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 phi1618
old hand
Registered: 02/14/04
Posts: 3,921
Last seen: 42 minutes, 25 seconds
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 Buy or Rent
#8111363 - 03/06/08 02:49 PM (8 months, 25 days ago) |
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With the housing market correction, this seems a good time to consider the question:
Buy or Rent.
Ginnie Mae has a brief comparison chart:
http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_chart.asp?section=YPTH
I think renting is a better solution for most people, and should probably be more widely adopted in our society.
The main differences are that a renter is more mobile, a homeowner takes care of their own maintenance, property taxes, etc., and that a homeowner has equity in their home.
Mobility:
A renter can easily move between cities, making it easier to find a job in most professional careers.
Maintenance:
Houses need regular and emergency maintenance. A homeowner needs to retain and manage capital to take care of regular and predictable expenses like roofing and painting as well as emergency repairs (frequently related to plumbing). These expenses are lumpy and not entirely predictable, and can create significant financial strain if the resources are inadequate.
In addition, a homeowner will need to manage the actual job - doing the work or finding and hiring contractors and making sure they do a good job for a reasonable price.
A person or organization who owns a large number of buildings should have the contacts, experience, and financial resources to deal with these issues.
Equity:
A homeowner has equity in the house.
What are the characteristics of a house as an investment?
1) Highly leveraged.
People who own homes profit from appreciation and experience the first loss from depreciation.
If a person has equity of 20%, a 20% increase in the price of the home doubles their investment and a 20% decrease eliminates it. A 30% loss would result in the homeowner owing more than the price of the home.
2) Generally house prices have increased roughly in line with inflation - so, a low, positive yield. However, the last 10 years have certainly shown that prices can be highly volatile.
3) Location, location, location. If the economy of an area is doing well, the price of the home will rise; if you live in Detroit, you should really consider tearing down your house and planting soybeans.
4) Big.
For many people, a house is a big investment - they may have a significant portion of their net worth in their home.
People should save money, but I'm skeptical about a house as an investment because of points 1, 3, and 4.
A house is a high-risk investment because of 1, and it inhibits diversification because of 3 and 4.
Since a house involves significant leverage for many people, the value of your investment (down payment + payed down principle) can be significantly reduced or wiped out by relatively small fluctuations in the value of the underlying asset.
You already live and work in your neighborhood - if the economy tanks, you'll already suffer. Do you want the price of your most valuable asset to plunge right when you need the money most? This is what's likely to happen, thanks to point 3.
Of course, if you have most of your money in your own home, your not well diversified and are exposed to significant risk.
There are significant tax advantages to owning your own home, and people differ in their situations and priorities - no solution will work for everyone.
What about you? Do you rent or own, and are you happy with the situation? Do you plan to buy, and why?
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ToolTroll
...reach higherground...
 
Registered: 08/02/04
Posts: 1,270
Loc: I'm on the inside, lookin...
Last seen: 1 day, 18 hours
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Re: Buy or Rent [Re: phi1618]
#8111443 - 03/06/08 03:04 PM (8 months, 25 days ago) |
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Here's the way I see it: I am living paycheck to paycheck, have been for 10 years and probably will for 10 more years. But if I buy a house now, I will almost assuredly be better off in 10 years than if I continue to rent. So I am going to buy...
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 badchad
Stranger
Registered: 03/02/05
Posts: 2,835
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I honestly can't see how renting is better.
I pay about $1200/month in rent. That money is gone. I will never see it, it will never appreciate etc.
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 Redstorm
Prince of Bugs
Registered: 10/08/02
Posts: 40,763
Loc: [life]now[/life]
Last seen: 9 minutes, 7 seconds
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Re: Buy or Rent [Re: phi1618]
#8112912 - 03/06/08 07:42 PM (8 months, 25 days ago) |
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I'm going to rent until I get my master's and get settled in at a job I see as permanent. There's just no good reason for me to look for a house while I'm in school and then get offered a job in a different part of the country.
