Wasted money

April 27, 2009 4:59 AM

Why do people say that they don't want to waste money on rent?

I keep hearing people say that they don't want to waste money on rent and that's why they buy a house/condo. I have done the calculations myself and after all fees/maintenance/tax advantages etc. buying is always much more expensive than renting (at least in my current area/financial situation). Do these people (in pretty much the same financial situation) know something I don't or do they just repeat something they have heard without anything to base it on? I don't understand how people forget to consider the interest part of mortgage as wasted money, after all, you are never going to see it again.

posted by Brennus to work & money (72 comments total)

Because owning a home builds equity. Once you pay off that mortgage, you OWN the house. If you plan on staying there sufficiently long, it makes an incredible amount of financial sense to own.

If two people own/rent for 30 years, the renter will have nothing to show for it at the end. If he stops paying, he gets evicted. The one who paid off his mortgage owns his house and then has nothing more to pay (except maintenance). He can also sell it for a profit and relocate to a more inexpensive home.
posted by sprocket87 at 5:04 AM on April 27

I'd agree that it's a pretty complex calculation to determine if renting is smarter than buying. Especially with the HUGE transactions costs of buying and selling a home (3% to buy and maybe 7 or 8% to sell... this is not down payment this is just the transaction costs).

Basically, if the housing market goes up while you're living there, you win. If not, you lose. In other words, you earn equity in the home (in up markets). Condos have fees, but if you buy a single family home, I'd estimate that the owner spends approximately the same amount in upkeep (replacing the AC unit, plumbing problem, etc., etc.) -- it's just divided unequally from month to month (many months $50, others $3,000).

So no, I don't think you're wrong.
posted by zpousman at 5:07 AM on April 27

Because owning a home builds equity. Once you pay off that mortgage, you OWN the house.

But a large part of your mortgage payment goes towards interest. That interest is money you will never see again. In addition, you have to factor in maintenance which is not your responsibility when you rent.
posted by Brennus at 5:08 AM on April 27 [2 favorites has favorites]

Comments like this can make sense if you live in a country with very low interest rates and in an area with very high rents. That's not to say that everybody who chooses to buy instead of rent is getting a good deal, but it's not an inherently illogical suggestion.
posted by embrangled at 5:08 AM on April 27

People are not rational when it comes to investments. We know this is true simply because if market participants behaved rationally, we wouldn't have bubbles.

But we see asset bubbles (a research interest of mine) on average about once every ten years, and we have seen such bubbles since the 1600's.

And you're absolutely correct; sometimes is indeed optimal to rent rather than own. This fact doesn't get in the way of emotion however. It is difficult for most people to behave rationally when money is involved, and very, very few people take the time to model out such a major purchase as a home.
posted by Mutant at 5:09 AM on April 27 [1 favorite has favorites]

The classic buy vs. rent debate. It has been going on for a very long time with, quite frankly, both viewpoints having merit. The NYTimes did an interactive article on it last year (which is quite good btw).

It really depends on your financial situation and what the current housing market looks like. For instance, right now is a prime buyers market. If you have the capital (savings, RRSPs etc.) then buying is a pretty good option. You've got lower interest rates with lower house prices. Depending on where you rent, it is conceivable that buying could be close to the same as your monthly rent (not withstanding overages like unexpected maintenance etc.).

I rent. I don't want the hassle of dealing with owned property at the moment. I invest the amount I save monthly so I can buy a place that is not a "fixer-upper" or "first time home buyer's dream". IMO, it is not throwing money as you are paying for both a place to live and the services/hassle to maintain it.
posted by purephase at 5:09 AM on April 27 [5 favorites has favorites]

"buying is always much more expensive than renting (at least in my current area/financial situation)"
Then rent until it makes more sense to buy.

I don't understand how people forget to consider the interest part of mortgage as wasted money
The tax savings alone make a huge difference in the amount I have to pay the government at the end of the year. Enough for 6 months rent in a lot of places. Also, you can pay MORE whenever you want (depending on your mortgage) It's not like one is forced to pay the minimal.

For me, I thought why would I want to rent when I can buy for the very same price and get a larger place with equity and tax write offs. Of course, this was before the huge blow up which has affected the Washington DC area quite a bit.

As far as maintenance, I spend next to none on that and you can write that off too.
posted by zephyr_words at 5:13 AM on April 27 [1 favorite has favorites]

It's many factors. People equate buying a home with building equity, but often do not consider whether the price to buy is reasonable compared to the price to rent, and so advocate buying even when it does not make sense (for example, when the difference between rent and a 30-yr fixed monthly mortgage payment on a home is so great that it makes more sense to pocket the savings and invest it elsewhere).
posted by zippy at 5:14 AM on April 27

That interest is money you will never see again.

That rent is money you will never see again, either.
posted by Blazecock Pileon at 5:15 AM on April 27 [8 favorites has favorites]

I also want to get rid of my place now because I feel like traveling; so I think the boat anchor argument it the best reason NOT to buy; at least for me =\
posted by zephyr_words at 5:16 AM on April 27 [1 favorite has favorites]

The one who paid off his mortgage owns his house and then has nothing more to pay (except maintenance).

Pretty sure you didn't read the question. A person who owns a house still pays insurance and taxes which, depending on where you live, could be monthly expenses equal to paying rent somewhere. Also, big deposit (which could be earning interest in a CD), closing costs, maintenance, home improvements, etc.

I think the idea of "it's better to buy" makes sense in a world of constantly increasing property value. You pay quite a lot more in monthly payments, but at the end of your mortgage, you now own something of value - more importantly, something of value that someone else wants to buy as an invest. But, even then, that only helps you if your home is worth more than another investment you would have made with the extra money you were saving by renting - for example, if you can save $500/month by renting instead of buying a house, and you put that $500/month in an IRA or stocks, will the value of that investment be worth more than the $400K or $600K or $800K or whatever the house would be worth in 15 years when you want to sell?

