7 ms·

There is a massive fiscal advantage in owning vs. renting, because payments toward ownership build capital. Let's take two scenarios: (A) In scenario A, you p

by s_q_b 11y ago

There is a massive fiscal advantage in owning vs. renting, because payments toward ownership build capital. Let's take two scenarios: (A) In scenario A, you pay rent on an apartment for $5000 per month. (B) In scenario B, you pay a fixed-rate mortgage on a residence in the amount of $5000 per month. Therefore: In scenario A, you are essentially taking $5k and setting it on fire once a month. In scenario B, you are paying that money toward a share of the property's ownership. So instead of setting it on fire, you're gaining $5k of equity in the property.

YZF 11y ago
It doesn't work quite like that. Here are the economics in my area: - Buy $1.2M - Rent $1800 a month. By law rent can only be increased a limited amount every year (and it's never been increased for me). The landlord is getting 1.8% return on his money before his maintenance expenses, taxes, etc. The only scenario this makes any sense is interest rates remain at 0% for the next 30 years. Even in this case it's not clear that house prices can keep appreciating at the same rate. Unless we go negative rates. If I have 1.2M in cash why would I buy this house instead of renting? I'm taking a big risk with a lot of money. It's true that over the last 10-20 years people who have taken this bet came usually ahead (except in some parts of the US) but it's still a huge risk.
- clock_tower 11y ago
  Indeed! If you have $1.2 million in cash, investing it to produce a 5% dividend gets you an income of $60,000 a year before taxes -- while $1800 a month is $21,600 a year. (Hint: Chevron's stock has fallen so far that their dividend, which they haven't lowered, is 5% of their stock price. The chance won't last forever; when the price of oil goes back up, Chevron will go back up with it.) An income from investments of $60,000 a year isn't enough to live like a king, but it's certainly enough to live like a yeoman, even after taxes. If you buy an expensive house with that money, instead of buying an income stream with it, the best you can hope for is to live like a wage-slave.
- learnstats2 11y ago
  This is not the only post with dodgy numbers, but this one may be specific to London: - London yields 2-5% https://www.portico.com/yields https://www.portico.com/yields - No such rent capping law in London, it's generally expected that rents will increase every year and there's plenty of demand to cover it. Clearly, people are making the decision to buy the house.
- kqr2 11y ago
  Actually in SF, you can have your cake and eat it too. If you live in a rent controlled apartment but can afford to purchase a single family home, you should stay in your rent controlled apartment, buy the house and rent it out at market rate since single family homes are not subject to rent control.
meric 11y ago
What about interest? What about property price falls during housing downturns (it will happen). Interest is equivalent to setting it on fire IMO.
- bane 11y ago
  It doesn't matter, it's still a smaller fire. It has to be an absolutely bizarre market for a renter to find an equivalent place to rent, then have enough money left over that they can invest in some mythical financial instrument that will earn them all that rent back plus whatever valuation a property owner is earning while their property appreciates in value. At the end of the mortgage the owner now only has to pay any applicable taxes and the cost of living is more or less "free" (minus maintenance). A renter will rent forever.
  - meric 11y ago
    >> It has to be an absolutely bizarre market A renter can rent a small room as part of a larger house, but you can't buy a small room.[1] My personal investment fund has had 50% per year gains since 2012[2]. Perhaps we do live in a bizarre market because I've done exactly what you described. [1] Do that here. https://flatmates.com.au https://flatmates.com.au [2] 2012-2014 in tech. TSLA & SCTY contributed the bulk of my gains. 2014- in Australian gold miners, whose index has doubled in a year. https://www.google.com/finance?cid=16106836 https://www.google.com/finance?cid=16106836
    - kazinator 11y ago
      Can't buy a small room? Says who? A house could be turned into a strata property. The hallways and bathrooms become common areas, and the bedrooms are free hold. :)
    - bane 11y ago
