5 ms·

It's very simple actually. Consider, for brevity, a mortgage where the monthly or yearly payment, including taxes, is equal to the rent you would be paying for

by etatoby 10y ago

It's very simple actually. Consider, for brevity, a mortgage where the monthly or yearly payment, including taxes, is equal to the rent you would be paying for the same place. Then live in the place and go about your life for several years, until the mortgage is paid for. Option 1, you took the mortgage. Now you own a house and you are not due any more payments. You can keep living there and use the excess income for other purposes, or you can sell the house and upgrade, or whatever. Option 2, you kept renting. You are still under a landlord, you are still due monthly payments, and you still don't own anything more that what you started with, after all those years. In this very real sense, rent is wasted money.

tunap 10y ago
The difference in costs are several factors between rent & mortgage+taxes+insurance+maintenance+appliances. I have better places for moneys(some investment, some wasteful) and I get to move whenever I please... although, I have had to move when it didn't please me, too.
_9MOTHER9HORSE 10y ago
You do incur a lot more costs as a property owner than as a renter, which you should bear in mind. Over the life of your average 20-25 year mortgage you should expect to have to replace numerous appliances, encounter a couple of catastrophic and unexpected issues (leaking roof, etc.), and after 10 years the decor will be outdated and shabby. To get optimum resale value you will have to sink a lot of time/money into remodelling (the money you will likely recover, but not the time/effort), then you have the stress of trying to sell the place. You are also bearing the risk of a downturn in the housing market, and could end up in negative equity. As a renter you have greater flexibility, much greater certainty over your outgoings, etc.
- bane 10y ago
  All of those costs are simply amortized over the rental agreement. I'm not sure why people who rent seem to think landlords are appliance/maintenance charities.
  - _9MOTHER9HORSE 10y ago
    Not necessarily. When the capital gains from simply sitting on a property are so great, I'm sure a lot of landlords are actually making a net loss on a renting operation, and don't care all that much. Regardless, the point is that a lot of people see the mortgage repayments equalling the rent and don't think about the extra costs of ownership.
    - bane 10y ago
      Landlords don't have infinite cash reserves. They still need to cover costs or minimize losses if they're betting on capital gains from property sale at some later date. Most renters pay for the maintenance and taxes of the property they live in, it's just not itemized for them and the costs are generally amortized and distributed among multiple tenants. Landlords are generally not charities, if you got lucky enough to find one who is, be very thankful. You are correct that rent != mortgage and shouldn't be compared too close. Renting is a 100% loss, while mortgage is <100% depending on where you are in your repayment plan -- allowing the owner to recoup some of their housing costs after time. After the mortgage is paid off, the renter still continues to loose 100% of their housing costs while the owner has only care and maintenance (and taxes) of the property to account for.
  - mgce 10y ago
    Rental prices are what the market will bear. These may or may not be strongly correlated to the landlord's ownership. Two very relevant examples of when the "amortization" argument won't apply: - a rising market in which the landlord bought a long time ago. Their purchase price was way below the area's current market value. So they can cover their expenses while you still pay less in rent than what a modern-day mortgage would be. - a home buying market that's expecting continued pricing appreciation. Homeowners can (and will) rent out property at a loss with the expectation it'll be made up in a higher sale value years down the line. Whether or not this actually happens, of course, depends on their ability to accurately predict the future. There's also the inverse case of declining markets, when landlords can end up over the heads financially and simply can't charge the rates they need to cover their mortgages, because the entire area has turned south. There are very real financial risks to landlords. They can't just charge whatever they want. It really depends on the state and future of their market.
- nemo44x 10y ago
  I was waiting for someone to mention that. Home ownership is expensive and makes you inflexible. Also, consider property taxes (which will scale with inflation) and the fact home owners insurance is more expensive than renters. And besides finance you need to consider if you want the responsibility of owning a home. Cutting the grass, shoveling snow, cleaning gutters, fixing things, painting, etc. It's a lot of work. Owning makes sense for some people but there are a lot of benefits to not having to spend your life taking care of a building.
  - sosborn 10y ago
    Taking care of the building is actually a lot of fun for some people!
    - nemo44x 10y ago
      No doubt and didn't mean that as a slight to people who take pleasure in maintaining their property. In fact I admire lovely landscaping and can see myself wanting to do that one day perhaps.
  - seanp2k2 10y ago