Ultimately, I think owning a house is a quality of life thing for most people, and they purchase a condo or a house because they "should" and it makes them feel like a responsible citizen, like they're actually investing in something, like they belong to a neighborhood/city, all that stuff. Which is totally fine and makes perfect sense. Plus, many people who are semi-irresponsible financial savers like the fact that they are being forced to pay their mortgage and taxes and insurance every month/year, because then they cannot opt out of their "investment," whereas a renter who is trying to funnel all of his/her extra income into random investments might find it difficult to maintain the same level of discipline, month after month, year after year. If you can do that, if you can aggressively invest your money in something that gives you a healthy return, and you do it consistently, then, no, it doesn't necessarily make sense to buy instead of rent. At the least, a person in the situation you describe (chilling out in the renters' market, hoarding his/her cash and investments) can feel comfortable watching the housing/real estate market fluctuate, then jump in at the moment he/she feels the market is the lowest, instead of scrambling to buy a house when the market is obviously inflated, as a lot of people did a few years ago.
posted by billysumday at 5:22 AM on April 27 [7 favorites has favorites]

It's a bit of folk wisdom that justifies what people want to do anyway, so it has staying power. It's pretty deeply ingrained culturally, like the related "well, they're not making any more land." Things that those are a way for people to avoid having to do the math to see if buying a house is the best thing. They can just jump in, backed by two truthy sayings.
posted by Pater Aletheias at 5:25 AM on April 27 [3 favorites has favorites]

I moved from a high cost, high interest city to a low cost, low interest city last July, and debated buying because I could actually afford a house in my new city. BUT I know that I'm not going to be here for more than a few years, so I am SO glad that I didn't end up finding a place, because in this market, I never ever would have been able to sell it. So basically I'm with zephyr_words; the fact that I can pick up and go whenever is worth the rent money that I'm allegedly "throwing away." I'm way more flexible than a lot of my friends who are paying two mortgages trying to sell a place in this economy in this particular city.
posted by cachondeo45 at 5:25 AM on April 27 [1 favorite has favorites]

Because owning a home builds equity. Once you pay off that mortgage, you OWN the house. If you plan on staying there sufficiently long, it makes an incredible amount of financial sense to own.

In addition, if you get a standard fixed-rate 30-year mortgage, and if there are any periods of inflation over that 30 years, inflation should push down the monthly out-of-pocket in real terms. For example, someone who got such a mortgage in 1961 would have seen inflation through the 1970s. When they made the last payment in 1991, that payment would have been made in 1961 dollars. I used to run credit reports on people around that time and see people whose monthly payments for a suburban ranch house were 1/2 or less what I was paying in monthly rent for a 1-bedroom apartment.

The situation has been muddied over the last few years by artificially low inflation, artificially high home prices, and bizarro mortgage deals. A person who bought in some markets in the last couple of years might find that it would be a long time before they got any advantage from inflation--if ever.
posted by gimonca at 5:47 AM on April 27 [2 favorites has favorites]

The yearly rent payments for a house similar to the one I own (outright) would be about £8k.
We have paid about £170k for the house, including interest payments.
Yearly maintenance costs are maybe £1.5k on average.
Insurance costs are negligible in comparison to any of this. I have no house-ownership-specific taxes.

I just knocked up a quick spreadsheet which suggests that in about 22 years after buying the house I will start being better off than if I had continued renting, and the profit will only increase thereafter. This calculation considered payments only, not the equity in the house - if you consider the equity I was in profit after no later than 7 years from buying.

In any case, after some years of scrimping and saving, the expenses of living in that house are already far far lower than they would be when renting.
posted by emilyw at 5:52 AM on April 27

I just knocked up a quick spreadsheet which suggests that in about 22 years after buying the house I will start being better off than if I had continued renting, and the profit will only increase thereafter. This calculation considered payments only, not the equity in the house - if you consider the equity I was in profit after no later than 7 years from buying.

This seems pretty reasonable to me. There's an adage that you shouldn't buy unless you can live in the house for 5 years. In emilyw's example, she's discovered that after 7 years in the house, she's already outperforming renting. After 22 years, she's outperforming renting, excluding the equity. So basically, the longer you stay in your house, the more economical it is, the better an investment it is. This is why one reason to argue against buying a house is the idea of mobility - if you move constantly then it makes sense to keep renting. If you're going to be somewhere for 5 years or more, and you have the money, then consider buying a house.
posted by billysumday at 6:04 AM on April 27 [2 favorites has favorites]

You must do this calculation very carefully because house price & rent fluctuation could ruin your planning either way. I think this conventional wisdom simplifies the concepts of "hedging" and "utility" for ordinary people, while also protecting them from their own consumerism.

Do you see that the house usually has higher utility than a stock market investment? First, the house covers one of your main expenses when you get old. Second, the house consolidates your luxury spending into one avenue which is partially recoupable.

Otoh, if you work in Manhattan or Silicon Valley, then your clearly better off in the stock market. Also, if you move enough, then a house may have negative utility, even if the market goes up.
posted by jeffburdges at 6:05 AM on April 27

No one has mentioned the fact that you get a federal tax break from the interest on your home mortgage. I don't know the numbers off the top of my head but that alone saved us many thousands of dollars last year.
posted by octothorpe at 6:09 AM on April 27

Financially: Consider that both rent and the interest portion of a mortgage payment are both moneys that you will never see again. Early in the life of a mortgage, the interest part will (typically) be higher than what rent would be. However, as the the mortgage is paid off, the interest part of the monthly payment slowly decreases; eventually, the interest part goes below what you would be paying for rent. At the end of the life of the mortgage, you own the house outright. Meanwhile, rent does not go down -- in fact, it usually goes up. So, financially you're better off on the long term buying.

Quality of life: Having a house means that you're tied down, since buying/selling can be expensive; also, you have to maintain the house, wheras with an appartment you (hopefully) have a landlord who will do the basic mantenance. Having a house also means that you have the choice to renovate/upgrade it however you want, and you're not dependent on someone else to perform basic maintenance (something that someone who's had a deadbeat landlord can attest to being very reassuring).
posted by Simon Barclay at 6:11 AM on April 27 [1 favorite has favorites]

There are pros and cons to each.

