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Buying Vs Renting

written by John Chow on August 24, 2006

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I noticed in his latest blog post that Tyler Cruz is looking at leaving the renting world and buying a house. This a big move for anyone and I can understand how nervous he is feeling. So I figure I will put together this little post on the old buying vs. renting argument and give some Dot Com mortgage tips as well.

The House You Live In Is Not An Asset

Many people view their house as an asset – and the biggest asset at that. The truth of the matter is your primary home is not an asset, it’s a liability. You see, assets make you money. However, the only way you can make money off your house is if you sell it for more than you bought it for. Until then, you have to pay maintenance, hydro, cable, property tax, mortgage, repairs, etc. Housing costs are among the highest recurring cost a family can take on. Would you call something that takes thousands of dollars each month to maintain an asset?

Let’s say you sell your house for more than you brought it for because the market is on fire. This is the situation I am in now. I bought my house about a year ago for $411,800. Right now it can sell for $525,000. That’s a pretty good profit, right? Many people can’t make $100,000 a year but my house has gone up by more than that during this time frame and I didn’t have to do any work. But let’s look at the numbers a little more closely.

First of all, you have to live somewhere – shelter is one of the basic requirements of life. So if I sell my house, I have to find another one. And guess what? My house is not the only house that went up in value – every house in my area went up! So if I brought another house that is of equal features to my current one, have I really made a gain? Some will say I could downgrade, or move to a cheaper market. Ya right! How many people downgrade their house? Most spend more money and upgrade.

This is not to say I am against home ownership. I am completely in favor of owning your own home. I just want people to understand that the house one lives in is not an asset, and it won’t become an asset until the day you sell it. Until then it’s a huge liability.

Renting Is Not Throwing Away Money

When I was renting I couldn’t keep track of the number of time my parents told me that renting was just throwing away money. I was paying someone else’s mortgage, they would tell me. I’m sure you have all heard the same thing from your friends or family members. At first this seems to make sense. Why pay $1,500 a month for rent when you can pay $1,500 a month for a mortgage and own your own home? There is one major flaw with this argument – the house you rent now isn’t the house you want to own.

When renters become owners, nearly 99.99% of the time they upgrade. They want a bigger place, in a better neighborhood, near a better school, etc. So suddenly, that $1,500 a month in rent becomes $3,000 a month in mortgage payments. And of course, maintaining that new house will cost a lot more than the rented place. See the true picture now? If everyone buys the same place they rent, then it would make perfect sense to own. But this is not how people function.

If you’re renting, don’t feel bad when people tell you that it’s just throwing your money away – unless the place you’re renting really is the place you want to own. Then you are throwing money away!

Dot Com Mortgage Tips

Being a Dot Com that makes all their income online presents an interesting exercise when getting a mortgage. This is the same for anyone who doesn’t have T4 or employment income. Banks will want to see proof of income in the form of a Notice of Assessment from the Canada Revenue Agency. The problem is many business owners tends to overstate or pad their expenses to show less taxable income. The bank has to base your mortgage on this Notice of Assessment and if the taxable income shown is say $33,000, they may wonder why you’re asking for a $1 million mortgage. Banks based how much mortgage you can afford on your income as stated from the Notice of Assessment. So if you make $33,000 a year you can afford $663 a month in mortgage payment. Based on 6.6% interest, it would mean you qualify for a $98,000 mortgage.

If you’re in a situation where your total income is a lot higher than your taxable income, it doesn’t have to prevent you from getting a big mortgage. All you need to do is make it so your bank doesn’t need to know how much you make. How do you do that? Put down 35% down payment. At 35% down, a bank can give you a mortgage based solely on your FICO credit score. If the score is high enough (680 or above) the bank can lend you the 65% without asking any additional questions – and they will give you their lowest interest rate as well. So if your credit is high enough and you really want that million dollar house and only have Notice of Assessment income of $33,000, just put down $350,000 and the bank will lend you $650,000 without asking a single question!

Now if you don’t have 35% but still want to get that big place you can go for what is known as a “low doc” or “I declare” mortgage. These are done through a mortgage broker. Your approval is based on your credit score. You can always get a free copy of your credit report from any of the three major reporting agnecies, like Equifax. You will still need to show your Notice of Assessment but it doesn’t matter what amount is stated there – it can even say zero. The down payment can be as low a 5% and there are even programs available with nothing down.

The disadvantage of these programs is higher cost. Because of the higher risk to the lenders, they will charge a higher interest rate. Also if you put down less than 25%, there will be insurance as well as application fees and other costs. These costs can range from 1% to 5% of the mortgage amount – not a small figure when you’re dealing in hundreds of thousands of dollars.

My recommendation would be to stick with the banks and go for 35% down. At this level the banks loves you! Their risk is very low because of the amount you have committed. They will waive all fees and even pay your closing cost. If you can’t do 35% then the next best bet is to do 25%. At this level the bank can still give you the same deal as at 35% but they will base your mortgage on your Notice of Assessment. If that notice doesn’t show enough to get the mortgage you need then get a mortgage broker to find you a low doc mortgage. You won’t want to go below 25% down because the insurance costs and fees on a low doc mortgage can be very high – they are all waived at 25% down.

Pay Your Mortgage Off ASAP

Most lenders shows mortgage payments based on a 25 year amortization. My recommendation is to never take a mortgage longer than 15 years. Say you have a $100,000 mortgage for 25 years at 6.6% interest. Your payments will be $676 a month and over the life of the mortgage, you will pay $102,800 in interest. If you shorten the term to 15 years, your payment will increase by just $196 a month but you will save $45,840 in interest.

Here’s another good reason to pay your mortgage off fast – Unlike the US, mortgage interest on a principle residence is not tax deductible. Because of this, your interest payments are made with after tax dollars. So that 6.6% interest can be as high as 13.2% after tax. It’s pretty hard to find a 100% safe investment that will give that kind of after tax return, but paying off your mortgage (or high interest credit cards) can. Remember, good debts are debts where the interest is tax deductible. Bad debts are debts where interest can’t be deducted. A mortgage on your primary home is bad debt and should be dumped ASAP!

There are ways to make the interest on a principal resident mortgage tax deductible. However, the maneuver requires a person with a lot of assets outside of his home. I’ll post about that in the future because this little post is no longer little.

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{ 71 comments }

Marco August 25, 2006 at 5:16 pm

“atomization” = “amortization”

As for renting… some people just wouldn’t have it any other way. It may not make sense to me/us, but some people just like to live simply and live each day as it comes…

Thanks for the article!

Lemmy August 28, 2006 at 5:44 pm

I remember a couple of years ago that we had this Conversation. Was it at Golden Award? BTW, this article has many good point. Good write up.

John Chow September 5, 2006 at 11:53 am

I think it was at Golden. We seem to discuss most things at Golden.

Wes Novack October 13, 2006 at 2:01 pm

I need to start writing US versions of your articles. :-P

Ken Fehling October 13, 2006 at 9:47 pm

Also, it’s nice not to have to mow a lawn and do other kinds of upkeep. Although, some people like that kind of stuff.

