Renting is Throwing Money Away, Right? (2015)

These articles always ignore leverage.

Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment. To use the example in the article, if your investment doubled between 2009 and now, your $200k in a $1M home just became 1.2M. 6x growth beats out 3x growth in stocks in the same period.

Sure, you can be leveraged in other investments but (1) your interest won't be tax deductible, (2) your interest rates won't be nearly as low, and most importantly (3) you won't be able to borrow with no recourse (depends on the state law, but "no recourse" means your downside on a primary residence is limited to the equity in the home. If you default on the loan they can't come after your other assets.)

Does it mean renting is a bad idea? No. There are plenty of reasons it might make financial sense to rent. But articles like these should accurately discuss the financial upside of buying.

The “pro renting” crowd has a lot of consistent falacies in arguments:

- Financial calculations ignore the leveraged nature of buying a home. Small increases in property value are multipled relative to your initial investment.

- Calculations also often assume someone just pays the minimum mortgage payment for the full term of the loan. Even small additional principal payments (which most mortgages allow without penalty) drastically reduces the duration of the loan and interest paid.

- “I don’t want to pay those high real estate taxes.” Renters still pay the same real estate taxes, it’s just baked into the rent and can’t be deducted from taxes.

- The tax system is very biased in a favor of home ownership. You basically get penalized at tax time if you don’t own your home as expenses both owners and renters “pay” (property taxes, mortgage interest) are only deductible for the property owner. This can make a huge difference. A renter paying $2000 a month in “after tax” money is spending a lot more than a home owner spending $2000 a month but paying the interest / propert tax portion of that 2k with pre-tax money!

- Capital gains from home ownership are also tax free (up to half a million in gains for couples).

There's another intangible benefit to owning if you know you're going to stay in the area long term -- you can't be forced out of your home.

I was forced out of one home I rented due to owner move-in, which led to a stressful 30 days of trying to find a new apartment in a tight housing market. We managed to find a place outside of the city, but close enough to transit for a manageable commute. And rent was about the same, though for an apartment half the size.

And then, as housing prices continued to rise, that apartment raised the rent 25%. Fortunately, they gave us 60 days notice, so we started looking around for an affordable home to purchase (even farther away, but still near transit), and found one where the PITI+HOA was less than the new rent would have been.

Rents have continued to rise (as have home prices, our home is now worth about twice what we paid for it 5 years ago, this market doesn't seem sustainable, but hopefully after the next crash we won't be underwater on the mortgage).

The strictly financial part of the calculation is important, but personal cost of volatility may be even more important for those in a position to choose to rent or buy. I suggest it should also give pause to those who plan to build extensive social capital somewhere long term, but continue to rent.

I view real estate ownership as a personal hedge. As we've seen in San Francisco from displacement of those in less lucrative sectors, rent that floats exposes you directly to the prosperity -- and inflation -- of all sectors in a region: in the future, that sector may not be your own. Property taxes expose you to this effect, but it is attenuated in magnitude (doubly so by California's Prop 13). The inflation of rents rendering your employment in a sector in a place obsolete is not so important if you can pick up and move, but it can prove socially expensive (and not priced in) if you have roots, are a contributor to civil society and/or have children. I feel badly for lifetime-renters-by-necessity those whose social capital is wiped out by these fluctuations without any compensation.

As I see it, buying reduces the cross section of your outgoing flows to more radical local fluctuations, binding it to fixed or more moderate internationally-floating indicators (like ten-year treasuries, or LIBOR).

Notably, no major family outgoing flow is so volatile: groceries have similar costs nationwide. Many other goods are globalized, have substitute options, and little friction: housing stands out as the big exception.

I also suggest that marriage-house-children is not mere tradition, though it is that too. It is also a recognition of the increases in cost of volatility to the family unit: finding mutual job opportunities, and then the complexity of transplanting a child.

I recently did the math on this myself, I just sold my Condo and right now I am renting while looking for a house. I have all cash so I can ignore interest rates which makes it easier, I also have a pretty good wealth manager so I have a pretty good idea of what my return will be if I invest the money in stocks and bonds and rent rather than buying a house. For me, renting comes out ahead strictly looking at the dollars over time, by a pretty good margin.

But, guess what, I am buying a house anyway for one very simple reason. I want to own my house and be able to do whatever I want. I am getting a place with a big basement and it will be my dream lab, with all my computers, 3D printer, test equipment, soldering station and so on. I could never set something like that up in an apartment. To me that is more important than the money.

This same principal can be applied to buying or leasing a car. When I first graduated college and had my first "adult" job I wanted to purchase my first car. The general mantra I heard was "Leasing is throwing money away". I ended up financing my first car, (used) thinking I was making the correct financial decision.

The problem with someone fresh out of college buying or financing a car is they really have no idea what they're next 3-5 years have in store (change in cities, jobs, etc).

My friends who went the leasing option were making considerably lower monthly payments and were able to move on to another car at the end of the year with no difficulty, or could move to another city without carrying a multi-year financial obligation.

I ended up moving to Europe before I had even completely paid off the car and had to sell it at a loss.

I wish I could go back and simply lease a car for my first few years out of school before I figured out where my career would take me.

A good way of looking at the “hidden cost” of buying your home- when you get a mortgage to buy a house, you’ve simply shifted from renting your home to renting the money used to buy your home.

Since your house and that cash are (sorta definitionally) worth the same amount, which you do makes less of a difference than you would think. (And no, it doesn’t matter that the mortgage money is “rent to own”- as the article points out, a home-renter could have just as easily been putting that extra cost into stocks the whole time.)

