5 ms·

> Someone owns the building where you live. Either that person is you, and you are paying off your own debt; or that person is someone else, and you are paying

by senko 4y ago

> Someone owns the building where you live. Either that person is you, and you are paying off your own debt; or that person is someone else, and you are paying off theirs. > If you pay mortgage, there is hope that one day you will have paid it off and no longer have to. If you pay rent, only your landlord profits. This argument only makes sense if the (monthly) rent payments are more than mortgage payments + maintenance costs. In most cases, that's not true.

vidanay 4y ago
> In most cases, that's not true. Are you claiming that most landlords operate at a loss? I don't buy that.
- senko 4y ago
  No. That would assume the property itself has no value.
- fargle 4y ago
  you guys are both right, kinda. no, landlords do not willingly operate at a loss. in a really bad market (housing glut) they may be forced to. that's not the situation right now, at least in highly populated areas. rents are usually going to be at least 20-30% higher than mortgage + expenses, or else the landlords will start selling or go bankrupt. however, that's the mortgage payment and interest rate from the time it was bought, not necessarily today. so if the landlord bought that investment property 5 years ago, his costs are probably less than 1/2 of what it would cost you today. even if the market rent goes lower than that, he can still be profitable. so, right now, temporarily, it can be slightly cheaper month-to-month to rent in a lot of markets in the us. the fact that's what the markets are doing says some things about the current and future home sale prices.
  - tsukikage 4y ago
    Note there is also a distinction to be made between the absolute money leaving the bank account every month, and the portion of that money that is paying off the principal of the loan. For renting to be better value than buying, the rent has to be cheaper than just the interest part of the mortgage payment plus whatever portion of the maintenance costs is for things a landlord could be persuaded to cover, a somewhat lower bar than the entire payment. Being able to actually afford the whole amount remains a concern, of course. Where I live obtaining mortgages for any significant portion of the cost of a property is generally hard for people on anything close to an average income or below, and so landlords can get away with charging rents that are literally higher than the total mortgage payment would be. Even though the tenant can demonstrably afford the repayments - they are literally paying a landlord more every month! - the bank will not lend more than a fixed multiple of their salary and so they cannot buy. I understand this is something of a local issue, though.
    - ryandrake 4y ago
      > For renting to be better value than buying, the rent has to be cheaper than just the interest part of the mortgage payment plus whatever portion of the maintenance costs is for things a landlord could be persuaded to cover, a somewhat lower bar than the entire payment Yep, this is forgotten in many discussions comparing rent and mortgage. Only the interest portion of your mortgage matters for the sake of comparing expenses. The principal portion is money going from one of your pockets to the other and does not represent an expense.
    - fargle 4y ago
      You are right, except that you also have to account for the "cost of money". Meaning from your principle being "tied up". So you essentially need to account for that as well. For example, if my capital investment is $60000 (and the bank's is $240000 - remember this house was bought at a favorable time), that $60000 tied up is costing me $200-$400 (4%-8%) per month. PITI: Principle+Interest+Taxes+Insurance. Out of which, ITI is straight up cost. P+I is a constant through the life of the loan. At the beginning P is very small in relation to I and increases over time. So for the first 5 years or so, P is so small that it essentially is a wash with your cost of lending yourself the money. After that, I think you can take some small credit for principle repayment. Adding maintenance and assuming 5-10% vacancy, it's normal to have rents be 120%-130% of the equivalent PITI when things are stable - I don't think that's just a local issue - that's healthy. This covers how much rents must be to be not a loss for the landlord. But if you comparing rents to purchase, you also have the same small effect happening for the purchasers potential mortgage too. People have noted the tax benefits of deducting your interest and local taxs (I+T), but that may have diminished a little due to much higher standard deductions since 2017. I have not noticed people pointing out that another benefit is that any "investment" growth, unearned equity increase when your house appreciates, is tax free on your primary residence. That can be substantial. While it's true that mortgages have a debt-to-income ratio limit (it's not income to loan ratio), so do landlords, except the very worst slumlords who don't care. Why would people pay a 20-50% premium to rent? Good and bad reasons: - short term, no commitment, might move, etc. - bad time to buy right now - bad credit - can't get together the sizeable down payment - scared - underestimate the financial benefits Several of those reasons are rational even to pay a premium. But of lot if it is irrational. TFA didn't adequately address any of the "good" reasons not to buy a house and mangled the rest.
- deleted 4y ago
  [deleted]
tsukikage 4y ago
In the UK, for buy-to-let mortgages, lenders typically require projected rent to be at least ~140% of buy-to-let mortgage interest repayments. Moreover they review the situation regularly and require the landlord to pay off some or all of the principal if they are no longer eligible by that criteria. As a landlord, therefore, you will not be loaned the money unless there is profit to be made on the rent; we don't have to speculate - we know absolutely for certain that (rent-maintenance) is enough to pay off all the interest and a little principal each month, otherwise the bank would not have lent the landlord the money. I am rather less familiar with the US buy-to-rent mortgage market, but I understand there are similar eligibility criteria involved there as well.
jjav 4y ago
> This argument only makes sense if the (monthly) rent payments are more than mortgage payments + maintenance costs. > In most cases, that's not true. In most cases, that's not true initially. Over time, rents rise substantially but mortgages are fixed and can go lower by refinancing. When I bought a house, the monthly cost was a bit over 200% of my rent at the time (of a roughly similar-sized rental unit). Yes it was painful in that first year. It only took ~3 years for the rents in the area to become similar to my then already lowered mortgage via refinance. Fast forward a couple decades and my housing costs are ~20% of rental rates in the area. By the time I retire the mortgage will be long gone. It is heartbreaking to watch older people on fixed income having to deal with ever-rising rents.
- senko 4y ago
  > mortgages are fixed and can go lower by refinancing. This varies by country. In my corner of the EU, morgages are flexible rate (following an index such as EURIBOR), sometimes with a 5-year fixed rate option (for a premium).