Phil October 13, 2006 at 9:49 pm

What he fails to mention about paying off your mortgage earlier is that more money paying a 30 yr mortgage at a 15 yr rate and investing the difference. It is absolutely true you will make that you will end up paying more in interest,but if you invest and earn a modest return(on the difference between the 15 & 30 yr rate) the return will greatly exceed the extra interest that you have to pay. Never underestimate the power of compounding interest. (Both ways, for and against you!)

Dave October 13, 2006 at 9:51 pm

I bought a house 2 years ago in the mountains in colorado for 720,000… now the market has crashed because anyone can get a loan, but stupid people got ARM loans, and payments doubled in last year, so they are now screwed, and going into forclosure. i’m lucky, i am just way behind on my loan for a house worth half the loan value.

Vince October 13, 2006 at 9:57 pm

Depending the country you are living in.
Netherlands: 1 bedroom flat in Amsterdam city centre.

Renting this flat: 900 euros/ month
Paying a mortgage for this flat: 400 euros/ month

Santos October 13, 2006 at 10:09 pm

God, this article is filled with so much misinformation and obvious confusion that I don’t even know where to begin. You obviously have a big chip on your shoulder about “common-sense”, but the truth is, renting a home when you could buy it for the same monthly payment is INCREDIBLY stupid, because when you buy the home, a significant amount of your monthly payment goes to principle, WHICH YOU KEEP. Additionally, you are muddled when it comes to taxes. I don’t know where you live, but it sounds like your interest payments on your mortgage are not T/D. This does make carrying a mort. a lot less desirable, but you still need to compare it to what you could have made by investing the money. You don’t seem to have a firm grasp on the concept of opportunity cost. Fundamentally, this is what seperates middle-class people from rich ones.

I have never been here before and I don’t know what you normally write about. Presumably, you know something about it. I recommend you stick to it.

So to summarize: The reason you BUY a house instead of renting is NOT because you are speculating on an increase in value, it is because some of the money in a mortgage payment goes to PRINCIPLE, which is YOUR MONEY. If you’re lucky enough to live in the U.S., it’s an even bigger no-brainer.

Marla V October 13, 2006 at 10:12 pm

Let’s assume you have $400,000 in the bank (if you don’t now, maybe someday you will.)
You can rent a house, let’s say that costs $20,000 a year. And you can earn 5% on your $400,000, which earns you $20,000. Basically, you break even.

Or, you can buy a house. You pay nothing in rent, but you give up the $20,000 you could otherwise earn. And you have to pay property tax, utility bills and repair of wear and tear. In return, if your house value goes up, you gain that as equity (which you could easily borrow against or get as cash with a reverse mortgage assuming you do not intend to leave your children anything).
Will you break even? In a lot of markets houses have gone up 20% or more a year. So, you gain equity of $80,000. Your utilities and taxes, are more like $10,000, and annual average for major repairs maybe $2,000. So an expense of $32,000 versus a gain of $80,000.
All in all, a great deal.

As you say though, constantly upgrading to bigger houses and borrowing huge loans may be less desirable. If you pay interest, and if your housing market does not go up as fast, it may not be as wise. Also, if you believe you can earn high rates of return some other way like stocks, you would see the numbers differently.

Buying your house IS an investment, an asset, which can give returns in the form of equity (which are easy to take out, not hard like you say). But, it may not be the best investment for everyone. In some areas values do not increase as fast, and some people should invest in other things instead, like more education, or starting a business if they have the aptitude for it.

Santos October 13, 2006 at 10:15 pm

“So that 6.6% interest can be as high as 13.2% after tax.”

Uggh… what does that mean? It’s still 6.6%, I *think* I see what you’re trying to do here, but you’re not “thinking outside the box”, you’re just confusing things.

If you have money and want to decide whether to invest it or dump it into your mortgage, here is the formula:

MortInt (say 6.6%) – Deduction (Say 0% you unlucky Canuck) = Actual Interest paid (let’s call it AIP)

vs.

Investment % Gain – Tax

Whichever is higher, put your money in that. Because we get our mort. interest deducted in the US, it’s dead simple which to pick, but I bet it’s often still better for Canadians to invest too.

Nick October 13, 2006 at 10:20 pm

I have to disagree with one of the points you make in the article; that most people trade up when they buy. This may be true of the expense and quality of appliances, fixtures, etc, especially if a new house is purchased, compared to what was supplied by the landlords.

However, speaking for myself and for everyone I know, when we rented, we lived in places we could not afford to own. Convenient apartments / houses right next to downtown, with beautiful views or extreme convenience (5 minute commutes to work, for example), or both. When we purchased our first home this year after renting for 15 years, we had no choice but to relocate to a small house much further away from our jobs (5x longer commute at 35 minutes), with no view, and in a “up and coming” neighborhood compared with the area we had been renting in.

I think that renting is perfectly valid, but not as a way to save money — more as a way to have a lifestyle that you otherwise would not be able to. Very similar to leasing or borrowing money to have a luxury car, rather than saving money to buy an economy or used model outright.

Chris E October 13, 2006 at 10:21 pm

Why not take out a longer-term loan and merely pay it off faster? You’d need to make sure the loan doesn’t come with penalties for overpayment, but the lower payment will be great for those months when the cash isn’t quite rolling in like you’d like it to.

Thanks for the article. My econ professor was talking trash about the “throwing money away” argument this afternoon. Conventional wisdom never applies quite as widely as it claims.

John Chow October 13, 2006 at 10:50 pm

John – I use AdSense Deluxe. It’s plugin for Wordpress. You can see how it works at this post.

Santos – In Canada, mortgage interest is not tax deductible. That means in order to pay $1 of interest you have to earn $2 because 50% of it will be taken away by tax (if you are in the top tax bracket). This has the same effect as turning that 6.6% interest into 13.2%. In other words, your investment must earn you 13.2% in order for you to match the return from paying off the 6.6% mortgage. Paying down the mortgage is 100% risk free. Trying to earn 13.2% is not.

Dave M. October 13, 2006 at 11:23 pm

OK, I’m not an economics major, I know very little about the subject. So I may be very wrong about what I am about to say…

If you live in the same place for lets say 20 years. If you have a mortgage, the payments will be roughly the same from year to year. Sure there will be small increases due to taxes and such. Renting, unless you rent from a relative, the monthly rate will go up from year to year. Possibly more than double your initial monthly payments by the end of the 20 years.

Buying a home, you can do with that home what ever you want. If you update a kitchen or add a room or deck, you typically increase the value of the property. Sure there are maintenance expenses, however, they will get fixed by you or a contractor that you hire in a typically timely manner.

Renting, you are typically at the mercy of the property owner when it comes to decorating. The owner can, when they fell like it, update something whether it is convenient to the renter or not. The renter doesn’t have to deal with most maintenance issues, however, they are at the mercy of the property owner to get things like air conditioner’s fixed.

Bottom line:
Buying a home, when and if you sell, typically you *WILL* make a profit, unless the home is not maintained. The profit may not offset the cost of the interest paid, but you get some money when you sell the house.

Renting, when you leave the property, not only do you not make any money at all, but you are at the mercy of the property owner when it comes to getting your security deposit back. So sure, you don’t have to pay interest when living in the rented property. What has happened is all the money you paid the property owner is gone.