I guess the main determinant should be mobility. If you are 23 and you dont have a career yet, want to go to a law or medical school, do your phd or whatever then chances are next 5-10 years you will be moving a lot and have no idea where you will end up settling down. In such cases having had committed to such an investment is a bad idea. But if you are 30 years old registered nurse married to your high school sweetheart who is a teacher and dont plan moving anywhere then buying is absolutely a safer bet. I dont know about other parts of the country but here most of the good areas of North East region mortgage is cheaper than rent. Most people buy a 4 bed 2 bath house and sublet the top floor or something making sometimes more than half of their mortgage payments from subletting. I think its an awesome investment if you purchase it at the bottom of the market, not on the peak, even if you buy at the peak over the course of 30 years you will end up having made a good investment unless your town goes to shit for some reason. And just like any market, housing markets goes through ups and downs and since its such a long term investment you are better off holding off 5-10 years to wait for the lows of the market meanwhile saving up for the down payment.

Mortgage interest tax deduction, especially for high-tax-bracket people, is often a major factor in calculating returns and should not be looked over for any 'opportunity cost' based arguments. It's also worth noting that most people, compared to a mortgage, don't have access to similar financing at similar interest rates for any other kind of investment/venture and have no hope of breaking out of a month-to-month living situation. 15 years may seem long, but eventually owning a home & not paying rent during retirement, having an asset to borrow against for a child's college or a health emergency, is a decent prospect for most people.

Since housing is an emotional subject, let's try to argue by analogy.

I regularly buy lots of dairy products. Milk, yogurt, cheese. Why shouldn't I save some money and buy myself a cow instead? That way, I could satisfy all my dairy needs, and maybe even have some extra milk to sell to my neighbors. No more making the dairy farmers rich at my expense.

Now, assume that I sell my cow ten years later. And let's say that cattle prices grow 3% annually. (As we all know, cattle prices can only go up.) Will my cow investment yield me a 3% annual profit, given that my cow has gotten older and I must have made significant investments to feed it and keep it healthy?

Home buyers often overlook the cost of selling their home when considering if renting is cheaper. That is 6% in realtors fees and another 2-3% in closing costs. Renting is a great deal if you are not going to live somewhere for 5+ years before moving

As a technologist who is a part-time real estate investor, this article, like many others, fails to take into account the context of the situations that people can face. There are plenty of situations where buying is better than renting, and plenty where renting is better than buying.

One major concept that breaks the traditional buy/rent arguments is that today we have the internet which creates a new type of opportunity: to work in a different city than where the company is physically located. This greatly changes the dynamic and enables new types of opportunities. Want to see the world? Then don't buy because you could live in 10 countries over 10 years for the same price (or maybe even cheaper depending on where you would have bought).

Point being, there are times where buying is the responsible decision, but renting can also at times be the smart decision. Don't let articles like this influence your decision. Make a spreadsheet, really dig into what are the pros/cons. I've helped many friends do this, and sometimes buying was the right decision, and sometimes it wasn't. What are your life goals? What are your investment goals? There are so many variables at play.

Do what's best for you. I rented for 12 years before I bought. If I had bought earlier, I would have been less likely to move...moving helped me advance my career more quickly but meant I rented longer. In the long run that was the right thing for me as I was able to buy a bigger place in a more expensive area (NYC vs Dallas). For others that might not have been important or necessary. Just because one person has a negative experience doesn't mean that you will to. The responsible thing to do is to understand what _you want_ and make sure you're making the right decisions to make that happen. Buy or rent based on that, not the other way around!!!

As a commitment averse 30-something perpetual renter I've always felt like I was "throwing money away" by renting - but having breakages, plumping, electricity, etc be someone else's problem was how I often justified it to myself. While I'm sure, like anything, the decision to rent or own is highly situational this article still gives me some hope that I haven't made every wrong decision when it comes to "build or buy".

In the housing market there is a useless but with big influence 3rd party that became so ordinary that nobody questions it anymore.

In eastern europe after comunist regimes fall houses were very cheap and nobody needed a loan to buy one, they could collect the money in just a few years, this has changed after eu banking entered the markets and loaning become something ordinary to buy a house just like in the west this lead to an average of 10x increase in prices.

If banks will be allowed only to loan money to businesses then the supply and demand alone will adjust the housing market to real buying power, this will also lead to more money being pumped into economy instead of keeping artifical economic bubbles.

Walls became the new gold for "investment" banks to keep their money, this mechanism is enforced through artifical goverment scarcity and bank loaning.

Another factor I found missing from this article was the inflation of rent prices over time. Back when I did my own rent vs. buy analysis, I found mostly as the author did. However, the key argument in favour of buying ended up being that rent increases seem to far-exceed inflation.

I could only find US trends for the period of 1940-2000 but, over that time, rents increased 5.32% per year compared to inflation of approx. 3.5% per year.

What this means is that if I don't buy a house now, and trends continue, the space that I was renting last year for $1500/mo will cost approx. $5,600/mo in real dollars in 2042 (a 25-year projection) or $2,360/mo in inflation-adjusted dollars.

This is just one more factor in a complex decision but it seems important to the cost-benefit analysis.

I implore you to find the data and run the numbers yourself if you're trying to decide but my prior research did not paint a good picture for life-long renters.

Edit: It's worth acknowledging that rent protections exist and can keep rents steady for some. However, these usually require that a tenant never moves which is an assumption the author made a good argument against.

The New York Times has a fairly detailed rent-vs-buy calculator that makes it easy to see the effects of changing some of the variables the author talks about in the article.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...

I own because I like knowing I can modify my living space however I like. I took out a bedroom to make a home theater, could never do that renting. There are definitely advantages to home ownership psychologically that can’t be defined in a dollar figure.

His main point though was that renting isn’t throwing money away. I say if renting is the better option for you then who cares?

There are a lot of short term periods where renting certainly makes more sense than buying. However over a lifetime it’s extremely hard to make the numbers work out if you only ever rent vs someone that conservatively owns.

That of course also ignores all the non-financial benefits of owning. Many people just want to own their little part of the world and make it fit just for them—decor, style, renovation, landscaping, etc. and you just can’t get that from renting. Being a lifetime renter is just not a lifestyle most people want—-hence the aspirational nature of home ownership.

