for the maintenance and upkeep on two or more properties and you get the cost of vacancies.
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.)
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.)
I know a multiple property owners. Here's some of the few more common cases as to why people don't strike it rich immediately when renting out properties.
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).
Rent will almost always go up. If I rented my house the moment I bought it, I would be running a nice deficit and have nowhere to live. Today I can rent it out and the market rate will make me enough money I can then go rent a 2 bed room apartment and still have a surplus. This is because my mortgage costs either stay the same or drop...in dollars priced at the year I borrowed the money originally. While the rental rate increases have matched or exceeded inflation every year since then.
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.
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 problem with this (admittedly very good) calculator is there are two key knobs that require massive amounts of speculation but have a huge impact on the decision: projected return on investment and expected home price growth. Good luck predicting either of these over the next 10 years.
I wouldn't say this is a problem with a calculator. These two factors make predicting whether renting or buying will be better really hard in some cases, and the page makes that clear. I see it as an interactive tool that helps you explore all the variables involved rather than a calculator designed spit out a clear yes or no answer in every case.
Same with retirement calculators. Step 1, at what age do you plan to die?
I resisted buying for a long time for mostly flexibility reasons. Eventually, with a 2.85% 15 year rate and a roughly 2.5% home price growth rate it was just stupid not to buy.
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.
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.
My uncle bought his house and pays $300/month in a neighbourhood where rent is $1,500/month on a similar home. He is near the end of a 30-year loan, and will retire soon, paying just property taxes and upkeep. Keeping the long-term in mind, it seems better to buy.
We're 7 years in on a home. Originally we had a 30 year mortgage, a couple of no cost refinances later we're on a 15 year mortgage with a <3% borrowing rate which is almost free money. We've been paying down the principle as well and our monthly mortgage is now about 50-60% of the comparable rents and dropping while rents in my area are rising at 5-6%/yr. We're on track with paying off the loan inside of 2 or 3 years after which we'll be living in a very nice home effectively for free. We're even thinking of doing some basement modifications and renting out the basement as a separate apartment (we never use the basement for anything the house is >5000 sq ft.) which will completely cover our mortgage while it's still required or will bring in income after the house is payed off. Every one of these scenarios would be impossible if we were renting, all of the money we would have payed in rent would have disappeared into smoke and we would have been helping somebody else make their mortgage payments or making them money.
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.
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.
Two important adjustments when using this:
"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.
"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.
> Only 4%? An index fund will return higher than that.
Just like homes will always go up?
Just like homes will always go up?
That's what makes me laugh when I talk to people who are looking to buy a home. Despite the housing crash of 2007, when I ask them what would happen if housing prices go down, they get this disturbed look on their faces and say "nah! not in this city!!".
As someone who has nearly paid-off a mortgage I have absolutely no interest in whether house prices increase or decrease.
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
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
This is great, but it's not a realistic scenario for most folks who aren't approaching retirement and can't be 100% sure they're never going to move again. If you ever needed to move, you'd suddenly care quite a bit about the current value of your home because it will have a tremendous impact on the actual cost of buying a new home.
True, but (assuming prices are comparably "up" or "down" in both places and that you're moving into something of similar size or larger) it's better to move when prices are low (since a lot of the costs are pegged to the price of the house).
Then it sounds like buying for the right reasons! Many people see buying a home as not only getting a place to live, but also as an investment. And for some reason many people see the investment as "low risk", which it often isn't.
No one said that index funds always go up but they do return more than 4% (nominal) as a long term average. I bet that the calculator uses 4% as the default because they assume a relatively conservative portfolio such as 50% bonds & 50% stocks. That portfolio may be appropriate for many people, but it is substantially less risky than tying up your entire net worth (plus more?) in a single house.
2% would be more accurate...
Get ready for lousy stock returns
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."
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."
In the short-term, perhaps. Returns long-term are high than 3%-4%.
Depends on which term. Retirement roulette.
The calculator is surprisingly accurate based on some math I did late last year when thinking about buying a house.
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.
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.
I might be missing something, but if house prices rise just 1% annually, your differential would shrink dramatically in favor of ownership.
In the scenario I modeled, I was assuming around ~3% growth.
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.
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.
There is no rent control on single family homes in SF, regardless of its age.
Rents tend to increase in normal markets at about the rate of inflation, in crazy NYC/SV markets they increase faster while mortgages will stay the same (or can be reduced or offset). In the long run, $4100/mo in 2014 dollars will still be $4100/mo in 2014 dollars 29 years later. Meaning they'll be a fraction of of 2043 dollars via inflation. The mortgage then de facto goes down while rent will continue to increase at least with inflation (or at least it does historically).