A personal example was when I sold my Condo to move into a home. I bought the condo at $63,000. The only thing I did to the condo before I moved out was replace the carpet. When I sold the condo 12 years later, it sold for $110,000. So I made $47,000. My payments were $500 a month (not counting taxes, insurance, etc.). So I paid $72,000 living in that condo. I don’t remember the exact amount of interest paid, but lets say it was $50,000. So, it cost me $3,000 to live in that condo for 12 years. Also, I was able to deduct the interest paid on my income taxes.

Now, lets say that instead of buying the condo, I was renting it. Same payments otherwise. At the end of the 12 years, I still would have paid the $72,000. However, I would not get the $47,000 when I left. In fact, I would have lost what ever security deposit I paid due to the need of replacing the carpet. It was damaged by pets. Now, I didn’t have any interest to pay, but I also was unable to deduct any of the $500 a month on income taxes.

Results:
Buying: -$3,000 (minus tax deduction savings)
Renting: -$72,000 (plus what ever security deposit)

Please, explain the flaws in the above. As I stated above, I’m no economics major.

mike October 13, 2006 at 11:34 pm

Well buying is more of a mental trap. People in fear buy, and then become obsessed with protecting the asset.

Here’s a small tip for those who can hear. If you work online live on a resort (all inclusive). Its cheaper than dirt. I don’t even change my own toilet paper or make even one meal. Nor do I sign leases of 1 year. I hop around.

Anyway to those unlucky to have vacation only once year I feel for ya I was there too.

Mike

John Chow October 13, 2006 at 11:41 pm

Dave M. – The flaw is you assume rent payments and mortgage payments will be the same. Like I’ve said, the place you rent won’t be the place you own. Say you have a renter paying $1,500 a month for rent and an owner paying $3,000 a month for a mortgage. IF (and this is a very big if) the renter puts the $1,500 per month saving into long term investments, it could be a toss up on who has more assets at the end of 20 years. One may have a fully paid for house worth x amount and one will have the compound growth of $1,500 a month for 20 years.

However, in real life, the renter would just spend the savings. :)

Iosif October 13, 2006 at 11:56 pm

This article is simply nonsense.
Over 25 years, you can clear a mortgage on a typical property easily if you don’t move up, and then you have no rent/mortgage to pay at all. So, once again, I will tell you, that by renting, you are throwing your money away.
Also, consider that the letter to must pay a mortgage – so to put you in a letted flat, you are paying both the letters Buy To Let mortgage, a chunk of profit to the letter, and on top of that, all the maintenance costs. Letting IS considerably more expensive, all other things being equal.
It IS considerably cheaper to buy a home. Look at the typical rental rates for properties in your area. Compare these to your mortgage repayment.
Also, if you keep renting, how are you going to accumulate the capital to move up to a bigger home? The mortgage payment would be to much, and the rental cost even more prohibitive.
A remarkably ignorant article, by someone with very little financial sense.
PS. I am British – a place where a typical 2 bedroom flat in a decent area costs ~£130000 ($250000) – expensive for young people in their 20′s like myself, so perhaps your experiences in other parts of the world may differ.

Alx Klive October 14, 2006 at 12:36 am

As with most things in life there is no clear cut right or wrong answer. The correct answer is going to be a different one for different people, in different circumstances, (and places and markets…)

The value of an article like this is that it exposes alternative viewpoints and opinions, which people might otherwise not have considered in their circumstance. To make the right decision (if you have the luxury of being able to choose) means considering your circumstance from all different angles.

A great article and fascinating comments.

Paul October 14, 2006 at 12:58 am

I live in San Francisco. I live in a 1 bedroom, 900 square foot condo. We pay $2300 a month to live here. Crazy?

Well, so many people feel they need to invest in buying homes. And feel that renting is just throwing their money away. But I look at renting as an investment in now. Today. Here’s what I get for my money:

- A beautiful place to live. I have a view, a garage, a fireplace, a rooftop patio, a deck, high ceilings, sunken living space, all modern appliances, laundry, elevator. This place is fun to live in and it feels like home.

- Location. This place is in the best neighborhood in the city, and within walking distance to three of the best areas of the city. The best restaurants, shows (live theater and movies), parks, hotels, museums, etc. are within a 10-15 minute walk of my front door.

- Peace of mind. I know how much living expenses are going to be every month. If something goes wrong with this place, the landlord fixes it and I don’t have to pay for it. While you’re worrying yourself sick over your variable-rate mortgage or broken water heater or the real estate market, and the return you’ll get years down the road on your precious investment, I’ll be over here not worrying about any of that and sleeping like a baby.

- Freedom. Not only can I move whenever I feel like it, but not being financially crushed under a mortgage allows me to buys things that I want, eat out whenever I want, see or do most anything I want, and travel.

So, for me, the $2300 we spend on rent every month is worth every single penny. That money buys me a quality of life and peace of mind that so many “homeowners” can only dream about. And what’s my worst case scenario? My landlord sells the place and we have to move? Boo hoo! So, I have to find some other cool place to live. At the end of the day, if that’s my worst problem, I’m doing pretty good.

News flash: the American Dream isn’t for sale anymore. You have to rent it.

ray October 14, 2006 at 1:04 am

“Would you call something that takes thousands of dollars each month to maintain an asset?”

Thousands of dollars a month to maintain?!?

Unless one owns a money pit, this is a highly exaggerated.

Plus, you list “cable” as something you pay for when you own a home. When I lived in apartments, I always had to pay for this myself.

This article is severely flawed and I can’t believe it was dugg to the front page.

You wasted five minutes of my life and I want them back! :P

Dave M. October 14, 2006 at 1:13 am

John, I made no assumption about rent payments staying the same. I stated very clearly that renters have to deal with their rent going up each and every year. Mortgages go up too, but only if you have taxes and insurance as part of the payments.

My personal example made the assumption for comparison purposes.

“Say you have a renter paying $1,500 a month for rent and an owner paying $3,000 a month for a mortgage.”

Why would a renter be paying only $1,500 a month and an owner $3,000? Wouldn’t the renter be paying close to the same amount as an owner for a place of equal size, if not more? My experience with renting vrs. owning has been pretty much that the renter is paying more for less space.

Stuart Howlette October 14, 2006 at 1:44 am

There’s a vital flaw in this arguement.

If you’ve been renting for ten years, and move to another place thats bigger, you have pay more, fair and square.

If you have been paying a mortgage for ten years, moving to a bigger place may cost you the same a month as you are now but just a longer term, because you already have 10 years worth of capital on the mortgage. Also, if your house has shot up in value (just like every single house seems to have done over in the UK), you can make £110,000 on an £80,000 house in 6 years (just like my parents did, bought for 80k, sold for nearly 200). They now have a mortgage of about a £100 a month on a £120,000 house.

All of a sudden having a mortgage makes sense…….

Shannon H October 14, 2006 at 2:27 am

Coming from someone who has done the math and purchased properties, and is now in the process of migrating my whole investment portfolio to real-estate type investments, I just gotta say your theories don’t measure up to real life.

But please, keep writing drivel like this; it scares people away from buying real estate and means more rental income for me.

Byron October 14, 2006 at 3:07 am

Did you even read this article before posting? you said “However, the only way you can make money off your house is if you sell it for more than you brought it for”

Brought is when you BRING something.
Bought is when you BUY something.

