For us, renting would have been a much wiser financial decision than buying with $0 down like we did 3 years back – hindsight’s 20/20. Now I just need to focus on accelerated reduction of our mortgage note.

You will have maintenance costs that renters would not have to pay for. That must be subtracted from your profits if you’re comparing buying with renting. There’s a risk California might change the law that will allow property taxes to be based on appraised value, not purchase value, so your taxes may increase much more than 2% a year.

I don’t think you necessarily made a bad decision in buying a house, and it may turn out to be a better choice than renting plus investing the difference, but it’s easier to rationalize after the fact especially when it’s easy to make assumptions that support your conclusion.

I think I’ll buy :)

I bought a house for $400K in 2009 after the same property would have priced at $550K in 2007. My total cash that I have to put out include the down payment, all kind of paper work, and some fixtures total to about $100K. I got that $8k tax credit refund so the total cash that I put in the house is $92K

I’ll be making monthly mortgage payment of $1585.00 for 360 months = $ 570K

My property tax in Orange County of Southern California for this first year is about $4.2 K and the tax rate is increasing at around 2% a year, over 30 years I’ll be paying a total of around $170k in property tax

My home insurance is about $700/year and assuming the rate is raised by 5% a year, over 30 years I’ll pay a total of around $46k in property insurance

Assuming that my house will appreciate at a rate of 5% a year, in 30 years my house is worth $1.7 million dollars

Total cash that I put in this house = $92k + $570K + $170K + $46 k = $878k, If I sell this home in 30 years I’ll make a profit of $822 K…………….I did not even take into account the mortagage interest and property tax that I can deduct….so tell me why I should rent instead of buy?

I do not envision any kind of major repair or remodeling for this home since the house will be my primary residence for my life and I’m very good at keeping “stuff” well maintained.

There are some good points in that article. Unfortunately, the author has both sensationalized it and not provided a very thorough analysis. That being said – counting on the appreciation of your home’s market value to create wealth is extremely suspect. In my opnion you when considering whether to purchase a home (or stay in a home for that matter) you really should be doing a analysis that is focused on imputed rent, utility and risk. Renting v. owning is a very complex analysis (NYT has one of the best rent v. buy calculators, but you still need to tweak the analysis a bit).

And PLEASE if you are considering a rent and invest the difference strategy carefully consider the asset allocation of your alternative investment (e.g. you’re trying to hedge perpetual rental payments with stocks and the risk of ruin is . . .)

Another advantage to renting where you live is the tax savings. Because we rent the downstairs and our house is a “legal duplex” we now will have 50% of house expenses as a tax write off.

Is it more work? Yes! But it all depends on how you look at it. Because we are willing to put in the extra work, we are getting a house almost for no mortgage cost.
Brandon

We have major problems coming.

Since most homes are leveraged with a mortgage, the leverage compounded with the tax benefits typically equals the average stock market return, with much less risk over the long term (say 10+ years). Yes, in the last 2 years home prices have fallen, for the first time in 80 years, but so did the “stock market”. In fact, the market lost roughly twice as much in the same time period.

And although a primary residence does not create income, it does eliminate inflation on the expense (payment), while allowing inflation (appreciation) on the asset growth. That is a double win, something rent can never compete with.

A primary residence is diversification of assets. An inflation hedge.

Not all investment decisions are based on return or income generation. Some are based on preservation of capital. Or risk avoidance. Or inflation hedges. An investment that rather than providing a direct income stream instead offsets inflation essentially accomplishes the same thing. My payment not going up 4% annually due to inflation effectively replicates a T bond or TIPS that returns 4% annually. And the boring 4% fixed income market, including MBS, is the largest market in the world.

And regarding rental properties, the benefit of rentals is not the income stream. It is the tax deductions (especially the 29 year depreciation schedule) and the appreciation of the home. The monthly positive cash flow is minor if the property is leveraged.

And the average aquisition cost of a home is 3% for real-estate commissions (one side) plus average 2% closing costs. So roughly 5-6% of the purchase price.

If home prices generally average a bit above inflation, say 3-5% appreciation, the payback is roughly 2-3 years. 4 being conservative. So I agree, if you plan on moving within 4 years or so renting is likely less risky and easier. After that, however, the ownership benefits, not including the psycological perks of “it is mine” and stability become exponentially clearer.

First, these comparisons completely depend on what and when you buy and sell. There plenty of people that have made tons of money investing in Real Estate (even on one house that they lived in for a limited amount of time).

For the average person, owning a home and eventually paying it off provides a great deal of security and lowers their cost of living as they approach and live through retirement. While it may not have made as much as a good stock portfolio at a specific point in time it keeps them warm and dry…..

