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Comment by etatoby | Hacker News Reader

It's very simple actually.

Consider, for brevity, a mortgage where the monthly or yearly payment, including taxes, is equal to the rent you would be paying for the same place.

Then live in the place and go about your life for several years, until the mortgage is paid for.

Option 1, you took the mortgage. Now you own a house and you are not due any more payments. You can keep living there and use the excess income for other purposes, or you can sell the house and upgrade, or whatever.

Option 2, you kept renting. You are still under a landlord, you are still due monthly payments, and you still don't own anything more that what you started with, after all those years.

In this very real sense, rent is wasted money.

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You do incur a lot more costs as a property owner than as a renter, which you should bear in mind.

Over the life of your average 20-25 year mortgage you should expect to have to replace numerous appliances, encounter a couple of catastrophic and unexpected issues (leaking roof, etc.), and after 10 years the decor will be outdated and shabby.

To get optimum resale value you will have to sink a lot of time/money into remodelling (the money you will likely recover, but not the time/effort), then you have the stress of trying to sell the place.

You are also bearing the risk of a downturn in the housing market, and could end up in negative equity.

As a renter you have greater flexibility, much greater certainty over your outgoings, etc.

All of those costs are simply amortized over the rental agreement. I'm not sure why people who rent seem to think landlords are appliance/maintenance charities.

Not necessarily. When the capital gains from simply sitting on a property are so great, I'm sure a lot of landlords are actually making a net loss on a renting operation, and don't care all that much.

Regardless, the point is that a lot of people see the mortgage repayments equalling the rent and don't think about the extra costs of ownership.

Landlords don't have infinite cash reserves. They still need to cover costs or minimize losses if they're betting on capital gains from property sale at some later date. Most renters pay for the maintenance and taxes of the property they live in, it's just not itemized for them and the costs are generally amortized and distributed among multiple tenants. Landlords are generally not charities, if you got lucky enough to find one who is, be very thankful.

You are correct that rent != mortgage and shouldn't be compared too close. Renting is a 100% loss, while mortgage is <100% depending on where you are in your repayment plan -- allowing the owner to recoup some of their housing costs after time.

After the mortgage is paid off, the renter still continues to loose 100% of their housing costs while the owner has only care and maintenance (and taxes) of the property to account for.

Rental prices are what the market will bear. These may or may not be strongly correlated to the landlord's ownership.

Two very relevant examples of when the "amortization" argument won't apply:

- a rising market in which the landlord bought a long time ago. Their purchase price was way below the area's current market value. So they can cover their expenses while you still pay less in rent than what a modern-day mortgage would be.

- a home buying market that's expecting continued pricing appreciation. Homeowners can (and will) rent out property at a loss with the expectation it'll be made up in a higher sale value years down the line. Whether or not this actually happens, of course, depends on their ability to accurately predict the future.

There's also the inverse case of declining markets, when landlords can end up over the heads financially and simply can't charge the rates they need to cover their mortgages, because the entire area has turned south.

There are very real financial risks to landlords. They can't just charge whatever they want. It really depends on the state and future of their market.

Correct. When rents get too far ahead of mortgages, people simply buy property instead.

In your first example, the landlord is amortizing expenses by charging rent above their ownership costs. It doesn't have to be at or higher than then current new mortgage rates.

The second example does happen. However, if the landlord's bet is wrong, and they have the runway to float the extra expenses for a while, they can simply wait for rents to rise and over decades make it back and begin amortizing then. Or they can sell and hope to make it back.

Property owners have many more financial options with their property than do renters.

Not at all. Rental costs are most strongly influenced by supply-and-demand of housing, whereas sale costs are mostly influenced by supply-and-demand of credit.

Not true, rental costs will go as high as possible until buying becomes more attractive. Buying costs are based on supply and demand of housing and credit. That's why it's more expensive to buy a house in San Francisco than in Kansas City, Missouri even if the credit markets are effectively the same in both cases.

Under normal market conditions, borrowing money becomes expensive as monetary supply decreases. However, very active central banking systems the last couple decades has changed the story on this.

I was waiting for someone to mention that. Home ownership is expensive and makes you inflexible. Also, consider property taxes (which will scale with inflation) and the fact home owners insurance is more expensive than renters.

And besides finance you need to consider if you want the responsibility of owning a home. Cutting the grass, shoveling snow, cleaning gutters, fixing things, painting, etc. It's a lot of work.

Owning makes sense for some people but there are a lot of benefits to not having to spend your life taking care of a building.