      > but you can't buy a small room. Sure you can. Housing units come in all shapes and sizes. In the U.S. at least small places are usually sold as condos and can be as small as any efficiency. > Perhaps we do live in a bizarre market because I've done exactly what you described. No, you rented a smaller place than a house, then invested the difference. I said "equivalent place to rent". I'll say it one more time and maybe this time your reading comprehension will kick in, unless you live in an absolutely bizarre market, where rents are vastly under mortgage costs, and you can rent an equivalent property (same size, same number of bedrooms, etc.) at those vastly lower rates, you'll never have enough money extra that you would have spent on property ownership that will earn back the money you've set to fire by renting. For example (since you seem to need a specific one): A house that costs $600,000 needs slightly more than $2,600/mo to service a 30 year loan. Unless you live in an absolutely bizarre housing market, you will not be able to rent the same house for an amount that is significantly less than that. But, let's suppose you cut a deal and rent it for $2,000/mo. That leaves you with $600/mo. You need to turn that $600 into $2,000 every month to make up for the loss on rent. I laugh at your 50% return, because now you're only $1,100 a month in the hole each month. Suppose your landlord is a real cool guy and let's you keep the same $2,000/mo for 30 years (unlikely, but let's suppose he's an idiot), You've now burned about $400,000 and still have to figure out how to cover housing costs until you die. Your smart friend on the other hand, after 30 years, has $600,000+ in property, no more major housing costs for the rest of his life and spent less than you to get there. Suppose your friend hits it big, he can refinance after a few years, lower his mortgage payment below your rent (which has probably gone up by then), and can now make 50% gains on his investments and he's still buying his property. Let's say he hits it really big on his investments, he can just pay the house off early, not pay the balance of the interest, his housing costs go to near zero and now he can invest all the money he'd spend on housing on your 50% return investment plan. If he's real smart, he'll just buy a second house, and rent it out to you since you'll just pay most of that mortgage for him. After 30 years he now owns two houses, has made a fortune on your investment plan and you're still paying what are probably much higher housing costs for renters. Maybe you're a real clever guy and after 30 years you've somehow saved up enough to just buy a house outright and skip all the other costs (minus maintenance), maybe you but the house your renting from your friend. Great, you now own property, and your friend still has his house and the money you paid to buy his second house (now valued well in excess of the $600,000 he paid for it) plus the fortune he earned investing in your stock tips, plus you'll probably have paid him back for all the interest he ever paid on the house via your purchase price. (okay okay, I'm handwaiving away interest and taxes and such, but the math doesn't change all that much once considered and most competent landlords simply pass along those costs to their tenants).
mrec 11y ago
That's the shoeshine-boy story: "you can't go wrong with bricks and mortar". Coming at the end of a decades-long rise in leverage it's easy to see why people swallow it without too much examination, but the Great Unwinding is arguably upon us, and you're assuming (and ignoring) a whole bunch of things. > because payments toward ownership build capital Money invested outside of property also builds capital. Money not spent on mortgage interest builds capital. Money not spent on maintenance builds capital. Money not spent on property transaction-related costs (surveys, legal fees, Stamp Duty in the UK) builds capital. Owning property when a major housing bubble collapses burns capital faster than your wildest dreams. (Not everywhere has a housing bubble at the moment, but an awful lot of places do.) Obviously you can argue with a lot of that, but the picture is nowhere near as clear-cut as you're making out.
- bane 11y ago
  Don't think about today. Think about 30 years from now. Markets swing up and down. In 30 years you can own your property or you can keep renting somebody else's property and paying their mortgage for them. If you rent, you're likely paying all those additional fees in addition to a share of the mortgage for the owner. Property owners aren't charities and are under no obligation to take on those costs when they can get somebody else to take them on for them. It really is as clear cut as that.
  - mrec 11y ago
    > It really is as clear cut as that. Sentences like that are a huge red flag. It cannot be as clear cut as that. You can't ignore price levels when making that kind of blanket statement. Think of it as a reductio ad absurdum: if it's always better to buy, then it's still better to buy when buying costs 25x the annual rent, right? 50x? 100x? 1000x? 1000000x? People really do fall into thinking like this; it's exactly how bubbles happen. Buying my current place would probably cost about the equivalent of 35 years' rent (before taking into account opportunity costs etc). That's longer than I expect to live. I could just about swing it, but my savings would be gone, I'd suddenly be stressed about losing my job etc. You might think it's still clear-cut, but it's far from obvious to me. If prices weren't completely ridiculous, sure, I'd probably go for it. But they are, and that matters.
kazinator 11y ago
How the heck are you getting 5K equity from a 5K mortgage payment? The loan would have to be at zero interest. But your point stands otherwise.