So I live in rent controlled area in the bay area where I pay around $1500 for a 2 bedroom. Using this calculator, it seems like buying almost any kind of home in the bay area would be a very bad decision.
Sure, until you decide to move. Then you'd have to pay market prices. Rent control, in San Francisco at least, is an exception that favors the renter and "punishes" the landlord. Even though the owner can't increase their current tenant's rent, the owner is still making an increase on equity due to the home's value increasing.
I'd personally find this more useful if I could start with what I'm paying for rent and get a result of "If you can buy a similar home for less than $xxx,xxx then buying is better."
You can do this by setting all of the sliders except for the home price, then dialing it in until your rent is shown.
Rent or buy arguments universally skip what I consider the most important factor in any major investment decision: freedom. When you buy a house, you tie up major assets and take on a huge debt load. This provides a massive constraint on your life. You're less likely to take on a risky job opportunity, you're less likely to move for a good opportunity, you're less likely to purchase other things you enjoy, and you put all your eggs in one basket. On the last point, as Americans should know now, real estate is not a sure holder of value. You can easily lose 50-100K if you need to sell your house to move somewhere else but there are no buyers. The flipside of this is you may sell it for the asking price but need to wait a year to do so.
When interest rates are low, prices are high, and when rates are high, prices are low. It's fairly straight-forward. Your payment works out about the same. You should buy when rates are high and prices are low because you can renegotiate the rate later. You can't renegotiate the price.
Rates are still pretty low now, and thus I continue to rent.
Rates are still pretty low now, and thus I continue to rent.
> When interest rates are low, prices are high, and when rates are high, prices are low.
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...
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...
Well it depends how good the rental rate is or how much good your investments are or how different is the increase in rental rate vs house value ...
That's where the calculator is useful.
That's where the calculator is useful.
Makes sense on the surface, but historically this hasn't been true.
Don't forget the human factor! Though theory says buying a house is not always the best financial move, on average those people are better of when they're old, because they are forced to live more frugal.
People that rent an apartment or house usually don't have the discipline to live as frugal as buyers are forced to be.
People that rent an apartment or house usually don't have the discipline to live as frugal as buyers are forced to be.
The New York Times has had this same calculator for years with all the same options and a much better interface: http://www.nytimes.com/interactive/business/buy-rent-calcula...
Why did they make it worse?
Why did they make it worse?
Worse according to who? I can see the appeal of the old version, but I found the new one more suitable to my needs in every way I can think of.
Really neat that you've updated this. One issue: The graphs of grey bars on white background have very little contrast even in different browsers on a nice monitor. The old version of the calculator has much more color contrast between the graphs and background and doesn't have this issue.
This analysis always misses the most important by far for non-yuppies: the housing mix for renting vs owning is very different. In my neighborhood, you can't rent a house, because everything is owner occupied.
Rent vs Own is a boring question. Rent This vs Own That is nearly impossible to quantify.
Rent vs Own is a boring question. Rent This vs Own That is nearly impossible to quantify.
This version is better:
http://www.nytimes.com/interactive/business/buy-rent-calcula...
http://www.nytimes.com/interactive/business/buy-rent-calcula...
Has anyone compared this to the Trulia buy versus rent calculator? http://www.trulia.com/rent_vs_buy/
Is this calculator very specific to the American market, or would it also produce accurate estimates for, e.g., France or the UK?
I've just used it for the UK. I ignored the currency and just used exact numbers (so what I paid for my house in £ is the number I put into the site as $). Under taxes, I adjusted property tax until the dollar amount was roughly equivalent to my annual council tax, and adjusted the deductible to 0. Under closing costs, I included stamp duty as a buying cost. Insurance, maintenance, etc are all direct conversions.
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.
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.
Another variable that would be useful is property-tax growth rate. Because sadly that seems to increase pretty constantly.
We need one like this but Canada; no tax breaks on mortgage interests or property taxes up here :-(
Canada also doesn't have 30-year mortgage terms. The loans are still amortized over 30 years, but you need to renew the mortgage every 5 years or so.
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).
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).
This sounds similar to the mortgage market in the UK. Longer term fixed rates exist but the rate reflects the yield curve over the fixed period (not just current spot rates) and there is usually a large redemption penalty. For example, if you sign up for a 4-year fixed rate deal, there might be a redemption penalty of 4% if you close it out in year 1, 3% in year 2 etc.
Canada has the pre-payment penalties as well. Wouldn't surprise me that origins of the Canadian system came from the UK.
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.
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.
