That's the difference. If you have a $2500/month mortgage, by year 10 or so that's probably $1000 equity + $1500 interest.
The "interest" portion gets tax-deducted (so you get a portion of it back), while the $1000 equity is literally yours. When you sell the house, that's the portion you get back.
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So really, $2500/month mortgage (after a few years of living there) is really a $1000 cost + $1500 forced savings account. Then some maintenance / taxes on top of that.
Since you're building equity while living in a home, a $2500 mortgage is in fact far far cheaper than a $2500 rental.
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If this is confusing, then think about the "down payment" when you first get the mortgage. A $100,000 down payment may have cost you cash, but its not like the down payment disappears. When you sell the house and close the mortgage, that $100,000 comes back to you (plus all the equity you gained).
I'm currently paying a $1600 / month mortgage, of which $1000 is principal, $400 is interest and $200 is escrow (tax / insurance) in an area with $2000/month rent.
So I'm really paying $600 / month for interest, tax, insurance. It's another $1400/month before I get to rent prices.
And even with a new roof and new deck last year, I'm no where close to renters prices in terms of actual cost. Especially considering that I had no maintenance costs in 2019 (lucky year)
And those $2000/month apartments are literally my next door neighbors. I get way more room than them, a private garage and lots of other benefits. (Those apartment dwellers occasionally ask me if they can park in my driveway when space runs out. That's how close they are.).
Your numbers don't seem normal. Looking at a mortgage calculator, given a new $370,000 home price, with 20% down, 3.92% interest... the P&I is $1,399. Of that, $967 is interest and $432 is principal. Those numbers are almost the reverse of yours. It wouldn't be until ~year 20 of the mortgage that the numbers would match yours.
Any homeowner with good credit scores can right now switch off their current mortgage into a 15-Y 2.375% ish loan.
If you can realistically afford a house, I don't see how renting could ever make sense, at least not when the prices are close. Basically, consider a mortgage payment as a rental payment where they match 50% of your rent into a nice investment fund you can cash out anytime you like.
- It's generally nowhere near 50% (of the cost of owning) going to principal
- Buying ties you into the house, or at least ties other costs to moving. If you're likely to need to move again in under 5 years, that cost is high.
- Related to the cost of moving, but... if you're moving to a new area and want to take some time to pick out where you're going to live for 20 years, then renting for a few makes sense.
Honestly, there's just a lot of reasons that can make it financially reasonable to rent instead of own.
Townhomes are like apartments but no worries about bothering people below your floors (or people above you annoying you when they move chairs). They also build equity at higher rates than renting. Bonus points: I have a dedicated driveway + garage while my neighbors are sharing their parking space with each other (and often run out).
Also like, +1000 sq. feet. 3 stories of space helps a lot compared to the apartment sizes.
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Look, not everywhere is the crappy San Francisco housing market. There are plenty of locations in the USA where rent prices are terrible and ownership is much better financially. Any location that's constantly building new homes (pushing home ownership prices down, and therefore rent prices down) will probably have a market like mine where ownership is in fact the better financial decision.
That's very little difference, ultimately, when it comes to the equity part of the equation.
I've had some upfront costs in the first three months, but none were surprises (appliances, knew that the AC was past its usable life.
And I would expect a landlord would build estimated repair costs into the rent as well, at least to some extent. Of course that doesn't mean something unexpectedly expensive couldn't happen.
But this is only true if your landlord purchased at the time you rented. I rented a $1.8M apartment for $3,000 per month (~1/3 of total ownership costs). That's because my landlord bought 20 years before when the apartment was worth $200k. His monthly costs were maybe $1,000.
The only thing your landlord saves on by buying 20 years ago is the nominal cost of the property itself, either as a low fixed mortgage payment, or as a paid-off property.
This is just the effect of time and a fixed mortgage rate. If you were able to buy now, in 20 years you could be in the same position with respect to your property costs.
