Owning a house versus renting: the math seems unbelievable, makes me skeptical

0.6 rent to own cost ratio? How is that calculated? I purchased a home 6 years ago and now rent it out. My monthly payments are ~$1200 including escrow, and currently charge $1750 for rent. Am I missing something?

The 10% compounding appreciation is bogus. That was the baby boomer life until 2008. Then they enjoyed a little bit of denial again until 2011. Now you really need to know your market or else you can't count on appreciation.

Having a home to call your own with a wife and children is a precious, precious thing.

But that wouldn't concern you, Jamin.

Mr. Mojo Risin wrote:

What I found was startling ... You end up with almost twice as much money if you own. It makes no sense because if this were true then why would apartments even exist if they could be converted to condos and everyone would make money? It's like the goose that keeps laying golden eggs.

As others have pointed out, there are a number of potential issues with the assumptions in your model, but there are a lot of reasonable models that come out with really good numbers for ownership. So to address this question: the major reason for a rental market is transaction costs. Buying and selling real estate is very expensive, so it isn't worth it for people who are young and mobile. Poor people can't buy because lenders demand down payments; they need a certain amount of equity to protect them from housing price fluctuations and to cover the cost of foreclosing and reselling the house if the lender defaults. If there were no transaction costs, then lenders wouldn't need any more security than the house itself, even with zero equity, so then everyone would probably buy.

A corollary to your question is why isn't everyone a landlord, because it seems like renting out properties would be super profitable. As it turns out, it isn't. Partly because of transaction costs (hard to fill apartments, and hard to evict non-paying tenants) and partly because of agency costs (renters take terrible care of their homes because they don't own them).

Real estate decisions and the accompanying math are highly localized, or should be anyway. In coastal and several large city markets, real estate investments tend to do very well over the long term. But I should stress "long term." Unless you are an experienced flipper or RE professional/investor, any real estate purchase should be made with the view to living in the property for at least 5 years.

Buying real estate certainly has its benefits. Everyone needs a place to live and paying off your own mortgage is often better than paying off someone else's by renting. In SoCal, we bought our house in 2012 and by 2018 the house has virtually doubled in value. We have received several unsolicited, all cash, no contingency offers recently. But again, it all depends on the local market.

+1 on this

To emphasize, have you forgotten the 2008 crash? Housing prices don't have to go up all the time - it's a big risk to assume so. From my own experience, the property I'm living in now is basically flat to when I purchased it in 2004. Pushes that 5 - 7 year break-even a little further out :-)

As an aside, I went super-aggressive and got an interest only mortgage. The only smart thing I've ever done is that I actually invested the difference (between interest only and traditional). Basically, I bet against the housing market, and it's worked out much better for me. Lucky!

bruh but what does peter schiff think?

asdfasdfasd wrote:

I live in SF and don't make much money (I'm a researcher but not a professor yet). I pay $1600/mo in a shared apartment. The cheapest apartment on the market is probably $800,000. I don't have enough for a down payment, and if I did I wouldn't make enough money to pay the mortgage. It might work out if I shared the purchased apartment with someone (sublet it to a friend), but then I have to deal with an eviction if there's a problem, I can't just move out of the house that I own.

I lived in the SF Bay area for a while too. Housing is a huge issue there.

We own a house worth about $1M (not USD), with a mortgage for about half that. Between condo fees, property tax, insurance, mortgage interest and property management we pay about $3400 a month, and we charge rent at $3800. Allowing for other maintenance costs, it’s a roughly break even situation, financially. So, in our market, with our type of property, your equity in the house needs to be about half it’s value to start to turn a profit as a rental investment property. It’s a lot of money to tie up for small return.

sit and kick wrote:

apartments permit transitional housing/moves which are especially important early in a career

easy to end up in a loss scenario if you need to move within 2-3 yrs

Not only that, but the amount of extra money you can make from job hopping when you're not tied down could give you a bigger return than locking yourself into one geographic area with limited opportunities.

i was house poor. sold.

- cost to commute $300 per month. had to purchase further from city/ gas , transit pas

- heating/electric $275

- yard , landscaping ..... $150

- garbage, utility $100

- home tax $ 3000 per year

- mortgage $1600 per month

- home insurance $700 per year

rent ....

$1500, walk to work.

Semenyagoat wrote:

The value of a house goes down like that of a car because it gets older. You also need to invest into it. In some Locations value might Go up for some time. Your calculations are stupid.

[quote]Semenyagoat wrote:

I hope you are trolling, because you are completely wrong.

Home values DO NOT depreciate like a car. They appreciate. Home values always go up in the long term, unless it is a blighted area or toxic waste dump. Home values may dip during a short term crash like we had ten years ago, but they will come back. Look at historical home values. In the long term you really can't loose with real estate.

Appreciation is the best thing about owning. The 2nd best is that the Principal portion of you mortgage payment is like paying yourself, you are converting that money into equity.

For most Americans, they would not be able to retire if they had not been home owners.

Technically the land appreciates, while the structure itself does in fact depreciate. In most markets the land just appreciates faster than the structure depreciates. This is the reason that in many high cost coastal markets a vacant lot is worth more than an identical lot with an old 1970s ranch on it. If you buy the lot with the old house on it, you have to pay to knock it down before you can build. The structure has fully depreciated to the point where it is worthless, it is just sitting on some valuable property.

Such a PITI wrote:

I hope you are trolling, because you are completely wrong.

Home values DO NOT depreciate like a car. They appreciate.

No, he's right. You need to account for (1) how much of the appreciation you think you're getting is actually from the land, not the house, and (2) how much you spend on maintenance. If you remove the appreciation of the land, then whatever is left over on the house will not come close to covering how much you've spent to keep your house standing.

With the right assumptions you can make the numbers say whatever you want them to say. Imagine that.

Ignoring the emotional side of ownership, I think home wins financially in the long-term because you can leverage more. I bought a home for 1M. I borrowed 800k to do so. It's now worth 2M. Yes, I pay interest on the loan, but E*Trade will not lend me 800k to invest in the market, even if the market might offer better returns due to greater diversification.

That's how I see it anyway.

no YOURE hilarious wrote:

The whole reason apartments exist is because some people don't have extra cash to use for a down payment or a large investment into the market.

Not true. When I relocated for a new job, I rented because I wanted to test the waters with my new employer to see if was actually a place I wanted to work for more than a year. Sign a lease for a year, see if the job sucks or not, and just quit and move out without all the drama of selling, negotiating, fixing it, inspections, etc. Plus, if the market is poor.....

And. if you can rent a place for $600 a month like I did on a salary of over $100K, you can still bank a lot of money, have great flexibility and time to relax without doing snow removal, lawn care and maintenance on your appliances, furnace, hot water heater, etc, which would cost you loads of cash if they break. With apartments, that hassle is taken care of.

I paid off my mortgage a few years ago and now own my home. It's the best feeling ever. The best investment you can make, in my opinion, is paying off a house.

When you pay off your house you don’t have any future rent or mortgage payments. To make things even you need to find the PV of All future rent payments under the rent scenario. That’s maybe 30+ years of rent for an equivalent square footage with the rental rate increasing at a greater rate than inflation, which has been much greater than CPI in many areas.