Home owning:

Pros - Profits, no landlord rules, no landlord to deal with period, you get something for your money, Ability to do whatever you want.

Cons - Stuck in one place, cannot relocate that easy, responsible for whatever happens, usually more expensive.

Renting:

Pros - freedom to move away, the landlord has to take care of things for you, usually cheaper monthly.

Cons - after you move out you have nothing to show for it, you cannot change anything without permission, landlord can kick you out, whereas with a home a bank does not really want to let you out of your debt. They would prefer you pay it.
posted by Mastercheddaar at 6:12 AM on April 27

Not having to deal with insane/inept/corrupt landlords and rental companies is priceless.
posted by LastOfHisKind at 6:13 AM on April 27 [4 favorites has favorites]

A lot of people also think owning="single family detached house" and renting="apartment with noisy low-class neighbours". If you are talking to someone renting a big family home about how great your owned tiny apartment in the sketchy part of town is they may think YOU are wasting your money.

In my case though, when we moved to our town there were no rentals. There is only one apartment building and very few family homes for rent. We moved from a big city to a small town and what we paid in rent on a 300 ft apartment paid the mortgage for a 1000 sq foot detached house (this includes the cost of utilities, taxes and insurance). We also had full control of repairs/heat/energy efficiency.

For quite a few people they need that stability for their psychological health. Knowing that they will be living in one place for a while, while they can decorate and change things to suit their needs. Other people need the flexibility to move somewhere better. Neither option is wrong.
posted by saucysault at 6:15 AM on April 27

The reason they say that is that buying builds some equity, while paying the same in rent builds zero. They can be wrong about which is financially optimal, but this is the answer to your question.

I have done the calculations myself and after all fees/maintenance/tax advantages etc. buying is always much more expensive than renting (at least in my current area/financial situation)

Almost everybody in the world is not in your area/financial situation.

Also, are you comparing apples to apples, or are you comparing buying a freestanding home to renting a shitty old student apartment, or buying a shiny new condo to renting a shitty old student apartment?
posted by ROU_Xenophobe at 6:22 AM on April 27

But a large part of your mortgage payment goes towards interest. That interest is money you will never see again.

The monthly interest that I pay on my house is smaller -- significantly smaller -- than the rent that I used to pay on my one bedroom apartment. So, I'm not sure if you're doing your calculations correctly, unless you're planning on doing one of these wacky "no money down" schemes that were all the rage before people noticed that they probably aren't the greatest idea in the world.

An additional consideration (perhaps it was already mentioned in the thread, I'm not sure) is that mortgage plus interest never increases. Never. At some point in the far future, it will drop to zero, but that's the only change it will ever make. In contrast to that, my rent increased significantly every single year I rented, for the exact same apartment. I shudder to think what my crappy old apartment is renting for nowadays. And I do that shuddering from the comfort and privacy of my house.
posted by Flunkie at 6:28 AM on April 27 [1 favorite has favorites]

I've owned one house and it was a huge money trap. I lost several thousands of dollars trying to sell it (before the economy collapsed) and it was a nightmare with upkeep. I've rented from now on and am much happier. I know the consquence, I won't have anything to show for it in 30 years. But my quality of life sure has improved since I've started renting again. (plus I tend to move around a lot so owning doesn't really work for me)
posted by Hands of Manos at 6:30 AM on April 27

No one has mentioned the fact that you get a federal tax break from the interest on your home mortgage. I don't know the numbers off the top of my head but that alone saved us many thousands of dollars last year.

Yeahbut, you don't actually receive any savings until your interest (and other deductions) are bigger than your standard deduction. If a couple buys a cheap place and pays $10000/year in interest and taxes, they save nothing.

An additional consideration (perhaps it was already mentioned in the thread, I'm not sure) is that mortgage plus interest never increases.

No, but your monthly payment will if your taxes increase.
posted by ROU_Xenophobe at 6:31 AM on April 27

An additional consideration (perhaps it was already mentioned in the thread, I'm not sure) is that mortgage plus interest never increases.

No, but your monthly payment will if your taxes increase.

That's true, and it has, for this reason. But my property taxes are minor compared to my previous rent, as are the increases in them.

And I am in a (supposedly) heavily taxed state.
posted by Flunkie at 6:33 AM on April 27

Calculate this into your conclusions. If rent= mortgage, and maintenance= rent increases...after paying off a 30 year mortgage, my initial down payment of $8,000 will have ballooned to the current value of the house. So let's say that that is $250,000. What other investment vehicle will have that kind of return? Now let's decide to retire and down-size. I take my $250,000 TAX FREE, and buy that retirement place...Meanwhile those that have paid rent for 30 years...well they can't.
posted by Gungho at 6:36 AM on April 27 [1 favorite has favorites]

The numbers are actually pretty simple if you take a far-enough step back.

Take the total cost of a house (listed price + loan interest + purchasing fees + all the maintenance you will ever have done to it + taxes + insurance).

Now, take the average cost of rent.

Divide the top number with the bottom number... that's how many months of rent you can have for the equivalent house.

This does not take into account the fact that you can pass along the equity of the house to heirs after you're dead. But from a strictly personal viewpoint, that's the equation.
posted by Civil_Disobedient at 6:40 AM on April 27

we just bought our first house. i couldn't care less about the money aspect. i got tired of renting. i just got through decorating this weekend. never had to call my landlord to see if it was "okay." nothing wrong with renting mind, but i never got the "throwing your money away" argument. horses for courses, methinks.
posted by iboxifoo at 6:41 AM on April 27

I'm going to admit that I'm in the buy camp.

I'm assuming I'm going to need a place for my stuff until I die and that I'm not going to die terribly young. I didn't aim very high. It needed, and still needs, lots of work, but, on the other hand, I could pay it off in five years without too much struggle. Assuming I kick off the moment I reach the national average I can expect to have lived 20-30 years sans house payment.