I said this when such a thread came up the last time: If you can (easily) switch jobs without moving it might make sense to buy. If you can't, however, renting is the safer option as you can move if/when there is a problem with the job. Domiciles can be rather illiquid at times, which sucks when you need to move for work.
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, ...
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, ...
Indeed, my wife and I both are pretty much equals when it comes to our careers, we both find them fulfilling and enjoyable, but they are completely different focuses. If one of us were to get a job offer that required us to move, we would have to be certain the other could get a job of equal value there as well or the job offered would have to be about twice as good as the current. So it made the decision to buy much easier and it hardens us against jumping from job to job simply because the grass may look greener.
Some people say "oh you can always rent the house out!" but they often forget that once they move away and have to hire a property management firm, the fees that they'll have to pay will erode the rent revenue below breakeven with the mortgage payments (without such a manager, you can frequently break even or better vs mortgage)
First, it depends on the rental market. Unless the local housing market deflates, after several years you should be able to get more than your expenses in rent, even after giving the management company their 10% (or whatever it is in your area).
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.
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 don't think people necessarily see that as a perfect solution in which they make a profit. If you can come close to breaking even by renting it out, that gives you more runway with which to sell the place. Reduces the time pressure, so to speak.
In at least one US State, your property taxes are different if you're living in the home vs. renting it out. In my case, losing the homeowner's exemption would almost double my property taxes.
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.
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.
> I'm not sure if you get to deduct property taxes for non-homestead property on your federal return
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.
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.
To add to this, people don't usually lose their jobs in a bubble. If you are losing your job, chances are a lot of other people in your area are also losing their jobs which makes it even harder to sell.
In general, the model doesn't include risk.
I think the NYT has redone this interactive piece like 50 times now.
Surely you jest! The previous version was four years ago (in 2010) and was implemented in Flash. Screenshot:
https://twitter.com/driven_by_data/status/469498632027537408
https://twitter.com/driven_by_data/status/469498632027537408
I'm looking forward to seeing more flash replaced with d3!
My bad
There is nowhere that I particularly want to live that I could possibly afford to buy in, though.
Broaden your horizons, perhaps? Manhattan & downtown San Francisco are not the only interesting places in the world.
If one of your major criteria is a walkable city (ie, no car required) within the US, that list is very short and very expensive.
Leaving the country broadens your options considerably, but that also adds its own complications.
Leaving the country broadens your options considerably, but that also adds its own complications.
If you demand walkable, then yes, you are up a creek. The only way to get purely walkable, with your grocer, theater, and night club all within a fifteen minute stroll, is high-density which generally happens in the heart of large cities, and is indeed expensive.
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.
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.
Lots of newer suburbs are being designed with high walkability in mind.
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.
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.
> that list is very short and very expensive
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.
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.
[deleted](1)
For full disclosure I am a founder of the company but many of the mistakes in math / modeling made in the NYT Tool are corrected at SmartAsset. One example is the tax consequence of ownership - which because of the standard deduction is overestimated for lower value homes (<$250,000).
I just wanted to reaffirm what you're saying about the deduction on lower value homes. When we bought, people were telling us "you get to deduct the interest, it will be a huge impact!"
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.
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.
It varies widely based on where you live, too. For example, in NYC state/local taxes are high (these are deductible on your federal return) so anyone with a reasonably high income is already beating the standard deduction, making the interest deduction a very large advantage.
I was only able to itemize for the first 5 years. After that, standard deduction ever since.
If you buy, you can do whatever the heck you want to with the house or your yard. That's true freedom and to some people - myself included - worth every penny.
If you rent, you can leave whenever the heck you want and then go live wherever the heck you want. That's true freedom and to some people - myself included - worth every penny.
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.
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.
"If you rent, you can leave whenever the heck you want and then go live wherever the heck you want. "
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..)
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..)
"You can do that when you own as well. You have to sell your house. "
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.
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.
"You buy a house tomorrow for $200k and want to sell it in 18 months because of a job opportunity or family emergency?"
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).
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).
I own two houses and I agree with you. If you're in great financial shape and you'd be happy buying a house, buy a house.
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... ).
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... ).
Why would I sell my house when I can get somebody else to rent it and make my mortgage payments on that house for me?
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.
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.
>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.
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.
I don't understand here. It costs some amount of money each month for housing. Unless I hugely overbuy a house or underrent a small, undesirable apartment, that amount is the same (Say $1000/mo).
(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.
(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.
