If you live in a major city, does it make sense to rent versus buying

brofest wrote:

NYC, San Fran (this two palces are a big extreme) but even Chicago - between taxes, maintenance fees and upkeep of the place, does it make sense to rent forever? On top of all that we could be in a housing bubble in the first two places. I am kind of convinced you are better plowing money into equities every month instead of being beholden to a mortgage. With that said if my grandmother mysteriously gifted me $10M I would most definitely buy a NYC apartment

Thoughts?

"It depends". Would the monthly rent be less than the mortgage? If you rent instead of buy: do you invest that "saved" down payment and make $$ that way? If you buy, did you buy at a good time, in a good location?

I live in Denver and our market took off 3-4 years ago. I had a friend who bough half of a duplex for $400,000 on the outskirts of a trendy neighborhood in 2013. He and his wife lived there for 24 months, made no improvements to it, and sold for $580,000. Those aren't typical results, but surely they were better off than renting.

Right now I'm renting. I put money in equities every month so they pay some dividends and they appreciate in price. I take advantage of call tax efficient vehicles and reinvest everything.

I've crunched the math a bunch of ways - I'm not totally convinced over the long term that one is necessarily that much better than the other.

Using the math for your friend that is a 20.4% IRR in 24 months before taxes. Sure that is better than renting but what is the normal return - closer to 10%?

Cost averaging the Dow isn't that far off over a long enough horizon and you have way more liquidity. Also closing costs and legal fees associated with buying and selling also eat into that IRR.

Depends

brofest wrote:

Right now I'm renting. I put money in equities every month so they pay some dividends and they appreciate in price. I take advantage of call tax efficient vehicles and reinvest everything.

I've crunched the math a bunch of ways - I'm not totally convinced over the long term that one is necessarily that much better than the other.

Using the math for your friend that is a 20.4% IRR in 24 months before taxes. Sure that is better than renting but what is the normal return - closer to 10%?

Cost averaging the Dow isn't that far off over a long enough horizon and you have way more liquidity. Also closing costs and legal fees associated with buying and selling also eat into that IRR.

Added bonus for my friend (and his wife), that $180k is tax free. If you live in a primary residence for 2+ years the 1st $250k (per individual) is not taxed.

I'm just some guy on letsrun, but I think renting makes a lot of sense until you don't need so much mobility. I bought a condo in my mid-20s but a couple years later a girl and better job meant I wanted to move. Unlike my friend I was sitting on a loss (in 2010), not a huge profit.

Can't put a price on the freedom that comes with being able to move

brofest wrote:

Can't put a price on the freedom that comes with being able to move

Exactly, don't underestimate the value of this. When job & relationship convince you to stay in one place it'll be a different conversation.

One last point about my friend: they made 45% profit on $400k - most of that $400k belonged to the bank. If they had chosen to rent while investing their downpayment instead: let's call it a 20% downpayment on $400k = $80k. Even making 45% on $80k is only $36k (before taxes), instead they walked away with $180k tax free.

But obviously results will vary, they showed up in the right neighborhood at the right time. I think "sticking with freedom & mobility" makes sense until you don't need it. The fact that you're looking so closely at the pros/cons says good things about you, you'll be fine in the long run, good luck!

If you can afford to buy and do not plan on moving for at least 5 years, buying is way better than renting. Over the long term, the benefits are astounding. My dad bought into the Back Bay in Boston in the 80s for about $250k. He used market appreciation to move into nicer and larger condos. He ended up selling a 1000 sq ft condo for about $1.1 mil. The money he made on market appreciation and the tax benefits basically netted out all that he spent on mortgages, taxes and condo fees over 25 years. You would really have to hit it out of the ball park with equities to beat that renting. And remember, rent goes up. Mortgages stay the same and actually get eaten up by inflation.

The main problem with buying in a major metro is the presence of international buyers distorting the markets. But this is mostly limited to the more high end areas. If you are willing to pioneer a bit into the up and coming neighborhood, the payoff can be amazing over time.

The problem with up and coming is 1) commuting is often miserable 2) if you have kids the schools probably stink 3) I am not smart enough to guess the next cool neighborhood in Brooklyn. Even outside of Manhattan proper (which is kind of a messed up market) the nice places you have an easy commute in New Jersey and Connecticut are a fortune and you pay a ton in property taxes.

I'm still in my 20s but 5 years still seems like an awful long time - the only really grounding thing would be if I had kids (I don't). Also I love hearing stories about your dad. I also know people who buy a $1M put another couple hundred thousand into and still only sell it for $1M (happened to my friend in suburban New York).

Just sleep in your car. There is an entire subculture of employed, educated individuals who are choosing to do so while showering at gyms and saving the bulk of their earnings for housing or retirement. There is even a pro baseball player who did this, living in a van and parking at Walmart (google the article).

brofest wrote:

Right now I'm renting. I put money in equities every month so they pay some dividends and they appreciate in price. I take advantage of call tax efficient vehicles and reinvest everything.

I've crunched the math a bunch of ways - I'm not totally convinced over the long term that one is necessarily that much better than the other.

Using the math for your friend that is a 20.4% IRR in 24 months before taxes. Sure that is better than renting but what is the normal return - closer to 10%?

Cost averaging the Dow isn't that far off over a long enough horizon and you have way more liquidity. Also closing costs and legal fees associated with buying and selling also eat into that IRR.

Good quick analysis. Can you or anyone elaborate more on the thought process of just investing in a house for renting out to tenants, versus DCA into the index?

I start to think about the assured income of renting out, covering the mortgage/taxes, and then making that bit of cash flow each month. But then I think about the liquidity of going into equities... and I'm just not sure.

24 years old here sitting on almost 40k in savings collecting approx 0%, looking to make a move.