Personal finance blog Get Rich Slowly breaks down the costs, savings, and investment gains associated with both renting and buying similar homes in the same market and finds that renting is a much better financial move. How much better? Tens of thousands of dollars better over the course of 30 years.
The losses start on day one (actually, they are the worst on day one) and continue for a couple decades.
Right off the bat, you see that simply trading straight across from renting to owning results in a 78% more expensive monthly bill. That’s not exactly chump change. With even a slight upgrade from renting to buying (which most first-time buyers are prone to do), you can easily see how the total monthly costs would be more than double.
In fact, not until the homebuyer has been paying down the mortgage for over 20 years will the amount they are “throwing away” be less than the renter.”
They go on to debunk what they call the “owning your own home is a forced savings plan” and “home ownership is an excellent path to build wealth” myths — with pretty convincing arguments. However, they hedge a bit on the final conclusion.
For most people buying a home will result in their largest monthly bill (by far), and because they believe that it will bring them wealth or that they are “throwing away their money” if they rent, they often take on a much larger home debt than a prudent budget would allow. It is a real shame when people are driven to get into the housing market because of misplaced notions of imagined financial benefits. Of course, everyone’s circumstances are different, and for some (particularly those that live away from the coasts) the numbers may actually work out in favor of buying.”
Certainly some of their assumptions can be called into question (and are in the comments) and there are, of course, non-financial reasons for wanting to own a home. That said, they certainly do a good job of showing the “conventional wisdom” of buying over renting may not be that wise a financial move after all.
Like most other financial issues, whether buying or renting is best for your pocketbook depends on your unique situation. Be sure to run the numbers and list the pros and cons (financial and non-financial) before deciding which way to go. Choosing the better of the two options for yourself could net you a hundred thousand dollars or more to your bottom line.— FREE MONEY FINANCE
Renting vs. Buying: The Realities of Home-Ownership [Get Rich Slowly]
(Photo: Getty)
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@silenuswise: First, I agree that there are a variety of factors to consider when deciding whether to rent or buy. You are correct in that is not rocket science.
Second, I would would be very interested to see how many of those people whose ARMs reset and put them out of a home were part of the sub-prime mortage market and should have aimed a little lower when purchasing a home…it does not take a rocket scientist to figure out what your budget is and stick to it when looking for a home. When you look at the apartment and housing rental market in Everett, WA where I live, it is pretty expensive to move in when you need to pay first, last, and deposit. In a lot of cases that is almost a down-payment on a condo right there.
Third…are you just an angry person or what?? Kinda snippy there in your response…almost defensive…just saying.
@JustAGuy2: We paid $66,500 with about $3K down, did some work to the place so had a small 2nd at about $15K and sold it for $115K.
@allirob: You hit the nail on the head. The article gives all kinds of examples of losses and not being able to sell at peaks and all that crap, none of which matters if you buy a house and stay in it. The previous owners of the house we own paid around $85K and we bought the house six years ago at $235K. They got back their investment over 20-some-odd years, and today our $235K purchase is would sell overnight for $350K in a “depressed” economy. Sure, it got up to $450K before the downturn, but over time I will get my equity back. You never see any of it again in a rental situation.
More bad econ.
I bought my house so I could be in charge of what was done to it (e.g., remodeling, painting, pets, etc), not so I could become rich. There’s lots of factors to consider beyond just financial.
Hey everybody, The Tim here, author of the linked article.
First off, I want to say that part in the lead-in here that says “renting is a much better financial move” paints an inaccurate picture of the point I was trying to make. My purpose in writing the article was not to say “renting is better,” but rather to point out many of the financial factors that should be considered when making the comparison between renting and buying.
In the Seattle market, renting is the clear winner. No, the rental was not “cherry-picked.” For those of you pointing out that the owner couldn’t possibly be making money, I think you’re failing to consider that the owner could have bought it pre-bubble. You can find many similar rentals around Seattle for yourself if you care to spend five minutes on Craigslist. Market rates for rentals are not set based on what the owners need to charge to profit, but by what local incomes can support.
In your market, buying may be the clear winner. I’m not going to argue with all of you that are chiming in with counter-examples from your local market. Obviously everyone’s situation is different. That’s the whole point of the article: Figure out the complete financial picture for your unique situation.
In past markets, buying was usually the clear winner. I’m also not going to argue with all of you that are saying things like “well I bought my house 7 years ago and just sold it for a huge profit!” Obviously it was a lot easier to financially justify buying in a pre-bubble market. Duh.
Lastly, to everyone making points like “but rent can increase, and a mortgage is fixed” and “but the maintenance is too high!” Increasing rents vs. fixed mortgage costs were factored in. Maintenance was calculated using a (fairly standard) 1% of purchase price per year.
