The Renter’s Manifesto
Share This
photo: Kelly Sims
“Stop throwing your money away on rent.” You see the phrase in Realtor junk mail and hear it from new homebuyers who are immersed in the nightmare of paperwork, points, and plastering.
The logic is simple: renting is just flushing money down the toilet; buying a house gives you a piece of something to call your own. You earn home equity and end up with something tangible to pass down to your heirs–or to sell or refinance when you retire.
There is a kernel of truth to all of this. But it’s mostly crap. I’ve been a renter all my adult life, and I have plenty of home equity. My home equity is called “cash,” and it’s the accumulated difference between what I pay in rent and what a comparable homeowner pays for their mortgage, maintenance, property taxes, and utilities. (Sure, I
pay for all of those things indirectly, but that’s the point: they’re rolled into my rent, and they’re not rolled into your mortgage.)
Unlike a homeowner, I can choose to invest my equity in something other than real estate. I can spend my equity without taking out a line of credit. I might squander my equity, but I’ll never be “underwater” due to the vagaries of the market. And I accumulate home equity more quickly than the average homeowner.
Yes, thirty years from now, when your mortgage is paid off, you will own a home, free and clear. You know what I’ll own? Enough money to pay cash for your home.
Sure, I’m making a big assumption: I’m assuming the value of your house won’t rise much faster than inflation (or, at least, not much faster than the performance of my investments). Harvard professor Ed Glaeser, writing on the New York Times’s Economix blog, thinks this is an excellent assumption:
Houses are assets, too, but it’s a mistake to expect them to offer a regular rise in price. Houses pay hefty dividends to their owners in the form of living space–that’s the real return on housing investment–and the basic economics of housing doesn’t point to perpetual price growth.
Indeed, the Case-Shiller index, the most respected measure of housing prices, shows that they’ve barely outpaced inflation since 1890.
I’m also assuming that I have the discipline to keep saving the money. So far so good. Homebuying is often lauded as a “compulsory saving scheme.” I guess that’s true: it’s a scheme that compels you to invest a large proportion of your money in real estate. How is this better than simply increasing your 401(k) contribution?
Two kinds of renters
We’re not so different, Joe Homeowner and me. I rent property from a landlord. He rents money from a bank.
Every month, I write my landlord a check. The money gets spent on orthodontia for the landlord’s kids, and I will never see it again.
Every month, Joe writes his banker a check. The interest portion of the payment–for Joe, that’s well over half the payment, more than I spend on rent for a similar home–gets spent on polishing the banker’s yacht, and Joe will never see it again.
For this analogy, I’m indebted to David Crook of the Wall Street Journal, who wrote a landmark 2007 column on the topic:
Mortgage interest is rent that you pay to your lender for the use of its money rather than to a landlord for the use of his house…most of your monthly payment neither builds equity nor is deductible. It just goes down the same black hole that sucks up any other renter’s money. And it takes 20 years before a typical borrower pays more principal each month than interest.
Oh, but what about the mortgage interest deduction? It’s not for Joe. It’s for my landlord and Joe’s banker. Only half of homeowners take it–the rest are better off with the standard deduction–and the average tax savings for those who do is $2000, according to Roger Lowenstein of the New York Times. (The big winners in the mortgage interest deduction game are homeowners who make over $250,000 a year but not so much that they can afford to buy a home with cash.)
Trapped in the closet
Home ownership, it has long been said, leads to financial and community stability. The last three years should have taught everyone that “owning” (that is, financing) a home is no protection against financial upheaval.
As for community stability, be careful what you wish for. If you lose your job, the worst place to find yourself is trapped in an underwater house. I could move with two weeks notice and get my security deposit back.
This isn’t just anecdote. As Tim Harford reported in Slate:
English economist Andrew Oswald has shown that across European countries, and across U.S. states, high levels of home ownership are correlated with high levels of unemployment…. Renting your home and staying flexible do wonders for your chances of always finding an interesting job to do.