Renting or owning from a purely financial point of view is a relatively straightforward problem and is answered quite nicely with the NY Times Rent vs. Buy calculator (with the caveat that the calculator has not been updated to reflect the new tax laws).

That being said, the biggest reasoning mistakes I run across are:

1. "You pay the landlords expenses plus some profit." Not true. The rental market is just that - a market that fluctuates with supply and demand. There are plenty of landlords who are losing money on their rental property.

2. "Once I have paid off my house I'm done paying for housing." Not true - you still have taxes, insurance, and maintenance whose costs will most likely increase over time.

3. Forgetting about the opportunity costs. Great - you paid off your mortgage. Now you have $500k in equity. Guess what - if you took that $500k and put it in a 5 year treasury you can earn a risk free 3% or 15k/year on that money. Better yet stick it in a broad based index fund and you will grow 6% albeit with more risk. That's your opportunity cost of your equity.

Overall this is such an emotional subject for most. I'm personally glad to see some push-back on the "buying is always better" argument because its been dogma for some time.

Edit: fixed typo

He's assuming that the rent stays constant.

A lot of what he says is correct, but this is a critical point. Buy, with a standard compound rate mortgage, and you essentially freeze your rental payment. Yes, for the first few years of the mortgage you won't pay back much equity - but you can compensate for that if you overpay your mortgage (make sure terms and conditions allow you to do this without penalty), say by the amount your rent would have otherwise increased. Do that, and you can make quite a dramatic difference in the cost, and the duration of the mortgage...further reducing your rent.

Broadly, house prices track the money supply growth, and money supply growth is approximately 2x a decade in the USA. Unless you're moving a lot, it is usually better to buy if you can.

> You hold a 5 percent fixed-rate 30-year mortgage

Wait, are you Americans paying 5% interest on mortgage, whitout even counting insurance? For real?!

Edit: Having looked at other comments in this thread, it looks like interest are taxe-deductible, which makes it more affordable, but that's also really weird: it means the gouvernment subsidizes financial institutions to charge American consumers a lot more than the normal prize …

(I wrote the payment plans calculator for asset based finances for a major financial services company, so I'm not unversed in the matter)

Having been a renter for a long time and a home owner for the last decade, I can tell you that the latter is far better than the former.

- The best thing: No Landlord! to tell you what you can or cannot do, fight over for repairs, or be at the whim of eviction (this will depend on the jurisdiction, but in most cases a landlord that wants you out e.g. to go live there herself will manage to evict you)

- Investing always carries risk. Any investor will tell you that the very best thing you can invest in is the thing that you enjoy, as that is always a gain no matter what the financial outcomes of the investment. That said, you should match your wants to your means. I would say go for a payment plan you are fairly guaranteed to be able to make, rather than gambling on getting substantially more income in the future than you are making now. You can do this by selecting a conservative formula (went for a fixed payment, variable capped run-time myself)

- I don't see why the author feels the need to be so derogatory to his readers with his frankly childish 'special snowflake' diatribes

Reminds me of a Harvard Daily Stat from 2012, inspired by Zillow data, which comes to a different conclusion. The Zillow data was based on a larger sample size as compared to the article above, which I felt was too qualitative.

The Daily Stat: After Just a Few Years, Home Ownership Beats Renting[1]

In three-quarters of American towns and cities, it takes 3 years or less for a homebuyer to begin seeing savings over the cost of renting, according to a CNN report on data from Zillow[2].

Factoring in such costs as mortgages, rents, down payments, commissions, taxes, and maintenance, Zillow calculates that the "breakeven horizon" is as low as two years in some areas. But in New York City, which has some of the nation's highest rents, it still takes more than a decade before ownership makes more financial sense than renting.

[1] Harvard Daily Stat, 9/12/2012 [2] http://money.cnn.com/gallery/real_estate/2012/09/06/buy-rent...

We've been living in an era of low inflation for quite some time. When inflation becomes more of a real issue again, renting is really going to look like a poor decision next to buying as rents skyrocket. What if this happens as you're getting ready to retire?

The calculations in the article assume PMI (not putting 20% down) and making minimum payments. Purchasing a dwelling this way adds risk and expense. It's better to wait until you have at least 20% to put down (AND 6 months of living expenses saved up), as you then avoid PMI and prove to yourself that you actually have the means to take on the purchase of a dwelling. Get the 30 year mortgage, but plan on paying it off in 10 - 15 years. Its also better to wait until the market is a buyers market.

Since purchasing a home, I've always paid less than I would have if I rented. Its now paid off and I don't have to worry about it. Freedom feels really good.

To me, renting vs. buying is a bit like AWS vs. own bare metal in a rack.

With AWS, you can have 1G RAM or 10000G RAM or anything in between, you can move between data centers without much trouble, and you can cancel virtually anytime. Once you spent $$$ on your own metal, you're stuck with it.

Renting gives so much flexibility, and even if it's a bit more expensive in the long run, flexibility pays. Of course, there are scenarios when you don't want to rent e.g. having kids or elderly parents living together.

Two things this also ignores that for me work out in favor of renting right now (in Seattle).

1) The options for renting and owning are not the same. We have a ~1300ft apartment that is just a bit too big for us; it is on the 4th floor and has an expansive view and southern exposure, which is rather important for me. There's transit access and groceries/coffee/etc. walking distance. Condos in Seattle are few, esp. in new buildings. Most of the houses are far from stuff, are by definition on street level so even under ideal conditions few have lots of air and view, and vast majority are too big... So, I'm going to be paying extra for sqft we won't use (we already have unused, unfurnished corners in 1300sqft), the yard that for me is a net negative (maintenance), and loss of quality in other dimensions (relatively worse view and light). If my apartment was a condo, I'd seriously consider buying it. As is, it's hard to find a house that is not much more expensive than rent while ALSO being worse.

