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

Buying totally makes sense if you can afford it. From the investment standpoint if you pay 20% down you get the appreciation on someone else's money. If you put down 20% and the price of the house goes up 20% then your equity doubled. The bank doesn't get any cut on the appreciation when you pay off the loan. This also doesn't factor in the portion of the loan you pay off during ownership further increasing equity. There are tons on other factors such as HOA, taxes, insurance, change in rental costs, maintenance.

One nice thing is that once you buy you are locked in at that monthly payment on your mortgage. It can never go up, if you do fixed rate, it can only go down if you refi when things are in your favor. With the stupid crazy rental cost increases where I live I could easily see rent doubling in the next 10 years which will make my mortgage payment look like a bargain in comparison.

The reality is the reason most people can't buy is they suck with money and planning. So many people have no ability to save even when they have the means. A lot of people could afford to go FHA and would be better off going this route but for whatever reason don't have the foresight or want the commitment to do so.

I understand that the stock market outperforms the housing market by leaps and bounds. That's not up for debate. What's up for debate is whether, if you are pretty certain you want to eventually settle down in a house, diverting some money from the stock market into a starter home or condo is a good idea. You could rent cheap, invest in the stock market and have $2 million liquid by age 40, but if the median house price went up to $2 million over the same period, nothing gained as far as your aspirations to own a home. The guy who bought may only have $500k in the stock market and $500k in home equity, but he gets to own a $2 million home and you don't unless you want to blow all your stock market money. I guess you could take $400k out of the stock market to use as 20% down on a $2 million house and then you'd still have $1.6 in the stock market ..... so maybe renting really is better. Wow.

Mr. Mojo Risin wrote:

I did some basic math with 2 scenarios:

(1) Put 20% down on house and make minimum payments every month

(2) Put the same 20% down into the money market and rent the same house

over a 10-yr timespan using the following assumptions:

* House value appreciates at 4%/yr (not compounded)

* Maintenance cost is 1% of value/yr

* HOA and home insurance increases at same rate as house value (4%)

* Fixed interest rate

* Market appreciates at 10% compounded

* Rent-to-own cost ratio is 0.6 (approx what it is in my area)

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.

* Maintenance cost is 1% of value/yr?

Surely you jest. I spend way more than $9500 on my house per year.

Mr. Mojo Risin wrote:

I did some basic math with 2 scenarios:

(1) Put 20% down on house and make minimum payments every month

(2) Put the same 20% down into the money market and rent the same house

over a 10-yr timespan using the following assumptions:

* House value appreciates at 4%/yr (not compounded)

* Maintenance cost is 1% of value/yr

* HOA and home insurance increases at same rate as house value (4%)

* Fixed interest rate

* Market appreciates at 10% compounded

* Rent-to-own cost ratio is 0.6 (approx what it is in my area)

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.

Yea, thats exactly how it works. But the main reason people don't just buy instead of renting is a lot of times because they cannot get a mortgage approved by the bank.

Put the rest of the money in REITS instead of a money market.

Getting Old wrote:

A few things I’d change:

- Your estimate of long run appreciation is high, historically real estate moves in line with inflation at 2-3% p.a.

Inflation and the time value of money make most housing values insignificant gains.

Mr. Mojo Risin wrote:

* Market appreciates at 10% compounded

False.l

Disciple of Flagpole wrote:

I see you've taken a liking to flagpoles teachings. BTW, if you're looking to buy a new car, you can't go wrong with a used Honda.

Nice...lol

Life owning you vs. You owning life....

Debtors prisons entrap people into a life mostly of obligation, from kids to mortgage to car leases. 100% overrated. Not mush of a dream is everyone wants it and everyone is stuck...

Or live free NOW and with a bunch of retirement money to roll big when you are done jobbing

In Econ we did a homework like this and everyone did a different scenario. We figured out the best way to do it was to buy the cheapest house that will serve your needs at first so you can pay it off quickly and live below your means for as long as possible. The reason it was so much better that way was because you paid much less interest. Then you could save the money each month after you paid it off and only move once you had enough to buy the next house in cash.