No, my renter is paying that for me. He's within a few percent of my mortgage in most markets (near the beginning of the loan, then as time goes on gets even more advantageous for the owner) so he's not working with some huge nest egg of capital that's making him loads of money. Especially if I just keeping financing at 100%. I can keep buyinbg properties and keep finding renters to pay them off for me as long as I feel like. Read the link I posted elsewhere here, buying is almost always better, even with the renter advantaged with a huge investment best egg to start. This nyt analysis isnt correct.
Keep downvoting. Numbers don't lie. Do the math yourself and show your alternate calculations where you don't own a house at the end of the loan period if you buy and getting somebody to pay your mortgage as their rent makes you own it even cheaper.
I think the reason you are getting downvoted (I upvoted) is because you are making statements like this:
"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.
"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.
edit more here https://news.ycombinator.com/item?id=7790758
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.
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.
>Numbers don't lie.
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.
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.
> 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..)
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.
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.
As another example I always buy a car for cash and never lease. I want to be able to wake up any morning and get a new car exactly when I want. And I don't want to have to obsess over miles on the car or at least have it quantified "12k miles .30 overage". Not even a money issue it just takes the "fun" out of it.
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.
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.
You are 100% incorrect on your first point. Selling a home is not easy nor cheap, takes time, and is wrought with uncertainty. It's usually a low liquidity environment.
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.
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 guess in the end I just like to do what I want to do and not have to ask for permission or get approval.
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.
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.
Or, you retain ownership of your house and become a landlord, whilst being a tenant in your location of choice.
Edit: Here the question isn't whether you should buy a house, but whether you should live in the house you buy?
Edit: Here the question isn't whether you should buy a house, but whether you should live in the house you buy?
You can break a lease whenever you want. Generally the most you can lose is the deposit plus rent until the unit can be filled. Compared to the transaction costs of selling a house it's negligible.
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.
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.
From what I've seen, you generally need a 12-24 month lease to rent a house. I can sell my house whenever I want (or leave and rent it out to someone else), but if I'm stuck in a 24 month lease I'm stuck for the next 2 years.
It's pretty rare that the penalty for breaking a lease is that you have to pay the entire remaining term of the lease. Usually you only have to pay until a new tenant can be found, and you can speed that up if you can find them a new tenant yourself. Quite often they're really happy to be rid of you, even if they won't say so, because if the market is up they can probably charge more for a new tenant than they can raise your rent (due to bylaw limits on rent raises).
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.
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.
I speak solely from my experience in California, but I've been renting for like 10 years now (in a variety of places, houses and apartments), and the way its always worked for me is a 12-year lease followed by month to month. The penalty for breaking the lease was always pretty lenient too. May be different in other places though.
12-year leases?!?! Please tell me that is a typo and you meant months.
yup, 12-month sorry.
In some cases you can get month-to-month, it just may cost you more. You can always break your lease but there's a financial penalty of some form for that.
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.
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.
>I can sell my house whenever I want (or leave and rent it out to someone else)
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".
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".
Not true in many, many cases. HOAs, condo boards, zoning laws, and historical societies can control homeowners pretty well.
THIS.
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).
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).
Condos are a complete nightmare, I don't know why people go for them. It's like having none of the benefits of home ownership with all the downsides of renting. Then you have HOA's on top of that. Also I hope no one on the board is crazy!
No thank you.
No thank you.
Yeah, this. I recently moved to the Los Angeles area. Even many houses have HOAs. One of the HOAs we looked at had the rule that your garage door was not allowed to be open unless your car was entering or exiting the garage.
Ultimately we found a place without one. But all newer construction (1990 or later) we looked at had an HOA.
Ultimately we found a place without one. But all newer construction (1990 or later) we looked at had an HOA.
And you still need to pay taxes (rent) to your municipality (landlord).
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?
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?
Because there's no value in having a word for a situation that basically no-one is in? Because despite your sophist argument there are huge practical differences between what normal people call "renting" and what normal people call "owning"?
Don't you have clothes that you own?
Don't you own your food before you eat it?
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.
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.
I own those things but that doesn't mean I have unlimited freedom to do whatever I want with them. I own my food but I couldn't sell it (I don't have the right licenses). I own my clothes but I still have to comply with the law when I do things with them. That laws/HOAs/etc. regulate what I can do with my flat does not feel substantially different.
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.
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.
You seem to think that the landlord in a regular rental situation is making you pay their taxes as well.
There are countries that lack property taxes, but they tend to be communist (china) and you are only buying a 99 year lease. Also, the lack of property taxes doesn't work very well, as it encourages speculation and then sitting on then property doing much with it waiting for values to rise. Property taxes enforces mandatory deprecation (you have to make it productive enough to at least pay the tax) and also funds things like roads, infrastructure and schools without shady corrupt deals.
