4 ms·

I was pulling numbers out of the air for simplicity. But essentially, even if you only bank $10 in equity, $10 is better than $0 you'd bank if you paid rent.

glenra 13y ago
> I was pulling numbers out of the air for simplicity. But essentially, even if you only bank $10 in equity, $10 is better than $0 you'd bank if you paid rent. Heck, then I'll do the same. Let's just pull some new numbers out of the air such that the rent is $20 cheaper than the mortgage payment. Now as a renter you can bank $20 in savings, which is better than the $10 you'd bank in equity if you had a mortgage. Problem solved!
- clavalle 13y ago
  Ok. But in my area rent is often more than mortgage + taxes. I know it is different in other places but that's why it is a simplifying assumption.
  - glenra 13y ago
    Is it also more than mortgage + taxes + broker fees + interest to borrow the downpayment?
    - clavalle 13y ago
      So, I did some more detailed calculations on a $500,000 home with closing costs included. I left out property taxes because I assumed anybody renting would recoup property taxes through increased rent. So, assuming rent + taxes == mortgage + taxes on a $500,000 property with $100,000 down payment where the value of the property stays the same over the life of the mortgage: $500,000 30yrs at 4.25% 20% down $100,000 $1967.76 monthly payment $22,644 closing costs By year four you are in the black compared to renting by $6132 You'd need an investment on your $100,000 that returns 1.49% compounded annually to make up the difference if you rented and invested the $100K that would have been spent on the down payment. By year five you are in the black by 14,122 You'd need 2.645% By year six you are in the black by 22459 You'd need 3.382% 7 31157 3.881% 8 40233 4.234% 9 49701 4.5% 10 4.683% 30 5.222% Here is the amortization chart: http://www.myamortizationchart.com/30-year/400000-dollars/4_.. http://www.myamortizationchart.com/30-year/400000-dollars/4_.... Here is the closing costs calculator I used: http://michaelbluejay.com/house/closingcosts.html http://michaelbluejay.com/house/closingcosts.html In short, you have a pretty good shot at breaking even between renting and buying if you invest the down payment. If you have less than a 20% down payment (3% I think is what you need for a FHA loan) then you reach covering the closing costs faster with accumulated principal payments but your monthly payment can be significantly more (up to 20% more a month). IOW a huge amount depends on what you can rent the same house for. If rent == mortgage + tax these calculations hold. If rent is less than it is almost always going to be better to rent. If rent is more you are looking at a better situation buying if you are staying more than a few years. Also, interest rates would play a huge part.
mikeash 13y ago
Why does "common sense" get to ignore realistic interest payments, maintenance costs, and the massive costs involved in paying middlemen during the purchase?
- clavalle 13y ago
  It doesn't. But the discussion of the common sense idea does, because otherwise the conversation becomes unwieldy getting mired in aspects that aren't all that significant, in general. For example...interest payments will not eat 100% like rent so the fact that interest payments could be higher is nearly irreverent. You can pay $400/year for maintenance protection for your home so the maintenance costs are nearly negligible. This is the most significant factor you mentioned: The middlemen payments amount to less than 5% of the purchase price (for the purchaser). This can be a problem if someone needs to buy and sell relatively frequently but as long as it doesn't add up to the difference between rent and the amount of equity stored in the time that the person owns the home it is still better to buy. But, you are correct, this is a significant risk. Keep in mind, we are not talking about owning a home as an investment. We are talking about owning a home compared to renting. As long as you are not taking a a full loss and then some it is still superior to renting which is a guaranteed 100% loss.
  - mikeash 13y ago
    Maybe things are different where you live, but around here, the realtors take 3% each (buyer's and seller's), and then there's taxes, title company, appraisals, etc. It's not 5%, it's more like 8%. Yes, if the amount you save by buying outweighs what you spend on buying, then you're better off buying. That is actually "common sense". But the problem I have with your supposed "common sense" scenario is that it completely ignores this by claiming that having a small amount of equity after a year is a win. Buying a house loses money up front. The only reason it's worthwhile is if the long-term tradeoff is worth it. That long-term gain almost never happens after a single year. It's typically 5-10 years before you break even. So no, $10 in equity is not better than the $0 you'd bank if you rented, because you're ignoring the tens of thousands of dollars you paid out up front.
benjaminwootton 13y ago
Not if you've tied up $200 to buy your house as you could have made more than $10 on investments or even cash in the bank. In other words, the opportunity cost of capital is not always accounted for in these comparisons...
- zero_intp 13y ago
  Now, fill the house with renters paying 10% of the purchase price per year. Mortgage property to 75%, recouping capital at a fixed interest rate. Re-invest capital into index ETF. Opportunities are what you make of them.

