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"Wasting capital on rent" may be the worst nonsense in our financial folklore. Always run the numbers. Rent vs. mortgage calculators and spreadsheets are readil

"Wasting capital on rent" may be the worst nonsense in our financial folklore. Always run the numbers. Rent vs. mortgage calculators and spreadsheets are readily available. Understand the factors they use, and perhaps tweak for your own needs and priorities. I'm glad that I did, as I completely dodged the disaster that was the housing bubble as a result -- my rent always looked like a killer deal compared to nutso house prices. On the other hand, I know those who "had to have a house" who are now seriously underwater on their mortgages. But good thing they weren't "wasting capital on rent!"

anigbrowl 13y ago
I also sat out the housing bubble and its insane prices, but now we have a house we love and very small mortgage. Of course capital invested during a bubble is wasted, but that doesn't mean all investment in that asset class is a bad idea.
- cwp 13y ago
  But saidajigumi didn't say that buying is always a bad idea. He said "always run the numbers."
  - vidarh 13y ago
    As long as you know how to factor in the costs if it turns out you were nowhere near the peak of the bubble, and you factor in the "lost" capital from paying rent rather than paying down on a mortgage. It can turn out to be extremely costly to wait out a bubble even if the alternative is buying a property that is guaranteed to drop in value at some point.
mistermann 13y ago
The downside to this is if you live in a place where the bubble didn't pop and are (seemingly) locked out of the housing market forever, or at least until the bubble does pop.
sologoub 13y ago
Bubbles happen in many more things than just housing. It just happened to hit way more people than any of the previous bubbles. I don't know much about the market conditions outside of SoCal, but here the housing seems to have recovered to 2005-2006 levels. It doesn't look like it has much fuel to go up for a long time, but those who bought 2009-2012 are definitely comfortably in the black. Some could be up as much as 50-60% from especially distressed properties. Doesn't sound bad to me... Factor in ridiculously cheap borrowing costs (even a couple months ago, there were 30 yr. mortgages for around 4%), and you have pretty decent investment opportunities. In an unbalanced market, one can always find ways to realize short-term gain. Trick is to not get suckered in and overplay the hand.
lizardking 13y ago
I bought right around the peak of the bubble in early 2006. Even with prices being what they were at the time, my mortgage wasn't much higher than rent was for comparable homes in my neighborhood. After having a couple of roommates move in I was paying very little to live. I sold the house early last year and actually made a small profit after doing a few renovations. I know my experience may not be typical but if you stay away from places with crazy inflated home values and are willing to deal with the headaches of owning a home, it's not too hard to turn a little profit. With renting it is a certainty that will not be the case.
- eru 13y ago
  I wonder how much your second job as a landlord (`headaches ouf owning a home') actually paid per hour.
  - lizardking 13y ago
    Considering on a given month I was making 700 dollars while doing almost nothing I'd say I had a pretty good hourly rate!
    - eru 13y ago
      Thanks. I just want to try to get an apples-to-apples comparison.
yourapostasy 13y ago
The best online rent-versus-buy calculator I have found is the one created by the New York Times [1]. As others in this thread have already noted, in suburban-to-urban population densities, the cost of shelter is in the dirt, not the improvements. The wisdom of embedding wealth into dirt in a highly technologically-developed economy where the value chain is much, much more abstracted away from the dirt is lost upon me. Bidding up the cost of dirt just seems to me an easy way to factor away any incremental new wealth created by those living on and paying for the dirt. Even lots of programmers here on HN eagerly brag up "good buys" they made on their houses, characterized as "good" because the house "went up in value". [1] http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0 http://www.nytimes.com/interactive/business/buy-rent-calcula...
- vidarh 13y ago
  Personally I want my house to drop in value, as long as it doesn't drop faster than my repayments, and as long as other properties in the area also drops: I want to be able to trade up cheaply. As for the "wisdom of embedding wealth into dirt": Long term, if property values drop, so what. You lose a little bit on your purchase vs. renting in that case, but you get massively cheaper housing from then on if you opt to switch back to renting and/or the value for money will be massively better if you decide to trade up to a bigger house. But if property values rises dramatically, owning a property is a very effective hedge against seeing your living costs skyrocket. See it as insurance. In that respect people do make good buys when the house goes up value: It means they largely locked in their housing costs at a lower rate and their insurance is paying off.
  - hsitz 13y ago
    "In that respect people do make good buys when the house goes up value: It means they largely locked in their housing costs at a lower rate and their insurance is paying off." No, the rent vs buy question is a lot more complicated than that. Renting can be and often is financially better even over the long term when house values are appreciating at historic rates, or even faster. As just a couple more factors to consider, property tax and maintenance costs go up as property appreciates and along with inflation, respectively. Remember that renters don't make any downpayment, and that that money and early term savings over mortgage can be invested in assets that tend to grow at rates much faster than house values. And the rent vs. buy issue that's hard to resolve is for comparable homes being rented or owned. The fact of the matter is that many people buy more home than they need, when they could have happily been renting a smaller home, and trade up only when necessary, skewing answer more toward side of rental being more cost-effective. (You could do this with a house, too, but people tend to buy more house than the need at the time, perhaps partly b/c of practical difficulties of selling a house and the large commissions that get paid to brokers.)
vidarh 13y ago
So that provides a reason for temporarily avoiding purchases when the prices are inflated and/or mortgage deals are bad. See purchasing as a hedge. "Worst case" your property becomes worthless, and you're left with nothing when the mortgage is paid down and may have paid more per month on average until them (but if so, while you may have lost vs. renting, properties are now ludicrously cheap, so who cares?). Meanwhile, if prices skyrocket, your equity likely rises at roughly the same rate. In the long run even those you know who are now seriously underwater are likely to do just fine as long as they can afford to sit tight. Of course people can "play the market" and do a good job timing when it's better to rent and buy again later, but as with anything it's very easy to mistime. It's extremely hard to come out badly if you are prepared to hold a property long term, though, as long as you don't overstretch, and can afford to sit tight for a few years if you go under water early on. Even if you end up paying more per month for a mortgage initially (I never did), chances are you'll be able to remortgage and bring the rates down to below rental costs within a couple of years once you've built up a bit of equity, and from then on save money every month on top of repaying the capital on the mortgage and be left living "rent free" apart from maintenance costs and insurance at the end of it. I'll never go back to renting - if I'd bought as soon as I could, I'd had roughly about 200k pounds more equity today, and would have had roughly the same monthly costs for most of that time. As it is, I'm now paying half as much on a mortgage as I would to rent the same size property, and my debt is dropping in absolute terms, and my interest rate is below inflation, so in real terms I'm getting fantastic value.
- ijk 13y ago
  "It's extremely hard to come out badly if you are prepared to hold a property long term" This is a major sticking point for many people, particularly once you factor in opportunity costs.
  - dllthomas 13y ago
    True, though it should be pointed out that "hold a property long term" may not necessarily involve living in that property long term.
- hsitz 13y ago
Jimichan 13y ago
After grad school, I shopped around all the sawmills in the state, bought the materials, designed and built a 2500 sqft log home. No mortgage, awesome house. It is out of town, on a great 5 acre wooded lot. I love the woods, with the deer, birds, etc., but it is a 20 minute drive to the office. On the other hand, the only debt I have is a student loan.