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phi1618
old hand
Registered: 02/14/04
Posts: 3,921
Last seen: 42 minutes, 25 seconds
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Re: Buy or Rent [Re: badchad]
#8112922 - 03/06/08 07:44 PM (8 months, 25 days ago) |
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If you own, you pay:
interest on your mortgage
property taxes
maintenance/landscaping
down payment
utilities
None of which you'll ever see again.
You also pay principle on the mortgage.
You might benefit from the appreciation of the house itself, but you're probably better off investing your money elsewhere.
On average, houses have appreciated at about the rate of inflation; house prices have soared in many regions recently, but have also come down off their highs and are likely to continue falling for some time - it's likely that some areas will see 30% depreciation or more. Add to that the effect of leverage - many people have less than 30% equity - and you've got one bad investment.
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Irradiated_Feces
doomedgeneration
Registered: 07/11/03
Posts: 4,048
Loc: Great White North
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Re: Buy or Rent [Re: badchad]
#8112937 - 03/06/08 07:47 PM (8 months, 25 days ago) |
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Renting can be better in a volatile market. You also don't have to pay property taxes, water bills, insurance, in some cases utilities. You don't have to repair shit when something breaks or call in a professional to do repairs. You can pick up and move whenever you want. You can skip out and not even pay rent and most likely nothing will happen to you. The list could go on and on why renting isn't the worst thing in the world. It all depends on what you're willing to put up with and what your life situation is.
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Some people are like Slinkies - not really good for anything, but you still can't help but smile when you push them down a flight of stairs.
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fireworks_god
Sexy ButtMcDanger
Registered: 03/12/02
Posts: 20,453
Loc: red panda village
Last seen: 21 hours, 8 minutes
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If you aren't settling down then buying a house is likely a bad move, unless you have a lot of resources. Owning a home and then renting it could become profitable I would imagine.
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Meet me in outer space
We could spend the night;
watch the earth come up 
I've grown tired of that place;
won't you come with me?
We could start again.
 
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Veritas
Registered: 04/15/05
Posts: 10,379
Loc: PNW
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Re: Buy or Rent [Re: phi1618]
#8115400 - 03/07/08 09:55 AM (8 months, 24 days ago) |
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Quote:
phi1618 said:
If you own, you pay:
interest on your mortgage
property taxes
maintenance/landscaping
down payment
utilities
None of which you'll ever see again.
If you rent, you can be sure that your landlord is charging you enough to cover their out-of-pocket expenses, plus their mortgage on the home. I've prepared many tax returns for landlords, so I see the way the income/expense breaks down. (Almost always in their favor.) They get the renter to cover their expenses, pay off their mortgage, and they only pay taxes on the profit.
Not only that, but the taxable profit is reduced by depreciation, which is NOT an out-of-pocket expense. The landlord can depreciate all the appliances, the portion of the property value attributable to the home (not the land), floor coverings, furnishings, etc...
With regard to the utility payments, I have rarely rented a place which included all utilities in the rent. I would imagine that the landlord would increase the monthly rent proportionately, so you would not save $ in the long run.
Also, you are incorrect about the down payment. It is applied to the purchase price of your home, which means that it is instant equity. The same cannot be said of the closing costs, some of which may be tax-deductible (pre-paid homeowner's insurance, property taxes, interest), but none of which are applied to the purchase price of the home.
Quote:
You also pay principle on the mortgage.
*principal. Yes, and this translates into equity. Renting is the equivalent of paying 100% interest, and not being allowed the tax deduction. 
I agree that it does not make financial sense to purchase a home if you are likely to relocate within a few years. The first few years of mortgage payments are mostly interest, though it is tax deductible (unlike rent). However, if you can afford to keep your first home as a rental house, and purchase a second home in the new town, you'll be in the position to get someone else to pay off your first mortgage!
