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Re: renting is wasting money. Think of the math this way. A $1mil condo in New York generates approximately 45k/yr income, or 4.5% return on investment per yea

by soyiuz 10y ago

Re: renting is wasting money. Think of the math this way. A $1mil condo in New York generates approximately 45k/yr income, or 4.5% return on investment per year in rents. Subtract taxes and amortization and ask yourself, can you get similar returns elsewhere? You could for example purchase an index fund with the same $1mil and contribute the gains towards rent. Either way you are living "for free." It is however risky not to diversify. So if the $1mil is all you have and it is all in the house, you are in danger. Additionally, property is not very liquid. In the downturn it would be difficult to exit. For these reasons, I believe house ownership only makes sense as a portion of one's assets. Renting makes solid financial sense otherwise. In the conversation of rent vs. own people often forget to take the opportunity costs into account.

bane 10y ago
To make your plan work, you'd have to have around $1mil in investment dollars that you'd place into various investments to make the "free" rent money. Since you're relying on those investments to provide shelter, they're just as illiquid as owning property (except with property you can make money off of it). The best plan here is to keep $800k in investments, move to rural nowhere and buy a huge house for $200k cash and live off the investment income entirely and not bother working. You can then rent off portions of the property (a bedroom, a basement, airbnb etc.) to surge your income if you need it. If you don't have $1mil up front to start, like most people, building equity in the place you live makes far more financial sense over time than does renting because you both get to live there and because it doubles as an investment. Starting from the same lack of a million dollars, renting only covers cost of living and does not provide for any investment opportunity.
- soyiuz 10y ago
  The amount is irrelevant, since you are making the same percentage on whatever sum investment. I think you are using a non-technical definition of liquidity: I can convert ETFs or stocks into cash almost immediately. So for example, it is easy to scale down or to move money from stocks to bonds. The house is immovable property in all senses of the word. It is difficult to convert to cash or to move (in case of political upheaval, for example). Your last point ignores the significant costs associated with 1. amortization and 2. the liquidity problem. First, given a neutral market, the house decays in value: appliances need fixing, floors, heaters, boilers etc. We are just used to rising prices due to speculation, but nothing guarantees the upward trend. Second, consider the cost of converting cash into house and the other way around: mortgage fees, interest, buying and selling fees, plus real estate taxes. The New York Times has an excellent calculator on buying vs. renting. The math just does not support your conclusions. Buying wins out after 10-15 years GIVEN an upward real estate market. With any downturns, renting wins out indefinitely. Include the risk of investing into a single instrument (all you money is in the house) plus the stresses of ownership (shit goes wrong all the time and costs you money) and the picture is not so clear at all.
  - bane 10y ago
    To make your original scheme work (investment earnings pay for rental costs), you investments are de facto illiquid, otherwise you have no way to pay for housing without breaking from the scheme. You also need to make more from your investments than renting currently costs because over time rental prices are likely to go up and your investment return will need to increase. You are right that property ownership is more illiquid, but supposing I had a million dollars invested making me a better than 4.5% return, why would I pay rent when I could just buy a house with that money instead? At the end of the mortgage period I'd have my original investment plus ownership of real property, while the renter would only have their investment dollars and would have to continue the investment-for-housing scheme for the rest of their life. > First, given a neutral market, This is a false assumption as markets are almost never neutral. It's impossible to be a market oracle, but historic trends show a general upwards movement in most well functioning economies. It's a better than chance bet that most markets are thus net positive. You are correct though that nothing guarantees this upward trend. The New York Times calculator is pretty good, but misses the simple fact that you need to live somewhere forever and not just for the period of a mortgage. Thus any comparison should be made with how long you expect to live. The picture is very clear, you will likely need housing longer than 10-15 years, and if that's true, then buying property nearly always wins over renting.
defen 10y ago
A person with $1 million available to put into an index fund is the 1%, and advice for them is not really applicable to the general population. For "normal" people, buying a house can be a good idea because you can deduct the interest from your income. It also gives you much more stability in terms of monthly housing payments if you get a fixed-rate mortgage (unless rent control is an option). Finally, you also "get back" a portion of your mortgage payments when you sell the house. You never get your rent money back.
- Godel_unicode 10y ago
  Rent/buy is not a simple analysis, there is no one right answer. If you ever (for medium-large values of "ever") find yourself in a situation where there's one obvious right answer for all cases, you probably did something wrong. Fortunately, at least for homes it's also a solved problem. Take your data to the below calculator, and get on with your life. http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0 http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
- soyiuz 10y ago
  See above. The amount is irrelevant. Deducting interest is good. However, you must take into account the costs of amortization, real estate taxes, and the costs of borrowing money. Check the NYT calculator. Owning wins out in an up market and only after a decade or so. It is much more difficult the absorb the costs of real estate transaction for those not in the top 1%. Rental is a reasonable financial strategy for any income bracket.
rapind 10y ago
In Canada you may also qualify for tax credits when buying a home. That combined with low rates creates house horniness that's hard to resist.
rwmj 10y ago
Who's going to lend me $1m so I can play the stockmarket?
- joeyo 10y ago
  You could absolutely borrow on margin to play the stock, although you would probably need to have more than the typical home mortgage 20% to get the loan.
  - rwmj 10y ago
    Is that really something that is available to the ordinary man/woman in the street? (Genuine question, I have no idea ..)
    - sportanova 10y ago
      ordinary people can borrow 50% on margin