2) I haven't done the math for this, but in the end, you die. I don't care how much I'm worth when I die as long as it's >= 0. So, leaving aside the case of getting lucky with well-above-inflation appreciation (still, did houses in Bay Area appreciate that much faster than stock market since 2000 or 2009?)... one could sell the house in Seattle and retire to Vegas if he were living in Seattle for job market access only. However, in that case one can probably retire early and move to Vegas without caring for job market access, on the difference from the house prices. If one were rooted in the community, selling the house and downsizing is not an option (in fact I've heard older people in Seattle complain about this - the value and property taxes go up and up but they never want to sell out of the community so the appreciation is a negative for them). There are various scenarios possible, and it's not clear that the net worth in 30 years is well, worth it - liquid; you may have little time left to use it, or not even want to sell.

The topic is almost esoteric, in a sense that they are "true believers" on both sides that always have the next argument ready why the other side can't be right. My conclusion is: the whole thing is a classic bet. If house prices develop really well, you are better off, if not you might be better off renting (assuming you are comparing same lifestyles). That's like forecasting the stock market.

I'm fed up of having this argument in London.

I rent, and pay about 2% of the value of the property in a year. I get around 8% on shares over the last ten years.

Renting is an absolute no-brainer for me. People are shocked when I tell them how much return I get on my savings vs how much my rent is, especially when I tell them where I live (a 'premium' part of London).

In 1995, I rented an apartment and kept it for 10 years at about $1000 per month. Total invested: $120,000.

Had I purchased in about 1998 or '99 when I was single, making good money doing hourly contracting, my then-$200K property would have risen to $500K by 1995 (in the area that I was house hunting). By today it would be $700K or more.

I was ill-advised by parents to not buy ("Not a good investment and you don't know where you'll be in five years") and I foolishly listened to them.

Now I own a couple of houses but with a lot of years left on the mortgages. Oh, how I wish I'd listened to my gut instead of lazily putting off purchasing! Today I'd have a positive net worth of probably over $1 million, instead of probably half or one third of that.

To young people in their 20s-30s, I strongly recommend getting some property. Buy the least expensive condo in the best neighborhood you can find, preferably with great schools (whether you have children yet is irrelevant). Live in it a while, then try to buy a standalone house with a bit of land--either trade up or, preferably, hang onto the condo and rent it out. There are cycles in real estate, but over the long haul, prices go up.

The best time to buy a house is 20 years ago. The second best time is today. Words of wisdom that are as true now as they were 50 or 100 years ago.

When the goal is to have a roof over your head, between renting or buying, the better option is to buy. If the goal is to invest wisely, of course buying a house is worse than say something like an index fund. But the problem is: I can't sleep in an index fund. A house isn't a depreciating asset. Renting is not an asset at all. Mortgages are fixed. Rent tends to frequently increase, skyrocketing at worse.

This article takes the very common scenario: 30 yr mortgage at market interest rate to compare to renting. Even on these terms its still lopsided. What about the people who do 15 year mortgage? What about those with large down payments? What about those who pay a little extra to their mortgage each month?

The overall home market keeps with inflation, but in markets where the land is trending towards scarcity, you are poised to make money as what happened in my first home. I like to think those who were lucky to purchase a house in the valley area before the extreme scarcity made a nice profit if they decided to sell.

The author fails to find a third point: in many cases, owning is cheaper than renting, especially in my city and cities like it. Rent here is around 1300 for a 1 bedroom 500 - 900 sqft apartment, depending on where you live. If you want multiple bedrooms, well now you are in 1800-2000 territory for 1300 sqft. You can own a 1800 sqft house for about 850 a month. You can put away half of your savings from rent for unexpected expenses, and use the other half to pay the mortgage off sooner, or you can spend it, either way it's roughly half the cost.

When you have kids it's nice to own because you know what school district you'll be in and knowing you are unlikely to be forced to move you can provide some stability for them. I never considered that aspect until I got there myself.

> You hold a 5 percent fixed-rate 30-year mortgage.

Is that really so? I've read that the mortgage interest rates are around 2-3% in Europe (by the way, in Russia they start from 9%-11% and can be as high as 15%).

> A house in 1897 cost the same as a house in 1997, adjusted for inflation.

It is hard to believe, given new technologies that are supposed to make it cheaper.

Also what the author didn't take into account - she assumes that she will be able to work forever. But what if you get too old and won't be able to do your job well? What if you get sick? What if you get fired? What if there is a financial crisis? What if the company you work at shuts down?

In all of these cases, a renter will be kicked out on the street (I know in some countries like Finland the government provides free apartment for people who don't have money, but I assume in US you'll have to live in the street). But if you own a house then you can live there even if your income drops. You can live without renovations, you can consume less electricity, you can ask for a tax deduction, you can rent out a room.

Also, an owner can leave a house or an apartment to his children.

The author writes about opportunity cost, that you can invest your money. But it is very high risk. If you invest into a private fund, it can become a bankrupt any time, if you invest into something government-related, tough luck if the national currency crashes. Investing into a house looks like a more safe option.

Of course, there are downsides to the mortgage. If you buy a house or an apartment, it will be probably not in the best location, far away from the center of the city in an undeveloped area, no good transportation around. Because the good ones are too expensive.

People often fail to take into account that risk has a value. I did some quantitative analysis (most of that is BS but that's another story) for a gig and it was big eye opener.

People talk like:

"Well property praises will always go up. It's a good investment yada yada" but there is a risk that they won't (which often is a sore point). There's even a risk they'll crash. Many people (at least in Sweden) is so over leveraged that it wouldn't take that much for the bank to require a mortgage holder to put in more money to cover the decreased value of the property.

How large risk for a "catastrophic decrease" varies but taking that risk is a cost in itself. It's the same as with insurance, the less healthy/more risk you are the more it costs.