Taking care of the building is actually a lot of fun for some people!

No doubt and didn't mean that as a slight to people who take pleasure in maintaining their property. In fact I admire lovely landscaping and can see myself wanting to do that one day perhaps.

Another counter-point: when you buy a house, even while the mortgage isn't paid off, you can immediately start renting parts of it and end up in a situation where your mortgage payments are equaled or exceeded by your rental income. I also believe that this is taxed differently from normal income, especially so if you're renting rooms in a house you live in vs. owning rental property.

In the Bay Area at least, a single-bedroom apartment is easily $2000 a month. If you play your cards right, a single-family home in a desirable neighborhood for tech workers or others can be had for under $1m with 4 reasonably-sized bedrooms, a garage, and a yard. You can then rent out 2 of the bedrooms at $1400/month each and end up with your mortgage payment from your tenants each month. There are still maintenance costs and very significant property taxes (~single-tens of thousands per year on such a property), but you also build equity, which you can later sell (minus the mortgage interest). Depending on the mortgage, you could also use this situation to over-pay mortgage payments in order to pay off the property faster and reduce the amount spent on interest if that works out to a better investment opportunity than anything else you could do with the same money (any early payoff penalties included).

It does seem to me that renting is a mixture of paying for convenience and throwing money away, given the above scenario and considering how after 5 years, the home owner ends up with ~$150k in equity assuming the housing market stays flat (it doesn't in the Bay Area, e.g. http://www.paragon-re.com/3_Recessions_2_Bubbles_and_a_Baby ) , taxes, maintenance, and interest included, you should still come out ahead with the house. Once you also factor in that renting gets you 8-20%+ increases in rental price per year, while the house value appreciates on the low end of that range over the same amount of time (and also that you can raise the rent for your lodgers accordingly), you really start to see why houses in the Bay Area are attracting foreign investors and starting bidding wars above asking price for nothing-special properties.

Edit: lastly, the point I feel everyone neglects: unlike other investments, your first property has the additional advantage and value that you can live in it, so comparisons to other investments become quite different. Sure, you could take your down payment and put it into ETFs, and on paper the yearly average gains might look similar, but if you suddenly lose your job, the ETFs won't provide a place to sleep at night.

Landlording poses significant risks which you also must take into account. Thus if your net worth is 500k and all of it is in a rental unit, what happens if your renter floods the house or damages it in some other way?

What happens when your renter quits paying rent and starts legal proceedings based on a grievance, real or perceived? Now you cannot sell the house nor are you collecting rents.

Lastly see my other comments. Any investment that pays dividends gives you a place to sleep. The fact that you live in your investment is uniformly a downside, as it hinders liquidity. The fact that you can rent is again not relevant. Most financial investments begin to return a percentage immediately. Renting rooms is just less liquid and more risky than investing in a balanced portfolio.

I think it's important to not conflate being a landlord (investment and business) with buying a home to live in.

The Bay Area is but a single market and not representative of all markets. There are many more markets that haven't seen similar growth. The Bat Area is the exception.

If you are paying off a home and you lose your job, if you've leveraged yourself like many home buyers have then you might lose your home! Especially if you lose your job because the economy tanked and home prices have ranked leaving you underwater owing more than the home is worth. And then the bank takes the home back and your entire investment is wiped out. Look to 2009 for an example of this. And rents dropped significantly at that time.

The opportunity cost of tying up a solid down payment needs to be considered too. 200k down could be used in other places too.

I think most people who buy with 20% or less down don't understand how leveraged and dangerous their position is.

Lastly if buying a home was a good way to get rich then we'd have a whole lot more wealthy people.

It's not a bad thing at all and for certain people in certain positions it's a good thing. If you can buy with cash and have at least 40% of your bankroll left afterwards then yeah it makes sense. If you plan on staying in a place forever (laying down roots) and can afford 30% down and still have 2 years of mortgage payments in a cash savings account it makes sense.

I feel like a lot of people buy homes because they just think that's what you do. A home has meaning to a lot of people. But the opportunity costs and risks are large and the rewards are generally a wash with renting long term in most markets with the exception of places that get a 30 year boom or other rare real estate lottery scenarios.

There are ways to win but 10% down and a 30 year mortgage is rarely it.

This cannot be overstated. I think many of us see the mortgage, taxes, and insurance are less than rent and call it a win. We are vaguely aware of the money pit and getting out issues but they are hard to predict and easier to sweep under the rug. This conversation should always be accompanied with, "Assume $5k per year for maintenance," or some related concrete number based on condition and size, so we force ourselves to deal with a number instead of brushing it off. Also, real numbers for seller's closing costs.