As for high levels of homeownership creating community, I’m not sure how you would measure that. All I know is that my family lives in one of the safest and most desirable census tracts in Seattle; as of the 2000 census, it consisted of 85% renters.
Why buy?
Am I saying nobody should buy a house? Of course not. There are plenty of situations where you would want to do so:
* You live in a place where the total monthly cost of renting is similar to borrowing. This is true in a lot of non-housing-bubbly places, outside of big cities and off the coasts. In that case, sure, why not?
* You really want to be able to renovate. Yes, this requires ownership. But be careful: renovation costs are almost never recouped when a house is sold. Also, people talk about the ability to customize as if this should be important to everyone. I just don’t care to get my hands dirty.
* The kind of house you want in the neighborhood you want isn’t available for rent. (This is unlikely to be the case in the present market, however).
* There’s a specific house you want, and you can afford to buy it with a big down payment and a boring 15- or 30-year fixed-rate mortgage.
Just because a house isn’t a good investment, in most cases, doesn’t mean you shouldn’t buy one. A steak isn’t a good investment, either. The problem is, houses cost more than steaks, and a lot of people are convinced that everyone should own one, whether they can afford it or not. If you can’t afford to buy real estate, or just don’t want to, don’t. It’s okay. You’re still a grownup.
Me? There isn’t anything I want out of my financial, social, or family life that requires me to own real estate. So I rent.
–
Hungry Monkey out now: http://hungrymonkeybook.com/
Related Videos
Popular Articles
95 Comments so far
leave a comment-
erin 661 days ago
3 likes
-
Glen 661 days ago
9 likes
-
Charles 661 days ago
7 likes
-
Michael of Bakersfield 661 days ago
5 likes
-
Charles 661 days ago
5 likes
-
Charles 661 days ago
2 likes
-
Paul 661 days ago
11 likes
-
Charles 661 days ago
4 likes
-
Josh 661 days ago
9 likes
-
Josh 661 days ago
like
-
Todd Davis 661 days ago
13 likes
-
Matthew Amster-Burton 661 days ago
10 likes
-
Patrick 661 days ago
9 likes
-
Ulsterman 660 days ago
2 likes
-
charlie 661 days ago
1 like
-
g 661 days ago
like
-
Jordan 661 days ago
3 likes
-
g 661 days ago
like
-
Matthew Amster-Burton 661 days ago
3 likes
-
ts 661 days ago
1 like
-
matt 661 days ago
1 like
-
Hotdrop 661 days ago
like
-
Greg 661 days ago
like
-
Ian 660 days ago
like
-
JM 660 days ago
3 likes
-
Matthew Amster-Burton 654 days ago
1 like
-
Drummy 653 days ago
1 like
-
Anthony 653 days ago
1 like
-
Richy 649 days ago
2 likes
-
pre-kindergarten-toys 642 days ago
6 likes
-
Jeremy 642 days ago
1 like
-
Zeal 640 days ago
2 likes
-
microwaveovens 640 days ago
1 like
-
Tiffany 603 days ago
3 likes
« Previous 1 2People routinely underestimate how much owning a home actually costs with all the maintenance, improvements etc. They don’t budget for it either so get what gets added to their credit card balances at 22%. I kept a list of all these costs with the last house I owned and it was starting. We sold our house for far more than we paid and still only broke even after five years.
This isn’t making sense to me. All of the costs that the landlord incurs (his mortgage on the property you rent, property maintenance, etc.) must at a minimum be included in the monthly rent, or the landlord is losing money, which is not likely. Even more likely the landlord is adding at least some profit onto the monthly rent. In which case, if you were to buy the equivalent property it should cost you no more, most likely less. Plus you’d have the tax deductions and equity on top.
I understand your point Glen however you’re assuming that the rent payment more than covers the cost of the landlord’s mortgage. I don’t know about everyone else, but in my experience, this is hardly the case. I’ve found that a lot of landlords bought their properties as investments and are willing to lose money month to month with the hope of a big payout when selling the property.