    Another counter-point: when you buy a house, even while the mortgage isn't paid off, you can immediately start renting parts of it and end up in a situation where your mortgage payments are equaled or exceeded by your rental income. I also believe that this is taxed differently from normal income, especially so if you're renting rooms in a house you live in vs. owning rental property. In the Bay Area at least, a single-bedroom apartment is easily $2000 a month. If you play your cards right, a single-family home in a desirable neighborhood for tech workers or others can be had for under $1m with 4 reasonably-sized bedrooms, a garage, and a yard. You can then rent out 2 of the bedrooms at $1400/month each and end up with your mortgage payment from your tenants each month. There are still maintenance costs and very significant property taxes (~single-tens of thousands per year on such a property), but you also build equity, which you can later sell (minus the mortgage interest). Depending on the mortgage, you could also use this situation to over-pay mortgage payments in order to pay off the property faster and reduce the amount spent on interest if that works out to a better investment opportunity than anything else you could do with the same money (any early payoff penalties included). It does seem to me that renting is a mixture of paying for convenience and throwing money away, given the above scenario and considering how after 5 years, the home owner ends up with ~$150k in equity assuming the housing market stays flat (it doesn't in the Bay Area, e.g. http://www.paragon-re.com/3_Recessions_2_Bubbles_and_a_Baby http://www.paragon-re.com/3_Recessions_2_Bubbles_and_a_Baby ) , taxes, maintenance, and interest included, you should still come out ahead with the house. Once you also factor in that renting gets you 8-20%+ increases in rental price per year, while the house value appreciates on the low end of that range over the same amount of time (and also that you can raise the rent for your lodgers accordingly), you really start to see why houses in the Bay Area are attracting foreign investors and starting bidding wars above asking price for nothing-special properties. Edit: lastly, the point I feel everyone neglects: unlike other investments, your first property has the additional advantage and value that you can live in it, so comparisons to other investments become quite different. Sure, you could take your down payment and put it into ETFs, and on paper the yearly average gains might look similar, but if you suddenly lose your job, the ETFs won't provide a place to sleep at night.
- shoover 10y ago
  This cannot be overstated. I think many of us see the mortgage, taxes, and insurance are less than rent and call it a win. We are vaguely aware of the money pit and getting out issues but they are hard to predict and easier to sweep under the rug. This conversation should always be accompanied with, "Assume $5k per year for maintenance," or some related concrete number based on condition and size, so we force ourselves to deal with a number instead of brushing it off. Also, real numbers for seller's closing costs. Still, I think for most markets in the US anyway, buying does make economic sense if you plan to stay in it for several years and enjoy or don't mind taking care of a building, to use peer's phrase. This calculator is excellent, btw: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0 http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
gruez 10y ago
>Consider, for brevity, a mortgage where the monthly or yearly payment, including taxes, is equal to the rent you would be paying for the same place. That's hardly always true
- vidarh 10y ago
  And if it is, you should do the maths and consider if you can afford becoming a landlord, because it means there's potentially room for yields well above normal (but beware the likely incoming flood of other landlords once people realise).
vidarh 10y ago
The maths rarely work out the way you outlined: If the mortgage is equal to the rent, then potential landlords are leaving money on the table. That rarely happens for long. Typically most landlords in competitive markets will leverage and take up interest-only mortgages to the extent were rent only barely covers interest and maintenance, and make most of their money on capital gains. For most people a repayment mortgage and maintenance and appropriate insurance should end up more expensive than renting for that reason. It is possible to come out financially on top by owning, not least if you're willing to do maintenance yourself etc., but it's not nearly as clear-cut. I've done very well buying, basically out of luck because I happened to buy on a tracker mortgage briefly before the interest rates crashed after the financial crisis, but if I'd foreseen that change I'd have been filthy rich instead of just a bit better off on my mortgage. But a tracker mortgage adds risk, and it could just as well have gone the other way. I took that risk because I could afford it. For me, the main economic benefit is that it is a hedge against unforeseen rapid changes in housing costs. If the area I live in suddenly gets drastically more popular than nearby areas, then I can still afford to live here. The cost is that I take a risk with respect to making it harder to move, but with a son in school locally that is not something I'd consider lightly anyway, and that if interest rates swings the wrong way I may still end up paying more overall.
- bane 10y ago
  The algorithm to make money as a landlord is pretty simple. 1) mortgage the property you wish to rent out 2) rent it out 3) wait until rents increase and earn profit (mortgages do not increase while rental rates do)
  - grkvlt 10y ago
    Not sure about point 3. Normally mortgage costs do increase - in line with interest rates. Even with a fixed-rate mortgage, there is usually a term for that rate, which is generally substantially less than the lifetime of the mortgage, often as little as two years, and rarely more than five. This is certainly the situation in the UK, do things work differently in the US?

by etatoby 10y ago

tunap 10y ago

The difference in costs are several factors between rent & mortgage+taxes+insurance+maintenance+appliances. I have better places for moneys(some investment, some wasteful) and I get to move whenever I please... although, I have had to move when it didn't please me, too.