This sentence implies that you can only make money off your house if you sell it for more then your brought it for, which would like what? transport costs if you moved a house to a new property?

MisYu October 14, 2006 at 3:20 am

Very interresting article, thank you.

Matt October 14, 2006 at 3:22 am

This is good advice. And it does make me feel quite a bit better. I’ve been renting for ages, and have long had that niggling feeling that I was “throwing money away”.

Some people find that buying a home is a great thing for them. But for others it’s a huge burden. At last with renting you can extricate yourself from the place if it ceases to suit. (That’s a lot more complicated to do if you’re buying, I’d imagine.)

pablohunny October 14, 2006 at 3:39 am

The only problem I have with the “renting is better than buying” debate is this – In the UK, pensions are proving to (currently) be a bad investment. This is being compounded by the fact that the state pension is being crazily padded, and the government is trying to say that in 50 years time, those on a pension will be having their pension paid by the people who are earning at that time. Their flaw is assuming that there will be enough people paying enough taxes at that time to cope.

The reason I mention this is simple. Renting, in 50 years time I have nothing to sell. I won’t have an income, because I won’t be able to work. Assuming I live to my mid nineties, any savings in accounts will be required to feed me for thirty years, pay my bills, etc (assuming £30,000 savings and same inflation rate as currently). How will I be able to provide the x thousands needed yearly to pay for my own living space?

Hopefully, by the time I retire I will have a nice enough house that, no matter how badly the market crashes, I can get about £150,000 (assuming horrible market crash, remember). Now, I’m looking at these residential areas that are being planned for the future (some already available), and hoping that I follow my family genetics of falling to pieces slowly, but good mental health, so I don’t have to pay for a home with constant care. If I transfer all the money from the sale of my home into a payment to move straight into one of these, to give me a tenancy for life.

Houses aren’t a good investment – you end up (around here) paying double what they are worth, and the market is so high, and the international situation is getting so bad, that it has to fall shortly, and you will lose some of its value there. What they do offer is security. Your bank can fall, and you can lose all your money, you can invest badly and you can lose all your money. However, you can keep your bricks and mortar. If they are blown up, you can get the insurance.

I’m another person who doesn’t have an economics degree (as may be obvious). However, I’m quite mean, and need security. I’m currently renting, and I like how easy it makes my life, which is why I want to be able to do it again in future. I can’t say whether buying or renting is “better”. But I know I can’t afford to speculate about a time when my life is made harder by physical problems, and watching my friends fall around me.

-A-

Btw, a good article, and useful, I think :)

Tommy October 14, 2006 at 3:41 am

Here in the UK, I can’t imagine anybody being able to find a place to buy where the mortgage is the same as the rent.

Just really rough figures, but in the south-east of England a small Apartment/Flat might cost you £100,000 (USD 185,000 / EUR 148,000) with a 25 year, 6% mortgage costing you £650 per month.

Renting the same place might cost £450 per month.

I would bet £450 rent and £200 invested for capital growth, gives very similar long-term risks and returns as £650 mortgage.

Those that argue that the mortgage still has the benefit that at the end of the 25 years you have no further expense, remember that with the renting scenario you have a pot of money, which can generate interest to pay the rent.

Things maybe different in countries where mortgage payments are tax deductible.

Bill V October 14, 2006 at 4:15 am

THANK YOU so much for this article. I’ve really been thinking the same thing myself and wanted to come up with some numbers to compair. With the combination of my Father-in-law, a few friends and now my co-workers giving me the “throwing your money away” speech every couple days its enough to drive a man insane.

The one area I would like to get some more info on is the difference between utilities. I live in MI and last winter it was pretty cold. And with the rising cost of gas, it just amazed me how the same people that told me I was throwing my money away renting couldn’t afford to heat their houses properly in the freezing weather. See here at my throw your money away apartment complex I live in, I get free heat in the winters. The way I see it that was saving me in acess of $500.

thanks again for the article, loved it and am forwarding it on to all our friends.

Mike J October 14, 2006 at 4:18 am

(1) The relative cost of rent vs mortgage varies quite a bit depending on where & when. In the metro area where I live, I’ve seen rent cheaper than buying at times, and buying cheaper than rent at times. Right now (in my area) housing has skyrocketed, rent has remained stable, so renting looks like a deal now. 5 years ago it was the opposite.

(2) Canada vs. US: US has no capital gains tax on the sale of a primary residence and deductible interest. Canada taxes the purchase of a house and has capital gains on sales and does not have deductible interest. The US tax code is clearly skewed towards home ownership as compared to Canada. My $10k/yr interest is really only $6500/yr after taxes.

(3) The above analysis’ ignore maintenance.

Furnace = $5000 every 25 years.
Roof = $10,000 every 25 years.
Windows = $20,000 every 40 years.
Carpet = $5,000 every 10 years.

In the US, most homes are not masonry, so figure siding = $20,000 every 25 years.

Bathrooms = $10,000 remodel every 30 years.
Kitchens = $25,000 remodel every 30 years.

Buying a 30 year old home with all of the above maintenance defered can double the cost of the home.

Renters get a $0 after the = on each of the above.

(4) On the other hand, as pointed out above, if a person owns and maintains a house long enough, they should eventually end up with a paid-off house. I’ve got 25 years of mortgages & in about 3 years I’ll own my house free & clear. If I were renting I’d be at about $2000/month for a decent place. (But my current house is 20 years old, so I’ve either already paid for, or will be paying for most of the above maintenance….)

I’d say that if one were to make a blanket statement that either renting or buying were cheaper, one would have to have a pretty fat spreadsheet with lots of carefully researched numbers backing them up.

–Mike

James McCarthy October 14, 2006 at 4:31 am

The situation on Ireland, the 1 bedroom flat me & my wife live in is 650Euro per month.

To buy it(or an equivalent) were looking at 350,000Euro.

Current interest rate 4.2%APR(going up in the next month soon)

Lending period 20 years

Cost of interest per month? Euro1225 to start off

Chris October 14, 2006 at 4:58 am

I agree with you, Mr. Chow. I am a homeowner, but it is a lot more work which eaquals a lot less life, plu th weight of your wallet is considerably lighter. I you can accurately track the money spent on you house ovef a period of time vs renting, most cases you will find that unless you had the foresight to buy in a great area, you may break even. You can keep costs down and bank a lot more money when you know what your expenditures are month to month. As an example, after a divorce and being upside $15,000- I managed to get right side up in 4 yrs to $40,000 to the plus just by knowing my bills each month. Forget what everybody says about throwing your money away-the toughest job is always being yourself!

Greenster October 14, 2006 at 5:06 am

There are two major flaws to your argument that I can see.

1: On average you spend at least 50 years in independent accomodation. If you buy a house when you leave home most are paid for in 25 years. the next 25 years there is no mortgage to pay. Renting= 50 years of paying.

2: You assume mortgage payments are more than rents.
This is mostly true for people who have just started
with a mortgage, but not so for people who have a mortgage that started 10 or more years ago. Their mortgage will be significantly cheaper than renting.
You have overlooked the fact that mortgage payments are CONSTANT throught the term of the loan. Rents increase steadily year on year. Ask people who have had a mortgage for 20 years what their payments are, you will p**s your pants when they tell you!!!

