On the one hand, yes, you're right that the repair expenses can be a big deal. If you don't want anything but the basics for the technology in your home, sometimes a home warranty can be a good option too but experiences vary significantly.
On the flip side though, after my 15 year mortgage is up I'm not going to pay another dime outside of maintenance on this thing. On a 30 year, you'll still pay a fortune over the life of the loan which makes the renting argument a lot closer.
It also depends on the phase of your life. Personally, I can't imagine having kids and dogs without a yard. If I didn't have kids or hadn't found an area where I really wanted to settle down, renting would make perfect sense.
At the point that you find somewhere to spend the rest of your life, become a part of the community, get involved, make local friends, raise a family...home ownership makes a lot more sense.
I'm a firm believer in outsourcing repetitive work. I've had a yard company since the first 2 months in my first house because the time trade off for me was more than worth it. You also will eventually learn your way around finding good and reliable contractors for the important things (plumbing, electrical, general repairs). Word of mouth is hugely important there.
A lot of this stuff is pretty easy to learn too. I was pretty proud of myself the first time I disassembled a toilet to fix it. The more you learn, the less you need to call for help for small stuff.
> On the flip side though, after my 15 year mortgage is up I'm not going to pay another dime outside of maintenance on this thing. On a 30 year, you'll still pay a fortune over the life of the loan which makes the renting argument a lot closer.
If you can assume historical returns, renting is a financially superior choice. Well, assuming my math was correct. Both are big assumptions admittedly.
The reason is that when you buy, while you are effectively saving by having your money go towards your home, over the long term on average home prices don't increase.
On the other hand if you invest that down payment, it will compound.
Note that the result is not the same if you buy a place with cash and rent it out to others, because in this case you can reinvest your returns. However if you buy a place to live in, for most people they need a mortgage and their theoretical savings can not be reinvested.
Or in other words, O(c^n) is a superset of O(n) for c > 1.
> over the long term on average home prices don't increase.
I assume you mean adjusted for inflation here? Even then that hasn't been true.
The problem with renting is that you're still paying the mortgage, only in the renting case you're also paying the middleman who then pays the mortgage. This is why rent per month is higher than mortgage per month for the same house. So the returns from that downpayment you instead invested need to make up for the monthly loss in rent, plus the lack of an asset at the end of the process.
It's not a small difference either. My current mortgage is $1250/month for a single family home. 13 years ago when I was renting the rates started at $1600/month for a tiny studio apartment unless you were willing to commute an hour each way. Rents have gone up in the meantime. You need to be making some baller returns on your downpayment if you're going to beat that.
This comparison isn't entirely fair because the rental unit also included maintenance and groundskeeping. In my house I have to do all that work myself or hire someone. However, in the rental unit I had to pay for the utilities. This is a problem because the landlord will never replace something like an AC unit or a refrigerator with anything but the absolute cheapest and most expensive to run model. In my house when I replace it I have the option of buying the high efficiency model and enjoying the cost savings over the life of the unit. Plus when something breaks in my home I just fix it or go out immediately and hire someone to fix it. In the apartment you have to contact the landlord who then sits on it for two weeks before contacting his maintenance guy who only comes by once every couple of weeks to look at it and then order the part so maybe he can fix it on his next visit. In the meantime I'm freezing my ass off with no heat for all of January. I don't miss renting at all.
The problem with renting is that you're still paying the mortgage, only in the renting case you're also paying the middleman who then pays the mortgage. This is why rent per month is higher than mortgage per month for the same house.
That statement is very location specific.[1] In SF, it's cheaper to rent than to buy (on a monthly basis) and because of rent control, it's often cheaper to rent versus buy over your lifetime.
In SF, it costs ~$1,000 to rent what would cost $600,000 to buy. In Cleveland, it cost ~$1,000 to rent what would cost $100,000 to buy.
Obviously very different outcomes if you rent versus buy in each city.
That analysis is overly simplified for a number of reasons, two of the big ones are 1) You often aren't comparing the same properties and 2) while it's true that you are potentially indirectly paying a mortgage, it doesn't have the same terms as what you could negotiate yourself for buying the same property today.
These and other reasons contribute to why rental costs and TCO for residential properties are not in lock-step.
So the real answer is (unsurprisingly) "it depends". Sometimes you are better off financially to rent, sometimes to buy - very dependent on location, dwelling needs, frequency of moving, etc. In the USA the balance is often tipped towards buying by tax incentives, which are politically if not economically popular.
"The stylized fact from the studies on long-run housing capital appreciation is that over long
horizons, house prices only grow a little faster than the consumer price index"
> The problem with renting is that you're still paying the mortgage, only in the renting case you're also paying the middleman who then pays the mortgage. This is why rent per month is higher than mortgage per month for the same house. So the returns from that downpayment you instead invested need to make up for the monthly loss in rent, plus the lack of an asset at the end of the process.
Right, but the down payment ends up compounding to greater than the value of the entire home at the end of the 30 years and the difference is significant enough to cover (rent - mortgage)
> This comparison isn't entirely fair because the rental unit also included maintenance and groundskeeping. In my house I have to do all that work myself or hire someone. However, in the rental unit I had to pay for the utilities. This is a problem because the landlord will never replace something like an AC unit or a refrigerator with anything but the absolute cheapest and most expensive to run model. In my house when I replace it I have the option of buying the high efficiency model and enjoying the cost savings over the life of the unit. Plus when something breaks in my home I just fix it or go out immediately and hire someone to fix it. In the apartment you have to contact the landlord who then sits on it for two weeks before contacting his maintenance guy who only comes by once every couple of weeks to look at it and then order the part so maybe he can fix it on his next visit. In the meantime I'm freezing my ass off with no heat for all of January. I don't miss renting at all.
