4 ms·

>Rent does not build wealth. Rent is the act of transferring wealth from the poor to the rich. That's not a general rule. It really depends on rents, interest

by gozur88 11y ago

>Rent does not build wealth. Rent is the act of transferring wealth from the poor to the rich. That's not a general rule. It really depends on rents, interest rates, and the cost to purchase housing. In a functioning market rents bring in just a tiny bit more than the monthly mortgage payment, including taxes and fees. There have been times in my area where you came out ahead renting, and times when you came out ahead owning. The government makes a terrible mistake when it pushes home ownership for people who cant afford it. In the US home ownership is a characteristic of the middle class, not a cause. It's as much consumption as it is savings.

makomk 11y ago
> In a functioning market rents bring in just a tiny bit more than the monthly mortgage payment, including taxes and fees. Which means rent is still transferring money from the poor to the rich. If you have a mortgage, you're hopefully building up equity that can be released when you retire to somewhere smaller or in a cheaper location (which you can do, since you don't need to live near jobs and any kids will have moved out). If you're renting, you pay the same amount but the money that would've gone into equity instead goes to your wealthy landlord. Here in the UK, there's been a huge wave of rich buy-to-let investors buying up properties on mortgages and paying the mortgage off with rent payments.
- tempestn 11y ago
  I don't know if I agree with your parent that rent should generally cover mortgage payments, but it should at least cover mortgage interest and other expenses, plus a rate of return on top of that. You need to take into account the opportunity cost of ownership. In addition to the interest, insurance, maintenance expenses, and risk, there is an opportunity cost to the money tied up in home equity. In a functioning market, if two people start with the same amount of capital, one decides to purchase a home and the other decides to rent a comparable home and invest the difference in assets of comparable risk, they will expect to come out the same. There is a small net payment from the renter to the owner, but that is because the owner is being compensated for having their capital tied up in the home. (Or looked at another way, the renter is paying for the benefit of not having to have their own capital tied up in the home.) It doesn't appear that way in practice, because in practice 1) the home owner generally started with more money, which is how they bought a home in the first place, and 2) ownership forces people to save money. A renter with the same income could save a comparable amount of money to an owner, but on average they don't because there isn't a mortgage payment forcing them to do so. So on average home owners tend to be wealthier than renters. But there's nothing special about ownership vs rent (besides forced savings) that causes that to be so. Rent is not a wealth transfer from poor to rich; it is payment for a service. Now, if house prices are depressed, like with any asset, it is possible that ownership will temporarily be a good deal. (And vice-versa.) In a situation where the market has taken a plunge, one might be able to buy in at a level where they could be cashflow positive from rent, even including un-rented periods, to an extent that over-compensates for the funds they have tied up in the house. However, in that situation, people will rationally buy investment properties, increasing demand, and returning prices to a more rational level. (Likewise if houses are overpriced, eventually people will stop buying them because they don't expect any return on the investment, which will cause prices to drop.)
- forgetsusername 11y ago
  >f you have a mortgage, you're hopefully building up equity that can be released when you retire to somewhere smaller or in a cheaper location In other words, you're relying on the "Greater Fool Theory" of perpetually increasing house prices. There is nothing special about real estate as an asset class.
  - makomk 11y ago
    This is true even without perpetually increasing house prices, so long as you're paying off the principal of the loan and not just the interest.
  - vinceguidry 11y ago
    Err, no. Building up equity is not the same as appreciation. It's basically a savings plan. This assumes that the property values remain sane and rational, not that they will constantly grow. If the house appreciates then you get that money at sale no matter how long you've paid into it or how much equity you have.
  - zanny 11y ago
    If I want oil, I can go find some and drill for it anywhere that makes fiscal sense. If I want clay, I can go find a riverbed and start digging. If I want the corner of Fourth and Chester for commercial traffic, my options are a bit more limited. The problem with land is not about its scarcity, its about its situational utility. The value of land is often completely out of control of the property owner themself, and you cannot create new city centers or in-demand residential neighborhoods in private enterprise.
- refurb 11y ago
  Which means rent is still transferring money from the poor to the rich. If you have a mortgage, you're hopefully building up equity Have you seen what percentage of your mortgage payment is equity early on? You're lucky if it's 5%. The rest is interest that goes to the "rich". Not sure I see much difference between owning and renting when it comes to who gets the money.
  - st3v3r 11y ago
    5% is more than 0. And over time, it does grow.
    - refurb 11y ago
      Sure, your equity grows over time, but lets say you buy a house and live in it for 5 years. Add in the relator fees, title taxes, maintenance, property taxes and interest paid on the mortgage. Now compare that with renting. In some situations you might be better off, but that usually requires appreciation in the value of your home. Often renting leaves you with more money in your pocket than buying does.
- gozur88 11y ago
  >Which means rent is still transferring money from the poor to the rich. Suppose I start with nothing, get a mortgage on a house and then rent it out. Am I rich?

