4 ms·

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 equiv

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.
    - orangecat 16y ago
      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. Correct, which means that renting isn't clearly superior to buying either. (Except during insane housing bubbles). Again exactly what we should expect. 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. And obviously growing your own food is better than buying it because lots of people grow extra food and sell it. The point is that the profits you can earn in either case aren't so great that it's foolish not to do it.

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.
  - orangecat 16y ago
    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. Correct, which means that renting isn't clearly superior to buying either. (Except during insane housing bubbles). Again exactly what we should expect. 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. And obviously growing your own food is better than buying it because lots of people grow extra food and sell it. The point is that the profits you can earn in either case aren't so great that it's foolish not to do it.