More importantly - I WILL NEVER HAVE TO DEAL WITH A LANDLORD! No sudden, inexplicable 15% increase in rent. No stuff not getting fixed and then getting blamed for the original failure when I break down and fix it myself. No, "Oh, I'm selling the place so you have to move when the lease is up. If I want to repaint, I can. Built-in furniture - no problem. If I want to add a door between the living room and the library, well, paging Dr. Sawsall!
posted by Kid Charlemagne at 6:41 AM on April 27 [2 favorites has favorites]

until your interest (and other deductions) are bigger than your standard deduction. If a couple buys a cheap place and pays $10000/year in interest and taxes, they save nothing.

Actually the interest deduction blows through the standard deduction, opening more deductions for you. The $10,900 per year married standard deduction requires a $200K mortgage with a 5% loan and 1% property tax, not that hard to achieve.

Anecdotally, buying anytime from 1940 through, oh, 2002, was an excellent inflation hedge. Plus all these innovation to make ownership easier -- interest deductions, allowing dual incomes to qualify, lowering down payments from 40% to -5%, seeing fixed interest rates go from 9% to 4%, extending loan terms from 15 years to 40, also jacked up the price of housing since the sales price is largely determined on what the bank will lend to buyers, so the more "affordable" we make housing the higher it goes.

My mom has her house paid off now so she can afford, barely, to live on SS. Without it she would not be independent (they bought in 1981 and the VA loan ran about $500/mo). The housing good her paid off house is providing now is worth around $1,000 per month, or the interest from a $300,000 annuity paying 4% after taxes.

I'm renting @ $1750 per month but as long as the house I want to buy is falling by 12X that per year I'm comfortable staying where I am.

Buying has historically been a good investment, but the problem is it is a crowded trade. And when recession hits (the late 80s downturn, the dotcom crash, and the present spindown) housing prices simply have to come down to match the reduced general buying power of the public.
posted by mrt at 6:52 AM on April 27

Nobody says you have to take 30 years to pay off a 30-year mortgage. By sending extra payments when you can, you can shave thousands off the total, and months or years off your commitment. I don't think I have ever only paid the amount that's on my mortgage ticket.
posted by bink at 6:52 AM on April 27

That old adage may have made sense prior to the run-up and implosion of the real estate market. Right now you really need to look on a case by case basis. And never, ever buy if you plan on staying less than 5 years. That is one of the biggest mistake all these flippers made.

For an apples-to-apples example-
I rent in a condo building.
An identical unit to the one I rent (actually worse as its on lower floor than mine) has been listed for sale at 330x my monthly rent. About 40% of my rent goes to the monthly condo maintenance&taxes from looking at this comparable listing. The monthly carrying cost is 2.3x my rent, for the privilege of holding an asset likely to decline another year or two.
posted by gomess at 6:53 AM on April 27

Your rent is likely to keep going up year after year, while a house payment with a fixed-rate mortgage will stay the same.

A lot of the financial advantages of home ownership only show up after staying in a place 5 years or so. It might be more expensive initially, but if your friends are planning on staying in place for a long time then their calculations might tell them that it is better to buy.
posted by selfmedicating at 6:58 AM on April 27 [1 favorite has favorites]

Except, that I'm perhaps saving $10,000 a year because my rent is that much cheaper than buying a comparable place in Brooklyn in my neighborhood. Over 30 years, what do I have to show for it? $300,000 plus compound interest.
posted by yeti at 6:58 AM on April 27

There is no universal truth in this area. It all depends upon where you live, what your needs are, your income, taxes, etc. One thing no really being discussed too much here, rent payments tend to go up every year and mortgage payments do not. Property taxes also tend to rise, but the impact is far less than rent payments. Also, people keep mentioning insurance as if it only applies to owners. If you rent you need renter's insurance, and this is relatively inexpensive. If you need a lot of space and you plan on being somewhere for a long time owning often beats renting, but do the math.
posted by caddis at 7:00 AM on April 27 [1 favorite has favorites]

Over 30 years, what do I have to show for it? $300,000 plus compound interest.

depends on what happens to rents. The 20th century featured the postwar population boom that put pressure on housing in many areas, which jacked up prices in the 1970s as all the boomers started forming new households.

What's Brooklyn going to look like in 2040? Will rents be $3,000 per month or $30,000 per month?

One cannot know.
posted by mrt at 7:03 AM on April 27

No one has mentioned the fact that you get a federal tax break from the interest on your home mortgage.

Although that's another case of oversimplification. You get to deduct your interest, but you also lose your standard deduction which is quite sizable.
posted by smackfu at 7:11 AM on April 27

It's just a silly folk saying. You'd expect the cost of renting and owning similar properties to track each other very closely, since producers in both categories are in competition with each other.

This can be confusing, since there are so many factors to consider. Homeowners pay insurance, tax and maintenance expenses, but get a hefty tax rebate and can cash in on real estate market growth. Renters get the hard-to-calculate benefit of reduced risk of falling real estate prices. But when everything is factored in, the cost of renting and owning the same property for the same period of time is usually similar.

You could possibly get a good deal if you have different preferences from the average person. Let's say the average person enjoys owning a house 10% more than they would enjoy renting the same house for the same price, but you are indifferent. Then you could rent, and get the same satisfaction as owning for only 90% of the cost.
posted by miyabo at 7:31 AM on April 27

gimonca: In addition, if you get a standard fixed-rate 30-year mortgage, and if there are any periods of inflation over that 30 years, inflation should push down the monthly out-of-pocket in real terms.

YES.

Unless you signed up for a variable-rate mortgage (which you should never do, unless you really, really, really know what you're doing), you're locking in your housing costs for the duration of the mortgage, which extends far beyond any lease. Inflation always trends upward in a healthy economy.
posted by mkultra at 7:33 AM on April 27

I keep hearing people say that they don't want to waste money on rent and that's why they buy a house/condo.