by soyiuz 10y ago

bane 10y ago

To make your plan work, you'd have to have around $1mil in investment dollars that you'd place into various investments to make the "free" rent money. Since you're relying on those investments to provide shelter, they're just as illiquid as owning property (except with property you can make money off of it). The best plan here is to keep $800k in investments, move to rural nowhere and buy a huge house for $200k cash and live off the investment income entirely and not bother working. You can then rent off portions of the property (a bedroom, a basement, airbnb etc.) to surge your income if you need it. If you don't have $1mil up front to start, like most people, building equity in the place you live makes far more financial sense over time than does renting because you both get to live there and because it doubles as an investment. Starting from the same lack of a million dollars, renting only covers cost of living and does not provide for any investment opportunity.

soyiuz 10y ago
The amount is irrelevant, since you are making the same percentage on whatever sum investment. I think you are using a non-technical definition of liquidity: I can convert ETFs or stocks into cash almost immediately. So for example, it is easy to scale down or to move money from stocks to bonds. The house is immovable property in all senses of the word. It is difficult to convert to cash or to move (in case of political upheaval, for example). Your last point ignores the significant costs associated with 1. amortization and 2. the liquidity problem. First, given a neutral market, the house decays in value: appliances need fixing, floors, heaters, boilers etc. We are just used to rising prices due to speculation, but nothing guarantees the upward trend. Second, consider the cost of converting cash into house and the other way around: mortgage fees, interest, buying and selling fees, plus real estate taxes. The New York Times has an excellent calculator on buying vs. renting. The math just does not support your conclusions. Buying wins out after 10-15 years GIVEN an upward real estate market. With any downturns, renting wins out indefinitely. Include the risk of investing into a single instrument (all you money is in the house) plus the stresses of ownership (shit goes wrong all the time and costs you money) and the picture is not so clear at all.
- bane 10y ago
  To make your original scheme work (investment earnings pay for rental costs), you investments are de facto illiquid, otherwise you have no way to pay for housing without breaking from the scheme. You also need to make more from your investments than renting currently costs because over time rental prices are likely to go up and your investment return will need to increase. You are right that property ownership is more illiquid, but supposing I had a million dollars invested making me a better than 4.5% return, why would I pay rent when I could just buy a house with that money instead? At the end of the mortgage period I'd have my original investment plus ownership of real property, while the renter would only have their investment dollars and would have to continue the investment-for-housing scheme for the rest of their life. > First, given a neutral market, This is a false assumption as markets are almost never neutral. It's impossible to be a market oracle, but historic trends show a general upwards movement in most well functioning economies. It's a better than chance bet that most markets are thus net positive. You are correct though that nothing guarantees this upward trend. The New York Times calculator is pretty good, but misses the simple fact that you need to live somewhere forever and not just for the period of a mortgage. Thus any comparison should be made with how long you expect to live. The picture is very clear, you will likely need housing longer than 10-15 years, and if that's true, then buying property nearly always wins over renting.

defen 10y ago

A person with $1 million available to put into an index fund is the 1%, and advice for them is not really applicable to the general population. For "normal" people, buying a house can be a good idea because you can deduct the interest from your income. It also gives you much more stability in terms of monthly housing payments if you get a fixed-rate mortgage (unless rent control is an option). Finally, you also "get back" a portion of your mortgage payments when you sell the house. You never get your rent money back.

Godel_unicode 10y ago
Rent/buy is not a simple analysis, there is no one right answer. If you ever (for medium-large values of "ever") find yourself in a situation where there's one obvious right answer for all cases, you probably did something wrong. Fortunately, at least for homes it's also a solved problem. Take your data to the below calculator, and get on with your life. http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0 http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
soyiuz 10y ago
See above. The amount is irrelevant. Deducting interest is good. However, you must take into account the costs of amortization, real estate taxes, and the costs of borrowing money. Check the NYT calculator. Owning wins out in an up market and only after a decade or so. It is much more difficult the absorb the costs of real estate transaction for those not in the top 1%. Rental is a reasonable financial strategy for any income bracket.

rapind 10y ago

In Canada you may also qualify for tax credits when buying a home. That combined with low rates creates house horniness that's hard to resist.

rwmj 10y ago

Who's going to lend me $1m so I can play the stockmarket?

joeyo 10y ago
You could absolutely borrow on margin to play the stock, although you would probably need to have more than the typical home mortgage 20% to get the loan.
- rwmj 10y ago
  Is that really something that is available to the ordinary man/woman in the street? (Genuine question, I have no idea ..)
  - sportanova 10y ago
    ordinary people can borrow 50% on margin