by s_q_b 11y ago

YZF 11y ago

It doesn't work quite like that. Here are the economics in my area: - Buy $1.2M - Rent $1800 a month. By law rent can only be increased a limited amount every year (and it's never been increased for me). The landlord is getting 1.8% return on his money before his maintenance expenses, taxes, etc. The only scenario this makes any sense is interest rates remain at 0% for the next 30 years. Even in this case it's not clear that house prices can keep appreciating at the same rate. Unless we go negative rates. If I have 1.2M in cash why would I buy this house instead of renting? I'm taking a big risk with a lot of money. It's true that over the last 10-20 years people who have taken this bet came usually ahead (except in some parts of the US) but it's still a huge risk.

clock_tower 11y ago
Indeed! If you have $1.2 million in cash, investing it to produce a 5% dividend gets you an income of $60,000 a year before taxes -- while $1800 a month is $21,600 a year. (Hint: Chevron's stock has fallen so far that their dividend, which they haven't lowered, is 5% of their stock price. The chance won't last forever; when the price of oil goes back up, Chevron will go back up with it.) An income from investments of $60,000 a year isn't enough to live like a king, but it's certainly enough to live like a yeoman, even after taxes. If you buy an expensive house with that money, instead of buying an income stream with it, the best you can hope for is to live like a wage-slave.
learnstats2 11y ago
This is not the only post with dodgy numbers, but this one may be specific to London: - London yields 2-5% https://www.portico.com/yields https://www.portico.com/yields - No such rent capping law in London, it's generally expected that rents will increase every year and there's plenty of demand to cover it. Clearly, people are making the decision to buy the house.
kqr2 11y ago
Actually in SF, you can have your cake and eat it too. If you live in a rent controlled apartment but can afford to purchase a single family home, you should stay in your rent controlled apartment, buy the house and rent it out at market rate since single family homes are not subject to rent control.

meric 11y ago

What about interest? What about property price falls during housing downturns (it will happen). Interest is equivalent to setting it on fire IMO.

