Comment by vidarh | Hacker News Reader

Comment by vidarh | Hacker News Reader

Parent Full thread

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.

Reply on news.ycombinator.com