A) Not true
but also
B) 150k is not enough money to purchase homes in several major metro areas.
I wish there were more affordable housing solutions for people for who didn't want to own a home, but at least where I live that is not the case.
Technically it is. The house itself depreciates, it's just that the land underneath appreciates so much faster that it masks the depreciation of the structure.
Edit: clearly one quote cannot capture the complexity of life. However, should I ever own a home, I'd be happy to let you guys pay for my mortgage.
Owning is a smart place to park money when you're sure you're settling down for a long while and can be a good investment at other times, but renting is "preferable" quite often too. People get very caught up in black and white thinking about this and it leads to a lot of counterproductive decisions and frustration.
« you’re either paying for your own plus more than a third in interests, plus strata, plus local taxes, plus maintenance or someone else’s mortgage which let you put your money elsewhere, live debt free, without the hassle of maintaining the place and the ability to move easily when new opportunities knock on your door »
I am not saying renting is better, but there is a different answer for everyone’s situation.
As someone who has been hit by a perfect storm of expensive repairs, I wish I were still renting.
Besides, repairs directly increase the value of your property, so there's that.
Everyone pays an average monthly cost to live in a “home”. Those who own their home still pay an average monthly cost in the form of maintenance, property taxes & assessments, insurance, and in most cases a mortgage. One should also factor in the opportunity cost of the money spent on loan origination, down payment, realtor fees, etc.
There are obvious benefits to owning too and thus we see the calculation is not an easy one. If one knows they will be able to pay off their mortgage then they can look forward to relatively cheap living expenses in retirement provided they did proper maintenance.
Being a landlord is profitable.
The rent you pay on a house covers all the costs of ownership (cost to buy the home, mortgage principal & interest, repairs, taxes, insurance) AND there is some left over as profit for the landlord.
If you owned the house instead of the landlord, you are still paying the same costs, but you don't have to pay the extra profit to the landlord. That is the amount of money you save by owning over renting.
There are edge cases, like people who want to move every year, but this is a useful heuristic. You can pay your landlord's salary or you can be your own landlord and keep that money for yourself.
1. You can maintain the property in question for less than the market rate.
2. You bought the property for less than the current market rate.
I looked into this in detail, talking with a realtor who very much wanted me to buy a second home to rent out, and determined that while the rental might be profitable a few years down the road--assuming I could keep it fully occupied and didn't end up with any "problem renters," even then it almost certainly would be more profitable to put the same capital outlay into the stock market, with the added advantages of liquidity and no renter headaches.
Most individual landlords are renting out houses they have already owned for a few years, so their mortgage is not based on today's price, and that is where their profit margin primarily comes from.
I actually have a spreadsheet that compares the total cost of ownership when buying and renting over a 10 year period. Believe me, it's really not as cut and dry as you and others are making it out to be. Quite honestly, for me a ton of it hinges on how much the house appreciates in value (since you're making a levered bet via a mortgage).
Another thing here is that you can be reasonably confident that the lot you buy will increase in value, so it also biases my point of view.
That's about where most people stop thinking. Clearly house values go up, I don't want to end up 30 years from now having paid rent and having nothing to show for it, I'm gonna buy a house. There's even one more factor, which is the US federal tax structure gives you a big break on any interest you pay on a home mortgage, so many people think: I get a tax break on my house payment, but not on rent.
Of course, most people don't put together a spreadsheet to consider how much money that old couple might have had if they had put that $100k into a stock market index fund the same year they bought the house.
Please understand, I'm not saying that buying a house is a bad investment. I'm just saying it's usually not the best investment. I don't think most people over-value buying a home, I think they under-value putting a home-sized chunk of money into an S&P index fund!
Thanks for the perspective, this is a question I've been thinking a lot recently and you (and others here) certainly have given me a lot to think about.
And tbh, it isn't the worst thing in the world. Regardless of what the spreadsheets say, my understanding is that buying a house forces a behavioral change on most people - the house becomes a forced savings account.
And repairs almost never increase the value of your property -- usually they just return it to expected value. When you sell a house, it's assumed that the plumbing and electrical work, and that's baked into the price. If they don't work, you have to make them work.
The only upside is that you get to keep the appreciation in the land value.
Check this out: https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
Basically, in the most expensive markets, financially it almost always makes sense to rent instead of own, assuming you invest the money you save by renting. Owning makes sense for non-financial reasons, like having more control over your living environment and a sense of place.
However, when renting, you have to cover the same maintenance cost + interest that the actual owner is paying - why else would they rent the place out? (Ok, maybe you can time the market or have another kind of fluke, but can you really count on that?)
Thanks for the link! I need to give this a deeper look, as I'm currently considering my options.