What a great post!

In other words, you would have done better financially by leaving your money in cash! (But at least you had a roof over your head, the real purpose of a home whether rented or owned.)

You don’t make much money with real estate at all, if any, unless it creates income, and your residence usually doesn’t create income.

Now, about renting. I’m not saying it always makes financial sense to rent rather than buy your primary residence. That depends entirely on your situation. But the chances are the crossover point — the amount of time you’ve owned your house before you come out financially ahead of renting a similar residence — comes much later than you think. Many families do not live in the same house long enough to experience the crossover point. You can play around with the figures yourself at the New York Times’ rent vs. buy calculator.

The decision to buy a house (to live in) is based more on family need and preference. Though some financial consideration is necessary as well, viewing your own home as an investment that can compete with investing in stocks or companies is a losing bet. Investment decisions are not made the same way you decide to buy a house; investment decisions are based on anticipated return and potential income generation.

It’s quite possible you buy into a hot market at the right time and are able to experience some great returns, but that doesn’t happen very often and should not be a given due to real estate’s poor track record of appreciation. Just like stocks, timing the real estate market usually results in poorer than average performance.

Whether or not a home will be a good investment will depend on the local market. Seattle is not Detroit and New York City is not Austin Texas. The most important thing about real estate: Location, location, location. Some markets appreciate much better than others. Some markets the rents are much higher and some places the mortgages are much higher. If you look at two equivalent homes one for rent and the other for purchase and the rent is much less than the mortgage then renting might make more sense, but if the rent is close to or lower than the mortgage then I’d buy.

No distinguishing necessary. Your argument assumes you have choice a or b. Make money or spend money on a property. But you don’t have either or. Everyone MUST live somewhere.

The choice is do you rent from yourself (OWN) or rent from someone else (RENT)

By your retort, you infer that landlords that own rental property should then in turn rent their own primary residence and invest the difference (if there is a difference) in the stock market. Run that past a few big landlords and see how long it takes them to stop laughing.

If that is the case, which it is not, who do they rent from? should they rent from someone else or themselves? If they own rentals, and rentals are profitable, and their primary residence should also be a rental, then why not rent one of their own rentals from themselves. Then they are both the renter and the rentee. According to your logic they are then kicking the systems you know what.

Real Estate is always an investment, becasue there is always an asset. Whether you as the owner decide to make it into a non owner occupied, or an owner occupied, does not change the assets value or rate of return. It does affect the cash flow, but only to the extent that you are tranfering cash outflow from that property to another that must provide you with shelter.

You can’t preditc the appreciation return on the asset (home value) although historically it is a bit above inflation, but you can guarantee the fixed cost of the payment, shich is a hedge agains inflation. A mortgage combines your renting and tips bonds theory into one handy dandy investment. In fact, that is essentially what a fixed rate home loan is. and has been for decades.

In the short term, for temporary purposes renting does make sense, but only to the point it offsets the aquisition costs. All property has carring costs, both rentals and owned. All property has taxes, insurance, maintenence, etc. Rent has those costs factored into the monthly rent. As I said before, landlords are not dumb. They factor in all the costs of owning a home into rent,

So the difference between renting and owning is 1)acuisition cost 2)expense stability 3)asset appreciation. That is it. Renting wins in the short term because it takes some time, usually 3-5 years to offset the acquisition costs. After that, Owning wins. Always.

Sure, if you’re a bad saver, buying a place is a good savings vehicle, but like any investment, there is no guaranteed rate of return. In 30 years you’d like to hope you have recovered the cost of the place, but really, all you got out of it was the utility of living there.

Currently I struggle with a condo that is underwater and down 20% from its purchase price and 40% from its peak value. Since I cannot sell it for a profit, I am turning it into a rental, but even that has a cost associated with it and I will have to sell my condo later for at least 10% above its original purchase price to feel that I recouped any cost, despite having lived there for 5 years as my primary residence.

And this doesn’t even touch on the tax benefits of home ownership (Interest and Tax deductions, $8000 FTHB tax credit), which also need to be taken into consideration when comparing the rent vs. buy situation. Nor are you considering the fact that rent will go up while my P&I is locked. And of course there is the speculative part of this in that Real Estate tends to perform well during times of hyper inflation, which some are expecting in our future.

Suffice to say, there’s a lot that needs to be considered in the rent vs. buy equation, and blanket statements such as “stocks outperform buying a house by leaps and bounds over long periods of time” can not be made. Yes, stocks will outperform buying a house if that was the simple choice, alas, I still need a roof over my head!