If you buy a house that really meets your needs, it is often a really good idea. No, that may not be the case in Silicon Valley, but there are plenty of awesome places in the world where you can buy a modest home for very little money. Depends on what you like to do, for example. Much of Colorado is expensive, but much of it is very reasonable--especially now. Owning a house means you pay taxes, but rents will of course reflect the taxes that the owners pay. You don't somehow magically get exempted from taxes because you rent. The biggest benefits of home ownership are (1) hedge against inflation in housing costs, and (2) zero tax on imputed rental income. Most people have never heard of the second of these, but it is quite simple.
Imputed Rental Income. If you own a house and rent it your friend, who rents you his identical house for exactly the same amount, both of you have a taxable income in the form of rent received. If you both just live in your own houses, you have exactly the same housing situation but no taxable income stream. Living in a house you own has a direct tax benefit in this way.
Inflation and taxes are two of the biggest threats to long-term FI, so understanding these two effects is important.
Why the anti home buying sentiment?
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ICouldBeTheWalrus
- Posts: 130
- Joined: Tue May 31, 2011 3:00 am
I think most of the anti-home-ownership sentiment is based in the fact that prices have been bid up so high due to many factors (subsidies included), and that it can tie up a lot of liquidity (unless one is highly leveraged) and it's a rather undiversified investment.
Personally, there are a few reasons I'd like to own a house, not the least being:
- ability to have a large garden.
- ability to replace appliances when they fail with better / higher efficiency appliances.
- actually being motivated to put some effort of my own into long-term improvements to the property. There's little incentive when renting, and if you do much the owner doesn't approve of, especially if you break something in the process, you're in trouble.
Theoretically, I could negotiate all of these in some rental agreement, though unless I own the place, the incentive to spend much of my own time/effort on improvements doesn't seem particularly worthwhile
Personally, there are a few reasons I'd like to own a house, not the least being:
- ability to have a large garden.
- ability to replace appliances when they fail with better / higher efficiency appliances.
- actually being motivated to put some effort of my own into long-term improvements to the property. There's little incentive when renting, and if you do much the owner doesn't approve of, especially if you break something in the process, you're in trouble.
Theoretically, I could negotiate all of these in some rental agreement, though unless I own the place, the incentive to spend much of my own time/effort on improvements doesn't seem particularly worthwhile
@Eabbey; I agree with your points on housing as an inflation hedge and the tax-free imputed rental income.
Similarly, if I buy a house all-cash for $100K and, prior to that my rent was $1000 per month (or $12K per year). Then, one could look at my annual ROI as 12,000/100,000 = 12% (of course this example is much simplified and doesn't consider annual property taxes and maintenance). Compare that to long-term CD rates of less than 2% today.
Taxes, maintenance, & reduced mobility are the big factors that can make home ownership less than desirable.
Similarly, if I buy a house all-cash for $100K and, prior to that my rent was $1000 per month (or $12K per year). Then, one could look at my annual ROI as 12,000/100,000 = 12% (of course this example is much simplified and doesn't consider annual property taxes and maintenance). Compare that to long-term CD rates of less than 2% today.
Taxes, maintenance, & reduced mobility are the big factors that can make home ownership less than desirable.
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Riggerjack
- Posts: 3191
- Joined: Thu Jul 14, 2011 3:09 am
There is a faction of our society that earnestly feels that the less you are responsible for, the freer you are. I was raised in that faction, and found responsibility like some men find religion.
That faction has been having a heyday talking up walking away from your mortgage. Talking about the freedom of renting. They earnestly believe this, and I can't say they are wrong. Just wrong for me.
This is a very personal thing that everyone needs to work out for themselves. Either you feel freer being in control/ownership, or you feel freer based on your ability to drop and run. There are solid arguments on both sides, you have to find which appeals to you.
Also, this faction seems to be attracted to urban areas, where real estate makes the least kind of sense.
Find where you need to be and the situation that works for you. and if it isn't where you are, then go there.
That faction has been having a heyday talking up walking away from your mortgage. Talking about the freedom of renting. They earnestly believe this, and I can't say they are wrong. Just wrong for me.