_9MOTHER9HORSE 10y ago

You do incur a lot more costs as a property owner than as a renter, which you should bear in mind. Over the life of your average 20-25 year mortgage you should expect to have to replace numerous appliances, encounter a couple of catastrophic and unexpected issues (leaking roof, etc.), and after 10 years the decor will be outdated and shabby. To get optimum resale value you will have to sink a lot of time/money into remodelling (the money you will likely recover, but not the time/effort), then you have the stress of trying to sell the place. You are also bearing the risk of a downturn in the housing market, and could end up in negative equity. As a renter you have greater flexibility, much greater certainty over your outgoings, etc.

bane 10y ago
All of those costs are simply amortized over the rental agreement. I'm not sure why people who rent seem to think landlords are appliance/maintenance charities.
- _9MOTHER9HORSE 10y ago
  Not necessarily. When the capital gains from simply sitting on a property are so great, I'm sure a lot of landlords are actually making a net loss on a renting operation, and don't care all that much. Regardless, the point is that a lot of people see the mortgage repayments equalling the rent and don't think about the extra costs of ownership.
  - bane 10y ago
    Landlords don't have infinite cash reserves. They still need to cover costs or minimize losses if they're betting on capital gains from property sale at some later date. Most renters pay for the maintenance and taxes of the property they live in, it's just not itemized for them and the costs are generally amortized and distributed among multiple tenants. Landlords are generally not charities, if you got lucky enough to find one who is, be very thankful. You are correct that rent != mortgage and shouldn't be compared too close. Renting is a 100% loss, while mortgage is <100% depending on where you are in your repayment plan -- allowing the owner to recoup some of their housing costs after time. After the mortgage is paid off, the renter still continues to loose 100% of their housing costs while the owner has only care and maintenance (and taxes) of the property to account for.
- mgce 10y ago
  Rental prices are what the market will bear. These may or may not be strongly correlated to the landlord's ownership. Two very relevant examples of when the "amortization" argument won't apply: - a rising market in which the landlord bought a long time ago. Their purchase price was way below the area's current market value. So they can cover their expenses while you still pay less in rent than what a modern-day mortgage would be. - a home buying market that's expecting continued pricing appreciation. Homeowners can (and will) rent out property at a loss with the expectation it'll be made up in a higher sale value years down the line. Whether or not this actually happens, of course, depends on their ability to accurately predict the future. There's also the inverse case of declining markets, when landlords can end up over the heads financially and simply can't charge the rates they need to cover their mortgages, because the entire area has turned south. There are very real financial risks to landlords. They can't just charge whatever they want. It really depends on the state and future of their market.
nemo44x 10y ago
I was waiting for someone to mention that. Home ownership is expensive and makes you inflexible. Also, consider property taxes (which will scale with inflation) and the fact home owners insurance is more expensive than renters. And besides finance you need to consider if you want the responsibility of owning a home. Cutting the grass, shoveling snow, cleaning gutters, fixing things, painting, etc. It's a lot of work. Owning makes sense for some people but there are a lot of benefits to not having to spend your life taking care of a building.
- sosborn 10y ago
  Taking care of the building is actually a lot of fun for some people!
  - nemo44x 10y ago
    No doubt and didn't mean that as a slight to people who take pleasure in maintaining their property. In fact I admire lovely landscaping and can see myself wanting to do that one day perhaps.
- seanp2k2 10y ago
  Another counter-point: when you buy a house, even while the mortgage isn't paid off, you can immediately start renting parts of it and end up in a situation where your mortgage payments are equaled or exceeded by your rental income. I also believe that this is taxed differently from normal income, especially so if you're renting rooms in a house you live in vs. owning rental property. In the Bay Area at least, a single-bedroom apartment is easily $2000 a month. If you play your cards right, a single-family home in a desirable neighborhood for tech workers or others can be had for under $1m with 4 reasonably-sized bedrooms, a garage, and a yard. You can then rent out 2 of the bedrooms at $1400/month each and end up with your mortgage payment from your tenants each month. There are still maintenance costs and very significant property taxes (~single-tens of thousands per year on such a property), but you also build equity, which you can later sell (minus the mortgage interest). Depending on the mortgage, you could also use this situation to over-pay mortgage payments in order to pay off the property faster and reduce the amount spent on interest if that works out to a better investment opportunity than anything else you could do with the same money (any early payoff penalties included). It does seem to me that renting is a mixture of paying for convenience and throwing money away, given the above scenario and considering how after 5 years, the home owner ends up with ~$150k in equity assuming the housing market stays flat (it doesn't in the Bay Area, e.g. http://www.paragon-re.com/3_Recessions_2_Bubbles_and_a_Baby http://www.paragon-re.com/3_Recessions_2_Bubbles_and_a_Baby ) , taxes, maintenance, and interest included, you should still come out ahead with the house. Once you also factor in that renting gets you 8-20%+ increases in rental price per year, while the house value appreciates on the low end of that range over the same amount of time (and also that you can raise the rent for your lodgers accordingly), you really start to see why houses in the Bay Area are attracting foreign investors and starting bidding wars above asking price for nothing-special properties. Edit: lastly, the point I feel everyone neglects: unlike other investments, your first property has the additional advantage and value that you can live in it, so comparisons to other investments become quite different. Sure, you could take your down payment and put it into ETFs, and on paper the yearly average gains might look similar, but if you suddenly lose your job, the ETFs won't provide a place to sleep at night.
shoover 10y ago
This cannot be overstated. I think many of us see the mortgage, taxes, and insurance are less than rent and call it a win. We are vaguely aware of the money pit and getting out issues but they are hard to predict and easier to sweep under the rug. This conversation should always be accompanied with, "Assume $5k per year for maintenance," or some related concrete number based on condition and size, so we force ourselves to deal with a number instead of brushing it off. Also, real numbers for seller's closing costs. Still, I think for most markets in the US anyway, buying does make economic sense if you plan to stay in it for several years and enjoy or don't mind taking care of a building, to use peer's phrase. This calculator is excellent, btw: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0 http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...