With renting you might not have the upside of investment, but you also don't have to bear the "cost" of that risk

Through complicated financial tools with all kinds of different tax implications, fees, and mental/time burden for management, yes a small subset of medium to high income people can attain similar returns on investment as a homeowner while renting in certain situations. But the very backbone of the American middle class has always been home ownership. It’s a simple, understandable investment which holds tangible value regardless of it’s current market price. The tax incentives in the US for the average wage earner are so heavily skewed toward home ownership that it is almost impossible to make it into the middle class any other way.

Rent, in an arbitrage free economy, should be exactly equal to the interest on the mortgage plus wear and tear on the house.

This article is classic example of misusing math to make an exact counter point. It ignores the fact that,

- rents always keeps increasing for renter staying at same location

- there are significant tax advantages for high income earners

- people are not usually qualified to make investment decisions that would consistently outperforme real estate

- you build significant credit worthiness

- you get almost 2X or more living space for same or lower expenses

- in hard times, you can sublet extra room typically generating more income than investment dividends

- you get great free public schools, saving tons of money in private schools

- you have a say in how your neighborhood develops and evolves

All I know is I put 10% down, had tenants pay the mortgage by renting out the three other rooms while I lived in the other one and sold it 3 years later for 100k more than I owed. My outlay was close to nothing on a net basis and it proved to be a really great tax shelter when I got a raise.

Also I was able to set roots down and get to know the city and feel some semblance of ownership in the town. That and my mortgage never rose except for when the value of my home rose with taxes.

We can certainly debate the financial benefits of owning vs. renting. It's an important angle to consider and this article is simply challenging the automatic assumption that ownership is financially always the sounder choice.

However, we might want to also consider other dimensions, like the social benefits of owning vs. renting. Is it really good for us as individuals and for society in general when property is concentrated in the hands of relatively few people? It's one thing to have a relatively large number of property owners who both rent their properties out and rent their own living space. It's a totally different thing when, say, several moguls and the government own 75% of the apartments in a city.

Also, while mobility is important for some, others form communities, and still others don't have that option or desire to move around. When you don't own, you don't really have skin in the game. If something sucks, you leave. When you own, you've put in your chips. You've bought a stake in the community. You're going to care more about both the property you live in and the neighborhood. If the market takes a turn locally, there will exist a greater incentive to make the changes necessary to buck the turn instead of just moving. If the schools suck, and you care about education, ownership is more likely to create the incentive to improve them. If you rent, you move to another district. For some, that move makes sense. But for many, it makes greater sense to improve what's around them.

In other words, the assumption that owning a house is primarily or solely an investment can be challenged as a narrow view of ownership.

He has a point. I learned this the hard way when I looked at the amortization tables when i bought my first house, it still stings when I think about it.

That said, mortgage interest is tax deductible, which lead to a decent refund this year. So assuming you’re not withholding income at your effective tax rate (but the usual 25-30%) you’ll get a fair amount of it back, which I don’t believe you would if you rent.

So yes, mortgages are throwing away money as well (less equity and reduction in tax liability)

Some of the countries with the lowest homeownership rates [1] are also amongst the most financially secure on the planet. In Switzerland only 43% of households own their home and swiss households are, on average, way more secure than their american counterparts.

[1]: https://en.wikipedia.org/wiki/List_of_countries_by_home_owne...

>Are you better off:

> - Tying up your cash into a home

> - Finding an alternative investment, coupled with a rent payment?

This is the part I don't get. That would require renting to be cheaper per month than having a mortgage, yet it will always be more expensive for the same property because the landlord is paying the mortgage* plus marking up the price to make a profit.

*Or at least charging the equivalent market value since there will be other landlords in the city who are paying a mortgage

The financial arguments assume one only pays the minimum mortgage payment amount. Many people add a bit extra each month which can quickly turn a 30 year mortgage into a 9-12 year mortgage.

It also ignores many of the other benefits of owning, such as having a lot more say over what you do with the propert and not always having to worry about rent increases or what happens when the lease ends.

The rent vs buy equation is never black and white but this article comes across as quite one sided.

If you think about this from a system or landlord's perspective, it's much easier. You don't need to do lots of accounting, just consider the system:

Your cost to live there is the same as as the landlord's, except for 1. Landlord's profit 2. Mortgage transaction costs and 3. Efficiencies through shared expenses.

For #1, You have the power to shop around.

For #2, You want to find a place where the landlord has owned or plans to own for a long-time, so e.g. the realtor's fee has long since been amortized.

For #3, One larger, more efficient heater is better than a bunch of smaller ones. Same goes for insulation. Industrial appliances like washers and driers mean cheaper cost per use.

Optimizing the system is about balancing your landlord's fees for running the house against your own opportunity cost to run your house as a hobby, with two credits in your favor for shared resources and buried expenses like realtor's fees. If you're handy, or have a partner who can work from home, running the house as a hobby is easier. If you or all partners work out of the home, your non-work time is much more valuable and running the house as a hobby is much more difficult.

This is one of the most annoyingly formatted and written articles. So antagonistic and condescending, with not-as-funny-as-you-think jokes and images inbetween, half a dozen single sentence, hell, single line paragraphs with white space inbetween, constant repetition and using up half my screen width.

As for content, meh. The point of the story is: it depends. Renting isn't throwing away money in every situation, fair enough. But it begs the question, what reasonable assumptions can be made for your situation. And here the author mostly fails to deliver, as it builds on a tens of assumptions without rooting them in evidence, or only partially.

So the author will happily use a timeframe of multiple decades to show interest rates are historically quite high, and thus a 5% rate is warranted, but then disregards a historical timeframe of a few decades and just assumes houses will appreciate 2% per year (!) and inflation is also 2% a year, aka houses haven't appreciated in real terms at all. Despite the fact the timeframe she uses for interest rates, shows housing prices vastly outpace inflation.

In short, awfully written, with a very basic point: it depends on assumptions, and then pulls assumptions out of thin air (no surprise, as the story ends with the buyer/renter being exactly as well off, indicating the author picked assumptions accordingly) without evidence, which often aren't even realistic in the first place.