If I buy a house in 2009 when the market is depressed, and by 2023 the value of that house has gone up immensely, but my mortgage is still based on my 2009 purchase, I can charge less to rent it out than it would cost someone to buy it. Or I can charge the going rate, and hope I find someone willing to pay it.
But if I'm on the other side of the table, it is usually cheaper and easier to rent a house from someone who bought it years ago than it is to buy a similar house myself.
Renting _this year_ may be cheaper than buying _this year_, but renting for a lifetime is always more expensive than buying unless you move constantly.
This also assumes that you aren't facing high maintenance costs. One popular rule of thumb suggests setting side 1% of the total value of the home for maintenance every year, and if the value of the home is rising, that set-aside is also rising. By more or less than rent? Depends on many factors.
That's not true at all. Most landlords are cash flow negative for the first 10 years.
What a landlord can charge is based on what the market will bear, not their expenses. And market is made of all landowners, including the ones who have no mortgage and can afford to charge less. Also, in California, the landlord who has owned for 30 years pays about 10x less in property taxes than a new buyer, so they can give a discount for that too.
In almost all cases, if you were to purchase the house you rent, you'd pay significantly more in mortgage+taxes+maintenance than when you were renting.
Landlords often don't rent out houses immediately after buying them. They must first either invest in repairs and upgrades to justify a higher rental price, or wait until the housing market itself justifies a higher rental price. For most landlords I've known, their first rental unit involved renting out their own paid-off or almost-paid-off house, and living in a new one they bought. Listing a new unit sometimes means being underwater for the first year or two, but they tell themselves that they're building equity and eventually rents will rise to more than cover their costs--which is eventually true.
Yes, but people wouldn't choose to be landlords if "what the market will bear" wasn't profitable. If renting didn't cover the landlord's costs (on average, over time), then nobody would be a landlord.
> but they tell themselves that they're building equity and eventually rents will rise to more than cover their costs--which is eventually true.
This is also true for you if you buy a house. Renters have their rent go up every year. Owners are always ahead after 30+ years.
A landlord is investing, and usually willing to consider returns over a long term. Landlords I have known are not profitable every year, and almost never from day one on any given property. I have known one landlord--and heard of others--who have seen multiple years of profit on a property get wiped out by a single bad tenant. But that's okay! Most landlords (not the big corporate landlords for which the economics are very different) console themselves in unprofitable times with the knowledge that at least they have the underlying asset, and it should increase in value over time.
> Renters have their rent go up every year. Owners are always ahead after 30+ years.
Look, if the only thing you care about is $X out every month, then sure, fine. Buy a house, don't look back, and whatever you do, don't every tote up every penny you've spent on everything related to your house and chart it against S&P Index returns over the same period of time if you'd rented a smaller apartment instead.
Someone making $150k+ in Atlanta should reasonably be expected to come up with $10,326 without much difficulty. Owning a home is a better investment, least of which is that the landlord won't double your rent because someone wants to pay more.
I think the renting is more of a desire to not be tied down to one location because of uncertainty in the job market, and social needs.
B) No, 150k is not enough in most markets these days, but it's 150k/year income and that definitely is enough to finance a house.
My counter-argument would be that when you rent, 100% of expenses for repairs and maintenance are borne by someone else, but if you have a mortgage all of those expenses are your own.
Different cites have different ratios between rent and mortgage, with some similar, some higher rents, some higher mortgages. I don't know any cites in which rents require a 20% down payment, though.
Finally, when comparing potential returns, and remember that neither the stock market nor future home equity are guaranteed, don't forget that down payment! Many people focus on the month-to-month after closing, and forget that if they put that lump sum into an index fund rather than into a down payment, they'd be able to (after 12 months) sell shares over time and take income from the index fund in a way they wouldn't from the house without selling it or taking out a HELOC loan.
Regarding down payment, that is still something you could likely recoup, and putting it in an index fund isn't necessarily more stable (especially over a 12 month period).
Except for the very expensive markets like downtown NY or Silicon Valley, making 150k/year should be enough to finance a house (especially considering in those expensive markets rent is also very expensive). When you rent you're essentially paying someone else's mortgage with repairs priced in (mortgage is often less than renting).
Repair, relative local markets, and interest rates are all very relevant reasons that renting may be better.
I understand that. And it is most definitely not enough to finance a house in a lot of places. NYC, SF, LA, even Sea now...Following the 28% rule your monthly payment would need to be about $3,500 on a $150k income.
At a 6% interest rate with $50k down (just pulling a reasonable number here) you can't reasonably afford anything over $500k, and with the taxes in those locales what they are you're really looking to max out around 400-450k. You simply cannot purchase anything at that price point in those cities.
So, it was generally expected that most people would rent until they can afford to buy on their path to accumulating wealth. There are certainly reasons for people not to buy, but not being able to afford a home is more of a problem now than it has been historically (obviously). This has significant knock-on effects for individuals and the broader economy.