5 ms·

I would argue in the current situation of 3.5% mortgage rate, the best scenario is to invest the cash in the stock market. If your returns are anything above 3.

by turar 11y ago

I would argue in the current situation of 3.5% mortgage rate, the best scenario is to invest the cash in the stock market. If your returns are anything above 3.5% over the 30 year load amount, you're good.

irishcoffee 11y ago
I read this counter-point a lot. Its never clear to me how you invest the mortgage payment and also pay rent to live somewhere. Am I missing something? Sincere question.
- feverishaaron 11y ago
  Especially when rents are rising 5-10% per year.
- JustSomeNobody 11y ago
  I have very often wondered the same. Someone somewhere said it, lots of people repeat it, nobody does it and nobody has fact checked it.
- heywiseguy 11y ago
  people who say this are talking about markets where the spread between renting and the finance cost of a similar bought property are huge. San Francisco, New York, LA... Let's say you're a couple years out of school and you work at Snapchat. Somehow you have a lot of money saved up and you can buy a little house near your office in Venice. A small house in Venice runs about $2m. So let's say you borrow 1.8m to pay for it, your monthly payment is about $8,500 on a 30 year fixed and thats before maintenance and insurance. That same house in Venice probably rents for somewhere between $3k and $4k/mo net of everything. So what those people are saying is to live in a rental and invest _the saved money_ in the market. Remember, in both cases you are renting: in one, you are renting real estate. In the other, you are renting money. But they have different tax treatments, and renting money allows you to lever yourself into eventually owning an asset who's value you might expect to rise.
  - Grishnakh 11y ago
    Renting is cheaper than buying? That really doesn't make sense, and I don't think that's the case in most markets. In California, it might because of the funny way they do property taxes there, where new buyers get stuck with huge property tax bills but long-time owners are grandfathered at far lower rates, so the landlords are likely people who've owned the house for ages. Other states just aren't like this.
    - heywiseguy 11y ago
      Renting is vastly cheaper than buying in many of the most expensive markets in the USA, if your only assumptions are like "borrows 30 year fixed at good credit rating current rates at 80% of the value of the property". Vastly. Fancy parts of LA. SF. All of New York. Pretty much anywhere in the train-serviced urban/suburban Northeast. It might not "make sense" but it is true. I'm also sure it's not the case in most markets in the USA, but in the large metropolitan markets, it is true, and that's the point people are making when they say "you know, it might make more sense to invest your investment money in a different asset class and rent rather than pay the ownership premium here in Santa Monica/Pacific Heights/Williamsburg"
    - ArkyBeagle 11y ago
      Renting can be cheaper or about the same as buying. And I mean a comparable property. You have to add it all up. My landlord has probably shelled out $10k in repairs ( the house is at that magic 20 year point where everything fails ) in five years. I've done the "buy cheap and spend the rest at Home Depot" thing. It's not bad, but it's not ideal. Unless I'm categorically certain of living in the house at least five years, I'll continue to rent. I've done the math - I'd have less equity in a house of the same value than I have in raw cash freed up just from renting. And that's really not counting fees and closing costs.
- floppydisk 11y ago
  The basic premise behind that idea is rents are (historically were) cheaper than a mortgage so you could take the mortgage-rent delta, invest that, and generate a return greater than the interest rate on the mortgage and end up ahead. A lot of the mortgage calculators have a 3-5yr inflection point where renting, traditionally, was always cheaper if you planned on staying somewhere for 3-5yrs and moving. The problem is, the equation has flipped. Mortgage payments are now, in many cases, cheaper than rent and there's such a high demand for rental units in some metro areas that landlords have no problems keeping tenants increasing rent 3-10% year over year. Ideally, you could do the same arbitrage buying a house (ideally an asset that nets 0 when you sell it worst case and you get your money back) and invest the rent-mortgage delta into other assets. The problem is "unlocking" the house option. If you don't have exemplary credit, and a certain pile of cash available, banks are leery to touch you and make financing available. Ergo, you get forced into the rental market and there's a huge incentive to turn properties into rentals. Tack on the millennial generation's hesitancy to settle down in one location and you get a set of economic conditions that encourage renting and regular rent increases.
  - Phlarp 11y ago
    >Tack on the millennial generation's hesitancy to settle down in one location and you get a set of economic conditions that encourage renting and regular rent increases. Are we hesitant to "settle down" or are we trapped in a death spiral of student debt, rising rents and underemployment?
    - floppydisk 11y ago
      As always, it depends. Speaking anecdotally, most of the millennials I know speak rather forcefully about their desire to not settle down, marry, or begin a family prior to 30. I can count the number (amongst my friends) on one hand who discuss factors like underemployment and debt as being significant in their decision to delay settling down. Most seem to enjoy the party/city lifestyle and spend their time focusing on their career/traveling instead. Yes, it's possible all of those things are factors but I'm going to argue for most it's subconscious rather than explicit factors in a settle/not settle equation. I think a lot of millennials are buying into the "extended adolescence"/party phase/single life/no responsibility/free spirit/high mobility (pick your moniker) lifestyle choices and acting accordingly - based on my anecdotal experience.
- fist 11y ago
  I believe what they're arguing is that you don't pay your mortgage off early with a 3.5% mortgage rate. You invest your excess money in the stock market (hopefully returning more than 3.5%) instead of paying off your mortgage early.