I intend to become a landlord as soon as I can manage it. IMO, it is one of the best ways to become wealthy.
I'm purchasing the home I've been renting, and will likely hold on to it until I've paid it off. I will accelerate my mortgage payments by paying the same amount I've been paying as rent. This will result in my 30-year mortgage being paid off in 20 years. It means that my overall housing expenses will increase, as I will have to pay all the other costs as well, but I will save about $50,000 in interest by accelerating my payments this way. 
I've lived in this town for 10 years, and I intend to stay here. My kids have grown up here, and they love this town. For me, buying is a wonderful investment, and I'm so glad that I am able to do it!
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No man is free who is not master of himself.
~Epictetus.
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wiggles
One Winged Angel
Registered: 11/09/05
Posts: 2,391
Last seen: 22 days, 21 hours
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Re: Buy or Rent [Re: Veritas]
#8115499 - 03/07/08 10:27 AM (8 months, 24 days ago) |
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My biggest problem with a house is, despite being an "asset," until you have enough money paid on your mortgage to have substantial equity built, its effectively just a liability. It will make you money eventually, but how long will it take? Realty markets are just like the stock market... hard to predict. It may be a money loser too.
Not to mention taxes... a renter pays no taxes on the property. In our area school taxes alone come to more than 4grand a year. Thats pretty damn substantial, over 10% of the average persons yearly wages (average income is ~40,000$ a year). Not to mention other taxes, upkeep, bills, mortgage payments etc. In the end you have a house though. Also if you sell the house, as long as you use the profits to buy a more expensive house you do not have to pay sales tax on the sale.
I pay about 7 grand a year in rent, have pretty much no taxes to pay. The money I would have to spend on taxes I can instead invest into other places like stocks, bonds, etc which tend to have higher rates of return currently (bonds at least). Plus I like the mobility.
It is really a matter of preference I think. I just don't like putting my eggs into one basket, and for most people, their home is their sole investment. Thats just bad form.
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You can turn your back on a person, but never turn your back on a drug, especially when its waving a razor sharp hunting knife in your eye.
Hunter S. Thompson
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Veritas
Registered: 04/15/05
Posts: 10,379
Loc: PNW
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Re: Buy or Rent [Re: wiggles]
#8115562 - 03/07/08 10:45 AM (8 months, 24 days ago) |
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In my town, the only way you could pay $7000 per year in rent would be to share a house with three other people, or rent a tiny room in a larger home.  This might work for someone who is single, just starting out, who doesn't want kids or pets, but for anyone else it would be too restrictive.
The average 2 bdrm., 900-1200 sf. rental house here goes for $800 - $1000 per month, depending on how nice the place is & how fancy the surrounding neighborhood looks. Add in utilities at an average of $100 per month, and you're looking at $900 - $1100 per month. ($10,800 - $13,200 per year.) No tax deduction, no equity, usually no pets allowed, no painting the interior, no positive impact on your credit rating, and no guarantee that you will be allowed to stay once your lease is up.
By contrast, the mortgage payment on the home I've been renting for $850 per month will be $740 per month. Of that, 1/3 will go towards equity during the first year, and more each year thereafter. 
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No man is free who is not master of himself.
~Epictetus.
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GnosticWarrior
Hermit
Registered: 03/11/07
Posts: 226
Loc: Oahu, Hawaii
Last seen: 6 days, 3 hours
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Re: Buy or Rent [Re: Veritas]
#8115910 - 03/07/08 12:40 PM (8 months, 24 days ago) |
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It's all about growing your equity. While you can do that with buying a house if you need a loan to do it your leveraging. Even if you could afford to make your payments, as an investment decision it might not be the best use of your money.
This article: http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx
and a comment I read by Warren Buffett which I won't site here, is the decision whether to rent or own comes down to, where do you want to allocate your capital. If you rent you may have more capital to invest in stocks than if you choose to own your own home. And stocks in the long run may yield higher returns, than what you would have with a house.