Keith October 14, 2006 at 5:16 am

I hate to say, given a choice I would really own a house, place it on mortgage and pay that monthly sum to the bank. Unfortunately, I don’t have the first hand payment, that’s why I am still renting.

DannyHSDad October 14, 2006 at 5:17 am

Great article and discussion. I’m a software engineer [19+ years of career] who’s owned 2 homes [serially] in the past [Austin, TX] and now I’m renting [Southern California] to great delight.

Some legal facts: In America, you never really own your home. If you don’t pay your taxes, you will lose your home [by force if necessary], guaranteed. Also, thanks to rather recent U.S. Supreme Court ruling (Kelo vs New London), a majority vote by your neighbors is enough to take your land away, willy-nilly.

After paying Caesar, the homeowner isn’t done since homes require maintenance: from the yard to various stuff which fall apart (roof, privacy fence, paint, water heater, A/C, etc.) which the owner has to eat [i.e., cannot be used to adjust the cost basis of the home per IRS instruction].

And then there are the repairs you must do like water leak, broken plumbing, electrical shorts, etc.

And then there’s risk management and paying for various hazard insurance [talk about "throwing money away"]. In the US, earthquake and flooding insurances are extra and costs an arm and a leg.

And for newer homes, there is also the HomeOwner’s Association or HOA which “manages” the community’s look and feel [like approving remodeling or enforcing the grass height of the front lawn]. And they require annual if not monthly fees.

And some newer homes also require special fees to get firefighters to cover out-of-city-limit homes [I don't remember when, but I read or saw on TV about some homes burning down in Texas because they weren't covered].

All the fees above are paid by homeowners but not the renters. [You can try to pass it on to the renters but rent is dictated by the market not the owner's cost (problems).]

As for mortgage: it means “death pledge.” Enough said! (grin)

Details on my personal experience of owning and selling my homes you can read about it at my blog: dannyhsdad.blogspot.com [I thought I wrote before but I didn't, so I will post later today]

Mark October 14, 2006 at 5:31 am

If you are renting you are throwing away your $. Period. If you rent you are either pretty wealthy and can afford to keep paying rent until you die or you are like the rest of us middle-classers and have no long-term vision for your life, esp. for your retirement. Your goal should be to live rent-free as soon as you can arrange it: no rent or mortgage. Then invest that $ you’ve been paying to your bank into your already well-funded retirement account. My wife and I sold our incredibly overvalued condo for a 400% return in 10 years. We just bought a 70 acre plot where we will build a zero energy, very modest home. When we’re done the only payments we’ll have on our property will be taxes. We’re in our 40′s and plan to retire there.

If you are renting someplace becaue you can’t afford to buy there you are living a lifestyle beyond your means. It’s time to grow up an think of your future. Your company or the government (look at all the pension plans that are going belly-up) is not going to fund your retirement like they did for our parents…

Someone above mentioned cars. These are even worse than houses. You should never have a car payment. It’s insane. I buy 6-10 year old, low milage cars that run great. I pay less in maint. than a car payment and I can put more money towards paying off my mortgage and put more $ into my retirement investments. A much better use of my $.

John Chow October 14, 2006 at 5:34 am

A big thank you to everyone who commented. This is a great discussion.

I like to clear up a few things that may have been misinterpreted. First of all, I’m not saying that renting is better than buying. In the end, it will always make more financial sense to buy than to rent – that’s just simple math. And this is especially true in the US because mortgage interest is tax deductible.

My argument was renting is not throwing away money as many people claim. Remember, we have to live somewhere. Shelter is not a want, it’s a need. When you are renting, you are getting something that you need. When you are buying, you are getting something that you want. See the different? One will cost a lot more than the other will. So the question about “Why pay $1,500 a month in rent when you can pay $1,500 a month in mortgage?” should be “Why pay $1,500 rent on a place you need when you can pay $3,000 a month mortgage on a place you want?”

I am not against home ownership. I think everyone should own his or her own home. My wife and I own five properties and we’re looking to buy more. However, keep in mind that your first house isn’t really an investment – you have to live somewhere. Any houses after the first one can be an investment. The house I’m living in now I bought because it had everything I wanted. The other houses met my investment needs.

Peter Cooper October 14, 2006 at 5:54 am

If you’re renting, don’t feel bad when people tell you that it’s just throwing your money away – unless the place you’re renting really is the place you want to own. Then you are throwing money away!

This is currently not true where I live (the UK).

We live in the sort of house we would like to buy. We pay £400 per month in rent.

I did the sums and even on a 30 year *interest only* mortgage we’d be paying about £650 per month for the mortgage -and- our savings would be down by about £10,000 for a deposit.

I think only idiots are first time buyers in the UK right now when rents are miles below mortgage payments.

Frank Black October 14, 2006 at 5:55 am

I’m certainly not going to attempt to change the flavor of the article, but what chaps my hide is the fact that a basic necessity of life (shelter) has become yet another commodity. Everyone talks about their homes as just another investment rather than their protection and (what I to be) a basic human right along with food, medical attention, etc. Something is lost when we size up our residence regarding its cash value rather than its intrinsic value. I’m not so naive that I don’t understand the economics of this situation, but economics are often psychological.

My home is not very large, but it costs more than it is worth to me. When I rented I didn’t worry about mowing 2 acres of lawn. I didn’t worry about cleaning and maintaining a pool. I did’t worry about sealing the driveway with icky goo. I didn’t worry about the roof, the basement flooding, etc. Over the last couple years we’ve put in a wood stove and new windows. That was $25,000. But what is all this in my time? I’m a damned slave both economically and chronologically to this place. No, I don’t HAVE to be here. I can move somewhere else. But when you are responsible for others, you can’t always do what you want. When you own the place, everything you look at is a potential problem. Everything screams for your attention: Wash me! Fix me! Caulk me! Mow me! Weed me! Replace me! Upgrade me! Paint me! Prune me! Empty me! Worry about me! All this stolen time would be better used contributing to my community, spending it with my family or learning to play the cello. But that is just me. Some people actually like doing this stuff. More power to them.

I’m not whining, per se. I’m just sad that this world is so consumed with money that even the basics of life are commodified. And if you think the house you “own” is yours, try not paying the taxes or doing construction without a permit or buying chickens when you are not zoned for it. I could go on. Renting, buying… all a lousy trap. Yeah, it is the best we’ve got, but it still sucks the time, energy and money out of us. In the end, we’re all working for someone else. I may have to do it, but I can still bitch about it. ;)

Sorry for the rant. Now if you’ll excuse me, I have to clean the gutters.

Frank Black
Tyler Durden says, “The things you own end up owning you”

Robert A. October 14, 2006 at 6:40 am

Great article. I currently rent, but plan to buy my own place soon. Then again I’m single, so it’s whatever.

CPA Steve October 14, 2006 at 6:50 am

OK, can I say something as a CPA and MBA?

You probably want to look at any investment (including homeownership) relative to other options…

Example for US residents: Homeownership may be a reasonable investment paying, say, 8% annually. (The investment you make in a home is basically the extra money you pay to own over and above what you pay to rent: down payment, mortgage-rent differential, etc..)