- turar 11y ago
  I'm not sure I understand why you would pay rent to live somewhere else. I'm talking about living in the house that you bought and have a mortgage on. Say your mortgage loan amount is $300K at 3.5%, locked in for 30 years. Instead of paying it off in 6-10 years with extra payments, I say invest those extra payments in the stock market, and keep paying the mortgage for 30 years at a locked rate of 3.5%. If that money that you invested makes anything above 3.5% over 30 years, then that's free returns to you. On top of that, it also depends where you think the interests rates will be in 10-20 years from now. If you believe that they will be higher than they are currently, then that's even more reason to keep that loan locked in for 30 years instead of paying it off sooner. Hope that helps.
  - JackFr 11y ago
    > On top of that, it also depends where you think the interests rates will be in 10-20 years from now. If you believe that they will be higher than they are currently, then that's even more reason to keep that loan locked in for 30 years instead of paying it off sooner. That makes no sense. You'll be better off paying a lower interest rate than you would be not having a loan in a high rate environment?
    - turar 11y ago
      Remember, the loan is locked in. Everything around you may be a high rate environment, but your loan is still 3.5% when regular bank savings account would be paying, say 7%. So, if you bought shares of an Emerging Markets ETF [1] with the money that you would have otherwise paid for accelerated mortgage payments. Today these shares are paying you around 3.5% in dividends alone. Fast forward ten years to a high rate environment, and ten years of buying ETF shares and reinvesting dividends, I'm assuming that the dollar amount of your shares would be higher than the amount of debt you would have otherwise paid off already. That's why no other country on Earth that I know of has 30-year fixed mortgages. They are essentially a government subsidy to homeowners via Fannie/Freddie. [1] https://www.google.com/finance?q=NYSEARCA%3AVWO https://www.google.com/finance?q=NYSEARCA%3AVWO
      - 11y ago
- dsp1234 11y ago
  The New York Times buy vs rent calculator[0] can help determine which side of the rent vs buy is better (from a financial standpoint only, not including factors like 'freedom') depending upon various factors. For example, here in Oregon based on all of the factors I adjusted, the result was "If you can rent a similar home for less than $1,422 per month then renting is better.". I could probably break even by moving to a different location, but then (for me) the freedom factor pushes it back towards home ownership. So you put your own assumptions in, and that can give you a good idea of where your own situation results. Its never clear to me how you invest the mortgage payment and also pay rent to live somewhere. As a direct response to this, the calculator will actually show what the expected costs are assuming you invest any difference between the rent vs mortgage in a vehicle with the specified returns (and over the time period you specify) [0] - http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...?
- MrApathy 11y ago
  It's an argument that's highly dependent on how high rents and purchase prices are correlated. In many markets the two are somewhat aligned, but on occasion the two diverge significantly. For example, if the cost to rent is $3k and the monthly mortgage on a comparable place (including insurance, RE tax) is $4k, then in the longer term it may make more sense to purchase. Over time the $1k difference will grow smaller and equity will be built up. But what if there's a "frothy" market where investors are bidding up the price of an apartment and after taking ownership they're renting them out rather than living in them. So it's $3k to rent, but $1.2M to purchase, meaning the monthly mortgage is closer to $6k. Well now it makes sense to rent and invest the difference outside of your local real estate market. This obviously looks like an extreme example, but during the housing boom and happened in Miami, Vegas, and many other cities, and it's arguably occurring in many localized markets today.
sf_rob 11y ago
Not to mention that this preserves some liquidity. It'd be a shame to have to refinance at an inopportune time to get some equity out of a house.
SilasX 11y ago
I've worked through the same logic myself. I don't deny that it generates better financial returns. However, the devil is in the details. Let's say after 30 years you have a big bag of money. Well, now you have to invest it for the passive income to continue paying rent. But, per my recent comment[1], inflation-protected passive income will pay something like 2.1%. Oh, and you're taxed on the interest income. So, more like 1.7-8% (in addition to whatever hit it because you couldn't put it all in tax-deferred retirement accounts). I hope interest rates return to something sane, but we can't assume that. In contrast, if that extra money paid off a house, it's implicitly "paying your rent" ... except that it's not an actual income flow, so it's not taxed at all! You just pay property tax, whose increases are capped because you're just an elderly person whose estate shot up in value. Plus, factor in rentals being generally targeted a lower-income people (or high-income yuppie singles) and therefore less desirable neighborhoods and less optimal for your lifestyle and it's looking steadily worse -- definitely need more than 3.5% for the break-even point (which would have to be the real, not nominal return anyway). [1] https://news.ycombinator.com/item?id=11027774 https://news.ycombinator.com/item?id=11027774
- srj 11y ago
  If you live in a home you own I think your rent can be thought of as the amount you could have made had you rented it out to someone else. It's not completely equal because there are burdens to being a landlord but from that perspective you're always a renter.
  - SilasX 11y ago
    Right, but the point is, that effective imputed income is probably going to be much higher than your investments will throw off, especially after considering taxes.
- thanatropism 11y ago
  > less optimal for your lifestyle That's a tiny bit racist.