But yes, agreed, renting certainly isn't always throwing away money. And dropping out of school certainly isn't always a bad thing. And amputating your leg certainly isn't in every single case bad for you, it can sometimes be good, like when you have gangrene. But all of that is silly without seriously talking about assumptions, taking 10 pages of antagonistic writing to tell someone to run their own numbers is beyond me.

What I really want as a renter is not to buy a house but to protect myself from rises in the residential housing market in whatever area I'm living. I want to invest a portion of my income that will grow when the housing market grows.

That way I can continue renting but hedge against big swings should I want to buy in the future.

This is a really poorly written and exaggerate article. I purchased a home in 2015, I had to pay $3000 to close with no further down payment. After three years I had to move for work. I'm now renting that house out, and earning $380 a month in profit. That house is mine. Our use that profit to pay extra on the principal and contribute to my 401(k). Someday, that house will be paid for, and it will be all mine. Then any profits will be completely mine, minus taxes and insurance of course. Renting puts you at the financial wims of someone else. How often do you see a rental company lowering your rent? By owning, you know that your monthly outlay is going to be very stable. That makes it a lot easier for financial planning, not just now, but for when we are older. Who wants to be 65 and still renting?

The sheer amount of fuckery that Landlords engage in was more than enough for me never to be a renter again.

Look at the author's "history of home prices" graph (that amusingly is from 2006)

The author cites that graph, then goes on to make the claim that housing costs rise with inflation. The graph certainly doesn't look like any reasonable measure of inflation I have ever seen.

Love that article, This is one of my favorite dinner conversation and I'm always shocked to see how most people never question the whole "buying a house" social construct.

Once you do the math, you start to realize that most of it is a fallacy, and that in most cases you are way better off renting a place.

Something else that people forget is that they tend to buy a house way bigger than what they actually need. Typically a young couple would be ok living in a one bedroom, but usually would prefer to buy a house with 3 bedrooms. This means that they are now paying a mortgage (and downpayment) for something way bigger than what they need and therefore losing an even bigger opportunity cost.

While I like the idea of doing the math for such impactful decisions, it's probably not that easy to get correct constants/values to do it so you get meaningful numbers. For example in Austria (europe) renting prices went up ~25% in the last 4 years or so, so the 2% inflation correction (per year) the author assumes is probably wrong for many countries/cities.

At the same time rent (in Austria) includes several cost factors such as water supply, garbage, insurances for the house,... whereas the cost of your house's mortgage does not.

What I'm saying is: If you do the math it only makes sense to do it in such a detailed way that you get meaningful results.

What about self-modifying renting contracts? In Germany, some contracts increase 3% every year, not that cheap.

And what happens when you're in retirement and your pension isn't as much as when you were working? Can you keep with the rent?

These articles sincerely freak me out. I just bought a house and frankly, I have second thoughts. But the entire subject is so polarized, I really have a hard time resolving whether or not it was a wise investment.

"You hold a 5 percent fixed-rate 30-year mortgage"

Yeah, no. I know that many people may have loans of this size and I never understood it. And it is of course a reason for high prices.

When my parent's bought a house a typical mortgage was paid off in maybe 10 years. I myself took a loan of 12 years. And not at 5% percent! The real rate is about 0.2% at the moment (and has been 1-2% during the ten years I've been paying). After paying this reasonably sized loan I can buy another house with a similar loan.

I have also heard of 60 year loans! (eg. sweden). Now that is indeed stupid and throwing money away.

The way they changed the standard deduction and personal exemptions for 2018, for most people the tax deduction from their mortgage won't be worth it. It will be better to take the standard deduction instead of itemize. I had to adjust my tax withholding this year otherwise I would have owed a few thousand next year (compared to the few thousand return I received this year).

The whole tax benefit for owning a home is gone. Not only is there no benefit, you are now penalized.

There are so many factors to take into account. When you buy, you buy generally bigger than what you would rent because you buy for the future, you rent for the present. Bigger houser means also more maintenance costs and more taxes. Inflation does not always work: the value of a house getting older and outdated may decrease. The environment may degrade. OTOH, when renting, it is psychologically harder to spare. With a mortgage, you have no choice.

It's less important to point out that bad real-estate deals exist. No one is debating that. Nor is anyone debating the sliding scale that shows your first year is mostly interest. ASLO, no one (even the OP) is debating (assuming you are savvy enough to avoid a bad deal) that in 30 years, home owners have a massive nest-egg, not to mention 30 years of effectivley fixed monthly payments (even if taxes go up slightly).

Would LOVE to compare net worth with the OP.

It really depends on your situation. If you can afford to buy, and plan to live at least in the short term in that property, I think buying is a good thing. If you need flexibility and want to move around, or you can’t afford to buy, then renting is better. Personally I think buying is the best thing in the long term, and by long-term anything longer than five years. Rent keeps going up. A mortgage doesn’t really change that much.

A point that is not mentioned is being smart about where you buy your house. If you can do some research and estimate the future demand for the area you are buying, buy a place with more of the cash going into the land value than the residence, not buy brand new (generally) etc. then your carefully chosen residence/investment might beat the stock market especially when leverage is applied.

I bought my first flat (got a mortgage on my first flat - £34.5k) in the mid nineties, I moved once, and now have no mortgage and a house worth £250k. If I had rented, I doubt I would now have savings to that amount.

Also I'm kind of a saddo who likes being able to change my home to how I like it.

People who rent often seem embittered by the experience, and angry that houses are too expensive to buy.

There's another post recently that's discussing the same topic. For an FHA back 30 year fixed mortgage, you don't need to put down 20%. I think the most I had to put down for my house was about $3000. It's turned out to be the best investment of my life, because I had to move away and so I am renting it out and make a nice profit each month.

The biggest issue I notice is that the rental inventory is _much_ lower quality than the for sale inventory. Might be a Bay Area thing.