Other landlords/owners are losing money on their purchase and are trying to sell and reduce his/her total loss. If this owner doesn’t live in the property, than he/she will rent it out in the meantime, usually at a loss, just to get some cash flow in.
I can see the logic of this article but the same argument could be made for using public transportation vs buying a vehicle. After you take in account for cost, taxes, upkeep/maintenance, gas, tags and license why on Earth would anyone buy a car? The moment you leave the lot your shiny new car is worth less. And cars aren’t known for increasing in value until they become vintage then it’s still a crack shot. Is it possible to rent for 20-30 years and save the money to pay cash for a house? Yes but it’s doubtful anyone would. Do I own a home-yes, am I underwater with it’s value-yes, do I regret owning a home-no freaking way! I’ve had my ups and down with renting and bad landlords. Owning a home isn’t for everyone or every situation.
Your analogy is invalid because there is a HUGE inconvenience usually when taking public transportation (with the exception of large cities like New York, DC, etc.). You have to walk to bus stops and train stations, carry shopping bags all over, etc.
When it comes to renting and buying, you’re still “residing” in the property the same way (no inconvenience).
Your analogy is invalid because there is a HUGE inconvenience when using public transportation in most cities. You have to walk to and from bus stops and/or train stations, you have to carry shopping bags all over town, a lot of buses and trains don’t run 24/7, etc.
When it comes to renting vs. buying, you’re “residing” or “living” in either the same way. There is no discernible difference when it comes to convenience.
For what it’s worth, I recently purchased my first home.
Like many have said, buying a house is great for some people, and a bad idea for others. I live in San Francisco and make close to 6 figures a year, but don’t have nearly enough for a down-payment that would allow me to have an affordable mortgage. A small, decent condo starts at $400K here. So, all my money would be going to the mortgage, taxes, etc. All that money for a place that likely comes with many significant downsides and compromises. Not worth it.
So, I’m a renter. But there are two main reasons that I’m okay with, and even prefer, that…
One, I get to live in one of the most beautiful cities in the world. I get to enjoy a diverse collection of friends and associates, great restaurants, great theater and cultural entertainment, great seasonal events, easy access to skiing (Tahoe) and wine country (Napa and Sonoma), and many other perks that are simply not available if I lived somewhere where homes are more affordable. Plus, I have an amazing job with an amazing company that I wouldn’t have if I didn’t live here. High rent and cost of living is just the price I have to pay for all of the above. And its worth every penny.
Two, many talk about home ownership as an investment, as opposed to renting which is considered by many to be “throwing your money away”. That might be true if money is the most important thing to you. But its not for me. My day-to-day life, my family and the experiences I have are the most important thing to me. The rent I pay is simply an investment in my life RIGHT NOW. Even though I rent, I love where I live. It gives me comfort and peace of mind every day to live there. Plus, I live in a place that costs about double what I could ever afford to buy, and is in an amazing building and neighborhood that I could never afford. So, my investment (in the form of rent) pays off for me every day.
In the end, each person should understand what makes them happy, and buy or rent accordingly.
Great post Paul and I totally agree. This has never and will never be a black and white discussion. Based on your comments, your situation fits you and that’s all that should matter.
For what it’s worth, I recently purchased my first home with my fiance. Because of where we are in our respective lives and our future plans, we felt that this was the right step for US.
To each his own.
This seems like decent information for certain people, but it all really seems relative to your location/situation.
For example, this is my stituation, one which seems hard to argue against, but is also just one example.
I’m 25. I live in an area where housing prices don’t fluctuate too much. They were down last year, though, as the whole country was. I bought a nice house, bigger than I need, in an area that has always sold well. I bought it from a person that just needed to move out, so I got a really good price. My house has an unfinished room on the second floor, some nice retro sea foam green themes in one of the two full bathrooms
and the kitchen could use some updating.