by turar 11y ago

irishcoffee 11y ago

I read this counter-point a lot. Its never clear to me how you invest the mortgage payment and also pay rent to live somewhere. Am I missing something? Sincere question.

feverishaaron 11y ago
Especially when rents are rising 5-10% per year.
JustSomeNobody 11y ago
I have very often wondered the same. Someone somewhere said it, lots of people repeat it, nobody does it and nobody has fact checked it.
heywiseguy 11y ago
people who say this are talking about markets where the spread between renting and the finance cost of a similar bought property are huge. San Francisco, New York, LA... Let's say you're a couple years out of school and you work at Snapchat. Somehow you have a lot of money saved up and you can buy a little house near your office in Venice. A small house in Venice runs about $2m. So let's say you borrow 1.8m to pay for it, your monthly payment is about $8,500 on a 30 year fixed and thats before maintenance and insurance. That same house in Venice probably rents for somewhere between $3k and $4k/mo net of everything. So what those people are saying is to live in a rental and invest _the saved money_ in the market. Remember, in both cases you are renting: in one, you are renting real estate. In the other, you are renting money. But they have different tax treatments, and renting money allows you to lever yourself into eventually owning an asset who's value you might expect to rise.
- Grishnakh 11y ago
  Renting is cheaper than buying? That really doesn't make sense, and I don't think that's the case in most markets. In California, it might because of the funny way they do property taxes there, where new buyers get stuck with huge property tax bills but long-time owners are grandfathered at far lower rates, so the landlords are likely people who've owned the house for ages. Other states just aren't like this.
  - heywiseguy 11y ago
    Renting is vastly cheaper than buying in many of the most expensive markets in the USA, if your only assumptions are like "borrows 30 year fixed at good credit rating current rates at 80% of the value of the property". Vastly. Fancy parts of LA. SF. All of New York. Pretty much anywhere in the train-serviced urban/suburban Northeast. It might not "make sense" but it is true. I'm also sure it's not the case in most markets in the USA, but in the large metropolitan markets, it is true, and that's the point people are making when they say "you know, it might make more sense to invest your investment money in a different asset class and rent rather than pay the ownership premium here in Santa Monica/Pacific Heights/Williamsburg"
  - ArkyBeagle 11y ago
    Renting can be cheaper or about the same as buying. And I mean a comparable property. You have to add it all up. My landlord has probably shelled out $10k in repairs ( the house is at that magic 20 year point where everything fails ) in five years. I've done the "buy cheap and spend the rest at Home Depot" thing. It's not bad, but it's not ideal. Unless I'm categorically certain of living in the house at least five years, I'll continue to rent. I've done the math - I'd have less equity in a house of the same value than I have in raw cash freed up just from renting. And that's really not counting fees and closing costs.
floppydisk 11y ago
The basic premise behind that idea is rents are (historically were) cheaper than a mortgage so you could take the mortgage-rent delta, invest that, and generate a return greater than the interest rate on the mortgage and end up ahead. A lot of the mortgage calculators have a 3-5yr inflection point where renting, traditionally, was always cheaper if you planned on staying somewhere for 3-5yrs and moving. The problem is, the equation has flipped. Mortgage payments are now, in many cases, cheaper than rent and there's such a high demand for rental units in some metro areas that landlords have no problems keeping tenants increasing rent 3-10% year over year. Ideally, you could do the same arbitrage buying a house (ideally an asset that nets 0 when you sell it worst case and you get your money back) and invest the rent-mortgage delta into other assets. The problem is "unlocking" the house option. If you don't have exemplary credit, and a certain pile of cash available, banks are leery to touch you and make financing available. Ergo, you get forced into the rental market and there's a huge incentive to turn properties into rentals. Tack on the millennial generation's hesitancy to settle down in one location and you get a set of economic conditions that encourage renting and regular rent increases.
- Phlarp 11y ago
  >Tack on the millennial generation's hesitancy to settle down in one location and you get a set of economic conditions that encourage renting and regular rent increases. Are we hesitant to "settle down" or are we trapped in a death spiral of student debt, rising rents and underemployment?
  - floppydisk 11y ago