But you need to compare the investment to things like 401(k)s, IRAs, etc.

Almost always, sticking money into something like a tax-deferred retirement account (especially an account with employer matching) is a better deal than buying a home.

Note that what this means, in the end, is you end up with $1,000,000 in your retirement account rather than with a $500,000 house you own. Because earning 9% is better than earning 8%…

Tangential comment: In grad school and then in the 1980s when I did lots of real estate finance stuff, I used to regularly write analyses of home ownership vs. renting. Usually home ownership turned out to be a decent investment simply because you tended to lock in your housing costs thereby protecting yourself against inflation.

Enough said. Sorry for rambling.

Jim October 14, 2006 at 7:11 am

mike
“If you work online live on a resort (all inclusive). Its cheaper than dirt.”

What sort of resort are you talking about here? The resorts I’m familiar with could not be described as cheap. As a telecommuter I’d be very curious to know.

John October 14, 2006 at 7:12 am

You, Sir, are a fool. And lazy as well. Wake up, take some responsiility for your life, and make something productive out of yourself.

Jorge Gutierrez October 14, 2006 at 7:33 am

I have been married for 13 years now and have lived in 11 different places so far, not only in my home country (Mexico) but also in different states of the US.

For obvious reasons we have rented since day one, but I think we have enjoyed it a lot. Almost every year we have lived in a new house, not worrying about maintenance at all. (It also gives us opportunity to run away from noisy neighbours ;) We never got bored.

Also, buying conditions were terrible here in Mexico for a while, with really high interest rates, but now that is all in the past.
Still, paying for rent, although it may equal mortgage payments, all of the extras always make a dent in anyone’s budget. I somehow compare it as to own a car (you know you have to spend in tune-ups, repairs, wheels, brakes, etc.) or lease it. Although that is a different story.

We are now living in a paradise like, spring-year-round city. But we have already moved twice within the same city, always looking for a better place to live. Although my reality is different now than when newlywed (we have a 12 year-old son), renting was a great choice these past years.

I think the decision depends a lot on your own personal reality, what works better for you.
Maybe time has come for us to finally settle down and find a nice home to own. Just maybe, my nomad spirit may arise again, who knows.

Osman October 14, 2006 at 7:48 am

There is a huge logical fallacy about your argument that renting is not throwing money away. I know for us, we did upgrade to a nicer place when we bought our condo. But if we didn’t buy the condo we were going to move into an apartment of the same size anyway. I think that is the case with a lot of people; they upgrade when they buy because they were going to upgrade anyway. We are paying about 300-400 more a month (about 20%) to own vs rent a similar place. However by owning a) we recoup almost that whole difference with principle and tax deduction and b) we don’t have to worry about rent increasing.

A lot of your monthly payment depends on the size of your down payment. My recommendation to friends is always rent until you can get a down payment large enough to make owning affordable. The real problem today is people buy with very little money down. That is the big mistake in my opinion.

Additionally, MOST investments are liabilities until you sell them, no matter what they are. I would argue the future “benefit” of this investment isn’t being able to sell it, but rather having very low to no housing costs later on down the road. There are very few investments which don’t carry risk.

Just my 2c

Neil McIntyre October 14, 2006 at 8:32 am

Good article in general, although your definition of an asset is off. Assets don’t have to make you money. Assets involve a future benefit that is controllable by you and resulted from a past transaction. In this way, a house is an asset. You’d be hard-pressed to find an accountant that wanted to book a building as a liability. I don’t even know how that would work. But I get what the thrust of your argument is – that a house involves a lot of costs that renters don’t have to deal with.

Yeago October 14, 2006 at 9:16 am

Sensationalist, headless rant. I love his “99.99%” statistic. =)

As for owning being a liability, a renter’s price is still tied to that liability regardless of whether they own it or not. Do you think owners rent out to people for less than this liability? It’s basically the same line of logic that concludes that renters don’t pay property taxes–they do. They do so by proxy.

Obviously there are parameters like the inability to afford a house, or simply not wanting to own the house you’re in, or being an an age that simply prefers mobility. As for the choice between sending the money to yourself every month in the form of a mortgage, and sending your money to someone else–I’ve never seen anyone put this in a more convoluted way.

The rest of the post, however, seems pretty straightforward and helpful. Still a little curmudgeon at times. I suppose the relevancy of this all depends on the intended audience.

Michael Bierman October 14, 2006 at 9:35 am

Okay, first, yes–assets require maintanance. Let’s say you own a large commercial building and rent it to a large corporation; you have to maintain it–but it is certainly an asset.

In Renting vs buying you aren’t taking into account tax incentives of ownership. Of say a $1500/month mortgage let’s say only 50% is tax deductable (here in the US). Now you are only paying $750/month. Even if your rent and mortgate were the same, you are saving money! Or, if you believe, as you do that you would buy a more expensive place than you rent, you can have a much nicer place if you buy for the same money as renting. Either way, if you can afford to buy it is the better decision most of the time.

John Chow October 14, 2006 at 9:45 am

Michael – Thank you. Your number is a little off. Yes you get a tax break on the mortgage, but it’s only on the interest portion, not the full amount. Depending on where you are in the mortgage that interest can be as high as $1,500 to as low as a few dollars.

In your commercial building example, that is an asset. The building makes money for the owner. And that money is made whether or not the building goes up in value. Your don’t pay rent for your primary house. Well you do, it’s a mortgage and goes to the bank. :)

Like I’ve commented, in the long run it is better to own than to rent. That’s why I own my house. However, there are situation where renting is more suitable.

John S October 14, 2006 at 11:16 am

The article is comparing lots of apples and oranges. It talks of home ownership versus renting. However, it doesn’t seem to discuss buying a property or renting that very same property.

Generally speaking, renting a house is fairly expensive (at least in my area). Sure, I can rent a two bedroom apartment for less than a five bedroom house costs, but I could also rent a small house trailer cheaper than an apartment. It depends on what you want.

You can buy a small cheap car or a larger expensive one. It depends on what you want for your money.

It also doesn’t discuss how long you stay at a property. For very short term ownership (less than three years or so) it might make sense to rent. Otherwise, unless your area has falling real estate prices, it would be hard to justify renting versus buying.

Paul October 14, 2006 at 12:43 pm

I think what so many people forget is that life isn’t solely about money. Its also about your experiences, your quality of life and your peace of mind.

If you can own a house, in a place where you want to live, and you can retain all of the above, then that’s great. But I’ve seen many people buy houses, for many reasons, that they can’t afford. They can’t do or buy what they want because all their money goes toward paying the mortgage. Their quality of life is low and their home is a constant source of stress and maintenence. As a renter, I wouldn’t trade places with those people for anything.

A true “home” is more about the people living there with you, and the experiences you have there, than it is about how much the physical structure is worth. In the end, whether you buy or rent doesn’t much matter, as long as you’re happy and enjoy where you live.

Cur October 14, 2006 at 1:36 pm

From what I have seen in the New York City area is this; Take what you pay in rent for the floor space. Cut the rent in half and that is how much the landlords are paying for the space. Yes people might want to “upgrade” when they buy but that is because they have big holes in the brain. If living in the space you have now is enough for you and you don’t hate the area you live in just imagine that you will have close to twice the space IF you buy in the are you live. OR move half the distance toward where you think would be an ideal place and keep the same size space.