Figuring out whether buying a home makes financial sense is hugely complicated. For example, most people overstate the benefit of the tax benefits. The standard deduction is pretty high. Until you've exceed it, you've not benefited from the mortgage interest deduction. Then you have to factor in the costs of taxes, insurance, repairs, and time lost caring for the place. The last two ended up being much more burdensome than I had anticipated. So to answer your question, most people spout that line because it's a flip response to a complicated question.
posted by malp at 7:33 AM on April 27 [1 favorite has favorites]

Actually the interest deduction blows through the standard deduction, opening more deductions for you.

If it does, which depends pretty radically on where you live.

I live in western NY in a detached 4-bedroom house in an established first-ring suburb in the catchment of one of the best elementary schools in the area.

Our mortgage interest for last year was nonetheless only about $8500, and we put nothing down.

If the property taxes here weren't astro-fucking-nomical (about 40% of our P+I), itemizing wouldn't have saved us squat, and as it is it didn't save us much. And in a few years, increases in the standard deduction and decreases in how much interest we pay will mean that itemizing stops being useful.
posted by ROU_Xenophobe at 7:45 AM on April 27

What's Brooklyn going to look like in 2040? Will rents be $3,000 per month or $30,000 per month? One cannot know.

Myself, and other young renters I know, look at the flip side of this. I see people my age and older eager to buy who got annihilated by the bubble. OTOH my grandma got a really good deal with inflation in the 70's. I could easily afford to buy, but I have no idea what property here will be worth in 10, 15 years in my area. Could be the next hot area, could be detroit. So why should someone like me put 2/3, 3/4 of my total savings into real estate speculation? Doesn't it seem a little strange to expect normal people to put all their assets into one speculative investment?
posted by a robot made out of meat at 7:47 AM on April 27 [5 favorites has favorites]

For me, the issue is one of control of my environment. I've owned my own place for a few years, but had to move to another city for a year for work. It's definitely only a year there, so I rented an apartment. I gotta say, I hate dealing with the landlord. They lie. It's a hassle getting them to do any maintenance. I hate dealing with them. Luckily, my year is almost up and I'm moving back.

In my home, like people above have mentioned, I can do whatever I want to it. If I want to make the place more energy efficient, I can. If I want to paint the walls black, I can. If I want to hang a pot rack, I can. The feeling of freedom is awesome.

I hope to be fortunate enough to never have to rent again. But realistically, I probably will have to at some point.

So, yes, if you stay in a place long enough, your lifestyle fits it, and the economic climate works for you when you buy, owning your own home can be financially good for you. My in-laws have the mindset that "paying rent is throwing money away" and it's really frustrating to talk to them about real estate. So I don't. :)
posted by reddot at 7:49 AM on April 27

"I have done the calculations myself and after all fees/maintenance/tax advantages etc. buying is always much more expensive than renting (at least in my current area/financial situation)."

In the long term 80+% of the time this isn't the case. Even minimal observation shows that the average landlord isn't some altruistic Mother Theresa like figure. Rather landlords are very interested in turning a profit. If all their expenses weren't being covered by rent with at least a little bit extra to cover the hassle they wouldn't be landlords.

The fact that landlords are down right nasty about turning a profit is an essential indicator of a housing bubble. If a (25 year mortgage payment with 25% down + taxes + a bit for maintenance) > what you can reasonably charge for rent then housing is over valued. The flippers left holding the bag are finding this out the hard way which is one of the reasons foreclosures are running so high. They bought overvalued housing stock whose payments can not be supported by rents.

Just as an example I'll show the figures for my house. When I bought it I put 35% down. My mortgage payment is a touch less than 3X. My house (Single Family + suite) was being rented for 3X up and 2X down. The tenants were splitting all utilities 2/3rds up 1/3rd down. Annual Taxes are 5X (2/5ths of which is homesteader rebated) and there are no HOA/Condo fees. Annual insurance is 2X As you can see that left the former owner 17X annually for maintenance and profit.

And honestly the upstairs should have been renting for at least 3.5X. I know because I tried in vain to find a place to rent for 8 months (vacancy rate less than 0.5%) and that would have been the minimum going rate. The tenants were protected a bit by government mandated maximum rent increases. And they were royally pissed about being evicted (because they were going to have to pay market rates at their new rental and because finding a rental property that allowed pets and smokers would be a serious challenge) to the point I had to threaten to call the mounties to get them to vacate.
posted by Mitheral at 7:55 AM on April 27

Couldn't find if anyone posted THIS.

Basically, a calculator that you can use to plug in rent/mortgage numbers - it outputs a graph showing which one makes more financial sense starting now and going into the future.
posted by infinitefloatingbrains at 8:02 AM on April 27 [2 favorites has favorites]

We paid off a 30 year mortgage in just 15 years, thus avoiding a lot of the interest, and we now own our house outright. I'm 43, I plan to live here for...well, ever (my folks live in the same state and I was born here, so I doubt that will change). I can still travel and all of that, but I have the security of knowing I am set for a place to live.

So, for me, the owning vs. renting argument is a no-brainer. I can't imagine having to rent again, would hate to go through that (rent ALWAYS goes up, apartments are a lot less secure in terms of theft, etc, no homestead exemption, landlords and maintenance problems). I also can't understand why anyone wouldn't go for a fixed-rate mortgage, presuming they have the credit rating to get one in the first place, over an adjustable-rate mortgage, which to me is just giving the bank permission to take your money a couple years down the line.

One aspect that hasn't been mentioned here: in addition to having a house to gift your heirs, when you own a home, there is the option of a reverse mortgage when you are older and on a fixed income. This has helped my in-laws, for example, with medical and dental bills and other unforeseen expenses, now that they are reaching their 80's. None of their kids will need to inherit a home from them, so they are now receiving monthly payments from the bank to supplement their income. We'd be glad to help them out financially, of course, but they are proud people and this arrangement suits their individual lifestyle quite well.
posted by misha at 8:09 AM on April 27

Also, don't neglect that when you buy, assuming you don't do something really dumb like an adjustable mortgage (never, never, never) your housing price is then a fixed cost, potentially for the rest of your life. Yes, taxes will change, and maintenance will fluctuate, but the actual month-to-month payment won't really vary. Meanwhile, hopefully, your salary WILL continue to increase over the 15-30 years of the life of your loan, making the overall cost per month a lesser and lesser slice of your check.