    As always, it depends. Speaking anecdotally, most of the millennials I know speak rather forcefully about their desire to not settle down, marry, or begin a family prior to 30. I can count the number (amongst my friends) on one hand who discuss factors like underemployment and debt as being significant in their decision to delay settling down. Most seem to enjoy the party/city lifestyle and spend their time focusing on their career/traveling instead. Yes, it's possible all of those things are factors but I'm going to argue for most it's subconscious rather than explicit factors in a settle/not settle equation. I think a lot of millennials are buying into the "extended adolescence"/party phase/single life/no responsibility/free spirit/high mobility (pick your moniker) lifestyle choices and acting accordingly - based on my anecdotal experience.
fist 11y ago
I believe what they're arguing is that you don't pay your mortgage off early with a 3.5% mortgage rate. You invest your excess money in the stock market (hopefully returning more than 3.5%) instead of paying off your mortgage early.
turar 11y ago
I'm not sure I understand why you would pay rent to live somewhere else. I'm talking about living in the house that you bought and have a mortgage on. Say your mortgage loan amount is $300K at 3.5%, locked in for 30 years. Instead of paying it off in 6-10 years with extra payments, I say invest those extra payments in the stock market, and keep paying the mortgage for 30 years at a locked rate of 3.5%. If that money that you invested makes anything above 3.5% over 30 years, then that's free returns to you. On top of that, it also depends where you think the interests rates will be in 10-20 years from now. If you believe that they will be higher than they are currently, then that's even more reason to keep that loan locked in for 30 years instead of paying it off sooner. Hope that helps.
- JackFr 11y ago
  > On top of that, it also depends where you think the interests rates will be in 10-20 years from now. If you believe that they will be higher than they are currently, then that's even more reason to keep that loan locked in for 30 years instead of paying it off sooner. That makes no sense. You'll be better off paying a lower interest rate than you would be not having a loan in a high rate environment?
  - turar 11y ago
    Remember, the loan is locked in. Everything around you may be a high rate environment, but your loan is still 3.5% when regular bank savings account would be paying, say 7%. So, if you bought shares of an Emerging Markets ETF [1] with the money that you would have otherwise paid for accelerated mortgage payments. Today these shares are paying you around 3.5% in dividends alone. Fast forward ten years to a high rate environment, and ten years of buying ETF shares and reinvesting dividends, I'm assuming that the dollar amount of your shares would be higher than the amount of debt you would have otherwise paid off already. That's why no other country on Earth that I know of has 30-year fixed mortgages. They are essentially a government subsidy to homeowners via Fannie/Freddie. [1] https://www.google.com/finance?q=NYSEARCA%3AVWO https://www.google.com/finance?q=NYSEARCA%3AVWO
    - 11y ago
dsp1234 11y ago
The New York Times buy vs rent calculator[0] can help determine which side of the rent vs buy is better (from a financial standpoint only, not including factors like 'freedom') depending upon various factors. For example, here in Oregon based on all of the factors I adjusted, the result was "If you can rent a similar home for less than $1,422 per month then renting is better.". I could probably break even by moving to a different location, but then (for me) the freedom factor pushes it back towards home ownership. So you put your own assumptions in, and that can give you a good idea of where your own situation results. Its never clear to me how you invest the mortgage payment and also pay rent to live somewhere. As a direct response to this, the calculator will actually show what the expected costs are assuming you invest any difference between the rent vs mortgage in a vehicle with the specified returns (and over the time period you specify) [0] - http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...?
MrApathy 11y ago
It's an argument that's highly dependent on how high rents and purchase prices are correlated. In many markets the two are somewhat aligned, but on occasion the two diverge significantly. For example, if the cost to rent is $3k and the monthly mortgage on a comparable place (including insurance, RE tax) is $4k, then in the longer term it may make more sense to purchase. Over time the $1k difference will grow smaller and equity will be built up. But what if there's a "frothy" market where investors are bidding up the price of an apartment and after taking ownership they're renting them out rather than living in them. So it's $3k to rent, but $1.2M to purchase, meaning the monthly mortgage is closer to $6k. Well now it makes sense to rent and invest the difference outside of your local real estate market. This obviously looks like an extreme example, but during the housing boom and happened in Miami, Vegas, and many other cities, and it's arguably occurring in many localized markets today.