glenra 13y ago

> I was pulling numbers out of the air for simplicity. But essentially, even if you only bank $10 in equity, $10 is better than $0 you'd bank if you paid rent. Heck, then I'll do the same. Let's just pull some new numbers out of the air such that the rent is $20 cheaper than the mortgage payment. Now as a renter you can bank $20 in savings, which is better than the $10 you'd bank in equity if you had a mortgage. Problem solved!

clavalle 13y ago
Ok. But in my area rent is often more than mortgage + taxes. I know it is different in other places but that's why it is a simplifying assumption.
- glenra 13y ago
  Is it also more than mortgage + taxes + broker fees + interest to borrow the downpayment?
  - clavalle 13y ago
    So, I did some more detailed calculations on a $500,000 home with closing costs included. I left out property taxes because I assumed anybody renting would recoup property taxes through increased rent. So, assuming rent + taxes == mortgage + taxes on a $500,000 property with $100,000 down payment where the value of the property stays the same over the life of the mortgage: $500,000 30yrs at 4.25% 20% down $100,000 $1967.76 monthly payment $22,644 closing costs By year four you are in the black compared to renting by $6132 You'd need an investment on your $100,000 that returns 1.49% compounded annually to make up the difference if you rented and invested the $100K that would have been spent on the down payment. By year five you are in the black by 14,122 You'd need 2.645% By year six you are in the black by 22459 You'd need 3.382% 7 31157 3.881% 8 40233 4.234% 9 49701 4.5% 10 4.683% 30 5.222% Here is the amortization chart: http://www.myamortizationchart.com/30-year/400000-dollars/4_.. http://www.myamortizationchart.com/30-year/400000-dollars/4_.... Here is the closing costs calculator I used: http://michaelbluejay.com/house/closingcosts.html http://michaelbluejay.com/house/closingcosts.html In short, you have a pretty good shot at breaking even between renting and buying if you invest the down payment. If you have less than a 20% down payment (3% I think is what you need for a FHA loan) then you reach covering the closing costs faster with accumulated principal payments but your monthly payment can be significantly more (up to 20% more a month). IOW a huge amount depends on what you can rent the same house for. If rent == mortgage + tax these calculations hold. If rent is less than it is almost always going to be better to rent. If rent is more you are looking at a better situation buying if you are staying more than a few years. Also, interest rates would play a huge part.

mikeash 13y ago

Why does "common sense" get to ignore realistic interest payments, maintenance costs, and the massive costs involved in paying middlemen during the purchase?

clavalle 13y ago
It doesn't. But the discussion of the common sense idea does, because otherwise the conversation becomes unwieldy getting mired in aspects that aren't all that significant, in general. For example...interest payments will not eat 100% like rent so the fact that interest payments could be higher is nearly irreverent. You can pay $400/year for maintenance protection for your home so the maintenance costs are nearly negligible. This is the most significant factor you mentioned: The middlemen payments amount to less than 5% of the purchase price (for the purchaser). This can be a problem if someone needs to buy and sell relatively frequently but as long as it doesn't add up to the difference between rent and the amount of equity stored in the time that the person owns the home it is still better to buy. But, you are correct, this is a significant risk. Keep in mind, we are not talking about owning a home as an investment. We are talking about owning a home compared to renting. As long as you are not taking a a full loss and then some it is still superior to renting which is a guaranteed 100% loss.
- mikeash 13y ago
  Maybe things are different where you live, but around here, the realtors take 3% each (buyer's and seller's), and then there's taxes, title company, appraisals, etc. It's not 5%, it's more like 8%. Yes, if the amount you save by buying outweighs what you spend on buying, then you're better off buying. That is actually "common sense". But the problem I have with your supposed "common sense" scenario is that it completely ignores this by claiming that having a small amount of equity after a year is a win. Buying a house loses money up front. The only reason it's worthwhile is if the long-term tradeoff is worth it. That long-term gain almost never happens after a single year. It's typically 5-10 years before you break even. So no, $10 in equity is not better than the $0 you'd bank if you rented, because you're ignoring the tens of thousands of dollars you paid out up front.

benjaminwootton 13y ago

Not if you've tied up $200 to buy your house as you could have made more than $10 on investments or even cash in the bank. In other words, the opportunity cost of capital is not always accounted for in these comparisons...

zero_intp 13y ago
Now, fill the house with renters paying 10% of the purchase price per year. Mortgage property to 75%, recouping capital at a fixed interest rate. Re-invest capital into index ETF. Opportunities are what you make of them.