by senko 4y ago

vidanay 4y ago

> In most cases, that's not true. Are you claiming that most landlords operate at a loss? I don't buy that.

senko 4y ago
No. That would assume the property itself has no value.
fargle 4y ago
you guys are both right, kinda. no, landlords do not willingly operate at a loss. in a really bad market (housing glut) they may be forced to. that's not the situation right now, at least in highly populated areas. rents are usually going to be at least 20-30% higher than mortgage + expenses, or else the landlords will start selling or go bankrupt. however, that's the mortgage payment and interest rate from the time it was bought, not necessarily today. so if the landlord bought that investment property 5 years ago, his costs are probably less than 1/2 of what it would cost you today. even if the market rent goes lower than that, he can still be profitable. so, right now, temporarily, it can be slightly cheaper month-to-month to rent in a lot of markets in the us. the fact that's what the markets are doing says some things about the current and future home sale prices.
- tsukikage 4y ago
  Note there is also a distinction to be made between the absolute money leaving the bank account every month, and the portion of that money that is paying off the principal of the loan. For renting to be better value than buying, the rent has to be cheaper than just the interest part of the mortgage payment plus whatever portion of the maintenance costs is for things a landlord could be persuaded to cover, a somewhat lower bar than the entire payment. Being able to actually afford the whole amount remains a concern, of course. Where I live obtaining mortgages for any significant portion of the cost of a property is generally hard for people on anything close to an average income or below, and so landlords can get away with charging rents that are literally higher than the total mortgage payment would be. Even though the tenant can demonstrably afford the repayments - they are literally paying a landlord more every month! - the bank will not lend more than a fixed multiple of their salary and so they cannot buy. I understand this is something of a local issue, though.
  - ryandrake 4y ago
    > For renting to be better value than buying, the rent has to be cheaper than just the interest part of the mortgage payment plus whatever portion of the maintenance costs is for things a landlord could be persuaded to cover, a somewhat lower bar than the entire payment Yep, this is forgotten in many discussions comparing rent and mortgage. Only the interest portion of your mortgage matters for the sake of comparing expenses. The principal portion is money going from one of your pockets to the other and does not represent an expense.
  - fargle 4y ago
    You are right, except that you also have to account for the "cost of money". Meaning from your principle being "tied up". So you essentially need to account for that as well. For example, if my capital investment is $60000 (and the bank's is $240000 - remember this house was bought at a favorable time), that $60000 tied up is costing me $200-$400 (4%-8%) per month. PITI: Principle+Interest+Taxes+Insurance. Out of which, ITI is straight up cost. P+I is a constant through the life of the loan. At the beginning P is very small in relation to I and increases over time. So for the first 5 years or so, P is so small that it essentially is a wash with your cost of lending yourself the money. After that, I think you can take some small credit for principle repayment. Adding maintenance and assuming 5-10% vacancy, it's normal to have rents be 120%-130% of the equivalent PITI when things are stable - I don't think that's just a local issue - that's healthy. This covers how much rents must be to be not a loss for the landlord. But if you comparing rents to purchase, you also have the same small effect happening for the purchasers potential mortgage too. People have noted the tax benefits of deducting your interest and local taxs (I+T), but that may have diminished a little due to much higher standard deductions since 2017. I have not noticed people pointing out that another benefit is that any "investment" growth, unearned equity increase when your house appreciates, is tax free on your primary residence. That can be substantial. While it's true that mortgages have a debt-to-income ratio limit (it's not income to loan ratio), so do landlords, except the very worst slumlords who don't care. Why would people pay a 20-50% premium to rent? Good and bad reasons: - short term, no commitment, might move, etc. - bad time to buy right now - bad credit - can't get together the sizeable down payment - scared - underestimate the financial benefits Several of those reasons are rational even to pay a premium. But of lot if it is irrational. TFA didn't adequately address any of the "good" reasons not to buy a house and mangled the rest.
deleted 4y ago
[deleted]

tsukikage 4y ago

In the UK, for buy-to-let mortgages, lenders typically require projected rent to be at least ~140% of buy-to-let mortgage interest repayments. Moreover they review the situation regularly and require the landlord to pay off some or all of the principal if they are no longer eligible by that criteria. As a landlord, therefore, you will not be loaned the money unless there is profit to be made on the rent; we don't have to speculate - we know absolutely for certain that (rent-maintenance) is enough to pay off all the interest and a little principal each month, otherwise the bank would not have lent the landlord the money. I am rather less familiar with the US buy-to-rent mortgage market, but I understand there are similar eligibility criteria involved there as well.

jjav 4y ago

> This argument only makes sense if the (monthly) rent payments are more than mortgage payments + maintenance costs. > In most cases, that's not true. In most cases, that's not true initially. Over time, rents rise substantially but mortgages are fixed and can go lower by refinancing. When I bought a house, the monthly cost was a bit over 200% of my rent at the time (of a roughly similar-sized rental unit). Yes it was painful in that first year. It only took ~3 years for the rents in the area to become similar to my then already lowered mortgage via refinance. Fast forward a couple decades and my housing costs are ~20% of rental rates in the area. By the time I retire the mortgage will be long gone. It is heartbreaking to watch older people on fixed income having to deal with ever-rising rents.

senko 4y ago
> mortgages are fixed and can go lower by refinancing. This varies by country. In my corner of the EU, morgages are flexible rate (following an index such as EURIBOR), sometimes with a 5-year fixed rate option (for a premium).