gruez 10y ago

>Consider, for brevity, a mortgage where the monthly or yearly payment, including taxes, is equal to the rent you would be paying for the same place. That's hardly always true

vidarh 10y ago
And if it is, you should do the maths and consider if you can afford becoming a landlord, because it means there's potentially room for yields well above normal (but beware the likely incoming flood of other landlords once people realise).

vidarh 10y ago

The maths rarely work out the way you outlined: If the mortgage is equal to the rent, then potential landlords are leaving money on the table. That rarely happens for long. Typically most landlords in competitive markets will leverage and take up interest-only mortgages to the extent were rent only barely covers interest and maintenance, and make most of their money on capital gains. For most people a repayment mortgage and maintenance and appropriate insurance should end up more expensive than renting for that reason. It is possible to come out financially on top by owning, not least if you're willing to do maintenance yourself etc., but it's not nearly as clear-cut. I've done very well buying, basically out of luck because I happened to buy on a tracker mortgage briefly before the interest rates crashed after the financial crisis, but if I'd foreseen that change I'd have been filthy rich instead of just a bit better off on my mortgage. But a tracker mortgage adds risk, and it could just as well have gone the other way. I took that risk because I could afford it. For me, the main economic benefit is that it is a hedge against unforeseen rapid changes in housing costs. If the area I live in suddenly gets drastically more popular than nearby areas, then I can still afford to live here. The cost is that I take a risk with respect to making it harder to move, but with a son in school locally that is not something I'd consider lightly anyway, and that if interest rates swings the wrong way I may still end up paying more overall.

bane 10y ago
The algorithm to make money as a landlord is pretty simple. 1) mortgage the property you wish to rent out 2) rent it out 3) wait until rents increase and earn profit (mortgages do not increase while rental rates do)
- grkvlt 10y ago
  Not sure about point 3. Normally mortgage costs do increase - in line with interest rates. Even with a fixed-rate mortgage, there is usually a term for that rate, which is generally substantially less than the lifetime of the mortgage, often as little as two years, and rarely more than five. This is certainly the situation in the UK, do things work differently in the US?