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Well they typically don’t make 500 ft^2 homes for $1M, but you can find 500 ft^2 apartments for $3k/month. I think a house has a minimum size, thus a minimum p

Well they typically don’t make 500 ft^2 homes for $1M, but you can find 500 ft^2 apartments for $3k/month. I think a house has a minimum size, thus a minimum price over that of rent.

refurb 7y ago
The same holds true for houses. As someone who has been following the SF market closely, an 1100 sq ft house that's worth $1.1M would cost $5,300 in cash flow per month (mortgage, taxes, insurance) plus another $925 in opportunity cost (down payment @ 5%) for a grand total of $6225. And that's not including maintenance costs. The same home could be rented for ~$4500 per month. Keep in mind that most rented houses were purchased a while ago. If you bought the same house when it was $700K, you could still make a profit on a rent of $4500. The reason why owning costs more is because buyers are also assuming appreciation. If you sell the same house for $1.5M 5 years later, you still make a nice profit even if your monthly cash flow is negative.
- kd5bjo 7y ago
  Don’t forget that part of that $6225 is paying down principal, which will be recouped when selling or simply disappear from monthly costs after the mortgage is paid off. Also, most ownership costs move less with inflation than rents do, so in 10 years the comparison is $6225 2019 dollars vs $4500 2029 dollars. Also, once you hit 20% ownership, you no longer have to pay mortgage insurance. I haven’t run the numbers lately to figure out which side wins, but the analysis is significantly more complicated than comparing monthly outlays in the first year.
  - refurb 7y ago
    which will be recouped when selling That assumes that you can sell the house for more than what you bought it at. You are correct that principle may be recouped and in addition, you get a mortgage interest tax deduction. However, you also pay 6% when you sell the place and maintenance costs (~1% per year) need to be accounted for. There are several assumptions you need to make for owning to be cheaper than renting - that usually involves owning for a longer period of time (>5 years) and some modest appreciation (~3%+). Of course, my numbers were from the SF market. There are many cities in the US where owning is cheaper than renting from day 1. SF just isn't one of those. A good place to mention the NYTimes rent versus buy calculator: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
    - kd5bjo 7y ago
      > That assumes that you can sell the house for more than what you bought it at. Not necessarily; as long as the value of the house[1] doesn’t fall more than the principal you’ve paid, you’ll get more cash from the sale than you put up as a down payment. The trouble with buying on margin, though, is that it amplifies losses— the worst single day in the stock market[2] was about a 20% drop, but you get the same effect from a 1% drop in your house value if you hold the 95% mortgage that you described. [1] Folding transaction fees into the effective value [2] https://en.m.wikipedia.org/wiki/Black_Monday_(1987)

Well they typically don’t make 500 ft^2 homes for $1M, but you can find 500 ft^2 apartments for $3k/month. I think a house has a minimum size, thus a minimum price over that of rent.

refurb 7y ago

The same holds true for houses. As someone who has been following the SF market closely, an 1100 sq ft house that's worth $1.1M would cost $5,300 in cash flow per month (mortgage, taxes, insurance) plus another $925 in opportunity cost (down payment @ 5%) for a grand total of $6225. And that's not including maintenance costs. The same home could be rented for ~$4500 per month. Keep in mind that most rented houses were purchased a while ago. If you bought the same house when it was $700K, you could still make a profit on a rent of $4500. The reason why owning costs more is because buyers are also assuming appreciation. If you sell the same house for $1.5M 5 years later, you still make a nice profit even if your monthly cash flow is negative.

kd5bjo 7y ago
Don’t forget that part of that $6225 is paying down principal, which will be recouped when selling or simply disappear from monthly costs after the mortgage is paid off. Also, most ownership costs move less with inflation than rents do, so in 10 years the comparison is $6225 2019 dollars vs $4500 2029 dollars. Also, once you hit 20% ownership, you no longer have to pay mortgage insurance. I haven’t run the numbers lately to figure out which side wins, but the analysis is significantly more complicated than comparing monthly outlays in the first year.
- refurb 7y ago
  which will be recouped when selling That assumes that you can sell the house for more than what you bought it at. You are correct that principle may be recouped and in addition, you get a mortgage interest tax deduction. However, you also pay 6% when you sell the place and maintenance costs (~1% per year) need to be accounted for. There are several assumptions you need to make for owning to be cheaper than renting - that usually involves owning for a longer period of time (>5 years) and some modest appreciation (~3%+). Of course, my numbers were from the SF market. There are many cities in the US where owning is cheaper than renting from day 1. SF just isn't one of those. A good place to mention the NYTimes rent versus buy calculator: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
  - kd5bjo 7y ago
    > That assumes that you can sell the house for more than what you bought it at. Not necessarily; as long as the value of the house[1] doesn’t fall more than the principal you’ve paid, you’ll get more cash from the sale than you put up as a down payment. The trouble with buying on margin, though, is that it amplifies losses— the worst single day in the stock market[2] was about a 20% drop, but you get the same effect from a 1% drop in your house value if you hold the 95% mortgage that you described. [1] Folding transaction fees into the effective value [2] https://en.m.wikipedia.org/wiki/Black_Monday_(1987)