This is a very personal thing that everyone needs to work out for themselves. Either you feel freer being in control/ownership, or you feel freer based on your ability to drop and run. There are solid arguments on both sides, you have to find which appeals to you.
Also, this faction seems to be attracted to urban areas, where real estate makes the least kind of sense.
Find where you need to be and the situation that works for you. and if it isn't where you are, then go there.
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DividendGuy
- Posts: 441
- Joined: Sun Dec 05, 2010 9:58 pm
I go back and forth on renting vs. buying.
I think if you compare apples to apples...same size house/condo in same exact neighborhood in same circumstances it will likely be cheaper to buy over the long haul, even with maintenance, taxes, interest, etc. included.
The largest challenges to me aren't the financial comparisons. For me, it is freedom..as was pointed out above. Flexibility and freedom is intangible, and you can't put value on it.
One of the nice things about pursuing ERE and becoming financially independent at a young age is the fact that you will one day be geographically independent as well. You won't be tied down to any one area, UNLESS YOU WANT TO BE. If you do want to be...and if you've found your paradise, then that's great! But, if you DON'T want to be tied down, then buying would not be a good idea.
For instance, I've entertained the idea of retiring overseas...particularly in the Philippines. If I was to buy a condo/house today, that would make the idea of retiring overseas that more difficult. I then have to navigate selling or renting out my property. If I don't buy a place, I can simply pack what I need and go. I've also entertained the idea of living up north half the year..and living down south half the year. This would also be infinitely easier if I don't own any property anywhere.
I really think the financial comparisons are not where it ends. Outside of renting a very small room in someone's home...I think you stand to be financially better by buying in most areas of the country. This is notwithstanding the extremes, as there are a few RE markets that are still overpriced (Manhattan and L.A. come to mind).
Just my take on it. I may buy one day, but this will likely be after the fact that I can see myself geographically tied down to one area.
I think if you compare apples to apples...same size house/condo in same exact neighborhood in same circumstances it will likely be cheaper to buy over the long haul, even with maintenance, taxes, interest, etc. included.
The largest challenges to me aren't the financial comparisons. For me, it is freedom..as was pointed out above. Flexibility and freedom is intangible, and you can't put value on it.
One of the nice things about pursuing ERE and becoming financially independent at a young age is the fact that you will one day be geographically independent as well. You won't be tied down to any one area, UNLESS YOU WANT TO BE. If you do want to be...and if you've found your paradise, then that's great! But, if you DON'T want to be tied down, then buying would not be a good idea.
For instance, I've entertained the idea of retiring overseas...particularly in the Philippines. If I was to buy a condo/house today, that would make the idea of retiring overseas that more difficult. I then have to navigate selling or renting out my property. If I don't buy a place, I can simply pack what I need and go. I've also entertained the idea of living up north half the year..and living down south half the year. This would also be infinitely easier if I don't own any property anywhere.
I really think the financial comparisons are not where it ends. Outside of renting a very small room in someone's home...I think you stand to be financially better by buying in most areas of the country. This is notwithstanding the extremes, as there are a few RE markets that are still overpriced (Manhattan and L.A. come to mind).
Just my take on it. I may buy one day, but this will likely be after the fact that I can see myself geographically tied down to one area.
I am guessing this is because if you take out a 30 year mortgage. You will be paying 3x the amount of the home over the course of 30 years. Also the tax savings from owning really is not that big of deal...
The apartment that I am living in right now is 400 per person per month. This includes water and garbage. If i were to live in a house the property taxes would already be above that...
The apartment that I am living in right now is 400 per person per month. This includes water and garbage. If i were to live in a house the property taxes would already be above that...
WRT rent versus buy:
A big part of this comes down to whether one has determined to stay in a particular location for a long enough period. Houses are illiquid, even in better markets (and many in CA cannot be considered such). A sale even five years after initial purchase may leave one in a less favorable position viz-a-viz renting a similar accomodation where prices are still falling and inventory remains abundant.