Still, I think for most markets in the US anyway, buying does make economic sense if you plan to stay in it for several years and enjoy or don't mind taking care of a building, to use peer's phrase.

This calculator is excellent, btw: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...

The maths rarely work out the way you outlined:

If the mortgage is equal to the rent, then potential landlords are leaving money on the table. That rarely happens for long. Typically most landlords in competitive markets will leverage and take up interest-only mortgages to the extent were rent only barely covers interest and maintenance, and make most of their money on capital gains.

For most people a repayment mortgage and maintenance and appropriate insurance should end up more expensive than renting for that reason.

It is possible to come out financially on top by owning, not least if you're willing to do maintenance yourself etc., but it's not nearly as clear-cut.

I've done very well buying, basically out of luck because I happened to buy on a tracker mortgage briefly before the interest rates crashed after the financial crisis, but if I'd foreseen that change I'd have been filthy rich instead of just a bit better off on my mortgage. But a tracker mortgage adds risk, and it could just as well have gone the other way. I took that risk because I could afford it.

For me, the main economic benefit is that it is a hedge against unforeseen rapid changes in housing costs. If the area I live in suddenly gets drastically more popular than nearby areas, then I can still afford to live here. The cost is that I take a risk with respect to making it harder to move, but with a son in school locally that is not something I'd consider lightly anyway, and that if interest rates swings the wrong way I may still end up paying more overall.

The algorithm to make money as a landlord is pretty simple.

1) mortgage the property you wish to rent out

2) rent it out

3) wait until rents increase and earn profit (mortgages do not increase while rental rates do)

Not sure about point 3. Normally mortgage costs do increase - in line with interest rates. Even with a fixed-rate mortgage, there is usually a term for that rate, which is generally substantially less than the lifetime of the mortgage, often as little as two years, and rarely more than five. This is certainly the situation in the UK, do things work differently in the US?

Yes they do. The most popular mortgage here is a 30 year fixed rate.

In a great many housing markets, there are several kinds of mortgages. But basically the fall into two types, fixed and variable (go up and down with then current market rates) -- there's some hybrid loan products and some non ursury types, but this is basically how they break down.

The most popular kind of mortgage is one where the rate is "fixed" or locked at the then current market rate, and it won't change regardless of market forces. The great benefit of these kinds of mortgages is that the repayment terms operate without respect to any inflationary forces or changes in lending markets. Repayment is typically 15, 20 or 30 years.

Historically, and I intend this to mean for something like 99% of history where these types of mortgages have existed, this means that by the end of the loan period, the monetary amount per repayment period (say monthly) is the same, but it's actually cheaper per repayment period in then future real currency. In other words, in 30 years, you're paying for housing at nominal currency values from 30 years prior. Given historic inflation rates, at the end of a typical 30 year loan, this can be around 50% per payment period discount over then future real currency value.

My understanding is that in the U.K., a "fixed rate" mortgage is what we in the U.S. would probably call an "Adjustable Rate Mortgage" or ARM with a fixed 2 year rate (though I believe the closer approximation for an ARM in the U.K. is a discount rate mortgage).

There are also variable rate mortgages, in some markets those are the only types available, in others they exist to cover higher risk borrowers but in others they offer some kind of monetary benefit to the borrower. Depends.

While mortgage rates under such systems can increase, it's not generally normal for them to over decades. For example, in the U.K. over the last 30 years, it's been the general trend for the rates to decrease. (http://www.bankofengland.co.uk/boeapps/iadb/Repo.asp)

Even if the rates do increase at some slow rate, the average of the mortgage payment is still likely to become cheaper over decades than the then future rental price. Following general inflationary trends, rents in most markets have doubled in the past 30 years, while a person who took out a mortgage on a house 30 years ago will be paying much less or will have payed off the property by now and has no specific monthly housing costs.

>Consider, for brevity, a mortgage where the monthly or yearly payment, including taxes, is equal to the rent you would be paying for the same place.

That's hardly always true

And if it is, you should do the maths and consider if you can afford becoming a landlord, because it means there's potentially room for yields well above normal (but beware the likely incoming flood of other landlords once people realise).

The difference in costs are several factors between rent & mortgage+taxes+insurance+maintenance+appliances.

I have better places for moneys(some investment, some wasteful) and I get to move whenever I please... although, I have had to move when it didn't please me, too.

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