Contrast this with renting, where in most cases I know of, the landlord/property owner will continue to raise rent every so often (yearly or so in the cases when I was renting). So your overall payment ratio won't drop at the same rate as purchasing.
posted by griffey at 8:12 AM on April 27

"I have done the calculations myself..."

You may have done some calculations, but you haven't done all of them because they aren't all doable, because there are too many variables in play to achieve anything like certainty. The best you can do is to study history and current conditions, place your bets, and hedge them. Calculations are helpful in modeling possible futures, but they aren't crystal balls.
posted by jon1270 at 8:16 AM on April 27 [1 favorite has favorites]

mortgage plus interest never increases. Never.

What about adjustable rate mortgages and balloon payments?
posted by Mo Nickels at 9:07 AM on April 27

..apartments are a lot less secure in terms of theft, etc....

I have rented in several states and have never experienced (thank God) theft. However, homeowners around me have experienced horrors ranging from car break-ins to armed home invasions. Houses are no more secure than apartments.
posted by Piscean at 9:09 AM on April 27 [2 favorites has favorites]

mortgage plus interest never increases. Never.

What about adjustable rate mortgages and balloon payments?

Yes, I'm sorry, you're correct. I should have said something more like "If you are sane, your mortgage plus interest never increases. Never."

Disclaimer: Yeah, yeah, I'm sure there are people out there who ARMs and balloons make sense for. But, generally speaking, they're just plain crazy things to get yourself into.
posted by Flunkie at 9:15 AM on April 27

I could easily afford to buy, but I have no idea what property here will be worth in 10, 15 years in my area. Could be the next hot area, could be detroit. So why should someone like me put 2/3, 3/4 of my total savings into real estate speculation? Doesn't it seem a little strange to expect normal people to put all their assets into one speculative investment?

I agree, many people make buying a house sound like a great investment when really your money could be put to better uses in the long run. But the big question is, where is 2/3-3/4 of your savings going to go if it doesn't go to equity in your house? If you own a house, you pay $X in interest/other expenses every month, along with $Y in equity from paying down the principal. If you rent, you pay $X on rent, but where does the rest go?

People don't usually take out a home equity loan to pay for an expensive wedding, for example, but I've seen people go broke paying for one by draining their savings accounts. Owning a house to a certain extent forces you to save money, which is for a lot of people the only way they will do it. Even if you buy a house in what turns out to be a terrible area 30 years later, and ends up being worth less than you bought it for, at least at the end of 30 years you still have a place to live. Renting works if you always have a steady income, but these days unless you're also paying money into your 401(k) and making other smart financial decisions you're not going to have enough money coming in to sustain it once you retire.
posted by burnmp3s at 9:18 AM on April 27 [1 favorite has favorites]

IT all depends on your area. A lot of people keep forgetting about PROPERTY TAXES.

Here on long island property taxes are easily 10,000 a year. so break that up monthly then add that to your mortgage home owners insurance ,flood insurance and all your bills.

Owning a home in my area(on long island) can easilly be $1000 or so more then renting.

so it all depends on where you live.
posted by majortom1981 at 9:24 AM on April 27 [1 favorite has favorites]

Mark Morford actually did a column on this late last year in the San Francisco Chronicle. When he dared to say it might be better to rent than to own, there were TONS of angry letters. Interestingly, very few were about "throwing your money away" or "a house is an investment." Almost all were rants about douchey landlords, no-pet policies, and poorly maintained dwellings.

Now that I'm positioned for a much higher-compensated career, I plan to own, even though it's insanely expensive here. Owning means you don't have to settle for cheapo energy-hog appliances and use them until they break. Owning means you can get double-paned windows and not have to beg your landlord to at least insulate, only to be told "no." Owning means I can have five cats if I want (barring restrictive HOA clauses). Owning basically means no more corrupt/insane/just plain douchey and cheap landlords and management companies. For me, for others who answered this question, and for many others, it appears that this is the biggest appeal of owning vs. renting even if it might not be the best financial decision.
posted by Rosie M. Banks at 9:32 AM on April 27

The sort of house I could afford and would want in Austin would be in the $300K range. I'm currently renting for what property taxes and insurance would cost me if I'd bought. Home price increases are close to flat at the moment, and I'm saving tons of money on what I would be spending on home maintenance, yard care and the occasional big expense (replacing an appliance, for instance.) I'm also able to live in a much more compact space as a renter than I could find in the "right" neighborhood as a buyer, which reduces my expenses even more. I have a one bedroom, which is fine for me. If I bought, I'd want a couple of extra bedrooms and two bathrooms, as I like to have guests.

In short, I'm saving far more money than I would ever be earning in real equity in a house, outside of peak "bubble" moments - which one is a fool to expect. I'll buy when the time seems right, but when I do so, I'll have a lot more than 20% down and therefore I'll save a lot of money I would have been paying in interest. I'm also overseas often at this stage in my life, and not having to worry about an empty house is worth something too. For me, renting is a huge savings over buying, even looking at the long-term.

I think one reason that a lot of people buy into the buying-is-better thing is because they're bad savers, and they would spend a lot of the money they could be saving while renting. So for them, buying a home ends up being kind of a forced savings account. I'm happy that works for them, but it's not something I would base a financial decision on - I can handle saving.
posted by Dee Xtrovert at 9:35 AM on April 27 [1 favorite has favorites]

One other issue is that it's not always possible to rent the property you want. A 4-bedroom house was very difficult to rent in my previous city, in my new city is the same or more expensive fro a straight monthly payment perspective. But otherwise people seem to have covered the major points. And while the real estate market has indeed tanked, I made a very, very substantial return on my first two homes. Those kind of returns may not lest forever, but they're great while they last.
posted by GuyZero at 11:31 AM on April 27

We bought our house 10 years ago, have seen its value double and because we live in a "decent part of Oakland the house has kept its value.

