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

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.

I forgot to mention that the 0.4 saved monthly from renting at a rent-to-own ratio of 0.6 would be invested in the market. That was part of my my analysis.

One thing I didn't factor in was the time to save up for a down payment. If it takes 5 years to save up $100k then the renter would be investing $20k at year 1, another $20k at year 2, etc., and would be starting with $134k.

Property taxes?

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.

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

Analyses may vary depending on location. In a place like Silicon Valley, it may be better to rent as opposed to sinking almost all of one's savings in a very expensive home. And since most people in Silicon Valley have relatively high incomes, people can put considerable amounts away to invest. In other words, it may make sense to have $2M plus in liquid investments as a person in their early 30's - very doable in Silicon Valley (I have seen it happen) - rather than have all of one's assets tied up in real estate.

I found nothing better than to buy a home well within your means - in my case it meant an 800k purchase prices as opposed to $.3-1.4M - I don't live in California so 800k still buys quite a bit of home in my area - and to do it on a 15 year mortgage. I am in my 50's with no mortgage and it changes the way I look at finances. Over 70 percent of what I make today goes to investment, and my goal is to retire with no diminution in standard of living (and I live well now). I don't want to have to travel, spoil grandchildren, and so on, worrying about money. I am not in the least religious like this guy Dave Ramsay, but I like his aversion to debt. I have kept Ramsay in my head as I only buy low mileage used cars with someone else absorbing the depreciation - purchased for 20k or under - and to limit credit card use (notwithstanding his rules, I use them to buy gas, rent cars, and stay in hotels). In any event, it never hurts to have personal financial discipline, and that includes approaching what kind of house to buy.

Are you taking into account transaction fees upon purchase and sale? Property taxes? Post a spreadsheet or something.

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.

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.

In the scenario you mention, you DO make more money if you buy the house, BUT that is only because you are deciding to rent the same house. If you rented a place initially for the same amount of money that your mortgage would be, you COULD have a different result. It takes a LOT to maintain a house, and then you have to pay all utilities too. You can invest a lot of money if you rent if you really want to. I'm all for buying, but you can end up financially free by renting too...you just have to make sure you invest enough so that you can always take care of rent.

The main difference between renting and owning is building equity. When you rent, every dollar spent on rent is a dollar you will never see again. So, a conservative rent of $1,500 over 30 years is $540,000.00 that you will never see again. And after 30 years, you will still be throwing money away on rent. If you buy and stay, you will generally get all your money spent on principle, interest, taxes and maintenance (with the possibility of burning your mortgage and only paying taxes and maintenance through retirement). And if you are in the right market, you can possibly get a lot more. But the main economic argument for renting is that you can do better by putting your money in the market. The problem with that argument is that people generally do not budget that way. People who rent will save what they think is necessary to fund a decent retirement and spend the rest on vacations, cars, restaurants, etc. People do not sit in a 2000 sq ft rental and think "I would normally have to pay $X every month for mortgage, taxes and maintenance, but only spend $Y on rent; therefore, I need to be sure that I am investing $X-$Y every month."

Of course, all bets are off if you have to move frequently or chose the cool up and coming neighborhood and end up spending $25k a year for private school for your kids.

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.

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.

We're selling, and our house has appraised at 40,000 more than what we bought it for, though to be honest we've put about 10k in it and bought two new heat and air units worth about 6,000 each.

Is your analysis based on moving to the Ukraine?

Few things missing in your analysis:

- Property taxes, normal 1-2% of assessed value (though highly variable by municipality)

- Transaction costs, on the front end (e.g. mortgage origination fees) which are not insignificant

- Transaction costs on the backend, especially the 6% broker commission which is on the appreciated value of the home

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.

- Not sure why your not compounding your appreciation, are you also doing this for your stock market returns for rent model? If so that would be a huge penalty against renting

In the typical real estate market, during a historically average period for both the real estate and stock markets, your breakeven on owning is 5-7 years. Your trading liquidity for a hedge against rising cost of living. You not getting rich off of real estate unless you are buying below market and selling at or above, or using the properties as a means of converting labor to income (aka sweat equity).

You left out 75% of the costs you would incur in owning a house

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

And even if you don't move to a new geographic region, you'll probably want to change your housing situation as you income and family situation change. The house I can afford to buy as a resident probably isn't going to be the house I want to live in as an attending physician, and the house I buy as a single guy won't meet my needs once I'm married with kids.

I have owned two houses .. current one is paid off and has never had any ... zero... zip increase in the market value. I even put in a pool in the house in Phoenix, held it for 10 years and still made nothing. Current house, only worth what I paid for it.

Bottom line... it all depends on whether there is someone who wants to buy your house.

I recently got to the 20% point but not in a rush to buy. Where do I invent the extra if already on track with retirement investing?

Best place to put the 20% to earn market gains but low risk and able to easily cash out for down payment?

Found this calculator for anyone interested:

nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Makes me feel less bad about renting.

If you can't afford the down payment (this is a big, big deal where I live. My down payment was $300,000. No, that's not a typo) then you can't buy a house. Buying a house ties you to a particular location. If you think you might move in the next few years then buying a house might not be the right choice.

Buying a house ties up your money in a non-liquid asset. Putting it into the stock market might yield less money over the short or long run, but in an emergency you can access the cash.

Renting may let you afford a bigger house or a house in a nicer neighborhood than you could afford otherwise.