Then, there is the issue of neighborhood blight. BBC did a story recently on the housing market in Las Vegas. The glut of empty, foreclosed homes is so huge that entire subdivsions that were originally marketed to middle class buyers have been emptied, vandalized and repopulated by less desirable folks who prefer loud music and recreational drugs to mowing lawns and general upkeep.
Given the lack of significant inflation and the oversupply of housing, rents will be stable for the coming decade. If one prefers an urban environment, renting seems like the better course of action.
A big part of this comes down to whether one has determined to stay in a particular location for a long enough period. Houses are illiquid, even in better markets (and many in CA cannot be considered such). A sale even five years after initial purchase may leave one in a less favorable position viz-a-viz renting a similar accomodation where prices are still falling and inventory remains abundant.
Then, there is the issue of neighborhood blight. BBC did a story recently on the housing market in Las Vegas. The glut of empty, foreclosed homes is so huge that entire subdivsions that were originally marketed to middle class buyers have been emptied, vandalized and repopulated by less desirable folks who prefer loud music and recreational drugs to mowing lawns and general upkeep.
Given the lack of significant inflation and the oversupply of housing, rents will be stable for the coming decade. If one prefers an urban environment, renting seems like the better course of action.
What @Maus says is very important from the speculative side. What do you think the future will hold.
The other aspect is the present day balance sheet. There are simply some places in which it makes financial sense to buy, and places where it does not. It's far too variable - especially today - to make a single statement that buying vs. renting is good or bad.
The other aspect is the present day balance sheet. There are simply some places in which it makes financial sense to buy, and places where it does not. It's far too variable - especially today - to make a single statement that buying vs. renting is good or bad.
Histroically, real estate takes a very very very long time to recover from this type of broad downturn caused by very real negatives. When you tie this in with the current poor job market, high rate of unemployment, banks that are still insolvent, and a continent (Europe) about ready to crash (China could be poised to crash as well, "The People's Republic of Madoff" has been used by a few China analysts), you don't get the necessary positives to create new real estate demand.
All of this means we still have years before the overall real estate market turns.
Buying vs. Renting is a purely mathematical model for me. In my area, DC/Arlington, VA, it is cheaper to rent over 30 years or longer than it is to buy when you factor in all costs (interest, taxes, hoa fees, etc.) and invest the difference at a modest return (5%).
All of this means we still have years before the overall real estate market turns.
Buying vs. Renting is a purely mathematical model for me. In my area, DC/Arlington, VA, it is cheaper to rent over 30 years or longer than it is to buy when you factor in all costs (interest, taxes, hoa fees, etc.) and invest the difference at a modest return (5%).
@EAbbey, the rent vs buy thing does come up a lot. I often join the pro-rent crowd. The biggest problem I find in these debates is that I feel that there are three commonly used housing solutions: renting, buying, and financing (i.e. having a mortgage). Buying and financing are often used as interchangeable terms, but fundamentally they aren't the same thing. Even your original post lists only buying vs renting.
Unfortunately, "buying" makes no distinction between an individual with $100k cash in hand who uses that cash to buy a $100k house, or an individual with $0 who borrows $100k at x% over 30 years "buy" a $100k house-- these are both lumped under "buying", yet these are dramatically different situations.
On a theoretical level, I don't see any of these three solutions as inherently right or wrong-- each seems to have its place depending on the circumstance. On a practical level, I have the means to buy a house without financing, but I find it difficult to find a house of small size with suitable quality, and in a suitable area, yet I find it very easy to find a rental with these characteristics. As an example, try to find a 1BR/1BA house, under 800sf, in a suburban area.
There are some advantages to renting not mentioned in previous posts. In some states, Indiana for example, there are tax advantages to renting. Also there is a hard to describe psychological phenomenon at play too-- at least in my mind. If we rent a place, my wife and I are willing to accept a lot less in terms of amenities and space. We recently rented a place with a fridge that didn't have an ice-maker, and we were fine with this. When we owned our own house, we had to buy a fridge-- it had an ice-maker. Ultimately, we found it hard to buy low quality items for our own home, whereas we don't find it hard to rent a place with low quality finishes..