anigbrowl 13y ago

I also sat out the housing bubble and its insane prices, but now we have a house we love and very small mortgage. Of course capital invested during a bubble is wasted, but that doesn't mean all investment in that asset class is a bad idea.

cwp 13y ago
But saidajigumi didn't say that buying is always a bad idea. He said "always run the numbers."
- vidarh 13y ago
  As long as you know how to factor in the costs if it turns out you were nowhere near the peak of the bubble, and you factor in the "lost" capital from paying rent rather than paying down on a mortgage. It can turn out to be extremely costly to wait out a bubble even if the alternative is buying a property that is guaranteed to drop in value at some point.

mistermann 13y ago

The downside to this is if you live in a place where the bubble didn't pop and are (seemingly) locked out of the housing market forever, or at least until the bubble does pop.

sologoub 13y ago

Bubbles happen in many more things than just housing. It just happened to hit way more people than any of the previous bubbles. I don't know much about the market conditions outside of SoCal, but here the housing seems to have recovered to 2005-2006 levels. It doesn't look like it has much fuel to go up for a long time, but those who bought 2009-2012 are definitely comfortably in the black. Some could be up as much as 50-60% from especially distressed properties. Doesn't sound bad to me... Factor in ridiculously cheap borrowing costs (even a couple months ago, there were 30 yr. mortgages for around 4%), and you have pretty decent investment opportunities. In an unbalanced market, one can always find ways to realize short-term gain. Trick is to not get suckered in and overplay the hand.

lizardking 13y ago

I bought right around the peak of the bubble in early 2006. Even with prices being what they were at the time, my mortgage wasn't much higher than rent was for comparable homes in my neighborhood. After having a couple of roommates move in I was paying very little to live. I sold the house early last year and actually made a small profit after doing a few renovations. I know my experience may not be typical but if you stay away from places with crazy inflated home values and are willing to deal with the headaches of owning a home, it's not too hard to turn a little profit. With renting it is a certainty that will not be the case.