Renters around me pay $500- $800. I pay about $1150 for my mortgage, taxes, mortgage insurance, and utilities (averaged for the year). I have two friends renting two rooms for $300 (figure I’d give them a good deal since I’m already in a good situation). So I pay about $650. I’m slowly developing equity, but with the great price I got on my home, I already had enough equity this year to get a line of credit which I used to consolidate other higher interest debt, and will use to turn that unfinished room into a master suite and update the kitchen and bathroom. After those updates, my house will be in the condition of homes that are selling in my area for $50,000 – $70,000 more than I currently owe on my mortgage. I’m not banking on taking that much home, but within the next 2 years, I will be selling it.
That’s 2 years because I have to wait that long to not repay the tax credit. For me, I basically was handed $8,000, lowered interest rates on some other debt I have, get great tax deductions, have only been continuing to improve my credit score, am paying less than many renters, have a much larger place to live, which accommodates all my hobbies, plus I have a yard and a garage. I can do what I want with my residence, and, again, I should have extra cash in a couple years to add to my personal portfolio, aside from my 401k and my IRA.
My point is not that this is what happens when you buy a house. It is that there are many aspects of home ownership to consider, and although renting may have been the best bet for you, it seems like encouraging people to look into both to make the right decision might be better than outright discouraging people from buying homes.
This seems like good information for certain people, but it definitely seems like it depends on an individual’s location and situation.
For example, this is my story, which seems hard to argue against, although I know it is just one example:
They were down last year, though, as the whole country was. I bought a nice house, bigger than I need, in an area that has always sold well. I bought it from a person that just needed to move out, so I got a really good price. My house has an unfinished room on the second floor, some nice retro sea foam green themes in one of the two full bathrooms, and the kitchen could use some updating.
Renters around me pay $500- $800. I pay about $1150 for my mortgage, taxes, mortgage insurance, and utilities (averaged for the year). I have two friends renting two rooms for $300 (figure I’d give them a good deal since I’m already in a good situation). So I pay about $650. I’m slowly developing equity, but with the great price I got on my home, I already had enough equity this year to get a line of credit which I used to consolidate other higher interest debt, and will use to turn that unfinished room into a master suite and update the kitchen and bathroom. After those updates, my house will be in the condition of homes that are selling in my area for $50,000 – $70,000 more than I owe on my mortgage. I’m not banking on taking that much home, but within the next 2 years, I will be selling it.
That’s 2 years because I have to wait that long to not repay the tax credit. For me, I basically was handed $8,000, lowered interest rates on some other debt I have, get great tax deductions, have only been continuing to improve my credit score, am paying less than many renters, have a much larger place to live, which accommodates all my hobbies, plus I have a yard and a garage. I can do what I want with my residence, and, again, I should have extra cash in a couple years to add to my personal portfolio, aside from my 401k and my IRA.
My point is not that this is what happens when you buy a house. It is that there are many aspects of home ownership to consider, and although renting may have been the best bet for you, it seems like encouraging people to look into both to make the right decision might be better than outright discouraging people from buying homes.
I do not mean to be rude to the author, but you must either be in the overly-optimistic 20 something crowd, or just extremely naive. Either way, your opinions here simply make no sense in the real world.
The premise that you will have saved so much money by renting that in the time it takes a homeowner to pay off their mortgage, you’ll have saved enough money to buy a house… is ridiculous beyond all thought. Please save my email address and email me a copy of your bank account statement in 30 years, and I’ll apologize when I see an account with $800,000+ dollars in it. But it won’t happen.
I both own a personal residence and a residence that I rent out. Now think about this logically, will you? My mortgage on the rental home is $1200/mo. I also pay for the annual property taxes, and basic maintenance. I charge my tenants over $2000/mo rent. So even after mortgage/maintenance/taxes, I walk away with some profits each and every month. But wait. Because I am building equity in that property. Not my renters, me. They are paying me to gain equity from my own property. And when they move out and in 30 years I sell that home, at the much inflated price that comes with age (I paid $200,000 for the house 15 years ago, it’s worth almost $700,000 now) I will make a fortune off the sale alone, not to mention the extra money I make each month x 30 years (Oh, and I’m sitting on their security deposit too. I’m just saying). Seriously. You do the math, but it’s over a million dollars in profit my friend.