sf_rob 11y ago

Not to mention that this preserves some liquidity. It'd be a shame to have to refinance at an inopportune time to get some equity out of a house.

SilasX 11y ago

I've worked through the same logic myself. I don't deny that it generates better financial returns. However, the devil is in the details. Let's say after 30 years you have a big bag of money. Well, now you have to invest it for the passive income to continue paying rent. But, per my recent comment[1], inflation-protected passive income will pay something like 2.1%. Oh, and you're taxed on the interest income. So, more like 1.7-8% (in addition to whatever hit it because you couldn't put it all in tax-deferred retirement accounts). I hope interest rates return to something sane, but we can't assume that. In contrast, if that extra money paid off a house, it's implicitly "paying your rent" ... except that it's not an actual income flow, so it's not taxed at all! You just pay property tax, whose increases are capped because you're just an elderly person whose estate shot up in value. Plus, factor in rentals being generally targeted a lower-income people (or high-income yuppie singles) and therefore less desirable neighborhoods and less optimal for your lifestyle and it's looking steadily worse -- definitely need more than 3.5% for the break-even point (which would have to be the real, not nominal return anyway). [1] https://news.ycombinator.com/item?id=11027774 https://news.ycombinator.com/item?id=11027774

srj 11y ago
If you live in a home you own I think your rent can be thought of as the amount you could have made had you rented it out to someone else. It's not completely equal because there are burdens to being a landlord but from that perspective you're always a renter.
- SilasX 11y ago
  Right, but the point is, that effective imputed income is probably going to be much higher than your investments will throw off, especially after considering taxes.
thanatropism 11y ago
> less optimal for your lifestyle That's a tiny bit racist.