Here in the bay area, you can Think of it as the cost of employment. When you work at Google and get paid X, roughly 50% goes to rent. But, as long as the rest of the 50% is enough to live comfortably and build large assets, then it's still a good deal. Then when you've built up enough assets, leave and retire somewhere.

I know a handful of people in their 60s...

The ones who made a point to buy instead of renting their entire lives are laughing all the way to the bank.

The ones who are still renting are still working nearly full time and will probably be doing so until the day that they die.

Buying and committing to a mortgage forces you to save money for your future, plain and simple.

If you are renting, you are renting it from someone who owns the place. I am going to assume that whoever is the owner will at least break even, but more likely will make a profit off the rent income. Therefore, buying is cheaper than renting.

Can anyone explain to me what's wrong with this argument?

A deliberately-one-sided note of the downsides of home ownership:

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrib...

The whole article is a statistical fallacy. You should never compare "average" growth rates but extreme outcomes. What is the best possible outcome and the worst one in case of renting and in case of mortgage?

P.S. Read Nassim Taleb (and Daniel Kahneman) for the sake of reason.

People often don't take property cycles in to account and they can be a huge factor in many markets and semi predictable. When stuff is cheap (price to wages) and going up buying is a no brainer. When it's expensive and topping out its questionable.

Article assumes that if you're a renter, you don't pay insurance.

Which is true for a lot of renters; but they will lose everything if the place burns down. The landlord's policy will not cover the belongings of the renters.

Comparing insured versus uninsured is stupid.

Renting = paying 'premium' to stay flexible. The reason I don't care about buying is that I don't even know which country I want to live in next year. Also i prefer to not have dept, for whatever reason.

Nothing could be better suited to the Boomer condition than buying real estate, so for the class of people who would rather die than think which is the ideal for most americans, cliches about buying always being better than renting ARE true if you're propagandizing legacy boomers about how wise they were to follow the herd a long time ago and BTW here is some delicious clickbait advertisements etc. For everyone else, yeah, not so much.

Schillers graph and assumption miss the point that we're in a long term multi decade credit crisis where the $ of GDP per $ of (new or existing) debt is collapsing. That leads to collapsing interest rates because you can't squeeze blood from a stone, low rates of investment return, hyper focus on risk control and limitation outside VC type gambling, etc. And housing prices are based on a constant $X/month being available to dump into mortgage (or rent) payments, so collapsing interest rates from normal levels when a gen-Xer was a kid to insane low levels now mean insane high real estate prices. House purchasers do not rationally evaluate the worth of a house like Graham and Dodd securities analysis from the 30s... Its a simpler calculation, I make the 95th percentile of income or whatever, I can afford $X/mo the COMMISSIONED real estate agent found me a great home which is also at the 95th percentile of luxury and quality and neighbors which costs $(X1.1)/mo (see comment about being commissioned salespeople, LOL) and at insane present interest rates $(X1.1)/mo magically turns into some insane and detached from reality purchase price. You're always buying the biggest loan you can afford, to live in the same house you'd live in regardless of current interest rate. And if you individually are a cash buyer or some other situation, it doesn't matter the market is swamped with loan buyers who control the price of the market regardless of your different personal situation.

We have too much debt for the size of economy we have, and the aging of generational shifts result in new leading and declining markets, leading to crazy weirdness. That's the current bubble economy in one line.

The main financial puzzle of life in the 10s, 20s, and beyond, is how to profitably short, or at least not get stuck in the carnage, of the post Boomer era in ... everything. Having a giant dollar value illiquid asset stuck like a millstone around your neck is probably not the best strategy for the future even if it was the best strategy for the past, that's all the article is really saying. Leverage is always only numerically illustrated by rising prices; post boomer the prices will fall.

Rent payments are set high enough to pay the owner's mortgage and give them a profit. If you already need to pay a mortgage, why not buy the house to get the interest deductions and equity?

Author writes like hyperactive undergrad, couldnt really get past it.

This article actually made me think quite a bit! I'll read it again an do the math when I'll search for a new place to live, and when I'll have some cash to invest.

And in some places rent is way lower than paying mortgage for the same kind of dwelling. Mortgages can simply be not affordable, while rent is.

Bad assumptions in the article. Firstly, rent in major cities (like where many of us live) is higher, sometimes much higher, than the mortgage payments for similar properties (home prices in my area give a mortgage payment of around 1500... rents are at 3k).

Secondly, you can get homes for way less than 20% down without huge jumps in total cost these days through various programs. The people making the choice between renting and buying are those who would be taking advantage of programs like FHA loans.

This article has a bunch of pictures and stupid shit in between paragraphs and makes it hard to read. Not HN worthy at all.

You know what else is throwing away money:

* Every house paying to own and store all the tools for maintaining a yard.

* Every home owner spending 1-4 hours each maintaining said yard, when economies of scale make outside labor about 400% more efficient. Unfortunately, much of these savings don't apply when 20% of the houses in a neighborhood outsource, and they all use 8 different companies.

* The ridiculous cost of building, heating, cooling, and maintaining an 8 sided cube (read: house) vs when building them adjacent to each other (read: townhouse) and pooling resources for half the maintenance.

* Every house even having its own yard, as opposed to plotting residential spaces with a shared "small park" adjacent to 4-10 residences, with even larger parks dispersed throughout. (Those houses with a tiny yard the breadth of a human wingspan are exempt from this criticism.)

I swear whoever is designing rural areas needs to take a look at master-planned communities like Daybreak in South Jordan, UT [1]. Sure some folks may have a libertarian, give me some land leave me alone I'll take care of myself kind of mindset, but we humans evolved in tribes. We need to build more communities that encourage random interactions with the other homo sapiens around us, while getting rid of this wasteful (both economically and from a time-wasting perspective) emphasis on owning a home and maintaining a yard.