Unfortunately, "buying" makes no distinction between an individual with $100k cash in hand who uses that cash to buy a $100k house, or an individual with $0 who borrows $100k at x% over 30 years "buy" a $100k house-- these are both lumped under "buying", yet these are dramatically different situations.
On a theoretical level, I don't see any of these three solutions as inherently right or wrong-- each seems to have its place depending on the circumstance. On a practical level, I have the means to buy a house without financing, but I find it difficult to find a house of small size with suitable quality, and in a suitable area, yet I find it very easy to find a rental with these characteristics. As an example, try to find a 1BR/1BA house, under 800sf, in a suburban area.
There are some advantages to renting not mentioned in previous posts. In some states, Indiana for example, there are tax advantages to renting. Also there is a hard to describe psychological phenomenon at play too-- at least in my mind. If we rent a place, my wife and I are willing to accept a lot less in terms of amenities and space. We recently rented a place with a fridge that didn't have an ice-maker, and we were fine with this. When we owned our own house, we had to buy a fridge-- it had an ice-maker. Ultimately, we found it hard to buy low quality items for our own home, whereas we don't find it hard to rent a place with low quality finishes..
Artificially high demand fueled over supply... Govt intervention propping up prices. Parasitic entities formed (realtor/finance fees, HOAs, high prop taxes).
I'm irritated that the powers that be fight so hard to keep the pricing of housing artificially high.
With the level of vacant houses, they'll eventually lose. In the meantime, I can wait, rent and enjoy the flexibility.
I'm irritated that the powers that be fight so hard to keep the pricing of housing artificially high.
With the level of vacant houses, they'll eventually lose. In the meantime, I can wait, rent and enjoy the flexibility.
Hi all:
A couple more thoughts. First, I am not saying that buying is always the best thing--I am just responding to the general bias against buying that seems prevalent here. Second, I do not believe that a house is a good investment per se. I expect my home value to appreciate no faster than the rate of inflation, on average. If you bought at the top of the market, you could be underwater for a decade.
I have owned my own house for more than 15 years, and I have been in the same house now for 10 years. This is my third house and I plan to keep it forever and pass it on to my kids. I have refinanced multiple times. My main purpose in owning a house is that I have locked in my cost of shelter, with the exception of any increases in property tax. I fully expect that we will see high inflation somewhere not too far down the road. Inflation is a huge threat to financial independence. Deflation is just fine.
I have solar panels on my house that provide 100+% of the power that I use, so that's another cost that is essentially taken care of for the long term (though panels do not last forever).
There are many reasons why people might decide not to own a home. If I did not have kids, it is certainly more likely that I would rent. Also, I get the sense that many of the devoted renters are also living in urban areas and that makes a difference too.
Anyway...bottom line is that I am in no way a champion of real estate ownership for all. It depends on your situation, your values, etc. In general, I think that FI is simply harder in urban areas, not least because of the cost of shelter.
A couple more thoughts. First, I am not saying that buying is always the best thing--I am just responding to the general bias against buying that seems prevalent here. Second, I do not believe that a house is a good investment per se. I expect my home value to appreciate no faster than the rate of inflation, on average. If you bought at the top of the market, you could be underwater for a decade.
I have owned my own house for more than 15 years, and I have been in the same house now for 10 years. This is my third house and I plan to keep it forever and pass it on to my kids. I have refinanced multiple times. My main purpose in owning a house is that I have locked in my cost of shelter, with the exception of any increases in property tax. I fully expect that we will see high inflation somewhere not too far down the road. Inflation is a huge threat to financial independence. Deflation is just fine.
I have solar panels on my house that provide 100+% of the power that I use, so that's another cost that is essentially taken care of for the long term (though panels do not last forever).
There are many reasons why people might decide not to own a home. If I did not have kids, it is certainly more likely that I would rent. Also, I get the sense that many of the devoted renters are also living in urban areas and that makes a difference too.
