5 ms·

I bought a house. According to this calc i may or may not have been a good idea based on how the house appreciates (I got it at the bottom of the market). But

I bought a house. According to this calc i may or may not have been a good idea based on how the house appreciates (I got it at the bottom of the market). But at the end of the day my house is like 4x bigger then my apartment. So worth it even if it does not end up being an over all savings or not.

rokhayakebe 16y ago
I don't get this calculator, because you are likely to make money or get back your payments when you sell the home. Rent is forever gone.
- sanswork 16y ago
  You're ignoring mortgage interest and costs associated with actually owning a home that you don't encounter when renting. Those are also gone forever and given that most of your early mortgage payments will be primarily interest ones when you sell early even for the exact same amount as you bought you lose out on that money.
- dreeves 16y ago
  I think I can make intuitive why the "rent is forever gone" argument is wrong. Another way to state that argument is "after I pay off the mortgage I own a house and live for free whereas if I'd rented the whole time then I'd own nothing and still have rent to pay". Quoting myself from the comments of http://messymatters.com/buyrent http://messymatters.com/buyrent ... Imagine yourself 30 years from now with a house you fully own, with no more payments to make. Now imagine your alternate renting self who, instead of steadily paying down the principal on the mortgage, has built up hundreds of thousands of dollars in equity in some other investment. You still have rent to pay each month but that's also about how much you're collecting in interest on your investments. So the renter now lives for free just like the home-buyer. Another way to say all this is that if you ignore price bubbles, taxes, personal preferences, and leverage then renting and buying are roughly financially equivalent. Not that you should ignore those things, just don't fall for the myths that it's a no-brainer decision.
  - orangecat 16y ago
    Another way to say all this is that if you ignore price bubbles, taxes, personal preferences, and leverage then renting and buying are roughly financially equivalent. And that shouldn't be surprising. In a world where buying really is clearly superior to renting, there would be lots of arbitrage opportunities to buy houses and rent them profitably. That would increase both the demand for houses and the supply of rentals, which would make buying more expensive and renting cheaper until they reach a point of equivalence.
    - patio11 16y ago
      You have just described one of the most common small businesses in the United States. I take your point though.
    - krschultz 16y ago
      Landlords aren't charities. Their profit is based explicitly on the idea that buyers get a better deal than renters.
      - dreeves 16y ago
        Quoting myself from http://messymatters.com/buyrent http://messymatters.com/buyrent again: In fact, landlord profits are probably a very small part of the equation: on par with the cost of collecting your rent and arranging (not paying for) maintenance. We can check this by seeing how much property management companies charge. Casual web searching indicates it can range from 3% to 15% of rent. But that includes the cost of finding new tenants — the equivalent of which home-buyers pay in spades in realtor commissions (directly or indirectly). I think it's safe to say that at most a few percent or so of your rent is wasted in the sense of being profit for your landlord. (Which is what you'd expect in a competitive market, as someone above pointed out.)
        krschultz 16y ago
