7 ms·

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 hous

by 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.
altano 16y ago
I don't get this commonly made argument. I'm either paying rent or a mortgage. It seems to rely on an assumed rich renter, who has enough money to rent an apartment AND invest money on top of it.
- dreeves 16y ago
  Say the home-buyer can just barely afford the mortgage payments and their renting alter ego can just barely afford rent. Then necessarily the renter is getting a much nicer place. Holding the niceness of the place constant, the renter will indeed have extra money to invest just like the home-buyer is gradually building equity (investing) in the house. Rent ratios are actually often such that the above is even more extreme: buying a house cost more per month even if you pay only the interest on your mortgage (which is equivalent to renting: building no equity in the actual house).
mattm 16y ago
> 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. Actually, the renter is better off from a purely financial point of view. Even if the house is owned free and clear, property taxes and maintenance will still need to be paid. The renter's rent covers all that.

by dreeves 16y ago

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.

altano 16y ago

I don't get this commonly made argument. I'm either paying rent or a mortgage. It seems to rely on an assumed rich renter, who has enough money to rent an apartment AND invest money on top of it.

dreeves 16y ago
Say the home-buyer can just barely afford the mortgage payments and their renting alter ego can just barely afford rent. Then necessarily the renter is getting a much nicer place. Holding the niceness of the place constant, the renter will indeed have extra money to invest just like the home-buyer is gradually building equity (investing) in the house. Rent ratios are actually often such that the above is even more extreme: buying a house cost more per month even if you pay only the interest on your mortgage (which is equivalent to renting: building no equity in the actual house).

mattm 16y ago

> 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. Actually, the renter is better off from a purely financial point of view. Even if the house is owned free and clear, property taxes and maintenance will still need to be paid. The renter's rent covers all that.