Now as for my renters, they are paying over $2000/mo for a home that they will never see a penny from. My mortgage costs will go up over the years, sure, as will my maintenance costs, but hey, guess what happens to the monthly rent? Right, it also goes up. So they will pay me more and more for the same exact product due simply to inflation. (I assure you my profit margin won’t drop). They can’t customize the home without my permission (which I’ll gladly give if they want to, it only benefits me). They pay me monthly for the cost of maintenance whether it is needed or not. Booyah.
Ok, so on the other hand, I have my own residence. I pay mortgage, I pay taxes, I pay for improvements. The thing to realize here is that that my mortgage payments are LESS than rental payments would be, I have TOTAL CONTROL over maintenance and improvement costs, generally speaking. Sure if something breaks, I have to fix it myself. But I can choose the lowest cost option to save money now, or a higher cost option which will reward me in the future when I sell the home. Any improvements are also under my control, and increase the future sale value of my home, again, netting me more money than I originally spent due to inflation and rising market costs.
Let me put this in simple logic for you.
Me = make money, make money, make money, and keep it all
Them = pay money, pay money, pay money, still have no money
You = ????
Todd, no rudeness taken. And in case anyone else is wondering, I’m 34, married, one kid.
Here’s what happened to you: you made a bet and are currently winning. Good for you; I’m envious. But if you think everyone who invests in real estate is winning, you may accidentally have set your TiVo to 2006.
The idea that your profit margin won’t ever drop strikes me as naive. What if prevailing rents go down in your community? (They have in mine.) You’ll still be paying the same mortgage. Will you let your property sit vacant until you find a tenant who agrees with your principled stand on landlord profit margins? What if you have a major, unexpected repair? That isn’t going to eat into your profit margin?
Again, this is just like saying, “I invested in stocks last year and made 50 percent! Everyone should buy lots of stocks!” The gains you’ve made are far from typical.
Finally, “The premise that you will have saved so much money by renting that in the time it takes a homeowner to pay off their mortgage, you’ll have saved enough money to buy a house… is ridiculous beyond all thought.”
Why is this ridiculous? I already have more equity than the average person my age. I’m not sure why this should change, unless we have another housing bubble and this time it doesn’t pop. Would that be a good bet?
So basically do not rent from @todd davis
Todd, you bought your place 15 years ago. The mortgage is less than rent. Of COURSE it is a good investment, but how many people would this apply to today?
That said, i do think the author is out to lunch if he thinks that he will diligently save the difference between rent and the ownership costs. Dream on. This is the constant refrain by bears no matter where they reside. They also always claim to have saved 200k downpayments too. Yes, i’m sure…
Rent is not fixed. And more than likely you wont be able to rent your apartment forever. At some point your landlord is going to sell or move in. (Probably at the end of your next lease).
This means you will need to find a new place with a new price.
You could easily find yourself in a city where the average rent almost triples in 10 years. (Charlottesville, Virginia)
If you buy a house, you can get a fixed APR. This way as long as you can pay your mortgage you will always have your own place for a fixed price.
Basically… do what you want… more than likely purchasing a home that YOU CAN AFFORD with a fixed interest rate is going to be the best choice. On that note, im going back to my apartment to drink a 40.