The 99 year lease is basically identical to ownership as people are exchanging the "lease agreements" like property titles. China hasn't decided what to do when the lease is up but in general it is highly unlikely they'd make you renew the full lease. Most likely they're going to start charging property tax.
I didn't say anything about the good or bad of taxes, just asking why people are using a word when it shouldn't be.
Historical reasons? Delusions? Sales tactics?
Historical reasons? Delusions? Sales tactics?
The right to property has never been without responsibility. I can own a house but then I'm responsible for sharing the costs of infrastructure around the house. You would find lower property taxes in the states in areas with little infrastructure (I.e. the bush in Alaska).
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.
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.
humannature, you are probably hellbanned, so I can't reply to your comment directly.
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.
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.
I remember reading about one Arizona neighborhood which had restrictions on having a desert style front yard landscape and had an implicit mandate on having a front lawn and a specific kind of front door. The implicitness was the difficulty in getting a fair refinancing deal from the bank, and a devaluation of the home for not being in sync with the neighborhood's uniform appearance.
I spent 30 years of my life living in a Townhouse with an HOA, so I understand the restrictions they can apply. I now own a single family home and trust me, freedom is a relative term - I'm drunk with the notion I can do nearly anything I want to do to or around my house within the limit of the law.
So don't buy where there's HOA, Condo Boards or Historical Districts. That leaves you with a lot of options.
That pretty much eliminates a lot of the big cities in the US, and a fair amount of the suburbs and smaller cities. Basically, anywhere where you'd be living in a building and not a single-family home. (Though a lot of single-family homes are coming under the purview of various associations and societies these days).
HOAs are a plague on humanity, but they're very hard to avoid in many circumstances.
HOAs are a plague on humanity, but they're very hard to avoid in many circumstances.
Agreed. I like the idea of disallowing pig farms, rooster farms, dog breeding, etc. But much beyond that, no thanks.
That's getting harder and harder to do in many places. If you like the neighborhood and the house, sometimes you just have to suck it up.
On the plus side, single family homes tend to have far less restrictive HOAs than condos.
On the plus side, single family homes tend to have far less restrictive HOAs than condos.
Well, usually. You can still be subject to HOA restrictions if you agree to them by buying a house in a HOA. You'll also be subject to township/borough restrictions which you can't really opt out of short of excluding entire neighborhoods from your home search (and researching local ordinances beforehand).
Except: take an extended vacation between employment, move to a hotter job market on a whim, move again on a whim, shield yourself to economic downturns.
Disclaimer: own a house in a place people rent, so I got out of that steaming pile of poo unscathed.
Disclaimer: own a house in a place people rent, so I got out of that steaming pile of poo unscathed.
I have a house on a corner. Can't put up a fence because it would block drivers from seeing around the corner.
At least that's what contractor told me when I tried getting an estimate.
At least that's what contractor told me when I tried getting an estimate.
So plant bushes or bamboo!
zappo had a list of uk cities comparing rent prices with interest only mortgage price. Some cities eg. Edinburgh showed hardly any difference (for comparable sized properties).
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...
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...
I think you might mean Zoopla?
http://www.zoopla.co.uk/press/releases/buying-beats-renting-...
http://www.zoopla.co.uk/press/releases/buying-beats-renting-...
Er... Yes.
Interest payments are only part of the story. The equivalent rent we calculate provides a much more direct comparison.
Would love to see this for lease or buying cars...
Leasing is almost always more expensive, but there are some benefits. This page explained it well: http://www.edmunds.com/car-buying/compare-the-costs-buying-v...
Buy a reliable cheap car that's easy and cheap to maintain and repair. Pay it off as quickly as possible and run it for 10+ years. Your operating cost per mile over a vehicle lifetime like that gets measured in fractions of a dollar per mile.
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 $12k new and I paid it off in 2 years so my actual purchase cost was something a bit higher, but I didn't let the financer recoup even half of their expected interest off of me.
My almost 13 year old car costs me something like <$.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.
The NYTimes did do it, it's just not as slick as the housing rent vs. buy calculator.
http://www.nytimes.com/2013/09/21/your-money/car-leases-grow...
http://www.nytimes.com/interactive/2013/09/21/your-money/To-...
http://www.nytimes.com/2013/09/21/your-money/car-leases-grow...
http://www.nytimes.com/interactive/2013/09/21/your-money/To-...
In theory, leasing should be much better, since cars don't appreciate in value, negating one of the advantages of owning. In practice, lease prices are so high that it seldom makes sense to lease.
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.