How might a home purchase be worse than renting if one is buying a home all-cash with:
Purchase price = $100K
Annual property tax = $1000
Annual maintenance = $2000
vs. monthly rent at $1000. Say, long-term interest rates at 3%.
What do you all see as the negatives for the home buyer?
I've run a very sophisticated spreadsheet model, and nearly no matter the variables, ownership always comes up better within ten years max, often much quicker. See this rent v. buy model http://michaelbluejay.com/house/rentvsbuy.html
High taxes & maintenance are the quantative variables that ruin the buy option. Lower flexibility and mobility are the subjective variables that do the same.
Also, remember, the purchase of a 3 bedroom/2 bath/2 car garage in a nice neighborhood does not compare to 1 or 2 bedroom rental in a large complex. When considering rent v. buy, one must compare apples to apples.
Why the anti home buying sentiment?
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George the original one
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@Andre900 - I agree with you that the numbers for ownership usually make sense (though they didn't 2006-2008).
However, as webberchoked wrote, there are situations where you don't want to tie oneself down with real estate:
1) no desire to be a landlord when not residing in property and don't want an illiquid investment
2) don't want the time/financial responsibility for repairs & maintenance
3) (debateable) better returns other than real estate
Obviously most of the above reasons are lifestyle choices rather than pure financial decisions.
However, as webberchoked wrote, there are situations where you don't want to tie oneself down with real estate:
1) no desire to be a landlord when not residing in property and don't want an illiquid investment
2) don't want the time/financial responsibility for repairs & maintenance
3) (debateable) better returns other than real estate
Obviously most of the above reasons are lifestyle choices rather than pure financial decisions.
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cloudeleven
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"I tend to favor ownership as the laws of the land tend to also favor ownership"
This is so not true. The renter has way more rights than the landlord. I have seen my uncle and my parents continually screwed over by the courts when trying to evict a bad renter.
Plus, as a renter if you put in a little work you can always find a good deal somewhere.
"But if I had invested my down payment + closing costs and the difference between my mortgage payments and the typical rent for that area over that same time period...I would have lost it in 08"
Or, you could have seen the crash coming, which wasn't that difficult and pulled your money out and then put it back in anywhere within a few thousand points of the bottom and made a killing.
It all depends on how you spin the scenario. For me the decision is pure numbers.
This is so not true. The renter has way more rights than the landlord. I have seen my uncle and my parents continually screwed over by the courts when trying to evict a bad renter.
Plus, as a renter if you put in a little work you can always find a good deal somewhere.
"But if I had invested my down payment + closing costs and the difference between my mortgage payments and the typical rent for that area over that same time period...I would have lost it in 08"
Or, you could have seen the crash coming, which wasn't that difficult and pulled your money out and then put it back in anywhere within a few thousand points of the bottom and made a killing.
It all depends on how you spin the scenario. For me the decision is pure numbers.
I was referring to leg work. No way I'm putting money into a rental. Not even new paint.
I couldn't have made my killing if I had spent on a house and mortgage that would be over double my rent. I wouldn't have had the capital. I have ran the numbers many times. All the scenarios show that even if I only get a 3-5% return a year for 50 years on the difference between renting and buying in my area, I easily beat owning a house. This factors in every data point.
There definitely are areas of the country that are the opposite. Pittsburgh is one, but not DC. No, Anacostia is not an option. Not even if it's free.
I couldn't have made my killing if I had spent on a house and mortgage that would be over double my rent. I wouldn't have had the capital. I have ran the numbers many times. All the scenarios show that even if I only get a 3-5% return a year for 50 years on the difference between renting and buying in my area, I easily beat owning a house. This factors in every data point.
There definitely are areas of the country that are the opposite. Pittsburgh is one, but not DC. No, Anacostia is not an option. Not even if it's free.
I've actually never had a lease that didn't require at least 30 days notice and my tenants have to give me 60 or 90. I can sell a house in this market in 60 days. If I can't I rent it. In this "terrible" market. Twice. So I don't get the illiquid thing? Can't you just rent it out?
If I can't convert an asset to cash within a week, I consider it illiquid. Liquidity describes saleability; having an alternative way to extract dollars from an asset doesn't make it more liquid.
Lease-breaking clauses don't actually restrict freedom. Just hand over an extra month's rent and bail out. No need to stick around waiting for something to sell.
Can you always sell a house (at a good price) all the time? How about at the end of 2008? What if the house next door just got busted as a crackhouse? If your answer is yes to these questions, you should be a Realtor (-:
If I can't convert an asset to cash within a week, I consider it illiquid. Liquidity describes saleability; having an alternative way to extract dollars from an asset doesn't make it more liquid.
Lease-breaking clauses don't actually restrict freedom. Just hand over an extra month's rent and bail out. No need to stick around waiting for something to sell.
Can you always sell a house (at a good price) all the time? How about at the end of 2008? What if the house next door just got busted as a crackhouse? If your answer is yes to these questions, you should be a Realtor (-:
Chad, I don't know what you expect to pay for rent, but assuming it's around $1000 for a room or tiny studio, you're looking at a max sales price in the $200-$300k range, depending on down payment, factoring in HOA dues and taxes / deductions. There are definitely comparable places available for that price.