However, Buffett also says to invest in what you know. And if RE is what you know, best to stick with it. However, I could be wrong bcs I don't understand the business, but isn't it better to manage properties vs. owning them? I thought I read that somewhere.
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phi1618
old hand
Registered: 02/14/04
Posts: 3,921
Last seen: 42 minutes, 25 seconds
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Re: Buy or Rent [Re: Veritas]
#8119375 - 03/08/08 10:25 AM (8 months, 23 days ago) |
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Financially, it's a question of opportunity cost.
Depending on your area, you will almost certainly be able to find a better return on your invested equity in something else, though whatever return you get on your house (positive or negative) will be amplified by the leverage you use (your mortgage).
Also, owning homes where you live is more dangerous than you think because of the lack of diversification. If your area runs on hard times (think Detroit), you can lose your job and your home equity at the same time.
Owning a house is expensive and a lot of trouble. Do you really have nothing better to do with your time and money than find a good painter or paint your own house, mow the lawn, clean the gutters, fix the roof, repoint the bricks, whatever else needs doing?
Of course, in most markets, rent will include all these things (in some markets recently this hasn't been the case because home prices were/are inflated to stupid levels), but at least the landlord takes care of it and all you need to worry about is making a single call.
Landlords have made an absolute killing over the last 10 years not on the backs of renters but from leveraged price appreciation. Anybody who owns property in the US is not suffering the reverse side of that. Depending on the area you live in, this dramatic appreciation won't happen again in any of our lifetimes.
For some people, owning and renting houses is a good way to make money, but more people get rich by having a good job and earning a good return on their money in stocks, bonds, REITs, commodities, etc. - in other words, a well diversified, high-yielding portfolio will make better returns at lower risk than a house.
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Veritas
Registered: 04/15/05
Posts: 10,379
Loc: PNW
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Re: Buy or Rent [Re: phi1618]
#8122963 - 03/09/08 10:44 AM (8 months, 22 days ago) |
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You seem to be ignoring the fact that your rent payment has a 0% return on your "investment." No one would agree to a mortgage in which none of your payments were ever applied to principal, yet this is exactly what renters are doing when they pay rent for many years. Not only that, but you must pay your rent with after-tax dollars, as compared to the pre-tax dollars used to pay mortgage interest. For most people, this is a difference of 15 - 35% (depending on state tax rates & federal tax bracket).
When you view a home purchase strictly as an investment, you miss the fact that you WILL have housing costs whether you opt to "invest" or not. The difference is that renters are paying off someone else's investment, instead of contributing to their own net worth.
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No man is free who is not master of himself.
~Epictetus.
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phi1618
old hand
Registered: 02/14/04
Posts: 3,921
Last seen: 42 minutes, 25 seconds
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Re: Buy or Rent [Re: Veritas]
#8126708 - 03/10/08 08:32 AM (8 months, 22 days ago) |
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When you pay rent, it's not an investment - you're just paying for a place to live.
When you buy, you're tied to a stationary investment the value of which is closely related to your earnings - if you lose your job, your house is more likely than normal to lose value at the same time, and you need to sell it before you move.
Sure, renting isn't investing - but, if you take the time and money you'd invest in a house and focus on a career and more liquid and diverse investments - which can include a REIT or two - you'll probably end up pretty far ahead of where you'd be if you bought a house.
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Veritas
Registered: 04/15/05
Posts: 10,379
Loc: PNW
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Re: Buy or Rent [Re: phi1618]
#8127149 - 03/10/08 11:39 AM (8 months, 21 days ago) |
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You can't invest the money you'd spend on a mortgage if you are already spending it on rent! This is the part you seem to want to ignore. Unless you are going to couch-crash or live with your parents, you WILL have to spend a certain amount of money on housing.
It simply does not make financial sense to flush that monthly payment down the toilet, and pay off someone else's mortgage & maintenance expenses. 