your… “throwing your money down the drain” Buying a house forces you to put money into it and start building wealth. When I rented, I spent my excess “cash” and didn’t save much. Maybe that was my stupidity at the time but now I see clearer on this side of things. My timing was basically perfect last year and I got a house for 180,000 when a bank had lent someone 360,000 for it a year before. Already its back up to 240,000 giving me 60,000 in equity. (I’m already thinking about buying another home and renting this one) My mortgage is $1,250, and comparable rents in the area are $1,600. That would give me $350 a month extra. Not bad. But in the long term, this decision looks even better. Inflation is about to destroy everyone in our country except for the people who have tangible assets. When inflation increases, tangible assets ride the wave because well…. that is exactly what inflation is. The banks need the dollar to fall by about 50% so in theory, homes, precious metals, stocks, down to candy bars will increase by that amount. These goods aren’t actually “rising” per say, but the dollar is worth less and it takes more dollars to equal the worth of these items. So banks still have homes on their books that they lent 500,000 for… and now they are only worth 250,000. If they sell these right now, they must take a 250,000 loss on their books. Multiply that by millions of homes and we’re in another crisis. The government has propped these $#$%holes up for the time being and they are inflating the currency. Soon the banks will be selling these at a “profit” even though candy bars will cost $10. Its all fudging #’s on the books. THEN, the government is down with this plan because everyone will be “over water” and when they decide to sell, they will be making huge “profits” on their homes which will be taxable. And not only that, but if the dollar drops by 50%, and our national debt is 15,000,000,000,000 in today’s dollars, then post inflation at 50%, we’ll only have 7,500,000,000,000 in debt, in theory. The banks win, the governement wins and our country and its citizens lose. Renters will lose even bigger unless they find something else to invest in (gold, stocks, etc.) but these are a lot riskier than owning a home and at least having a roof over your head no matter what) My loan after and mortgage payment post inflation will be nothing in today’s dollars. Its going to be like paying 600 rent for a house right now. I live in DC. Good luck though.
Todd: “(Oh, and I’m sitting on their security deposit too. I’m just saying.)”
Where I live, if you hold a security deposit from a tenant, you must refund it with interest when they move out. I guess this isn’t universal.
Anyway, owning a property for income is great if your timing is right. Todd bought his rental property in the mid-1990s, presumably for a good price, and is paying a $1,200/mo mortgage out of the $2,000/mo rent he charges his tenants.
Someone who bought the same income property in 2006 could easily be paying twice as much each month, and trying to cover it with a “market rate” rent would be very difficult — especially if local rents are stagnant (this does happen — my rent has not increased in six years).
The worst possible thing to do would be to buy an income property at the very top of a housing boom — a perfect storm of a big mortgage and a renter’s market.
Wow you really don’t have a clue. You obviously don’t speak with any experience. I find it funny how people like you seem to think when the market is down that it’s always going to be down and vice verca.
Your deductability argument is completely false. Mortgage intrest IS deductable and makes a big difference. If you are in a 25% tax bracket it’s like getting $250 PER MONTH back on every $1,000 spent. So that $1,000 interest payment only actually costs $750. But your rent payment is just that. A payment that you get nothing out of.
House values on average double every 10 years. This is the first time in recent history that values have actually gone down but they will rise once again and wealth will be built. You however will not see any increase in wealth because you have nothing of value.
And the pipe dream that in 30 years you’ll have cash to buy a house is laughable. You won’t be able to keep up. And all that money you’re saving that you were investing you just lost in the market as well which dropped further than housing.
So good luck with your theory and in 30 years when I’ve built wealth and you’ve built rental history we’ll see which one gets us farther! LOL!
g, you are simply mathematically incorrect about the mortgage interest deduction. Let’s say I got a mortgage with $1000 in monthly interest.
I’m married, filing jointly, so right now (as a renter), I take the standard deduction of $11,400. With my shiny new mortgage, now I get to deduct $12,000 ($1000 x 12 months). I’m in the 25% tax bracket, so that means the mortgage interest deduction is worth:
($12,000 – $11,400) * 0.25 = $150.
A hundred and fifty bucks. Better than nothing, I guess. (Yes, this understates it because I have some charitable deductions that I could now itemize.)
Are you following me here? This is why half of all homeowners don’t get *anything* from the mortgage interest deduction: because they’re better off taking the standard deduction. Have you calculated what the mortgage interest deduction is actually worth to you, given your own tax situation? The answer may surprise you.