        That's not the point at all. The strategic picture is this: if renting were so much better than buying fewer people would buy, and nobody would be dumb enough to buy and then rent the place. But obviously buying is better than renting because a lot of people choose to go and spend their money buying extra homes beyond the one they need and renting it. I don't need to refer to google searches for my information, I have seen the landlord perspective 1st hand. I'm not surprised that most landlords see very little in the way of month to month cashflow profit. The renter pays in but you have to pay out a lot of other expenses (as mentioned). But at the end you own the house and the renter doesn't. Basically if you have enough money to front for the down payment the house costs you little or nothing after that except time/hassle of dealing with your tenant. It probably doesn't actually put more money in your pocket each month, but neither would a bunch of stocks if you were reinvesting the returns. So why tie yourself up in a single house instead of a bunch of stocks? Leverage.If I have 40k and get a mortgage on a 200k and make a small return, at some point that is better than getting 40k of stocks and making hypothetically a bigger return. Plus there are other intangiables. I can buy a shitty little house and spend a few weeks working on it and turn sweat equity into real equity, no matter how much you look at your stocks you haven't increased their value. Of course there are negatives, the tenant can trash the place, you can go without tenants for a while, but overall it makes sense for a lot of people who have some free cash and a bit of extra time and want to have a side business.
- akronim 16y ago
  Interest paid to the bank is also forever gone.
  - jasonkester 16y ago
    As are property tax, neighborhood dues, garbage fees, and a half dozen other little fees associated with home ownership that, comically, add up to about the rent on a nice apartment in most cases.
- jhy 16y ago
  These buy vs rent calculators assume that any savings made from paying rent instead of mortgage is paid directly into an investment account. I.e. you sock away the full theoretical mortgage amount less rent paid into a managed fund or some such. The reality that I've seen is that people never actually do that, or at least not to the full degree, and treat the difference as extra disposable interest. And so the money gets frittered away and the calculations are wrong. You can't do that with a mortgage: you have to pay it, and so therefore people have an enforced savings/investment discipline. And also the incentive to sock as much money into their house as quickly as possible, to pay down the debt. So the money side is generally better, and you generally get a better house, when buying. But it's a bit of a commitment which some people will avoid on principle.
  - jasonkester 16y ago
    Well said, but that doesn't make the calculator wrong. It'd be cool if there were some form of financial instrument for the weak-willed individuals you describe (which as you say probably represent 90% of the population), that acted exactly like a mortgage but simply left your money in a pile you could access later. Sorta like an IRA that you could force yourself to commit to, with nasty letters arriving in red envelopes if you skipped a payment.
    - dreeves 16y ago
      There's something like that (though on a different timescale) called Christmas Club accounts. You can deposit money but you can't take it out until December. I understand it was quite popular in the 70s. The idea is to force yourself to save enough for holiday shopping. I'm totally fascinated by commitment devices like that. I've been compiling a list of them here: http://padm.us/akrasia http://padm.us/akrasia The "getting a mortgage to force yourself to save" was actually the first example I thought of, from when this topic came up a year ago.

