4 ms·

Why Entrepreneurs Should Not Buy Homes

25 points by esalazar 15y ago

randall 15y ago
"Rent. People will argue that the price of the mortgage, maintenance taxes, etc is all baked into the price of rent. Sometimes this is true. But usually not. And often maintenance and taxes will go up faster than your rent." Citation needed. If I pay $2000 per month * 12 and get 0 equity, vs paying $2000 * 12 + 2000 and get some percentage of that in equity, and deduct some from my taxes, something tells me if I get past the initial up front costs, and my time horizon for moving is > 5 years, owning a home probably isn't a bad call.
- runako 15y ago
  > pay $2000 per month * 12 and get 0 equity, vs paying $2000 * 12 + 2000 and get some percentage of that in equity In many/most markets, renting a place costs less per month than owning it. Spending an equivalent amount on rent vs. total home ownership overhead typically will mean that the renter ends up in a much nicer place. So the math would typically look something like this: > pay $1200 per month * 12 and get $11,600 in investable cash, vs paying $2000 * 12 + 2000 and get some percentage of that in equity risk. FWIW, I've owned homes in two states and taxes have increased every year without fail, even when housing crashed.
  - lpolovets 15y ago
    The buy:rent ratio varies a lot from place to place. In a few markets, like New York, buying is definitely way more expensive than renting. On the opposite end of the spectrum, in a place like Vegas or Miami, your rent will be significantly more than your mortgage payment. I think a buy-to-rent ratio of about 15 (i.e. 15 years rent = purchase price) is about where buying and renting break even. If you live in a place with a lower ratio, your mortgage payment would be less than the rent on the equivalent place; if you live in a place with a higher ratio, you can get a nicer place for the same monthly amount by renting. http://explore.trulia.com/datavis/rentvsbuy/Q2-2011/ http://explore.trulia.com/datavis/rentvsbuy/Q2-2011/
    - Vadoff 15y ago
      "On the opposite end of the spectrum, in a place like Vegas or Miami, your rent will be significantly less than your mortgage payment." I think you meant to say significantly more.
      - lpolovets 15y ago
        Fixed. Thanks!
    - runako 15y ago
      Generally agree with your comment, but a couple of small quibbles with the numbers. The ratios and stats typically published by those in the RE industry (the Trulia post included) only take into account the mortgage payment itself. That is, principal and interest. Those are not generally even close to the monthly payment that a homeowner sends to the bank, which must cover insurance, taxes, etc. The difference is frequently substantial. And of course, a homeowner still has the obligation of maintenance.
  - ebiester 15y ago
    As a counterpoint, my parents pay less on their nice 4 bedroom house in a desirable neighborhood than I paid for a 2 bedroom house in the same city. If you're planning on staying in the valley for 20 years, you will never find a better deal on rent in 20 years then if you buy today. I rent because I like the option to chase opportunity.
- rogerbinns 15y ago