@ dragoncar
Unfortunately, there are not comparable places for $200-300k. There isn't one townhouse or house inside the beltway (in a decent area) for that price. And, I am never buying anything outside of the beltway, as there are numerous issues with living out there (less stable prices, traffic, public transportation, quality of life).
Condos that are around $200k won't be anywhere near a Metro stop and most condos in the area have very high HOA fees (hundreds of dollars). The numbers just don't work for buying when I invest the difference.
Unfortunately, there are not comparable places for $200-300k. There isn't one townhouse or house inside the beltway (in a decent area) for that price. And, I am never buying anything outside of the beltway, as there are numerous issues with living out there (less stable prices, traffic, public transportation, quality of life).
Condos that are around $200k won't be anywhere near a Metro stop and most condos in the area have very high HOA fees (hundreds of dollars). The numbers just don't work for buying when I invest the difference.
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jennypenny
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I agree with Chad that inside the beltway is a little different. My DH works in DC. It is cheaper for us to rent a place for him there for during the week and keep our home here. My sister does the same thing--home at the Jersey shore, apartment in DC.
The natural laws of the universe don't seem to apply inside the beltway.
The natural laws of the universe don't seem to apply inside the beltway.
Sounds like we have a little convention here. I live just outside and work inside the beltway.
Housing prices are generally stable and relatively expensive the closer in near DC you go, except in the really poor neighborhoods. And there are a lot more decent places to live in the DC core than there were 15 years ago. But lots of foreclosures in the outer burbs. We bought our house ten years ago before the bubble and its still worth a lot more than we paid for it.
This is one of the few areas of the US that has not really seen a serious downturn. DC is still a good place to "buy and renovate" if you have the skills. (I do not.)
Housing prices are generally stable and relatively expensive the closer in near DC you go, except in the really poor neighborhoods. And there are a lot more decent places to live in the DC core than there were 15 years ago. But lots of foreclosures in the outer burbs. We bought our house ten years ago before the bubble and its still worth a lot more than we paid for it.
This is one of the few areas of the US that has not really seen a serious downturn. DC is still a good place to "buy and renovate" if you have the skills. (I do not.)
Chad, you didnt answer my questions about expected rent. The 200-300k number was based on expected rent of $1000 for a tiny studio or room. Yes, there are options in the dc core for that price.
Of course you won't get a standalone home or townhouse for that price. But you also couldn't rent one for $1000. More like a few thousand? Its possible the rent/buy ratio is only high at the low end and it gets worse as you buy bigger and bigger.
Edit check out: http://hotpads.com/search#lat=38.905594 ... pRentRatio
Zoom in a bit to see the heat map legend.
Of course you won't get a standalone home or townhouse for that price. But you also couldn't rent one for $1000. More like a few thousand? Its possible the rent/buy ratio is only high at the low end and it gets worse as you buy bigger and bigger.
Edit check out: http://hotpads.com/search#lat=38.905594 ... pRentRatio
Zoom in a bit to see the heat map legend.
Yes, expected rent of $1,000. Though, it is actually less because I get free parking, free cable/internet, and free utilities (well, none of it is free, but inlcuded in the price of the room). So, really it's more like $850-900.
I live in Arlington (when I say DC I mean the area), so any housing in DC would have to factor in the increased property and wage taxes that DC has (VA cities/counties have no wage tax). This really eliminates DC.
Limiting myself to Arlington and then limiting that to something close to a Metro stop only gives a couple options. I will research those options off of Hotpad. However, I am highly doubtful they are actually $200k. More than likely there is something seriously wrong with the condo or some other issue exists for it to be at $200k along the Metro line in Arlington, VA. It just doesn't happen.
I live in Arlington (when I say DC I mean the area), so any housing in DC would have to factor in the increased property and wage taxes that DC has (VA cities/counties have no wage tax). This really eliminates DC.
Limiting myself to Arlington and then limiting that to something close to a Metro stop only gives a couple options. I will research those options off of Hotpad. However, I am highly doubtful they are actually $200k. More than likely there is something seriously wrong with the condo or some other issue exists for it to be at $200k along the Metro line in Arlington, VA. It just doesn't happen.
To chime in with some numbers. With maintenance fees (HOA fees and property taxes) in the hundreds of dollars (and they only go up), add utilities, physical maintenance of the interior, insurance and the occasional assessment, and the savings over $1000 per month rent might be $500 per month. Times 12 is $6000, which is 3% on $200,000. Add the closing costs on the way in and the exit costs on the way out such as commissions, and it doesn’t seem to work well absent housing appreciation.
I lived in Arlington a long time ago, and the numbers didn’t make sense then either without substantial appreciation. Especially true if you wanted close Metro access (I lived in Roslyn so got the benefit of 2 lines in and out of the District).
More broadly, speaking to the thread topic, in urban areas the cost of ownership always seems above the cost of renting unless rents skyrocket without affecting the sales market, or the sales market appreciates considerably. Often, the only financial benefit of ownership is the ability to sell to someone else at a higher price.
I lived in Arlington a long time ago, and the numbers didn’t make sense then either without substantial appreciation. Especially true if you wanted close Metro access (I lived in Roslyn so got the benefit of 2 lines in and out of the District).
More broadly, speaking to the thread topic, in urban areas the cost of ownership always seems above the cost of renting unless rents skyrocket without affecting the sales market, or the sales market appreciates considerably. Often, the only financial benefit of ownership is the ability to sell to someone else at a higher price.