5 ms·

Renting is throwing away money. I understand people do it when they only plan on living in a place for a brief period of time, but you'd still be better off buy

Renting is throwing away money. I understand people do it when they only plan on living in a place for a brief period of time, but you'd still be better off buying a house, then selling after a few years in most time spans. There is risk though, but I doubt the risk would ever equal $3000 a month loss you are currently taking. For example, if you bought a house, it would have to lose $72K value in 2 years or $144K in 4 years (minus inflation, taxes, maintenance) to break even with paying $3000/month rent. However, if your house appreciates as most do in highly industrialized areas, you basically get paid to live there.

gruez 5y ago
>For example, if you bought a house, it would have to lose $72K value in 2 years or $144K in 4 years (minus inflation, taxes, maintenance) to break even with paying $3000/month rent. You're not factoring in transaction costs, maintenance, property taxes, and cost of capital (ie. the downpayment). Transaction costs (eg. relators) are 2.5% on each side, so after buying/selling you're already down 5%. Property taxes and maintenance are estimated to be 1% each, so over 4 years you're down 8%. The cost of capital is hard to quantify, especially if you also factor in appreciation, but housing has historically under-preformed the stock market, so that should theoretically be a non-zero cost there. Suppose we ignore cost of capital (since that's hard to quantify), let's calculate what that % equates to. According to [1] the price to rent ratios is many cities exceed 30. If we use a price to rent ratio of 30, then a $3000/month rent translates to a house price of $1.08M. Factoring in the % costs from before, that's a cost of $140.4k. That's nearly as big as the $144k loss that you budgeted for, before factoring in drop in home price. The maintenance/property taxes alone is going to eat up more than half of your hypothetical $3000 in rent savings. [1] https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci... >However, if your house appreciates as most do in highly industrialized areas, you basically get paid to live there. but that's the same force that makes housing unaffordable.
- lakecresva 5y ago
  > Factoring in the % costs from before, that's a cost of $140.4k. For a married person with a million dollar home, they'll make ~$150k back from the section 121 nonrecognition provision alone if they ever sell, not to mention the salt and mortgage interest tax deductions. The tax code heavily incentivizes home ownership.
  - gruez 5y ago
    >For a married person with a million dollar home, they'll make ~$150k back from the section 121 nonrecognition provision alone if they ever sell 1. that's on capital gains. If they're selling for a loss in OP's scenario, that works out to a tax savings of $0. 2. realistically speaking this can be factored into the cost of cost of capital (ie. opportunity cost of the downpayment/mortgage payment), but I didn't want to get into that because the calculation can get subjective. Housing has historically under-performed the stock market, but if you're a housing permabull, you might argue that the housing bubble will continue and outperform the stock market, making the opportunity cost of buying a house negative. >not to mention the salt and mortgage interest tax deductions that's a savings on mortgage interest, which is a cost that wasn't in my calculations. Including that cost and factoring in that deduction will make the numbers worse, not better. >The tax code heavily incentivizes home ownership. no disagreement there.
    - lakecresva 5y ago
      I didn't realize you assumed a loss through the entire thing. Sure, if you ignore the realities of the US property market and begin with the assumption that your home is going to lose six figures in value every few years then yeah I guess renting is better than buying.
- stonogo 5y ago
  That's not how realtor fees work. The seller pays them. And plenty of real estate changes hands without the involvement of real estate agents. What you've described is a worst-case scenario which completely ignores the fact that homeowners have a real asset they can then sell. Further, any of this handwaving about all the fees of ownership apply just as well to whoever owns the property you're renting -- all of which costs they simply pass to the renter. There is no world where renting is as cost-effective as ownership over the long term.
  - gruez 5y ago