This is a very interesting topic for me since I have been a realtor, I have owned in the last 5 years and sold 1.5 years ago when the market was really crashing for a profit and I realize how lucky I was go get out at that time. My husband and I are now moving and faced with the option to buy or rent. We have spent countless hours measuring the pros and cons of our situation. We lived in the Atlanta area and will be moving to the Charlotte area. In the area we want to live in, which is right down town, it is actually cheaper to buy than to rent because all of the people renting the properties out are asking so much; on the average $600 more a month then if we would purchase a property in that same neighborhood, or even if we purchased the same property (many for rent are also for sale). Also we have really, really missed that deduction…it sucks having to pay taxes on April 15th. Another thing to consider is the fact that most landlords are simply in this for the money and rental properties are usually not in the best condition and take it from someone who has rented 2 properties in very nice neighborhoods in the past 1.5 years, there is nothing more unbearable then being pregnant in the middle of August with no air conditioning (happened at the first place we lived in) and then we moved 7 months later and it happened in the 2nd place we lived in and it was that way for a month! If it had been our home it would not have been that way for a day. Anything you do to a rental to upgrade or maintain, which has to be done to make rentals livable, is just the same as putting that money and time into your landlords pocket. If you are not going to live in a place for more than 5 years, do not buy. If you are made of money and do not care about saving for your future and having something to pass on to your children then do not buy. If your job is not secure then do not buy. If you are settled and in a secure job then honestly, whether or not the market has hit the bottom it is probably close and if you lose a little now I feel confident that in the next 5 years you will be seeing the appreciation and if you have put a little work into your home it will be comfortable and you will have equity that is borrowing power for your children’s future school and weddings and when you have paid that baby off in 20-30 years then you own from the core of the earth all the way up to infinity within those property boundaries, which is the American dream. My Granny lived through some very difficult times and saw it all, she was born in 1916 and just passed, she was wise and lived comfortably in her old days because she had land and houses that paid her well. Sure they cost money for the upkeep but she could think long term and her children were always taken care of because of her ability to think long term and wait out the hard times for the big gains.
Your logic here is flawless. Based on this article alone I have decided to never own a home. Also, the idea of rental properties has been completely debunked by this mastermind.For a future article, can you please explain to these neanderthals the financial benefits of leasing cars rather than buying them?
You bring up some valid points.But keep in mind buying a house has one major difference from buying a stock – you are leveraged 5:1 conservatively, probably closer to 10:1 or 20:1 these days. That means you have the potential to win really big or loose really big on very minor swings. The upside potential infinite and in most states the there is a defined risk of your down payment (and even then you get 6+ months free rent and probably 1-2k from the bank for moving out peacefully and not trashing the property) . You are essentially making a large leveraged bet kind of like if you could bet on a stock at 10x leverage no margin calls and a defined risk. The problem is that the stock you are getting this awesome deal on is Enron and its being managed by Bernie Madoff. Still sound like a great deal now?
As with anything we need to talk about location depending on where you plan to live owning or renting real-estate can be very expensive.
I also think its extremely disingenuous to even imply that if you rent you have equity in the form of extra cash once again it all depends where you live. However most of the time it’s simply not true that if you rent your going to be flush with cash. Just try renting in a nice area in Orange County or the San Francisco Bay area.
Cold hard facts about renting:
1) 99.9% chance your rent is going to go up every year and there is not a darn thing you can do about it other then move and guess what moving costs money and time.
2) You will never have any real equity when you rent unless your lucky enough to live in one of those Rent with Equity programs that some apartments offer. If you have to rent this is a good way to go.
3) When you rent you never get to choose who your neighbors are they may be good or bad. When you buy a home in a nice area there is very little chance you will be living next to the Section 8 Housing folks.
4) Unless you bought a townhouse you never have to bang on the wall because the folks next door like to make love as loudly as possible. These type of events are all too common to renters. OK, it’s amusing to see how many times the police are called out on the weekends.
In my case owning a home has allowed me to by and sell and make a small profit and that’s something that renting would never had allowed my family to do. Owning a home allows me also to better plan out my cash flow. True I may have the odd extra expense now and then. However when renting I have never had a yearly raise cover the increase in apartment rent. The only honest and good thing you can say about renting is it allows you to be flexible and move at the end of your contract.
