6 ms·

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

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encounter a couple of catastrophic and unexpected issues (leaking roof, etc.), and after 10 years the decor will be outdated and shabby.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.
  - bane 10y ago
    Correct. When rents get too far ahead of mortgages, people simply buy property instead. In your first example, the landlord is amortizing expenses by charging rent above their ownership costs. It doesn't have to be at or higher than then current new mortgage rates. The second example does happen. However, if the landlord's bet is wrong, and they have the runway to float the extra expenses for a while, they can simply wait for rents to rise and over decades make it back and begin amortizing then. Or they can sell and hope to make it back. Property owners have many more financial options with their property than do renters.
- Sophistifunk 10y ago
  Not at all. Rental costs are most strongly influenced by supply-and-demand of housing, whereas sale costs are mostly influenced by supply-and-demand of credit.
  - bane 10y ago
    Not true, rental costs will go as high as possible until buying becomes more attractive. Buying costs are based on supply and demand of housing and credit. That's why it's more expensive to buy a house in San Francisco than in Kansas City, Missouri even if the credit markets are effectively the same in both cases. Under normal market conditions, borrowing money becomes expensive as monetary supply decreases. However, very active central banking systems the last couple decades has changed the story on this.
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...

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.
- bane 10y ago
  Correct. When rents get too far ahead of mortgages, people simply buy property instead. In your first example, the landlord is amortizing expenses by charging rent above their ownership costs. It doesn't have to be at or higher than then current new mortgage rates. The second example does happen. However, if the landlord's bet is wrong, and they have the runway to float the extra expenses for a while, they can simply wait for rents to rise and over decades make it back and begin amortizing then. Or they can sell and hope to make it back. Property owners have many more financial options with their property than do renters.
Sophistifunk 10y ago
Not at all. Rental costs are most strongly influenced by supply-and-demand of housing, whereas sale costs are mostly influenced by supply-and-demand of credit.
- bane 10y ago
  Not true, rental costs will go as high as possible until buying becomes more attractive. Buying costs are based on supply and demand of housing and credit. That's why it's more expensive to buy a house in San Francisco than in Kansas City, Missouri even if the credit markets are effectively the same in both cases. Under normal market conditions, borrowing money becomes expensive as monetary supply decreases. However, very active central banking systems the last couple decades has changed the story on this.

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...