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When the goal is to have a roof over your head, between renting or buying, the better option is to buy. If the goal is to invest wisely, of course buying a hous

by jimmy1 9y ago

When the goal is to have a roof over your head, between renting or buying, the better option is to buy. If the goal is to invest wisely, of course buying a house is worse than say something like an index fund. But the problem is: I can't sleep in an index fund. A house isn't a depreciating asset. Renting is not an asset at all. Mortgages are fixed. Rent tends to frequently increase, skyrocketing at worse. This article takes the very common scenario: 30 yr mortgage at market interest rate to compare to renting. Even on these terms its still lopsided. What about the people who do 15 year mortgage? What about those with large down payments? What about those who pay a little extra to their mortgage each month? The overall home market keeps with inflation, but in markets where the land is trending towards scarcity, you are poised to make money as what happened in my first home. I like to think those who were lucky to purchase a house in the valley area before the extreme scarcity made a nice profit if they decided to sell. The author fails to find a third point: in many cases, owning is cheaper than renting, especially in my city and cities like it. Rent here is around 1300 for a 1 bedroom 500 - 900 sqft apartment, depending on where you live. If you want multiple bedrooms, well now you are in 1800-2000 territory for 1300 sqft. You can own a 1800 sqft house for about 850 a month. You can put away half of your savings from rent for unexpected expenses, and use the other half to pay the mortgage off sooner, or you can spend it, either way it's roughly half the cost.

chrisseaton 9y ago
> owning is cheaper than renting This is the key thing! Obviously owning is cheaper than renting, as renters have to cover the costs of their landlord owning, and then some profit for them on top of that.
- pwinnski 9y ago
  A house built today of a certain size can be purchased with a lower monthly payment than it can be rented, yes, for exactly the reason you describe. A house built ten years ago, or twenty years ago, or thirty years ago, can often be rented much more cheaply than a house built today can be purchased. An apartment of the same size as that hypothetical house might be higher or lower, since the economics of apartment buildings tend to be different. A 1-bedroom or 2-bedroom apartment can quite often be rented more cheaply than a 3-bedroom house. "owning is cheaper than renting" is exactly the sort of generalization that gets people into trouble. Every situation is slightly different.
  - deleted 9y ago
    [deleted]
- pgwhalen 9y ago
  While this is mostly true, it’s important to understand that rents are not just “cost + profit.” They are market based. Sure, the market often pushes it towards something close to that formula, but it is not a guarantee, and many of the subtleties of buying vs renting are lost on those who reduce it to that formula.
- closeparen 9y ago
  Your landlord is probably not buying at the same instant he signs a lease with you, and he could be benefitting from economies of scale that you don't have by purchasing capital, homes, and maintenance services in bulk.
- cosmie 9y ago
  The market tends to decouple from that logic in an appreciating market. My landlord bought the house I'm in about 10 years ago. His mortgage is a fixed monthly payment that's locked in from when my house was worth less than half it's current value. The rent for where I live tracks really closely to the mortgage rate it'd cost me to buy at it's current valuation. For any investor that bought a rental right now, they'd barely make anything per month. But for my landlord that bought 10 years ago, he nets $1k - $1.5k per month above his costs. It's also not as straightforward in a depreciating market, either. In a depreciating market, some property owners may rent a property out at a loss, with the expectation that the monthly loss is temporary and less than the loss they'd take it they sold now.
  - ghaff 9y ago
    >The market tends to decouple from that logic in an appreciating market. I don't know how decoupled but I definitely know of cases where someone bought and has a good longterm tenant and that tenant gets a pretty good rate because they're profitable, a known entity, and low maintenance.
- cozzyd 9y ago
  In the case of renting a SFH from a random person, that might be kind of true (but not all landlords make money off renting anyway), but consider: - Your landlord may have a lot more capital to buy homes with no mortgage and the and ability to maintain homes cheaper than you can or remodel homes cheaper than you can. - Your landlord might be a large apartment complex where the economics are different from SFH.
- usaar333 9y ago
  As sibling comments note, not necessarily due to appreciation being baked into housing costs. Additionally, the owner and renter may have different risk tolerances where in the renter is comfortable putting cash in the stock market, the owner might want lower-risk, lower-yielding assets. Finally due to tax distortions, the owner may have a better deal on their own house than a prospective new owner could get. The Bay Area is an example where renting is much cheaper than owning: https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-the-bay-area-right-now-9eff37da8d6 https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...
- refurb 9y ago
  That's not true at all. My landlord bought the condo I live in 10 years ago when it was worth maybe 30% of what it is today. My rent right now is ~40% of what my mortgage would be if I bought the place. We're both happy!
phamilton 9y ago
> A house isn't a depreciating asset False. Land isn't a depreciating asset, but according to U.S. tax law a house is indeed a depreciating asset. EDIT: I'll rephrase and say "It's complicated". You can deduct depreciation on a house under some situations because structures are assumed to be depreciating. But a house can still appreciate and when you sell you may be on the hook for gains because of deducted depreciation.
- jimmy1 9y ago
  > False. Land isn't a depreciating asset, but according to To make such a bold refutal will require another source besides what the U.S. tax law says, because US tax law classifications aren't the same thing as market classifications. There are other reasons at play why tax law considers an asset to be of a certain type/category. I am glad you qualified. Like you said it depends. If you live in downward trending market in a city/town/state where jobs are leaving and aren't keeping your house updated, yes you have a depreciating asset. If you bought in early next to a brand new man-made lake on the outskirts of a major metropolis, you could build a shed and make out like a bandit once the market surges. Most cases fall somewhere in between, on average, keeps up with inflation (the article cites Yale research in this regard). By keeping up with inflation, that by definition makes it not depreciating. Your point about deduction that is how our economy works. The government pushes you into home ownership. Our economy is based on incentivizing debt. Path of least resistance. Work with your economy, not against it. It isn't hard to see this.
pwinnski 9y ago
The author described how to calculate the ratio of sale price to average monthly rental to determine if owning is cheaper or more expensive than renting in your area. In some cities (including mine), owning tends to be cheaper. In other cities (including one in which I used to live), renting tends to be cheaper.