I have never every seen anyone make any money by renting. But hey perhaps your mom cut you a deal on rental she owns so if that’s the case count yourself lucky.
All I have to say is that all of the wealthy people in this country own their property and have paid off their mortgage as well (MILLIONAIRE NEXT DOOR, and a gazillion bios of millionaires/investors) so I am going to go with that view vs. some random internet blogger trying to get attention
Great article! I know some people who think home ownership is a required part of the “real world.”
This Todd character is completely naive to think home owners on average will “earn more equity” in 30 years than someone who rents and saves money. One home owners are paying interest on their mortgage, never heard of renters paying interest. The renter is taking straight cash and investing it, saving it, or otherwise using it for other things they deem important. Housing prices go up and down and factoring in repairs, taxes, fees, interest, and insurance it doesn’t seem like owning a home is such as wise investment.
Plus Todd, what kind of greedy scam artist are you? Marking up a 1200 a month property to 2000 a month. Thats nearly doubling the price, I’m not sure who would want to rent from you.
Here’s a column by David Leonhardt in today’s New York Times. I’d like to think (even though I would be completely mistaken) that he wrote it to rebut my column.
In Sour Home Market, Buying Often Beats Renting
http://www.nytimes.com/2010/04/21/business/economy/21leonhardt.html
In it, he confirms what I (and many of you) have said: in some markets, it’s cheaper to buy then to rent, and Seattle is emphatically NOT one of those markets.
I bought a condo in 1988. The price shot through the roof, I sold it, made $60,000. Used that money to buy a house in 1989. Prices fell through the floor, I got laid off, and after 5 years sold the house and lost everything.
I bought a condo in 2000. The price shot through the roof, I sold it, made $80,000. Used that money to buy a house in 2006. Prices fell through the floor, I hate my job and need to quit, and after 3 years will sell the house and lose everything.
Do I detect a pattern?? I’ll probably buy again because that’s how I am, but logically it’s not worth it.
Nice discussion!
I also living in a rented house but in near future I plan to own one.
This post and comments discussion is good to see the both sides of
the picture.
I think there are a lot of variables to way. It’s not an easy decision. It’s a lifestyle decision. The confidence you have in your job staying local is a factor. The size of your household matters. The square footage you live in matters. Whether you can handle landlording or flipping. And the financial calc is a tough one because the result varies with the time you expect to stay in the place.
There are many fine buy vs rent calculators you can search for online.
I’ve made a simple spreadsheet on Google Docs if anyone wants to see how I compared the two options recently. It’s at;
https://docs.google.com/previewtemplate?id=0Aug9UmA5J8NFdDJ1RnBQVE9rT3RVN3c1ZXEyejlHS2c&mode=public
We need to get away from the notion of homes being purchased solely as investments (not unlike stocks) and back to the notion of purchasing a home because you need it! You buy a home because you need the home not because you’re counting on it doubling in value every ten years.
Nice work, I like your point about renovation costs, many people think they can just throw cash into a place and make money, Its just not true most the time.
I recently went through the home buying experience myself, and one of the things I did was graph the money I’d lose to rent(assuming it increases with average inflation) versus what I’d lose in interest, taxes, basic repairs, insurance, etc from owning a home. It was amazing how long it took for purchasing a home to be cheaper than renting on my graphs. In the end, it was about the rental properties not having what I was looking for, and the desire for owning my own place. Even with the tax credit, and two additional mortgage payments every year towards principle, it will still be 10 years before owning my house will lose me less money than renting (and that’s with the tax credit).
We should have always known better. There have been a number of housing bubbles in the past, some worse than the current situation.
This is a pretty interesting take on renting vs home ownership. Usually these articles are written the other way around. I personally enjoy renting for the simple fact that I don’t want to deal with maintenance & utilities, plus if I want to pick up and leave… I Can!