by gozur88 11y ago

makomk 11y ago

> In a functioning market rents bring in just a tiny bit more than the monthly mortgage payment, including taxes and fees. Which means rent is still transferring money from the poor to the rich. If you have a mortgage, you're hopefully building up equity that can be released when you retire to somewhere smaller or in a cheaper location (which you can do, since you don't need to live near jobs and any kids will have moved out). If you're renting, you pay the same amount but the money that would've gone into equity instead goes to your wealthy landlord. Here in the UK, there's been a huge wave of rich buy-to-let investors buying up properties on mortgages and paying the mortgage off with rent payments.

tempestn 11y ago
I don't know if I agree with your parent that rent should generally cover mortgage payments, but it should at least cover mortgage interest and other expenses, plus a rate of return on top of that. You need to take into account the opportunity cost of ownership. In addition to the interest, insurance, maintenance expenses, and risk, there is an opportunity cost to the money tied up in home equity. In a functioning market, if two people start with the same amount of capital, one decides to purchase a home and the other decides to rent a comparable home and invest the difference in assets of comparable risk, they will expect to come out the same. There is a small net payment from the renter to the owner, but that is because the owner is being compensated for having their capital tied up in the home. (Or looked at another way, the renter is paying for the benefit of not having to have their own capital tied up in the home.) It doesn't appear that way in practice, because in practice 1) the home owner generally started with more money, which is how they bought a home in the first place, and 2) ownership forces people to save money. A renter with the same income could save a comparable amount of money to an owner, but on average they don't because there isn't a mortgage payment forcing them to do so. So on average home owners tend to be wealthier than renters. But there's nothing special about ownership vs rent (besides forced savings) that causes that to be so. Rent is not a wealth transfer from poor to rich; it is payment for a service. Now, if house prices are depressed, like with any asset, it is possible that ownership will temporarily be a good deal. (And vice-versa.) In a situation where the market has taken a plunge, one might be able to buy in at a level where they could be cashflow positive from rent, even including un-rented periods, to an extent that over-compensates for the funds they have tied up in the house. However, in that situation, people will rationally buy investment properties, increasing demand, and returning prices to a more rational level. (Likewise if houses are overpriced, eventually people will stop buying them because they don't expect any return on the investment, which will cause prices to drop.)
forgetsusername 11y ago
>f you have a mortgage, you're hopefully building up equity that can be released when you retire to somewhere smaller or in a cheaper location In other words, you're relying on the "Greater Fool Theory" of perpetually increasing house prices. There is nothing special about real estate as an asset class.
- makomk 11y ago
  This is true even without perpetually increasing house prices, so long as you're paying off the principal of the loan and not just the interest.
- vinceguidry 11y ago
  Err, no. Building up equity is not the same as appreciation. It's basically a savings plan. This assumes that the property values remain sane and rational, not that they will constantly grow. If the house appreciates then you get that money at sale no matter how long you've paid into it or how much equity you have.
- zanny 11y ago
  If I want oil, I can go find some and drill for it anywhere that makes fiscal sense. If I want clay, I can go find a riverbed and start digging. If I want the corner of Fourth and Chester for commercial traffic, my options are a bit more limited. The problem with land is not about its scarcity, its about its situational utility. The value of land is often completely out of control of the property owner themself, and you cannot create new city centers or in-demand residential neighborhoods in private enterprise.
refurb 11y ago
Which means rent is still transferring money from the poor to the rich. If you have a mortgage, you're hopefully building up equity Have you seen what percentage of your mortgage payment is equity early on? You're lucky if it's 5%. The rest is interest that goes to the "rich". Not sure I see much difference between owning and renting when it comes to who gets the money.
- st3v3r 11y ago
  5% is more than 0. And over time, it does grow.
  - refurb 11y ago
    Sure, your equity grows over time, but lets say you buy a house and live in it for 5 years. Add in the relator fees, title taxes, maintenance, property taxes and interest paid on the mortgage. Now compare that with renting. In some situations you might be better off, but that usually requires appreciation in the value of your home. Often renting leaves you with more money in your pocket than buying does.
gozur88 11y ago
>Which means rent is still transferring money from the poor to the rich. Suppose I start with nothing, get a mortgage on a house and then rent it out. Am I rich?