That said I would never consider buying a house knowing what I now know. Unless you have sacks of money or settle for buying a shit box new house in the far burbs the house is a constant draw on your wallet.

Rent and you have all the money and time you will spend maintaining "your" house. What can you do with the time and money when you are not painting plumbing or weeding? I'll never know.

Home ownership is a ball and chain.

Don't get me started on marriage.
posted by pianomover at 11:42 AM on April 27 [2 favorites has favorites]

There's a mountain of discussions about this on this site, and they all go pretty much the same way: Depending on your circumstances and location, it MAY be advantageous to rent or to own. And in addition to strictly financial advantages of each, there may be other advantages based on your personal view (for me, sharing a wall with a stranger was a nightmare -- everyplace I rented, I had a noisy neighbor that I wanted to kill.) Each person must figure it out for themselves.

My own view: I bought a house and rent out 2 of the bedrooms. The amount I make in rent pays for my mortgage, so there's no downside at all -- buying was the smartest thing I ever did.
posted by coolguymichael at 11:56 AM on April 27 [2 favorites has favorites]

All other things being equal (which they never are), if I buy a house and rent it to you at a profit, then your cost of living there will be greater than if you buy the house, since there is no profit to the landowner.

If you rent, it makes sense to put some money aside every month to build an equity cushion. Makes sense to do that even if you don't rent.
posted by theora55 at 12:01 PM on April 27

if I buy a house and rent it to you at a profit

California's infamous Prop 13 gives landlords an advantage over buyers since many of them have their property tax basis fixed at a level from decades ago.
posted by GuyZero at 12:31 PM on April 27 [1 favorite has favorites]

Billysunday had a pretty good answer. It all depends on circumstances so there is no single conclusion. The NYTimes calculator is about as good a guess you will get on the trade offs, but it depends on the assumptions you put into the calculator.

As billysunday says, owning a home should really be a lifestyle choice, not an investment. The people who claim that owning a home builds equity are forgetting that they are foregoing the opportunity to make other investments by paying a mortgage that is higher than rent. If you are a renter and good saver, at the end of 30 years you can have the same money in cash or stock equities as the homeowner has in their house. Their money is illiquid, tied up in their house. You have cash that you can spend as you like. This includes buying a home in the area of your choice rather than owning the place the home owner got stuck in 30 years ago. Or you can continue renting with enormous pile of cash that you have, if you prefer. The homeowner has fewer options.
posted by JackFlash at 12:46 PM on April 27 [2 favorites has favorites]

well, here's the deal... If you are comparing renting a home to buying the same home, buying it should always be the cheaper option. Simply because who ever is going to rent that house to you is going to make a profit off it.

Now if you want to change the balance of the equation by comparing different homes, or houses to apartments, that is a different story.
posted by magikker at 12:59 PM on April 27

If you are comparing renting a home to buying the same home, buying it should always be the cheaper option. Simply because who ever is going to rent that house to you is going to make a profit off it.

This is just not true. Landlords have all sorts of tax deductions not available to home owners so their costs are lower. Housing markets are highly efficient. If there were large profits to be had, then landlords would bid up the prices to houses so that home owning would become more expensive. Home owners pay a premium for housing because they put a higher value on the home owning lifestyle. This is not necessarily so for renters or landlords.
posted by JackFlash at 1:19 PM on April 27

It's nice not having to deal with a landlord, with being able to paint your walls any color you want or take down a wall between 2 rooms, install another bathroom, have a backyard, have an attic for storage and a basement for a hanging-out room, replace the crappy washing machine to a more energy-efficient one, not worry about a lease, not have to wonder whether the landlord will want to sell your place or not after the lease is up. While you can rent a house which has a backyard and more closet space than an apartment, most people rent apartments and don't have those luxuries.

And, assuming house prices go up, you can make a profit and it's a good investment. I'm just sick of renting because I want to do what I want with my own space.
posted by KateHasQuestions at 1:25 PM on April 27

lots of people are wrong about this; a few people upthread were right, so let me throw my weight on that side. The simplest answer I can think of to refute your argument can be summed up in a single sentence:

Landlords own the space that you rent, and they own property in order to make a profit.

Simple, right? Nobody would ever invest in real estate if there were no profit potential. Your rent pays their mortgage, insurance, taxes, maintenance, and then some. Granted, in a bad market, owners can lose money, if market rates don't support their target rent. That's the penalty for a bad investment decision. But saying that it ALWAYS makes sense to rent is like saying that it's better to keep money stuffed under your mattress rather than put it in an interest-bearing savings or investment account. Yes, sometimes the owner/investor makes a bad decision and ends up throwing money away instead of profiting. However, the renter/mattress-stuffer ALWAYS throws money away due to inflation and (literally) rent.

Now, for any given individual, circumstances play a large part in whether to rent or buy their primary residence. Many considerations are non-financial: do you want to be tied down to illiquid property in a down market? Do you long for the freedom to renovate your home to suit your tastes? Those are some big reasons for or against that have nothing to do with money. But the big reasons that do involve money also involve time, to wit: the time value of money. Money today is worth a lot more than money in the future, and both renting AND buying involve payments in the future. You can't take simple dollar amounts and add them up to compare the two options. You have to adjust future payments to their present worth in order to get a dollars-to-dollars comparison. And often, buying makes more sense.

Another different way of thinking about this, that doesn't involve math, that may help you to see the situation differently: when you pay a fixed-rate mortgage, the payment never goes up. $1000 a month for a mortgage feels like a lot today when market rent on that home is $750, but it will be nice 20 years from now when the mortgage payment is still $1000 but market rent on that home is $2000 or more.
posted by Chris4d at 3:54 PM on April 27 [1 favorite has favorites]

FWIW when we were looking at moving to a place (near a famous resort type area) where the rent vs mortgage rates where way out of kilter (you could rent a place for about $1200/month or buy the same place with a monthly mortgage payment of about $2800/month), it was clear that the most prudent course would have been to rent the house and put the extra $1400/month into some kind of investment or retirement account.