    >That's not how realtor fees work. The seller pays them 1. even if you're not paying them, it's baked into the price. 2. OP mentioned buying and selling (for a loss), so he'll eventually have to pay it 3. if you search around, realtor fees are customarily at 6% for the seller, so my estimate of 2.5% for both sides is actually underestimating it. > What you've described is a worst-case scenario which completely ignores the fact that homeowners have a real asset they can then sell. I'm using the case that OP himself provided. >Further, any of this handwaving about all the fees of ownership apply just as well to whoever owns the property you're renting -- all of which costs they simply pass to the renter. There is no world where renting is as cost-effective as ownership over the long term. Right, I'm not claiming that you're not throwing away any money when renting, just that it's nowhere the full rent, and the numbers aren't as rosy as OP initially suggested (ie. you can lose $144K house value in 4 years, and still break even).
WalterBright 5y ago
Paying property taxes and mortgage interest and insurance and maintenance and real estate commissions are also throwing away money. Don't forget all the carrying costs when you're selling the house and have the house sit empty for months. Just because you already moved out doesn't mean it stops costing you $$$. Buying a house only makes sense if you're going to stay there 5+ years. I've owned several homes as I've moved around. Lost money on all but one. My parents lost money on all the houses they bought. Real estate is hardly the guaranteed "wealth builder" people think it is. I hate mowing the lawn, too. Oh, and if you build a new house in Washington state, you get to pay sales tax on it! That's another 10% poke in the eye.
- lakecresva 5y ago
  > Paying property taxes and mortgage interest and insurance and maintenance and real estate commissions are also throwing away money. I don't understand, do you think landlords don't pay tax, insurance premiums, or maintenance costs for their property? Those are all passed on to tenants with room left over to make the landlord a profit.
  - WalterBright 5y ago
    Of course the landlords do. But I'm talking to the assumption that paying rent is throwing away money, while buying a house is not throwing money away.
    - Clubber 5y ago
      >But I'm talking to the assumption that paying rent is throwing away money, while buying a house is not throwing money away. Compare paying someone $3k a month to use their asset vs paying a bank ~$3k (probably less) a month while owning that same appreciating asset. When renting, that $3k is gone, a guaranteed loss. With buying, it goes into an asset you can later sell, hopefully at a higher price. Alternatively you can keep it and not have to pay mortgage or rent once it's paid off and still have a place to live. You can also borrow off whatever equity you've built up. Also that mortgage payment is locked in, so you aren't subject to the landlord raising rent after your contract expires in a couple of years. It's a big investment that you also get to live in. You could lose money on it, but it's unlikely in most populated places, and you will most likely lose less than what you would otherwise pay in rent. Just make sure you buy in an area / state that isn't shrinking.
rictic 5y ago
Don't forget closing costs and the opportunity cost of investing the down payment (which regulations basically require to be like 20% now I think). But yes, I agree that that's the history, that if you're in an area for a few years it's better to buy than to rent, but isn't it untenable for real estate to increase in value at ~3% higher than inflation indefinitely? I genuinely don't understand the long run bull case for real estate as an investment. But the idea that you'll get a rate of return that's close to the stock market, from owning some land that's just sitting there? It's very strange to me, from a 10,000 foot view of the economics. It's true that there's a fixed amount of land, but the population (both in the US and in the world as a whole) is growing slowly now and will soon stop. I suppose one potential driver for real estate's value in major cities is that the returns to concentration of talent will continue to increase. That seems possible (though beware of tail risks there, like remote work, VR, pandemic). But for real estate that's outside of a big growing city? It just seems possible that we've been in a long bull run in real estate that could slow down or halt drastically at any time. But that doesn't mean that it's not better to own than to rent. When you rent, you've got another party that's looking for a profit, and your rent is pricing in risks that are more under your control when you're an owner (like the risk that you totally trash the property, or the opportunity cost when the house is sitting empty).