John Utah wrote:

For the record, I have tripled my initial equity investment on my home based on current value. Investing at 80% leverage is pretty awesome. That's to say nothing of the value i've received from owning and living in my house. Bought my house new so maintenance has been fairly negligible over that term. This is not theory. This is hard reality for me.

John Utah is the first to point out secret to the misleading calculation. You are comparing one investment with 5x leverage to another with no leverage. If you were to buy your stocks on margin, even at 3-1, you would be better off renting. Or if your house appreciated at 1%, or if you paid for the house in full, or in about a thousand other scenarios.

Nonetheless, you make out better with a house in a thousand scenarios, too. So if the price is right, I like to own.

JustAnotherRunner2001 wrote:

In Econ we did a homework like this and everyone did a different scenario. We figured out the best way to do it was to buy the cheapest house that will serve your needs ...

Well duh you should buy the chepeast house that serves your needs if you're going to buy a house.

The question is whether it is better to buy or rent in a market where you can serve your needs for much cheaper (in terms of monthly cost) but with no home equity.

Lets say your household can afford $3k/mo max and you live somewhere such that the choices are

A. Buy decent house at a cost of $5k/mo (not an option for you at the moment)

B. Buy tiny fixer-upper in unsafe neighborhood for $3k/mo

C. Rent house 1. for $3k/mo

If the extra $2k/mo you invest by going with option C grows enough compared to the price of the house you're renting, you can buy the house later and you never have to live in a dump like B.

Mr. Mojo Risin wrote:

C. Rent house 1.

Type-o. I meant house A.

Unless you live in Sydney Australia, never too late to buy a house, they have been saying its the boom for 20 yrs and the prices keep going up.

Add to that something called 'negative gearing' on buying investment properties has led most retirees with multiple properties subsidised by taxpayer

I Am Sam wrote:

Unless you live in Sydney Australia, never too late to buy a house, they have been saying its the boom for 20 yrs and the prices keep going up.

Add to that something called 'negative gearing' on buying investment properties has led most retirees with multiple properties subsidised by taxpayer

PS...your rent at $3K now is not always going to be less than the interest.

When we bought our first the rent was half what we paid as interest. That house is now worth 6 times the original purchase price. We are still in that one, but the interest on the same amount as purchased would be 25% that which we can rent it for- we still have to live somewhere.... but if we downsized to another property obviously that rental will quickly outstrip what we paid in interest.

Renting is for suckers, unless it is a short term situation.

Parents bought a house for 240k thirty years ago, now worth 1.1MM.

Multiple friends have become millionaires off of buying multiple houses and renting them out.

My home has gone up 15% in two years ... about to buy a second property. Renting is throwing money away.

I heard a news report this morning that some people in Dallas are literally being taxed out of their houses. Their home values have increased so much that they can no longer afford the property taxes and are being forced to sell and downsize.

This supports the "buy the cheapest house that fits your needs" theory. Too many people start by asking how much home they can afford...they should probably be asking how little home they can live with.

And yes, we Texans pay for not having a state income tax by paying high property taxes.

Owner of House wrote:* Maintenance cost is 1% of value/yr?

Surely you jest. I spend way more than $9500 on my house per year.

That's about right, according to most sources, and also my experience. Some years more, some years less. Maybe higher for older places (unless they are being let go), and a little less at first for newer places. But as a planning figure, setting aside 1% of the home value per year is about right. Plus or minus...

It can be different for some in Britain. I was talking to the cleaner in my office yesterday (had to work late) and she told me how she was looking forward to giving up work when she sold her house. I was surprised and asked how she would manage this, and she told me she would move into a council house (state provided house) with her 3 children, get housing benefit (rent paid by the state), tax credits, some other benefits, etc. - much cheaper than paying her mortgage as she would basically get free housing - all her rent paid. Obviously not a great long term goal but theres no time limit on this benefit. As I say, I was pretty shocked.