rokhayakebe 16y ago

I don't get this calculator, because you are likely to make money or get back your payments when you sell the home. Rent is forever gone.

sanswork 16y ago
You're ignoring mortgage interest and costs associated with actually owning a home that you don't encounter when renting. Those are also gone forever and given that most of your early mortgage payments will be primarily interest ones when you sell early even for the exact same amount as you bought you lose out on that money.
dreeves 16y ago
I think I can make intuitive why the "rent is forever gone" argument is wrong. Another way to state that argument is "after I pay off the mortgage I own a house and live for free whereas if I'd rented the whole time then I'd own nothing and still have rent to pay". Quoting myself from the comments of http://messymatters.com/buyrent http://messymatters.com/buyrent ... Imagine yourself 30 years from now with a house you fully own, with no more payments to make. Now imagine your alternate renting self who, instead of steadily paying down the principal on the mortgage, has built up hundreds of thousands of dollars in equity in some other investment. You still have rent to pay each month but that's also about how much you're collecting in interest on your investments. So the renter now lives for free just like the home-buyer. Another way to say all this is that if you ignore price bubbles, taxes, personal preferences, and leverage then renting and buying are roughly financially equivalent. Not that you should ignore those things, just don't fall for the myths that it's a no-brainer decision.
- orangecat 16y ago
  Another way to say all this is that if you ignore price bubbles, taxes, personal preferences, and leverage then renting and buying are roughly financially equivalent. And that shouldn't be surprising. In a world where buying really is clearly superior to renting, there would be lots of arbitrage opportunities to buy houses and rent them profitably. That would increase both the demand for houses and the supply of rentals, which would make buying more expensive and renting cheaper until they reach a point of equivalence.
  - patio11 16y ago
    You have just described one of the most common small businesses in the United States. I take your point though.
  - krschultz 16y ago
    Landlords aren't charities. Their profit is based explicitly on the idea that buyers get a better deal than renters.
    - dreeves 16y ago
      Quoting myself from http://messymatters.com/buyrent http://messymatters.com/buyrent again: In fact, landlord profits are probably a very small part of the equation: on par with the cost of collecting your rent and arranging (not paying for) maintenance. We can check this by seeing how much property management companies charge. Casual web searching indicates it can range from 3% to 15% of rent. But that includes the cost of finding new tenants — the equivalent of which home-buyers pay in spades in realtor commissions (directly or indirectly). I think it's safe to say that at most a few percent or so of your rent is wasted in the sense of being profit for your landlord. (Which is what you'd expect in a competitive market, as someone above pointed out.)
      - krschultz 16y ago
        That's not the point at all. The strategic picture is this: if renting were so much better than buying fewer people would buy, and nobody would be dumb enough to buy and then rent the place. But obviously buying is better than renting because a lot of people choose to go and spend their money buying extra homes beyond the one they need and renting it. I don't need to refer to google searches for my information, I have seen the landlord perspective 1st hand. I'm not surprised that most landlords see very little in the way of month to month cashflow profit. The renter pays in but you have to pay out a lot of other expenses (as mentioned). But at the end you own the house and the renter doesn't. Basically if you have enough money to front for the down payment the house costs you little or nothing after that except time/hassle of dealing with your tenant. It probably doesn't actually put more money in your pocket each month, but neither would a bunch of stocks if you were reinvesting the returns. So why tie yourself up in a single house instead of a bunch of stocks? Leverage.If I have 40k and get a mortgage on a 200k and make a small return, at some point that is better than getting 40k of stocks and making hypothetically a bigger return. Plus there are other intangiables. I can buy a shitty little house and spend a few weeks working on it and turn sweat equity into real equity, no matter how much you look at your stocks you haven't increased their value. Of course there are negatives, the tenant can trash the place, you can go without tenants for a while, but overall it makes sense for a lot of people who have some free cash and a bit of extra time and want to have a side business.
akronim 16y ago
Interest paid to the bank is also forever gone.
- jasonkester 16y ago
  As are property tax, neighborhood dues, garbage fees, and a half dozen other little fees associated with home ownership that, comically, add up to about the rent on a nice apartment in most cases.
jhy 16y ago
These buy vs rent calculators assume that any savings made from paying rent instead of mortgage is paid directly into an investment account. I.e. you sock away the full theoretical mortgage amount less rent paid into a managed fund or some such. The reality that I've seen is that people never actually do that, or at least not to the full degree, and treat the difference as extra disposable interest. And so the money gets frittered away and the calculations are wrong. You can't do that with a mortgage: you have to pay it, and so therefore people have an enforced savings/investment discipline. And also the incentive to sock as much money into their house as quickly as possible, to pay down the debt. So the money side is generally better, and you generally get a better house, when buying. But it's a bit of a commitment which some people will avoid on principle.
- jasonkester 16y ago
  Well said, but that doesn't make the calculator wrong. It'd be cool if there were some form of financial instrument for the weak-willed individuals you describe (which as you say probably represent 90% of the population), that acted exactly like a mortgage but simply left your money in a pile you could access later. Sorta like an IRA that you could force yourself to commit to, with nasty letters arriving in red envelopes if you skipped a payment.
  - dreeves 16y ago
    There's something like that (though on a different timescale) called Christmas Club accounts. You can deposit money but you can't take it out until December. I understand it was quite popular in the 70s. The idea is to force yourself to save enough for holiday shopping. I'm totally fascinated by commitment devices like that. I've been compiling a list of them here: http://padm.us/akrasia http://padm.us/akrasia The "getting a mortgage to force yourself to save" was actually the first example I thought of, from when this topic came up a year ago.