I completely agree. The thing I actually really wanted to buy a house because I want a grand piano and to not have to worry about moving it. Sadly at least from my own calculations I just can't justify it.
The thing that pushed me over the top on renting was purchasing a house with an accessory dwelling that we could rent. Houses with rentable space often don't sell for that much more than those that don't have said space, but they come with an income stream.
That's an excellent point. Like I said in my original comment, it is comparable if you buy a place outright. I suspect if you are able to both extract rent while also save on your own rent, that may be the best of both worlds.
Perhaps I should take your idea and use it myself =D
From what I've seen, the assumptions tend to dominate this discussion. I'm absolutely cherry-picking to make a point, but if you took your down payment in 1965, thinking the market looks pretty darn good, and put it into a DJIA index fund while you rented, about 30 years later, your investment would finally be worth again what you put in [1], while the person who bought the house would have some sort of equity in it.
To cherry-pick in the other direction, if you could either buy or rent starting in 1980 or so, in 30 years you'd see ~7x return (no inflation adjustment). There are homes you could buy in 1980 that would exceed that, but not very many places, and it's tricky to know what those are without hindsight. (Investing is pretty easy in hindsight, in general.)
To the extent that the stock market is modeled by an exponential curve, it has deviations from that curve on the order of your entire working lifespan.
Discussions about the utility of the stock market for retirement revolve around you investing in it continuously. In that chart, even though a point investment in 1960 may not turn out well, the money someone is putting in every year will start to do pretty well in the 1980s. The analysis around buying in a bit every year is different, but in the previous paragraphs, I'm talking about a point-in-time investment of a particular sum, so we can just follow the chart across. If you can finagle a rent that is significant lower than a mortgage, then you can also include in your model putting that difference into the market. (Though, for that to be "valid", note you actually have to, you know, do that.) But while rents and mortgages tend to be close to each other for various reasons, at different times and places they trade off which is more expensive, so that's not an assumption you're justified with in the general case.
So if you've got a mortgage cheaper than rent in 1960, you're going to pretty handily beat the guy investing in 1960 for quite a span of time. If you can get rent cheaper than a mortgage in 1980, and invest the difference over time as well, you're going to handily beat the guy buying the house.
What about if you buy a house, say, right now? Well... that's the million dollar question, isn't it?
Well that is simple, minimize your down payment even if it means taking on PMI as long as your mortgage payment is less than rent then you are better off with the house.
It's not that simple of course, because there are many other concerns like property taxes, insurance, maintenance, renovations/upgrades, furnishings, etc... But the idea that you have to lock away a massive down payment into a non compounding asset isn't necessarily true.
In my calculations I found a home to be slightly more expensive than renting when taking everything into account. But it's a huge lifestyle upgrade for some people, myself included.
Are you accounting for the fact that if you pay off the house you are now living rent free with only maintenance + property taxes + insurance?
Would the difference between rent vs buy be enough to draw down at what is considered a safe rate of 4% to pay for some place to stay - ie if you could save $1000/month by renting instead of having a paid off house would you be able to have an extra $300,000 (12000/.04)?
If you run the numbers and assume that whatever you’re putting into the mortgage will be invested instead once it’s paid off, the house catches up over time.
Of course, this is varies a bit depending on the numbers involved.
>On the flip side though, after my 15 year mortgage is up I'm not going to pay another dime outside of maintenance on this thing.
You'll have property taxes as well, which could be meaningful depending where you live. I was talking to one of my neighbors the other day who has lived in his home here in Seattle for over 40 years and he told me he is taking out a equity line of credit against his fully owned home to pay the property taxes as they've increased beyond what his retirement income can cover.
Once the home gets older you get into more than just maintenance as well; you get into replacement. Replacing the appliances, roof, windows, mechanicals, etc can be lead to some very serious expenses. The same neighbor needs to replace his roof, which he also can't afford until he gets the credit line.
You are absolutely correct. However, there are better ways to handle a roof replacement than incurring the $10k+ cost in one year. It's a foregone conclusion that you will need a new roof, just a matter of when. Best to start saving right away every month and include that in your overall cost calculation. It's much easier to pay for a roof over 25 years instead of all at once. Plus then you can use interest to your advantage.
On the one hand, yes, you're right that the repair expenses can be a big deal. If you don't want anything but the basics for the technology in your home, sometimes a home warranty can be a good option too but experiences vary significantly.
On the flip side though, after my 15 year mortgage is up I'm not going to pay another dime outside of maintenance on this thing. On a 30 year, you'll still pay a fortune over the life of the loan which makes the renting argument a lot closer.
It also depends on the phase of your life. Personally, I can't imagine having kids and dogs without a yard. If I didn't have kids or hadn't found an area where I really wanted to settle down, renting would make perfect sense.
At the point that you find somewhere to spend the rest of your life, become a part of the community, get involved, make local friends, raise a family...home ownership makes a lot more sense.
I'm a firm believer in outsourcing repetitive work. I've had a yard company since the first 2 months in my first house because the time trade off for me was more than worth it. You also will eventually learn your way around finding good and reliable contractors for the important things (plumbing, electrical, general repairs). Word of mouth is hugely important there.
A lot of this stuff is pretty easy to learn too. I was pretty proud of myself the first time I disassembled a toilet to fix it. The more you learn, the less you need to call for help for small stuff.