  In California property taxes are 1% of the purchase price and can then only go up by 1-2% a year. In the house I currently rent the property taxes are $4,000 per year. If I bought the house then they would be around $7,500 per year. Everything else being equal that is a $300 per month saving by renting. There are various rent versus buy calculators online. Below is the NYT one. Buying will make sense eventually but that is measured in years. Putting in the current figures for my house, buying will never make sense unless there is at least 5% increase in house price per year every year. Banking on certain rates of return is what turns it into an all eggs in one basket "investment". http://www.nytimes.com/interactive/business/buy-rent-calculator.html http://www.nytimes.com/interactive/business/buy-rent-calcula...
trip42 15y ago
For many people, the real return on buying a house is owning the house, not the increase in value of the property. Where I live housing is fairly inexpensive and I can't think if of any other similarly sized investment that is guaranteed to cover my cost of housing for the rest of my life. (edit: typo)
lpolovets 15y ago
In the introduction, the author mentions that 1) he had a lot of problems selling his first home and 2) the story of his second home is so painful that he doesn't want to write about it. After reading that, it's hard not to take the rest of the article with a huge grain of salt. There are a few good points about home ownership requiring a lot of cash and limiting your mobility, but most of the points are very questionable: the tax deduction is NOT microscopic, maintenance does NOT have to be a huge issue (depending on the house), you will NOT spend all of your time working on the house (again, depending on the house), and so on. Entrepreneurs, specifically, can do clever things with houses. For example, if you can afford the down payment, there are many places where you can buy a 4 bedroom house, rent out 2-3 of the bedrooms and have a net profit every month (especially with the current interest rates.)
- jarek 15y ago
  > rent out 2-3 of the bedrooms ... thus further limiting your options should you wish/need to liquidate your investment or just plain move...
  - herval 15y ago
    why so? In most countries I lived on, you can evict renters with at most 1 month of notice. Plus, some people actually prefer to buy estate which is already rented (specially with long-term contracts)
- justncase80 15y ago
  If the business you want to be successful at is being a landlord then I think this is fine. Otherwise it's a time sink and not worth it.
jcslzr 15y ago
So basically is instead of making a downpayment for a house, invest in a business, and get a much better return. The difference is the risk involved in those decisions, since a house is kind of a guaranteed investment.
- nestlequ1k 15y ago
  Kind of... except when it's not.
nolanbrown23 15y ago
Buying home is not for everyone but renting is NOT always better. It's better when you only need a studio or 1 bedroom but once you have a family and children, renting a 2 or 3 bedroom apartment make no financial sense. In San Francisco, I'm looking at $1000 more in rent going from a 1 bedroom to a 2 bedroom and can expect that to continue going up. If you buy smart (i.e. not at the top end of your budget) with the intention to pay off your mortgage (not sell/buy every 3-7 years), you're in a far better position then someone who still has ~1/3 of their monthly income still going out the door. Even if you don't pay off your mortgage, you have the possibility to refinance, reducing your monthly nut making it far easier to survive as an entrepreneur.