In that case, buying the house was clearly "throwing money away" whereas renting was a (relative) bargain.

(And that was maybe 2-3 years ago, so you can imagine how happy we are to NOT be in some crazy 80/20 mortgage at nearly $3000/month, in a house worth 60% what we paid for it then and a 5 year balloon coming up real soon now . . . )

By contrast, the house we're currently in started out with mortgage payment about the same as the cheapest apartment we could have fit into in our area, even though the house is quite a bit nicer in various ways.

And now, some year later, our mortgage is quite a bit less than rent would have been, plus we are building equity, etc.

So it really does depend on the particulars of your local housing market, interest rates, and all the rest.

Sometimes renting is a better deal and sometimes buying is--even assuming you're going to stay in the same place for a relatively long time.
posted by flug at 7:30 PM on April 27 [1 favorite has favorites]

Landlords own the space that you rent, and they own property in order to make a profit.

This is the certainly the overall rule of thumb but in a number of U.S. housing markets the rental vs. purchase prices have been incredibly out of wack for quite some time and so the "profit" part of it really doesn't work the way one would think.

Just for example it's been quite common in certain U.S. markets recently for monthly rental and monthly mortgage payments to be nowhere near each other. Typically the rental price has been far lower--sometimes 50% or even less of the monthly mortgage payment if you were to buy the same property.

(Not surprisingly, many people take this as a sign that the housing prices in such markets are out of touch with reality! That is undoubtedly true, but it's also true that markets can stay in that crazy state for far longer than one might expect, and if you are living in one of those crazy markets then the conventional wisdom about what a great idea it is to buy vs rent just simply doesn't apply to you.)

In markets like these, especially if people feel like the situation will continue more or less indefinitely (say, the central part of large metro areas) relatively wealthy people will buy properties as a long-term investment, knowing that they will definitely lose money on the difference between their mortgage and the rent in the short term.

But they are betting that they will make money overall in the long term when they sell the property.

In some cases it can even be advantageous (especially for tax purposes) for people to take a loss in the short- to medium term, especially if they think they can make it back, and more, in the long term.

The tax advantages plus a reputation that real estate in a certain area is a "good investment" can cause the cost of buying real estate to go up (now investors are competing to buy properties, leading to increased demand, leading to higher prices) while simultaneously causing rents to drop (all those investors need to rent their properties out, leading to an oversupply of rentals and thus causing rent to drop).

The result in such situations is the price to rent a particular property can be far, far less than the monthly mortgage payments to purchase the same property.

Two particular markets I happen to know in that situation over the past few years are San Francisco, CA, and Sun Valley, ID.

However it's quite common in the densely populated parts of many big cities--real estate can take on a value that seems quite disproportionate to the amount of rent the property can realistically generate.

Whether this is a real, sustainable long-term phenomenon or some temporary weirdness of our recent housing bubble I'll leave for wiser heads to discuss.

But again--if you live in such an area, the conventional wisdom of "Landlords own the space that you rent, and they own property in order to make a profit" just doesn't apply--because the landlords just aren't breaking even on their rental payments.

They're losing money every month and so will you, if you buy in that market at that time.

Just like the investors, you might make money in the long run if you can stand the loss in the short and medium term, and if you win your bet that housing prices will continue to rise in the long term.

But you might also lose your shirt--either by going bankrupt by too-high payments in the short/medium term, or if housing prices don't rise in the end.

For investors, your house in one investment among many--they can stand the loss if it comes to that. For you, it's your one and only home and if it goes bust you likely will go with it . . .
posted by flug at 8:00 PM on April 27 [1 favorite has favorites]

However, the renter/mattress-stuffer ALWAYS throws money away due to inflation and (literally) rent.

In a perfect world, yes. But this is not a perfect world. I've lived in places where rent was about 35% of what the smallest house in a similar neighborhood would have cost me as an owner. It'd been that way for decades, according to long-term renters I knew. At that rate, they're certainly not throwing their money away by renting.

This is true today, where I live in Austin. Last year, I subtracted my rent from what a house would have cost me for the year, and put the surplus in the bank. As I mentioned earlier, my rent is about what my property tax would have been if I owned. In the past twelve months, I've banked about $18,700 by *just* by doing that. This amount is more than double what I would have gained by owning, given expected housing price increases in Austin . . . and it doesn't take into account the "extra" money I would have to pay out in increased utilities, maintenance and many other things had I bought. My money's in the bank, earning interest roughly comparable to the expected increase in home prices for Austin annually. Unless a radical new bubble occurs - and that may not be for quite a while, if ever within my life - someone who bought a home last year simply won't keep up (in equity) with the money I'm saving by renting. And if prices do shoot up quickly, I'll have more than enough to buy within my desired price immediately.

At the start of this post, I mentioned a perfect world. You're comparing apples to apples when you compare renting to buying. But most people - like me - rent places they'd never buy. I mentioned this before, too - I'll buy a 3 bedroom, 2 full bath house. I live in a one-bedroom, one-bath apartment and I'm happy - but I'd never buy such a place. That's how renters can come out way ahead . . . by living simply until they can easily afford a house, not by struggling to hang onto something they weren't quite ready for. The renting vs buying things isn't nearly as simplistic as you put it.
posted by Dee Xtrovert at 8:52 PM on April 27 [3 favorites has favorites]

I think it depends on your area and how your local real estate market is doing right now.
posted by qvtqht at 12:18 PM on May 3

I thought I'd mention this because I didn't see anyone else bring it up.

We made the decision to buy on a 30-year mortgage for many reasons but one of them is that when we are 65, our mortgage will be paid off. This means no rent or house payments, which means our pension will go twice as far as it otherwise would have.

That was the deal-sealer for us.

Granted where we live there are no property taxes, but everywhere I've lived (NY, NJ, RI, London) the property taxes didn't come anywhere near to that kind of monthly expenditure, even when you take that into the equation.
posted by DarlingBri at 11:56 AM on August 27