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In yet another series of calculations about rent vs. buy. I never can shake the feeling that I’m still getting a good deal by renting in my awesome neighborhood rather than buying in a shitty one.
But wait, there's more
This work by MattK is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International
I hate to be the naysayer, and there’s a lot of situations where renting makes sense (you don’t know if you’re going to stay in the area, you want to wait until the market stabalizes, you can’t be arsed with repairs or taxes or co-op boards, you’re thinking about having kids and moving to a bigger place anyway, etc etc), but I gotta object to the article.
Almost any time you crunch the “how much will I really be paying per month” numbers, rent will be cheaper than mortgage (if it isn’t then buy that sucker and rent it out right now!). The main draws of purchasing are the stability and appreciation.
Ignoring the rent-stabilized and rent-controlled anomalies (if you live in one of those, then stay there!), you have no control over what will happen to your rent at the end of your lease period (usually 1 or 2 years). If the owner decides to sell the place after that, you have to start over. If the owner decides to jack up the rent to the current market rate, you can either bend over and pay, or move somewhere else for the same rent. At any rate, your rent is probably going to rise by at least 2-3 per cent per year (hell, it’s assumed that your rent will increase – that’s one reason why a 2-year lease generally costs more per month than a 1-year lease). Assuming you’ve got a relatively benevolent and stable landlord who raises your rent by 2.5% per year, that means that over 20 years your rent increase will be roughly 25% in 10 years and 65% in 20 years. After 30 years, your rent has more than doubled (and every fellow renter you know will be begging to sublet your place for the relatively cheap rent when you retire to Florida). Again, this is assuming that your landlord doesn’t decide to sell the building or bring your rent more in line with the market.
Contrast that with the fellow in the example who purchases a home today. At the end of 30 years, he will have just made his final payment, which is the same amount as the first payment. Furthermore, he will now own the home and can sell it for a boatload of money. I think it’s also safe to say that, 20 years down the line, his mortgage payment will be considerably less than the market rental rate. Also, he’s in no danger of getting screwed by his landlord.
As a added bonus, the property will have appreciated considerably during that time – let’s be modest and assume that it’s worth 25% more than he paid for it. If it’s the $750k “cheap” house in the given examples, then that gives our fellow a house worth $937k – take away realtors fees and closing costs from that (assuming realtors haven’t been cleansed from the earth at this point) and he’s left with about $870k to retire in Florida with. As of right now you can tax-deduct $250k of the appreciation of your residence (or $500k for a married couple), and since he bought it for $750k he’s well within that threshold – so he ends up with $870k of tax-free money (again, assuming only a 25% increase in home value over 30 years, which is probably overly conservative). He might sell the place, or he might rent it out (hopefully for more than the cost of his retirement home – given that the example house is in Silicon Valley that’s probably possible).
Ah, but let’s not forget about the 20% down payment that didn’t get spent! Assuming the fellow invests it in the Treasury Bond mentioned in the article, he’s going to multiply it about 2.5-fold, for about $375k (tax free!) after his 30 years are up. Or, if he takes a somewhat more aggressive investing strategy and averages 6%, he could get it up to about $850k – incidentally about the same amount as the fellow who bought the house – of course, he’ll be taxed on all the money, plus don’t forget he’s paying considerably more per month for rent than the homeowner, so it’s not really the same thing, but then again perhaps he’ll be a great investor and end up averaging 10% (not my experience, but then again I’m not a great investor).
So, I guess the moral of the story is, rent if you:
–Have the discipline to save money and not pull it out for frivolities like vacation or sending your kids to college
–Are confident you can get a good (at least 6% but more like 10%) consistent return on your money
–Are very confident in the long-term prospects of your rent situation
And buy if you:
–Don’t fit into all of the above criteria
That being said, it’s a crappy time to buy right now – I would give everything a little time to stabalize. Stay where you are and enjoy your backyard.
–Nate
I’ve read stuff like this before that says that the rate of return in the market is better in the long run than a house but the problem isn’t the money you could potentially win or loose; it’s that a person needs security as they get older. Most sources of smart personal finance info I know say that the best scenario is to hedge against the worst case scenario, not to put your eggs in one basket – which includes property – and have a balanced portfolio with stocks, bonds, T-Bills, 401(k), and no debt except to buy real estate as soon as possible so you pay rent for the least amount of time. An idyllic idea but not a reality in nyc, london, tokyo, san fran or anywhere else we’d care to live!