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No man is free who is not master of himself.
~Epictetus.
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GnosticWarrior
Hermit
Registered: 03/11/07
Posts: 226
Loc: Oahu, Hawaii
Last seen: 6 days, 3 hours
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Re: Buy or Rent [Re: Veritas]
#8128427 - 03/10/08 05:44 PM (8 months, 21 days ago) |
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The tax laws are weird. A homeowner has more tax deductions available as a landlord than living in their own house, such as building depreciation, maintenace and insurance costs. I have zero experience or first hand knowledge but in theory it looks as if a landlord could actually have a financial benefit by renting his or her property for cost.
That is very interesting. In no other business is that possible. The renter can save the cost of those maintenance and insurance costs that they would have had to spend, if they owned the same house they are renting. This savings could be applied to investments in stocks.
This is a win/win for both landlord and renter. By owning the property, you cannot benefit by falling home prices, a renter can. If home prices are rising, by renting you're making the payments for the landlord's property and they'll have the benefit of the capital appreciation. However, if you owned it instead, no one would have the tax benefits.
It could also be possible that the renter benefits indirectly by rising home prices. If they have investments in stocks, higher home prices could lead to a wealth effect that creates higher stock market prices.
By renting you are helping to create demand for this win/win relationship. Who can predict the market? But overall, the tax benefit of the landlord, affects the price of rent, and the renter can save money vs. owning, which frees up capital for other investments.
I see more positives to renting vs. buying. Unless its possible to receive the tax benefits by renting to yourself?
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phi1618
old hand
Registered: 02/14/04
Posts: 3,921
Last seen: 42 minutes, 25 seconds
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Mortgage interest payments are tax deductible, and there are advantages to having your money in your home if you declare bankruptcy or go/send your children to college.
That said, the landlord is providing a service by arranging and financing maintenance - owning a house is expensive, and a pain in the ass. (I rent, and could afford to buy)
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Veritas
Registered: 04/15/05
Posts: 10,379
Loc: PNW
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Re: Buy or Rent [Re: phi1618]
#8132537 - 03/11/08 04:03 PM (8 months, 20 days ago) |
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Here's another advantage to building equity in a home, rather than throwing your money away on rent:
If you need to borrow money, you can get a home equity loan. The interest you pay on this loan is tax deductible. This is true whether the loan is for improvements to your home, medical bills, or a wild vacation in Maui. Now, I'm not an advocate of incurring debt, but, if you must, it makes sense to get the tax advantage on your interest payments.
Additionally, you can use the equity in your home to secure loans for investment properties. If your second property is used as a rental, you can get some schmuck to pay off your mortgage & maintenance expenses! 
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No man is free who is not master of himself.
~Epictetus.
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Veritas
Registered: 04/15/05
Posts: 10,379
Loc: PNW
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Quote:
Unless its possible to receive the tax benefits by renting to yourself?
Not unless you set up a corporation to hold the property. (And this is definitely risky, as it could trigger an audit by the IRS.)
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No man is free who is not master of himself.
~Epictetus.
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GnosticWarrior
Hermit
Registered: 03/11/07
Posts: 226
Loc: Oahu, Hawaii
Last seen: 6 days, 3 hours
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Re: Buy or Rent [Re: Veritas]
#8133339 - 03/11/08 07:03 PM (8 months, 20 days ago) |
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Quote:
Veritas said:
Not unless you set up a corporation to hold the property. (And this is definitely risky, as it could trigger an audit by the IRS.)
I'm trying to read up on the IRS laws. Maybe family members could all take the tax benefit by renting to each other. I think its legal but as a landlord you have to charge the market rate for rent, I read this statement somewhere regarding family members, but it might also apply to anyone. It could be the IRS doesn't want you renting for the sake of being able to deduct the losses from your other income. That would be the only reason I would want to be a landlord. But if that only applies to family members, then I guess you could find a friend to cooperate with.
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