bane 11y ago
It doesn't matter, it's still a smaller fire. It has to be an absolutely bizarre market for a renter to find an equivalent place to rent, then have enough money left over that they can invest in some mythical financial instrument that will earn them all that rent back plus whatever valuation a property owner is earning while their property appreciates in value. At the end of the mortgage the owner now only has to pay any applicable taxes and the cost of living is more or less "free" (minus maintenance). A renter will rent forever.
- meric 11y ago
  >> It has to be an absolutely bizarre market A renter can rent a small room as part of a larger house, but you can't buy a small room.[1] My personal investment fund has had 50% per year gains since 2012[2]. Perhaps we do live in a bizarre market because I've done exactly what you described. [1] Do that here. https://flatmates.com.au https://flatmates.com.au [2] 2012-2014 in tech. TSLA & SCTY contributed the bulk of my gains. 2014- in Australian gold miners, whose index has doubled in a year. https://www.google.com/finance?cid=16106836 https://www.google.com/finance?cid=16106836
  - kazinator 11y ago
    Can't buy a small room? Says who? A house could be turned into a strata property. The hallways and bathrooms become common areas, and the bedrooms are free hold. :)
  - bane 11y ago
    > but you can't buy a small room. Sure you can. Housing units come in all shapes and sizes. In the U.S. at least small places are usually sold as condos and can be as small as any efficiency. > Perhaps we do live in a bizarre market because I've done exactly what you described. No, you rented a smaller place than a house, then invested the difference. I said "equivalent place to rent". I'll say it one more time and maybe this time your reading comprehension will kick in, unless you live in an absolutely bizarre market, where rents are vastly under mortgage costs, and you can rent an equivalent property (same size, same number of bedrooms, etc.) at those vastly lower rates, you'll never have enough money extra that you would have spent on property ownership that will earn back the money you've set to fire by renting. For example (since you seem to need a specific one): A house that costs $600,000 needs slightly more than $2,600/mo to service a 30 year loan. Unless you live in an absolutely bizarre housing market, you will not be able to rent the same house for an amount that is significantly less than that. But, let's suppose you cut a deal and rent it for $2,000/mo. That leaves you with $600/mo. You need to turn that $600 into $2,000 every month to make up for the loss on rent. I laugh at your 50% return, because now you're only $1,100 a month in the hole each month. Suppose your landlord is a real cool guy and let's you keep the same $2,000/mo for 30 years (unlikely, but let's suppose he's an idiot), You've now burned about $400,000 and still have to figure out how to cover housing costs until you die. Your smart friend on the other hand, after 30 years, has $600,000+ in property, no more major housing costs for the rest of his life and spent less than you to get there. Suppose your friend hits it big, he can refinance after a few years, lower his mortgage payment below your rent (which has probably gone up by then), and can now make 50% gains on his investments and he's still buying his property. Let's say he hits it really big on his investments, he can just pay the house off early, not pay the balance of the interest, his housing costs go to near zero and now he can invest all the money he'd spend on housing on your 50% return investment plan. If he's real smart, he'll just buy a second house, and rent it out to you since you'll just pay most of that mortgage for him. After 30 years he now owns two houses, has made a fortune on your investment plan and you're still paying what are probably much higher housing costs for renters. Maybe you're a real clever guy and after 30 years you've somehow saved up enough to just buy a house outright and skip all the other costs (minus maintenance), maybe you but the house your renting from your friend. Great, you now own property, and your friend still has his house and the money you paid to buy his second house (now valued well in excess of the $600,000 he paid for it) plus the fortune he earned investing in your stock tips, plus you'll probably have paid him back for all the interest he ever paid on the house via your purchase price. (okay okay, I'm handwaiving away interest and taxes and such, but the math doesn't change all that much once considered and most competent landlords simply pass along those costs to their tenants).

mrec 11y ago

That's the shoeshine-boy story: "you can't go wrong with bricks and mortar". Coming at the end of a decades-long rise in leverage it's easy to see why people swallow it without too much examination, but the Great Unwinding is arguably upon us, and you're assuming (and ignoring) a whole bunch of things. > because payments toward ownership build capital Money invested outside of property also builds capital. Money not spent on mortgage interest builds capital. Money not spent on maintenance builds capital. Money not spent on property transaction-related costs (surveys, legal fees, Stamp Duty in the UK) builds capital. Owning property when a major housing bubble collapses burns capital faster than your wildest dreams. (Not everywhere has a housing bubble at the moment, but an awful lot of places do.) Obviously you can argue with a lot of that, but the picture is nowhere near as clear-cut as you're making out.

bane 11y ago
Don't think about today. Think about 30 years from now. Markets swing up and down. In 30 years you can own your property or you can keep renting somebody else's property and paying their mortgage for them. If you rent, you're likely paying all those additional fees in addition to a share of the mortgage for the owner. Property owners aren't charities and are under no obligation to take on those costs when they can get somebody else to take them on for them. It really is as clear cut as that.
- mrec 11y ago
  > It really is as clear cut as that. Sentences like that are a huge red flag. It cannot be as clear cut as that. You can't ignore price levels when making that kind of blanket statement. Think of it as a reductio ad absurdum: if it's always better to buy, then it's still better to buy when buying costs 25x the annual rent, right? 50x? 100x? 1000x? 1000000x? People really do fall into thinking like this; it's exactly how bubbles happen. Buying my current place would probably cost about the equivalent of 35 years' rent (before taking into account opportunity costs etc). That's longer than I expect to live. I could just about swing it, but my savings would be gone, I'd suddenly be stressed about losing my job etc. You might think it's still clear-cut, but it's far from obvious to me. If prices weren't completely ridiculous, sure, I'd probably go for it. But they are, and that matters.

kazinator 11y ago

How the heck are you getting 5K equity from a 5K mortgage payment? The loan would have to be at zero interest. But your point stands otherwise.