People wonder why they get ill (Big Problem in US even with health insurance, 50% of personal bankrupt in 2001 were due to health costs) as they load up the debt and material things in life. Instead of looking to the things they have and the people that are close to them and count themselves lucky for what they have. Us living in US, Canada, and Europe have so much more in those ways that we forget how the other 80% live.

Eli Lilly October 14, 2006 at 5:16 pm

The reason to buy a house is because the mortgage payment, on a fixed rate loan, is essentially based on the market at the time the house was bought. Rent will always rise, at least from what I have seen during my life. My aunt laments her $400/month mortgage payment on a 1800 square foot house bought probably 20 years ago. I think that’s hilarious and I look forward to the day where my mortgage is similarly valued.

e.p. October 14, 2006 at 6:11 pm

mortgage payments will ALWAYS be cheaper than rent for an equivalent domicile. Reason being… most people renting out their homes are still paying off their mortgage.
Here in the US, anyways, renting is better than owning in almost any situation. There is this little thing called “net worth” which you can build via home ownership (Assuming you pay off your mortgage) and by investments and 401k’s and roth IRA’s, but you don’t built up net worth by renting or cars or any of those other temporal things.

Nick October 14, 2006 at 7:03 pm

You sir are a Financial Moron.

Scott October 14, 2006 at 8:54 pm

In the US there are plenty of banks that will work with you directly even on 0% down loans with standard 30 year fixed terms and give you a reasonable interest rate along with either lender paid PMI or ‘normal’ PMI. I don’t think our rate was much more (less than a quarter point) from the ‘cheapest’ loan I saw advertised at that time.

If you have a great credit report (we were ~720 FICO) and enough credit history, there isn’t a huge compelling reason to even talk to a broker. Find a bank you trust and start working with them. Remember that you can always walk away and find another bank!

I told our representative that I’d walk if they weren’t able to give me reasonable terms. They did the legwork on their end and got me terms that were fully reasonable. Too many people don’t utilize this non-confrontational technique often enough. No reason to get mad, just let them know its not possible to provide them scads of cash (believe me, they make a ton of money on you for the initial fees and the interest rate — check out the ‘free’ promotions some banks run to new loans, from tons of FF miles on an airline to free vacations!) every month if they don’t come down to your direction.

John Chow October 14, 2006 at 9:58 pm

Nick – Anytime you want to compare financial statements, you just let me know. :)

steve October 15, 2006 at 2:18 am

Sigh… I don’t know if it’s worth commenting on these kinds of threads, since so many opinions are being thrown around that the wheat gets lost in the chaff.

I think this is what John Chow was getting at, although I don’t think our views are exactly in alignment:

Where you live is a liability, not an asset. You have to pay for the roof over your head. That is an expense. Expenses are liabilities, no matter what you do.

The goal is to reduce your liabilities and increase your assets. The house you live in is never ever going to be an asset, because it’s an expense to keep the rain off your head.

The mistake that people make is in thinking that the house they live in, and are paying for, is an asset. It’s not. It’s just a pool of equity that can be tapped by exposing yourself to risks.

You can reduce your expenses and risks by renting the place you live in, as the maintenance and upkeep goes up more than the rent for the better houses.

You can make money by buying and renting out houses that you don’t live in, as they can be carefully balanced at the point where rent is greater than mortgage without regard for whether you like the house or not.

Of course I’m probably just writing more chaff, but at least I’m doing this instead of just talking about it.

Jim October 15, 2006 at 6:41 am

I’m scratching my head wondering how you came to write this.

You really need to take a remedial course in economics, if not common sense. I’ll try not to repeat what others have written, just give you my own experience

I bought my second house (current home) in the US for 185k US (50% down) in 2000. It was a ‘fixer-upper’. I put in 200K to update it and add space. The loan is approx. 300k; the bank values it at 500k for their purposes and the current market value (based on recent local sales) is about 800k. Even in this so-called ‘down market’ the value is still appreciating owing to its location.

Rent vs. buy?

There are several things I can do as a homeowner as opposed to had I been a renter. One, I can take a loan against the equity value in my property and invest in it or another property. I’ve not done that but it’s an option. Two, I configured the house in such a way that I could take in a renter if I wanted to. Three I could use the equity to build another house and rent this at tremendous profit. How?

I have a 10 year interest-only note on the property at 6%. My total payment with taxes and interest is $1750. I could easily rent this house for double or triple that. It’s now completely tax deductible.

Also, in 10 years at 3% inflation I’ll have lowered my real-dollar cost by 30%. So in ten years I’ll effectively take out a $200,000 mortgage (measured in today’s dollars); if the cost of money- the interest rate at that time- is too much, I’ll sell off a portion of the land or I’ll cash in another investment and pay down or pay off this mortgage.

A house is indeed an asset and like any other must be properly managed and undrstood. There are very good reasons for renting, but seeing that as a vehicle to build wealth is not a sound proposition

Robert October 16, 2006 at 11:18 am

House is a liability, not an asset? Jeesh…

Read the above comments and take their points… don’t try to relate things to “common sense.” Take a finance class at a local community college instead.

andrew748 October 16, 2006 at 12:18 pm

i disagree with 90% of this.

i’m in my third owned home i made serious profit on the previous 2, and after 4 years here my current home has doubled in value, (south of London, UK)

a few first time buyer top tips for you.

buy in the best area you can afford.

don’t buy in trendy areas, (research your chosen areas, a superficially popular area could cost you a packet and also bear in mind that if you can’t afford to live somewhere where you feel comfortable, then you have bigger issues.

do not but new houses unless they are executive or made to your spec.

hearing your neighbor fart or shag can seriously affect your house value.

don’t be afraid of old houses or conversions.
a funky converted flat in a “quality” part of town.will always make you money.

old houses are the preferred target, look for repossessions, probate, friends and family.

stay clear of derelicts unless you are a tradesman.
that means you mr weekend diy-er.
this is the only way you can lose money on an old house’s final resale value.

get a proper mortgage with a reputable bank.
don’t go bargain hunting, get proper advice.
you can bargain hunt your next mortgage.

the chances are you will move in the next 2-3 years

so as long as you followed the above you will have made money :)

selling is next weeks lesson

brainscan October 16, 2006 at 1:18 pm

Yes, I’ve heard that saying… “why would you pay someone else’s mortgage when you could be paying your own?” Here’s why: my landlord’s mortgage is roughly half of what my mortgage on the same condo would be.

Right now, in my housing market (Boulder, Colorado), I would lose money by buying the same exact condo that I am currently renting. The current owner bought the unit here about 6 years ago. Now the same unit would sell for nearly twice their original buying price. I’d much rather pay their mortgage and boost my retirement savings than pay my own mortgage, and taxes, and mortgage interest (the ~75% that isn’t tax-deductible), and maintenance, oh yeah, homeowner’s association fees, closing costs… and realtors commissions.