Anyway...bottom line is that I am in no way a champion of real estate ownership for all. It depends on your situation, your values, etc. In general, I think that FI is simply harder in urban areas, not least because of the cost of shelter.
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George the original one
- Posts: 5406
- Joined: Wed Jul 28, 2010 3:28 am
- Location: Wettest corner of Orygun
@George too,
It works the same as if you are self-employed only you would show the 1st pg. of your 1040 for income, and the first page of a bank statement showing ready cash. This plus a good credit history is what's needed. The problem arises where there are income thresholds. Here it's 40 times the monthly rent for most apartments, i.e., $1000/mo rent requires $40,000 a year income showing. Can certainly be a problem.
On the credit history side, I have heard Dave Ramsey say that due to his lack of any credit score, he couldn't rent an apartment in a complex even though he could write a check and buy the whole complex.
Maybe sometimes ownership becomes a necessity?
It works the same as if you are self-employed only you would show the 1st pg. of your 1040 for income, and the first page of a bank statement showing ready cash. This plus a good credit history is what's needed. The problem arises where there are income thresholds. Here it's 40 times the monthly rent for most apartments, i.e., $1000/mo rent requires $40,000 a year income showing. Can certainly be a problem.
On the credit history side, I have heard Dave Ramsey say that due to his lack of any credit score, he couldn't rent an apartment in a complex even though he could write a check and buy the whole complex.
Maybe sometimes ownership becomes a necessity?
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webberchoked
- Posts: 36
- Joined: Tue Jan 11, 2011 4:22 am
1. i havent lived in the same place let alone the same country every year for the past 4 years. renting>owning
2. i never have to maintain my house. no lawn, no painting, no worry if shit breaks.
3. its infinitely easier to move if i have shitty neighbours
4. its infinitely easier to move if i see a better apartment/place to live.
5. i get better returns from investments+paying rent than i could buying a house as well as the need to stay liquid because i like actually spending money on doing stuff rather than having all my money tied up in a house without any liquid networth to do anything. renting>owning
cant see any positives if you are a single high liquid networth individual who actually likes doing stuff rather than sitting in the same spot grinding away at life waiting to die.
2. i never have to maintain my house. no lawn, no painting, no worry if shit breaks.
3. its infinitely easier to move if i have shitty neighbours
4. its infinitely easier to move if i see a better apartment/place to live.
5. i get better returns from investments+paying rent than i could buying a house as well as the need to stay liquid because i like actually spending money on doing stuff rather than having all my money tied up in a house without any liquid networth to do anything. renting>owning
cant see any positives if you are a single high liquid networth individual who actually likes doing stuff rather than sitting in the same spot grinding away at life waiting to die.
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George the original one
- Posts: 5406
- Joined: Wed Jul 28, 2010 3:28 am
- Location: Wettest corner of Orygun
> individual who actually likes doing stuff rather
> than sitting in the same spot grinding away at
> life waiting to die.
Erm, you've gone a bit overboard if you're equating moving frequently/traveling with "doing stuff". People who own homes are still doing stuff, too.
Agree with your reasons that renting is a suitable habitat for you.
> than sitting in the same spot grinding away at
> life waiting to die.
Erm, you've gone a bit overboard if you're equating moving frequently/traveling with "doing stuff". People who own homes are still doing stuff, too.
Agree with your reasons that renting is a suitable habitat for you.
dragon: "Unfortunately, the powers that be let those fall into disrepair and then bulldoze them, writing off the loss, and reducing supply."
LOL, all too true... Then they'll just build them again. Frightening its stupidity.
... webber has a good list, I agree with all that... I've gone so far as building spreadsheets calculating the return on my money spent on cash buying a house.
When I first made it I wanted 10% guaranteed to deal with the hassle... Now that I own rental homes, and know everything associated, that % has jumped a lot.
LOL, all too true... Then they'll just build them again. Frightening its stupidity.
... webber has a good list, I agree with all that... I've gone so far as building spreadsheets calculating the return on my money spent on cash buying a house.
When I first made it I wanted 10% guaranteed to deal with the hassle... Now that I own rental homes, and know everything associated, that % has jumped a lot.