[1] http://www.daybreakutah.com/daybreak-story/

another thing this article fails to address is what is the supply of homes in a given region and how wealthy are people there. if you take mountain view where google is headquartered there are many wealthy people near by thanks to rising stock prices of goog, fb, aapl, Netflix etc. because of this and the lack of homes getting built house prices are just going up.

in 2017 less than 250 single family homes sold in mountain view. just put that in perspective. 250. thousands started working at google but only 250 homes sold. and the average days on market for a home was: ~10 days.

if these firms continue making money and if they continue to see their stock prices going up then you'll continue to see house prices rise in these markets.

articles like these fail in markets like mountain view / Palo Alto. they probably make more sense for markets that have abundant housing like Las Vegas / Denver.

renting is paying a premium for the right to move easily.

for a freelancer that moves from country to country that's important.

if you view buying as a consumption decision then a lot of this doesn't apply

As soon as someone quotes the Dow Jones I stop reading because I know they have nothing worthwhile to say.

(2015)

i would say both renting and buying a house are bad ideas. when you rent, you have to pay a huge amount of money to pay for your landlords premium gasoline for his lambo. when you buy (in a city), you are having to take on the cost of every other person who bought before you -- nobody ever willingly sells a house for less than they bought it, so houses are like ratchets that go up and up and up in price. when you buy a house in a city you are also paying for someones premium gasoline. its an endless cycle of people buying the house and making it more expensive.

i would say that buying a remote home is where its at. with solar power, electric cars, self driving (even in its current state), and the soon-to-be mesh of satellites that will provide decent internet to every corner of the globe, along with a whole lot of other things, remote land and home ownership is a very exciting prospect indeed.

most of the cost of a house in a city or heavily populated area is in the land (location) and in paying for the profit margin of all the buyers who came before you. so building your own house on remote land is extremely affordable because there were few previous owners and its not close to anything -- you dont need financing like with a regular house.

i saw a story, i believe it was here actually, about a woman who bought a cheap house somewhere remote but good, and just did a four hour commute on the train. you can make just about anything work. and from my perspective, having your own land and a place to sleep that is truly your own is so fundamental and vital that extreme measures feel justified.

i currently share an apartment with a bunch of people. our complex holds at least 200 or 300 units. at an average of two thousand dollars for each unit, all 200 of them. the people who own this complex bring in almost half a million dollars every month before taxes. a while ago, a pipe broke in our kitchen -- a pipe behind a wall, underground that carries sewage. our entire kitchen and dining area were flooded with foul water. it took them almost a month to even get someone to look at it, even though i visited the office every day to remind them that half of my home was flooded with foul water. their response was that getting a plumber to do a job like this is very expensive, so they had to go though a bidding process instead of just hiring someone asap. i dont have a lot of money or free time so i was powerless in this situation. eventually, the pipe was fixed. when you rent, you are powerless. the power dynamic is obvious both in principle and in experience. why then are so many people eager to enter into this demented arrangement in which they are essentially a modern peasant?

i think everyone should own some kind of house somewhere because there is absolutely nothing worse than getting stuck without somewhere to stay. life is chaotic, rent is very expensive in many areas and housing can be difficult to come by and there have been times when i almost wasnt able to find housing. definitely one of the worst feelings ive ever experienced. unlike some people, i have no nets to catch me. if i had a remote home, not finding housing in the city would transform from a ulcer-inducing nightmare into a short vacation back to the country while keeping an eye out for good housing on craigslist.

The answer in most cases is "yes".

This post is full of the kinds of flawed arguments that usually accompany pro-rent arguments -- which do a real disservice in identifying those cases where the answer is "No".

Breaking down the problems by section:

Equity

"Here’s the rub: Only a small slice of your mortgage payment builds equity."

There you go, the article defeats itself not even a full screen below the correct answer.

   If you rent, 0% of your monthly payments build equity.
   If you own, X% of your monthly payments build equity.
   X > 0

It attempts to list all the parts of a mortgage payment as if itemizing it makes the equity earned meaningless.

   Your mortgage consists of four parts:

   Principal (the equity-building piece)
   Interest
   Taxes
   Insurance

This is basically correct, but the case for "Your rent consists of the same four parts + two additional parts where the property owner may make a profit off of you as well as some additional money to cover various expenses that they'd rather not pay for out of pocket."

Again, nothing in this section invalidates that building equity is better than not.

One way of thinking about renting is that you pay all of this, plus the extra stuff and in the end you've built equity for somebody else and none for you.

Opportunity cost

I didn't bother to read this to be honest, these sections are almost entirely filled with notions that "if I just invested my money in horse farms or leverage backed security instruments I'd make more money in the long run" blah blah blah. The logical flaw in these are usually pretty easy to spot as they involve a scenario setup that's not like-for-like (meaning the same house as a renter vs. as a buyer) and focus on weird time frames like the lifetime of the loan not the life of the person.

In other words, at the end of 30 years, the rent may have made more money in some scenario of a perfect investor, but then they still have to rent to have a place to live. The homeowner now owns their property free and clear and can do all kinds of things with it, and their now future income is entirely liquid.

Should I rent of buy

Do what you want! But don't follow the flawed arguments in this blog. Here's what it really comes down to, do you want your money to be more liquid and your location to be more mobile? Then rent.

Do you want to own large amounts of assets that can be liquidated in a few months (in most places) or that you can live in virtually free in the future? Then buy.

Bonus: if you buy, you can end up in a situation where you just have other people literally giving you money to pay your mortgage away...it's called being a landlord. You can even do it with parts of your property, like a bedroom or a basement. Over time you can own a property outright, rent it out, and use that rent to service another mortgage in a property where you live meaning you live virtually free and accrue assets at a frightening rate.

edit once again, here's probably the best post written on the subject.

http://assayviaessay.blogspot.com/2014/04/rent-or-buy.html

what sucks is that any savings is taken by property taxes, especially in NJ, NY etc. And they go up every year. That alone is in many cases as much as rent (albeit on a smaller place, but still) http://www.nj.com/politics/index.ssf/2018/03/nj_towns_with_t... Hey, at least state officials will have nice pensions wen they retire.