gruez 5y ago

>For example, if you bought a house, it would have to lose $72K value in 2 years or $144K in 4 years (minus inflation, taxes, maintenance) to break even with paying $3000/month rent. You're not factoring in transaction costs, maintenance, property taxes, and cost of capital (ie. the downpayment). Transaction costs (eg. relators) are 2.5% on each side, so after buying/selling you're already down 5%. Property taxes and maintenance are estimated to be 1% each, so over 4 years you're down 8%. The cost of capital is hard to quantify, especially if you also factor in appreciation, but housing has historically under-preformed the stock market, so that should theoretically be a non-zero cost there. Suppose we ignore cost of capital (since that's hard to quantify), let's calculate what that % equates to. According to [1] the price to rent ratios is many cities exceed 30. If we use a price to rent ratio of 30, then a $3000/month rent translates to a house price of $1.08M. Factoring in the % costs from before, that's a cost of $140.4k. That's nearly as big as the $144k loss that you budgeted for, before factoring in drop in home price. The maintenance/property taxes alone is going to eat up more than half of your hypothetical $3000 in rent savings. [1] https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci... >However, if your house appreciates as most do in highly industrialized areas, you basically get paid to live there. but that's the same force that makes housing unaffordable.

lakecresva 5y ago
> Factoring in the % costs from before, that's a cost of $140.4k. For a married person with a million dollar home, they'll make ~$150k back from the section 121 nonrecognition provision alone if they ever sell, not to mention the salt and mortgage interest tax deductions. The tax code heavily incentivizes home ownership.
- gruez 5y ago
  >For a married person with a million dollar home, they'll make ~$150k back from the section 121 nonrecognition provision alone if they ever sell 1. that's on capital gains. If they're selling for a loss in OP's scenario, that works out to a tax savings of $0. 2. realistically speaking this can be factored into the cost of cost of capital (ie. opportunity cost of the downpayment/mortgage payment), but I didn't want to get into that because the calculation can get subjective. Housing has historically under-performed the stock market, but if you're a housing permabull, you might argue that the housing bubble will continue and outperform the stock market, making the opportunity cost of buying a house negative. >not to mention the salt and mortgage interest tax deductions that's a savings on mortgage interest, which is a cost that wasn't in my calculations. Including that cost and factoring in that deduction will make the numbers worse, not better. >The tax code heavily incentivizes home ownership. no disagreement there.
  - lakecresva 5y ago
    I didn't realize you assumed a loss through the entire thing. Sure, if you ignore the realities of the US property market and begin with the assumption that your home is going to lose six figures in value every few years then yeah I guess renting is better than buying.
stonogo 5y ago
That's not how realtor fees work. The seller pays them. And plenty of real estate changes hands without the involvement of real estate agents. What you've described is a worst-case scenario which completely ignores the fact that homeowners have a real asset they can then sell. Further, any of this handwaving about all the fees of ownership apply just as well to whoever owns the property you're renting -- all of which costs they simply pass to the renter. There is no world where renting is as cost-effective as ownership over the long term.
- gruez 5y ago
  >That's not how realtor fees work. The seller pays them 1. even if you're not paying them, it's baked into the price. 2. OP mentioned buying and selling (for a loss), so he'll eventually have to pay it 3. if you search around, realtor fees are customarily at 6% for the seller, so my estimate of 2.5% for both sides is actually underestimating it. > What you've described is a worst-case scenario which completely ignores the fact that homeowners have a real asset they can then sell. I'm using the case that OP himself provided. >Further, any of this handwaving about all the fees of ownership apply just as well to whoever owns the property you're renting -- all of which costs they simply pass to the renter. There is no world where renting is as cost-effective as ownership over the long term. Right, I'm not claiming that you're not throwing away any money when renting, just that it's nowhere the full rent, and the numbers aren't as rosy as OP initially suggested (ie. you can lose $144K house value in 4 years, and still break even).

WalterBright 5y ago

Paying property taxes and mortgage interest and insurance and maintenance and real estate commissions are also throwing away money. Don't forget all the carrying costs when you're selling the house and have the house sit empty for months. Just because you already moved out doesn't mean it stops costing you $$$. Buying a house only makes sense if you're going to stay there 5+ years. I've owned several homes as I've moved around. Lost money on all but one. My parents lost money on all the houses they bought. Real estate is hardly the guaranteed "wealth builder" people think it is. I hate mowing the lawn, too. Oh, and if you build a new house in Washington state, you get to pay sales tax on it! That's another 10% poke in the eye.

lakecresva 5y ago
> Paying property taxes and mortgage interest and insurance and maintenance and real estate commissions are also throwing away money. I don't understand, do you think landlords don't pay tax, insurance premiums, or maintenance costs for their property? Those are all passed on to tenants with room left over to make the landlord a profit.
- WalterBright 5y ago
  Of course the landlords do. But I'm talking to the assumption that paying rent is throwing away money, while buying a house is not throwing money away.
  - Clubber 5y ago
    >But I'm talking to the assumption that paying rent is throwing away money, while buying a house is not throwing money away. Compare paying someone $3k a month to use their asset vs paying a bank ~$3k (probably less) a month while owning that same appreciating asset. When renting, that $3k is gone, a guaranteed loss. With buying, it goes into an asset you can later sell, hopefully at a higher price. Alternatively you can keep it and not have to pay mortgage or rent once it's paid off and still have a place to live. You can also borrow off whatever equity you've built up. Also that mortgage payment is locked in, so you aren't subject to the landlord raising rent after your contract expires in a couple of years. It's a big investment that you also get to live in. You could lose money on it, but it's unlikely in most populated places, and you will most likely lose less than what you would otherwise pay in rent. Just make sure you buy in an area / state that isn't shrinking.

rictic 5y ago

Don't forget closing costs and the opportunity cost of investing the down payment (which regulations basically require to be like 20% now I think). But yes, I agree that that's the history, that if you're in an area for a few years it's better to buy than to rent, but isn't it untenable for real estate to increase in value at ~3% higher than inflation indefinitely? I genuinely don't understand the long run bull case for real estate as an investment. But the idea that you'll get a rate of return that's close to the stock market, from owning some land that's just sitting there? It's very strange to me, from a 10,000 foot view of the economics. It's true that there's a fixed amount of land, but the population (both in the US and in the world as a whole) is growing slowly now and will soon stop. I suppose one potential driver for real estate's value in major cities is that the returns to concentration of talent will continue to increase. That seems possible (though beware of tail risks there, like remote work, VR, pandemic). But for real estate that's outside of a big growing city? It just seems possible that we've been in a long bull run in real estate that could slow down or halt drastically at any time. But that doesn't mean that it's not better to own than to rent. When you rent, you've got another party that's looking for a profit, and your rent is pricing in risks that are more under your control when you're an owner (like the risk that you totally trash the property, or the opportunity cost when the house is sitting empty).