I owned a house in the midwest before moving here. During our ownership, we had a super-low fixed interest rate (4.25%), no PMI, low taxes, and cheap homeowners insurance. We sold our house back to the guy we originally bought it from. Because we knew one another and he really wanted his old house back, we didn’t go through a realtor (eliminating commissions). The selling price was $13,000 more than we had bought it for two years prior (5.17% yearly increase, which was average for our region of the Midwest). We were ripe to make a killing!!!

We walked away from the table with $12,000… most of which was our original downpayment of $10,000. Where did all of that money we were going to make go? 1) We still owed taxes on the property for the portion of the year that had not yet been paid. 2) We were paying interest on our loan, and insurance on our property, through an escrow account, and 3) closing costs (title search and the such).

Basically, the extra $2000 that we made was due entirely to the difference between the interest rate (4.25%) and the appreciation in our area (5.17%). The monthly payments that I made, otherwise known as mortgage and maintenance, were slightly cheaper than renting. True, I got a slightly nicer place that I would have by renting, but in exchange, I had to mow my own lawn, fix my own sump pump, install my own dishwasher, etc.

Now, with interest rates going up, and many markets depreciating in value (like Colorado: the foreclosure capital of the USA), I wouldn’t walk away with $2000 extra money… I would have quite likely lost money.

You can’t count on the difference between your income (price appreciation) and your expenses (mortgage interest, property taxes, homeowners insurance, maintenance, extraneous lawn mowing costs, closing costs and realtor commissions) to be very large… maybe 0.5% per year. Don’t believe me… check the difference between the average mortgage interest right now (5.94%) and home price appreciation in your area right now (which is negative where I live, and stagnant in many other places). see http://mortgage-x.com/general/historical_rates.asp and http://www.frbsf.org/publications/economics/letter/2004/el2004-27.html (specifically the first and last paragraphs) for more info.

The only advantage is that, after 30 years, your mortgage is paid off (due to forced savings over 30 years time). Then you get to live in your place without paying rent (although you still have taxes, maintenance, insurance, etc).

Why do property investors take on the responsibilities of being landlords then? They are leveraging investments… essentially the same as people who buy stock on margin. They can rent to people who aren’t in a position to take out a mortgage, forcing them to save little bits of money on their behalf. All the while, the property investor is borrowing the bank’s money to make a little profit for themselves. They further make money by buying at a value (foreclosed properties, fixer-uppers, buying from people who need to sell in a hurry), and by leveraging multiple properties over time (i.e., getting 20 people to save a little bit of money on their behalf).

With posts this long, maybe I should start my own blog!!!

Bill Perry October 19, 2006 at 4:09 am

Great tips on the rent/buy debate, sir. I think it goes back to what Robert Kiyosaki says about the importance of financial literacy. most people might see the $100K profit potential and jump, but they’ll never make the analysis of the other things like capital gains taxes and such. That’s one of the times it pays to have legal advice on hand.

Bill

Stephen October 30, 2006 at 12:05 pm

Please think carefully, who will make these Real Estate properties available for renting if renting is so much better than owning. We shouldn’t assume those property owners were stupid or something and would continue to spend their money to buy properties if they couldn’t making money from you.

A simple economic logic (demand and supply) – will govern all these scenarios. If rents were shifted to be much lower than mortgage payments and/or to the point the property owners couldn’t make money from you, they would quite buying properties. This would cause having less Real Estate properties available in the rental market. What would you think about the rents? They would go up. Conversely, if the property owners had found out it was too easy to make money out of the renters, they would buy more Real Estate properties. Needless to say, too much more than needed properties available in rental market would ultimately drive down the rents. The demand and supply would eventually drive it to a equilibrium point until some other economic factors disturb the system. Then the cycle would go again to another equilibrium point.

The bankers are just sitting there to facilitate all these enconomic activities by adjusting their interest rates.

Moreover, I like to say there is something a renter would never have, it is a pride of ownership on Real Estate property.

ryoma November 19, 2006 at 11:32 pm

1. I want to point out that a house will not appreciate unless you can sell your house and get a better house than the one you sell. A house depreciate, period. The reason why you think house appreciate is because money itself depreciates.

Everybody know car depreciates. If money depreciate fast enough and someone is willing to buy your grandpa’s old car (say 25 years old, bought for $2000 at that time) for today’s price say $30,000. It will be a great “investment”

Even if money doesn’t depreciate, another tricky thing is amortization. Say, your monthly payment is $2000, which let you live in a nice brand new home. 25 yrs later, your monthly payment is still $2000, but it’s 20 yrs old. Would you pay $2000 to rent a 25 yrs old house?

Final Fantasy November 29, 2006 at 8:25 am

Renting for the long term is always worse than buying. The question is just how long will that take. I rent because I plan to move soon, and I don’t want to have to worry about renting out my house when I choose to leave. If I knew I was going to be in an area for 20 years though the arguments for buying become very compelling.
The only other consideration is home price appreciation. In many US markets, especially in the west, home prices have skyrocketted. Its already cheaper to rent than own right now. I feel bad for people sitting on ARMs who aren’t prepared for a 1% rise in interest rates.

Rasna Arora December 18, 2006 at 7:22 pm

I think the article was good and it gives you the chance to think in a different direction… i agree that renting for sometime makes sense when you are actually putting the rest of your earnings into a savings account to put towards the downpayment of your home and buying it in a few years would make sense. also in this part of the world it seems to be the ‘in’thing to buy a bigger house than what you really need just because you qualify for a bigger mortgage…but thats going to just benefit the banks and financially strain the common man/woman who is now stretched to his/her limit in paying th eutilities and property taxes n the 10 other bills that u get as a homeowner that you do not as a renter… hence, i agree that renting is a good option-BUT-only when you are actively putting aside money to put towards a bigger downpayment-25% or more…

Ed December 28, 2006 at 9:28 am

Duude, thousands of dollars a month to maintain? Are you serious? I don’t think my monthly maintenance even comes to “hundreds” of dollars (not even “a” hundred — except maybe land taxes). In some areas (Bay Area) rent prices are sky rocketing as more poeple try to rent than buy.

And I have the perfect proof against this article: I own a house WITH a basement apartment, so my house almost pays for itself.

Kenric January 2, 2007 at 4:00 pm

When the market is not appreciating and renting costs less than owning. What are the advantages of owning financially?

If a house costs $200k and rents for $800 and your payments + taxes = $1300. You can rent the house for 12 months and but that same house for $200k one year later. You’re in better shape than you were a year ago.

Leo January 22, 2007 at 1:45 am

Great posting John, great feedback folks (for the mostpart).

Yes, buying a principal home generally is a safe way to save and invest. However, there are times (albeit fewer) when renting is preferable.

I have been in markets (outside N. America) where renting is 7x cheaper than buying, and some of you know what it’s like to have mortgages worth more than your home.

Many see things in terms of today’s up markets. If it were down (yes I know historical), there would be other better investments netting more powerful returns.

It depends on the market you are in, your time horizon for a particular investment, and whether you are invested elsewhere. There are also too many other variables.

John, I think, is comparing apples and oranges a bit, hence the confusion. But I agree with John and Rob K in that a principal home (as opposed to investment purchase) is NOT a true ‘asset’, or one that would be generating cash.

However, I do think your home should be just that and not an ivestment, but that’s for another day.