by jimmy1 9y ago

chrisseaton 9y ago

> owning is cheaper than renting This is the key thing! Obviously owning is cheaper than renting, as renters have to cover the costs of their landlord owning, and then some profit for them on top of that.

pwinnski 9y ago
A house built today of a certain size can be purchased with a lower monthly payment than it can be rented, yes, for exactly the reason you describe. A house built ten years ago, or twenty years ago, or thirty years ago, can often be rented much more cheaply than a house built today can be purchased. An apartment of the same size as that hypothetical house might be higher or lower, since the economics of apartment buildings tend to be different. A 1-bedroom or 2-bedroom apartment can quite often be rented more cheaply than a 3-bedroom house. "owning is cheaper than renting" is exactly the sort of generalization that gets people into trouble. Every situation is slightly different.
- deleted 9y ago
  [deleted]
pgwhalen 9y ago
While this is mostly true, it’s important to understand that rents are not just “cost + profit.” They are market based. Sure, the market often pushes it towards something close to that formula, but it is not a guarantee, and many of the subtleties of buying vs renting are lost on those who reduce it to that formula.
closeparen 9y ago
Your landlord is probably not buying at the same instant he signs a lease with you, and he could be benefitting from economies of scale that you don't have by purchasing capital, homes, and maintenance services in bulk.
cosmie 9y ago
The market tends to decouple from that logic in an appreciating market. My landlord bought the house I'm in about 10 years ago. His mortgage is a fixed monthly payment that's locked in from when my house was worth less than half it's current value. The rent for where I live tracks really closely to the mortgage rate it'd cost me to buy at it's current valuation. For any investor that bought a rental right now, they'd barely make anything per month. But for my landlord that bought 10 years ago, he nets $1k - $1.5k per month above his costs. It's also not as straightforward in a depreciating market, either. In a depreciating market, some property owners may rent a property out at a loss, with the expectation that the monthly loss is temporary and less than the loss they'd take it they sold now.
- ghaff 9y ago
  >The market tends to decouple from that logic in an appreciating market. I don't know how decoupled but I definitely know of cases where someone bought and has a good longterm tenant and that tenant gets a pretty good rate because they're profitable, a known entity, and low maintenance.
cozzyd 9y ago
In the case of renting a SFH from a random person, that might be kind of true (but not all landlords make money off renting anyway), but consider: - Your landlord may have a lot more capital to buy homes with no mortgage and the and ability to maintain homes cheaper than you can or remodel homes cheaper than you can. - Your landlord might be a large apartment complex where the economics are different from SFH.
usaar333 9y ago
As sibling comments note, not necessarily due to appreciation being baked into housing costs. Additionally, the owner and renter may have different risk tolerances where in the renter is comfortable putting cash in the stock market, the owner might want lower-risk, lower-yielding assets. Finally due to tax distortions, the owner may have a better deal on their own house than a prospective new owner could get. The Bay Area is an example where renting is much cheaper than owning: https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-the-bay-area-right-now-9eff37da8d6 https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...
refurb 9y ago
That's not true at all. My landlord bought the condo I live in 10 years ago when it was worth maybe 30% of what it is today. My rent right now is ~40% of what my mortgage would be if I bought the place. We're both happy!

phamilton 9y ago

> A house isn't a depreciating asset False. Land isn't a depreciating asset, but according to U.S. tax law a house is indeed a depreciating asset. EDIT: I'll rephrase and say "It's complicated". You can deduct depreciation on a house under some situations because structures are assumed to be depreciating. But a house can still appreciate and when you sell you may be on the hook for gains because of deducted depreciation.

jimmy1 9y ago
> False. Land isn't a depreciating asset, but according to To make such a bold refutal will require another source besides what the U.S. tax law says, because US tax law classifications aren't the same thing as market classifications. There are other reasons at play why tax law considers an asset to be of a certain type/category. I am glad you qualified. Like you said it depends. If you live in downward trending market in a city/town/state where jobs are leaving and aren't keeping your house updated, yes you have a depreciating asset. If you bought in early next to a brand new man-made lake on the outskirts of a major metropolis, you could build a shed and make out like a bandit once the market surges. Most cases fall somewhere in between, on average, keeps up with inflation (the article cites Yale research in this regard). By keeping up with inflation, that by definition makes it not depreciating. Your point about deduction that is how our economy works. The government pushes you into home ownership. Our economy is based on incentivizing debt. Path of least resistance. Work with your economy, not against it. It isn't hard to see this.

pwinnski 9y ago

The author described how to calculate the ratio of sale price to average monthly rental to determine if owning is cheaper or more expensive than renting in your area. In some cities (including mine), owning tends to be cheaper. In other cities (including one in which I used to live), renting tends to be cheaper.