eru 13y ago
I wonder how much your second job as a landlord (`headaches ouf owning a home') actually paid per hour.
- lizardking 13y ago
  Considering on a given month I was making 700 dollars while doing almost nothing I'd say I had a pretty good hourly rate!
  - eru 13y ago
    Thanks. I just want to try to get an apples-to-apples comparison.

yourapostasy 13y ago

The best online rent-versus-buy calculator I have found is the one created by the New York Times [1]. As others in this thread have already noted, in suburban-to-urban population densities, the cost of shelter is in the dirt, not the improvements. The wisdom of embedding wealth into dirt in a highly technologically-developed economy where the value chain is much, much more abstracted away from the dirt is lost upon me. Bidding up the cost of dirt just seems to me an easy way to factor away any incremental new wealth created by those living on and paying for the dirt. Even lots of programmers here on HN eagerly brag up "good buys" they made on their houses, characterized as "good" because the house "went up in value". [1] http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0 http://www.nytimes.com/interactive/business/buy-rent-calcula...

vidarh 13y ago
Personally I want my house to drop in value, as long as it doesn't drop faster than my repayments, and as long as other properties in the area also drops: I want to be able to trade up cheaply. As for the "wisdom of embedding wealth into dirt": Long term, if property values drop, so what. You lose a little bit on your purchase vs. renting in that case, but you get massively cheaper housing from then on if you opt to switch back to renting and/or the value for money will be massively better if you decide to trade up to a bigger house. But if property values rises dramatically, owning a property is a very effective hedge against seeing your living costs skyrocket. See it as insurance. In that respect people do make good buys when the house goes up value: It means they largely locked in their housing costs at a lower rate and their insurance is paying off.
- hsitz 13y ago
  "In that respect people do make good buys when the house goes up value: It means they largely locked in their housing costs at a lower rate and their insurance is paying off." No, the rent vs buy question is a lot more complicated than that. Renting can be and often is financially better even over the long term when house values are appreciating at historic rates, or even faster. As just a couple more factors to consider, property tax and maintenance costs go up as property appreciates and along with inflation, respectively. Remember that renters don't make any downpayment, and that that money and early term savings over mortgage can be invested in assets that tend to grow at rates much faster than house values. And the rent vs. buy issue that's hard to resolve is for comparable homes being rented or owned. The fact of the matter is that many people buy more home than they need, when they could have happily been renting a smaller home, and trade up only when necessary, skewing answer more toward side of rental being more cost-effective. (You could do this with a house, too, but people tend to buy more house than the need at the time, perhaps partly b/c of practical difficulties of selling a house and the large commissions that get paid to brokers.)

vidarh 13y ago

So that provides a reason for temporarily avoiding purchases when the prices are inflated and/or mortgage deals are bad. See purchasing as a hedge. "Worst case" your property becomes worthless, and you're left with nothing when the mortgage is paid down and may have paid more per month on average until them (but if so, while you may have lost vs. renting, properties are now ludicrously cheap, so who cares?). Meanwhile, if prices skyrocket, your equity likely rises at roughly the same rate. In the long run even those you know who are now seriously underwater are likely to do just fine as long as they can afford to sit tight. Of course people can "play the market" and do a good job timing when it's better to rent and buy again later, but as with anything it's very easy to mistime. It's extremely hard to come out badly if you are prepared to hold a property long term, though, as long as you don't overstretch, and can afford to sit tight for a few years if you go under water early on. Even if you end up paying more per month for a mortgage initially (I never did), chances are you'll be able to remortgage and bring the rates down to below rental costs within a couple of years once you've built up a bit of equity, and from then on save money every month on top of repaying the capital on the mortgage and be left living "rent free" apart from maintenance costs and insurance at the end of it. I'll never go back to renting - if I'd bought as soon as I could, I'd had roughly about 200k pounds more equity today, and would have had roughly the same monthly costs for most of that time. As it is, I'm now paying half as much on a mortgage as I would to rent the same size property, and my debt is dropping in absolute terms, and my interest rate is below inflation, so in real terms I'm getting fantastic value.

ijk 13y ago
"It's extremely hard to come out badly if you are prepared to hold a property long term" This is a major sticking point for many people, particularly once you factor in opportunity costs.
- dllthomas 13y ago
  True, though it should be pointed out that "hold a property long term" may not necessarily involve living in that property long term.
hsitz 13y ago

Jimichan 13y ago

After grad school, I shopped around all the sawmills in the state, bought the materials, designed and built a 2500 sqft log home. No mortgage, awesome house. It is out of town, on a great 5 acre wooded lot. I love the woods, with the deer, birds, etc., but it is a 20 minute drive to the office. On the other hand, the only debt I have is a student loan.