25 points by esalazar 15y ago

"Rent. People will argue that the price of the mortgage, maintenance taxes, etc is all baked into the price of rent. Sometimes this is true. But usually not. And often maintenance and taxes will go up faster than your rent." Citation needed. If I pay $2000 per month * 12 and get 0 equity, vs paying $2000 * 12 + 2000 and get some percentage of that in equity, and deduct some from my taxes, something tells me if I get past the initial up front costs, and my time horizon for moving is > 5 years, owning a home probably isn't a bad call.

runako 15y ago
> pay $2000 per month * 12 and get 0 equity, vs paying $2000 * 12 + 2000 and get some percentage of that in equity In many/most markets, renting a place costs less per month than owning it. Spending an equivalent amount on rent vs. total home ownership overhead typically will mean that the renter ends up in a much nicer place. So the math would typically look something like this: > pay $1200 per month * 12 and get $11,600 in investable cash, vs paying $2000 * 12 + 2000 and get some percentage of that in equity risk. FWIW, I've owned homes in two states and taxes have increased every year without fail, even when housing crashed.
- lpolovets 15y ago
  The buy:rent ratio varies a lot from place to place. In a few markets, like New York, buying is definitely way more expensive than renting. On the opposite end of the spectrum, in a place like Vegas or Miami, your rent will be significantly more than your mortgage payment. I think a buy-to-rent ratio of about 15 (i.e. 15 years rent = purchase price) is about where buying and renting break even. If you live in a place with a lower ratio, your mortgage payment would be less than the rent on the equivalent place; if you live in a place with a higher ratio, you can get a nicer place for the same monthly amount by renting. http://explore.trulia.com/datavis/rentvsbuy/Q2-2011/ http://explore.trulia.com/datavis/rentvsbuy/Q2-2011/
  - Vadoff 15y ago
    "On the opposite end of the spectrum, in a place like Vegas or Miami, your rent will be significantly less than your mortgage payment." I think you meant to say significantly more.
    - lpolovets 15y ago
      Fixed. Thanks!
  - runako 15y ago
    Generally agree with your comment, but a couple of small quibbles with the numbers. The ratios and stats typically published by those in the RE industry (the Trulia post included) only take into account the mortgage payment itself. That is, principal and interest. Those are not generally even close to the monthly payment that a homeowner sends to the bank, which must cover insurance, taxes, etc. The difference is frequently substantial. And of course, a homeowner still has the obligation of maintenance.
- ebiester 15y ago
  As a counterpoint, my parents pay less on their nice 4 bedroom house in a desirable neighborhood than I paid for a 2 bedroom house in the same city. If you're planning on staying in the valley for 20 years, you will never find a better deal on rent in 20 years then if you buy today. I rent because I like the option to chase opportunity.
rogerbinns 15y ago
In California property taxes are 1% of the purchase price and can then only go up by 1-2% a year. In the house I currently rent the property taxes are $4,000 per year. If I bought the house then they would be around $7,500 per year. Everything else being equal that is a $300 per month saving by renting. There are various rent versus buy calculators online. Below is the NYT one. Buying will make sense eventually but that is measured in years. Putting in the current figures for my house, buying will never make sense unless there is at least 5% increase in house price per year every year. Banking on certain rates of return is what turns it into an all eggs in one basket "investment". http://www.nytimes.com/interactive/business/buy-rent-calculator.html http://www.nytimes.com/interactive/business/buy-rent-calcula...

trip42 15y ago

For many people, the real return on buying a house is owning the house, not the increase in value of the property. Where I live housing is fairly inexpensive and I can't think if of any other similarly sized investment that is guaranteed to cover my cost of housing for the rest of my life. (edit: typo)

lpolovets 15y ago

In the introduction, the author mentions that 1) he had a lot of problems selling his first home and 2) the story of his second home is so painful that he doesn't want to write about it. After reading that, it's hard not to take the rest of the article with a huge grain of salt. There are a few good points about home ownership requiring a lot of cash and limiting your mobility, but most of the points are very questionable: the tax deduction is NOT microscopic, maintenance does NOT have to be a huge issue (depending on the house), you will NOT spend all of your time working on the house (again, depending on the house), and so on. Entrepreneurs, specifically, can do clever things with houses. For example, if you can afford the down payment, there are many places where you can buy a 4 bedroom house, rent out 2-3 of the bedrooms and have a net profit every month (especially with the current interest rates.)

jarek 15y ago
> rent out 2-3 of the bedrooms ... thus further limiting your options should you wish/need to liquidate your investment or just plain move...
- herval 15y ago
  why so? In most countries I lived on, you can evict renters with at most 1 month of notice. Plus, some people actually prefer to buy estate which is already rented (specially with long-term contracts)
justncase80 15y ago
If the business you want to be successful at is being a landlord then I think this is fine. Otherwise it's a time sink and not worth it.

jcslzr 15y ago

So basically is instead of making a downpayment for a house, invest in a business, and get a much better return. The difference is the risk involved in those decisions, since a house is kind of a guaranteed investment.

nestlequ1k 15y ago
Kind of... except when it's not.

nolanbrown23 15y ago

Buying home is not for everyone but renting is NOT always better. It's better when you only need a studio or 1 bedroom but once you have a family and children, renting a 2 or 3 bedroom apartment make no financial sense. In San Francisco, I'm looking at $1000 more in rent going from a 1 bedroom to a 2 bedroom and can expect that to continue going up. If you buy smart (i.e. not at the top end of your budget) with the intention to pay off your mortgage (not sell/buy every 3-7 years), you're in a far better position then someone who still has ~1/3 of their monthly income still going out the door. Even if you don't pay off your mortgage, you have the possibility to refinance, reducing your monthly nut making it far easier to survive as an entrepreneur.