Property taxes are capped in terms of growth. Likely paying 10% of what I’d pay if I bought.
And biggest of all, he locked in his mortgage payment while rents went up 4x. And rents were still lower than cost of owning as housing prices priced in appreciation.
Home ownership, especially buying a home as an "investment" is such an emotional thing that plenty of people buy property just to buy property, the math doesn't come into it. Most of the time, even with the appreciation of the property that they sell, the landlord would have been better off putting their money into other more liquid investments with higher returns.
But, many people just buy property because they don't know any better.
Of course the landlord couldn’t sell it for $1.8M with me in it (because of SF rent control). But when I moved out and it was empty? They absolutely could.
But I'll admit that part of my reason for buying was to prevent the situation where I might be living on a fixed income some day, and having my rent go up every year. That seemed like a good thing to try to prevent.
Buying a house requires a high monthly payment, which remains constant over time, and one day ends. Renting requires a high monthly payment that rises over time, sometimes unpredictably, and never ends.
You may be right, especially absent property appreciation, but there's a lot of value in having a fairly predictable set of costs into an indefinite future absent really unpredictable problems. And not being forced to move at some point.
You may be paying more in mortgage+taxes+insurance+maintenance when you buy the house, but 10 year later, rents have almost certainly gone up.
We had our monthly house payment more than double due to hurricane insurance increases. This even tho our particular area hasn't had a landfall in 100 years & gets hit less than DC, NYC, etc.
If that's a $200,000 house, in 10 years the extra premium would cover the house... I don't see how landlords could escape levying a rent increase when faced with such a huge increase in insurance prices.
I believe you assume that the increase was tied to our increased risk. It would be more accurate to say that it was tied to risk of other places, hundreds of miles away. In my post, I had stated that we were at less risk than major mid-Atlantic cities.
I can understand that a huge insurance rate increase would make your house much more expensive than you thought it would be, I'm just trying to understand how such a rate increase only applied to residential houses, but not rental properties (many of which are just residential houses).
It's important to take into account the intangibles of buying vs. renting. It's not just a straight up financial calculation. Buying makes your living situation far more stable than renting. If I miss my rent for 3 months, I'll be getting a knock from the sheriff and put out on the street. If I miss my mortgage for 3 months it can take over a year to be foreclosed on. On top of that, buying puts you in a community of owners. It's a completely separate population from renters. People are far more incentivized to act civil and be considerate of their neighbors when everyone owns and lives somewhere long term. Not to mention the ability to renovate, add on, and otherwise make a house into a home. Buying is an emotional decision as much as it is financial.
But in the end I have 2.5x the square footage, a private yard/pool/grill vs. community, a two-car private garage with guaranteed electric vehicle charging, the ability to furnish however I wish, and to top it off much less reduced risk of housing inflation (a very real concern).
Nine years ago in the same market where I own my house an apartment unit I used to rent was ~$900/mo. The same unit on the market today is $2,352/mo. Even if home values increase and my property taxes jump it won't jump that high.
FWIW, I live in Texas so this place gets a good chunk of its tax revenue from property taxes. The odds of them cutting the tax rate just because your house shot up in cost at least to me seems pretty low. This is one of the problems of gentrification, where long time owners find they are unable to continue owning in the $90k house they bought 20 years ago because now they pay property taxes on a $750k property.
My mortgage is much more affordable than the rents that have gone up over the years to more closely reflect the 650k pricing.
But damn the taxes are gonna hurt everyone here... renter or owner (as the renter you're just covering them for the owner)
For example, in my city, 70% of households rent and half of those are in the hood. Bad neighborhood valuations are essentially a factor of Section 8 prevailing rent, and many properties fall off (as they stop meeting HUD standards) and get abandoned as they decay, because slumlords.
The effect is that in a good neighborhood, your pro rata share of the levy always climbs, even without an increase in value.
Not only is our house cheaper than a decent 3 bedroom apartment, but we’ve been here about 15 years and will own the place free and clear in ~5.