Thanks for all the feedback, everyone.
I think the running theme, including from the author of the linked article is YMMV ~ best to consider all factors.
As a perspective landlord, I didn’t buy any properties during the real estate bubble because that market rent couldn’t support the mortgage + profit for an investment property. Part of the joy of buying investment (for rent instead of flip) property is that it is pretty clear if you are going to make money and how much based on the purchase price, loan terms, and tax considerations. There is no emotion tied to the analysis because you will never live in the place.
For people who are making the rent vs buy decision. It depends on your plans. Generally speaking if you are planning on being in the same place for a long time (five years or more as a rule of thumb), buying is generally better than renting. If you are not planning on being in the same place for a long time, renting is better because real estate transactions are large built-in costs (points, commissions, etc) that are upfront and need to be “depreciated” over a long period of time.
Generally, rents increase over time which favors the “frozen” payments of a fixed rate mortgage. Generally, home values increase over time which favour ownership over renting.
Conditions which contradict these general concepts are the use of Adjustable Rate Mortgage (ARMs) that allowed many people to borrow more than they could afford during a period of true historically low interest rates and now the “correction” in interest has screwed a lot of those people. Also in “single” industry markets (like the oil cities in Texas in the late 80s, the aerospace communities in Southern California in the 90s, the the “rust belt” communities in the same period), real estate values can be depressed for an extended period of time as people leave with the dissolution of those single industries. In these markets, it would be advantageous to rent as market rates decline with property values.
Overall, there is no absolute right choice to rent vs buy. The right choice is dependent on your personal plans and on your local market conditions.
I think some people are taking the argument out of context.
Just because you bought 10 years ago and now made money doesn’t mean that it’s good to buy _now_.
The current market is not “depressed” yet. If you bought 5 years ago and sold now, you would make money.
The question is, should you buy now, or rent+invest and buy in 4 years? If you had 2 identical people and one bought now and the other waited, who would you think would come out ahead?
In some markets, the renter, in others the buyer.
BTW, the Bay Area (SF, California) has plenty of properties that sell for $800K and rent for less than $2K. You can check my reply at the Get Rich Slowly blog for references from different sources.
For the rich people that own multiple rental properties, chances are, they didn’t buy them at the “wrong” time.
So, in the US there are areas where you should be buying and areas where you should be renting (or selling). If your mortgage is very close to your rent, you should probably buy. If a mortgage would be more than 3 times rent you should probably stick to renting.
To the people that say that they make money even in this “depressed” economy, the question is not how much money did you make since you bought the house, but how much did you make last yeaer and how much will you make this year. If it’s not that much then new buyers should wait.
If you don’t know what the trends are, do some research, like from the US Office of Federal Housing Enterprise Oversight, [www.ofheo.gov], check out the report, and see if a change of -4.4% is good for buying (Like Sacramento, CA in the last year). See the House Pricing Index for 2007. See page 30 for bad cities, page 29 for good cities wrt appreciation last year.
You’re free to read the whole report for a better idea.
Alternatively you can read the news about mortgage companies [news.google.com] and see how they are doing. Apparently not very good, some are declaring bankruptcy because people are not paying. They took risky loans at the wrong time and are defaulting on their payments. Ask them if buying was such a good idea.
Summary, run your own numbers. If you happen to live in Wenatchee, WA, I hope you bought, because prices went up by 25% last year.
And just because on average prices go up, it doesn’t mean that every day is a good day to buy. (or sell).
I get sick of areas too fast (I like change too much) to buy a house. If I ever do buy a house I would rent it out and make money off it. Renting a house out is better then reselling it. Rental gives you residual income over time and more then house selling at one time. Plus if you rent a house out you don’t have to part with it completely and if you want it back you can get it bck when the tenant(s) don’t want to live there anymore. Rental pays for the mortgage and some profit. I wouldn’t buy anything over what I would (in reality) pay in saved money theres a formula to use whether or not it would profit enough to rent it or sell it. All depends on area you live in. Some areas that have more renters than buyers are good but if it’s an area where more buyers are then you might be good to rent if the area has alot of young people. If the area has more established people (specially with kids) then selling is better.
@GreedSucks: “well I bought a house and sold it 7 months later for $100,000 more than I paid for it…so I would say it was a good financial move.
And… when I bought my first condo, the mortgage payment was a couple hundred dollars less a month than I would have been paying for rent anywhere in the city. “- BY RAPIDBLUE
I have had the same experience with renting vs. buying!
“finds that renting is a much better financial move. How much better? Tens of thousands of dollars better over the course of 30 years.”
“Try and tell this to my wife, our two homes and our savings!”-former landlord-Edit for clarity.
This is just more lies to keep people from getting ahead.
Find a rural area by you work and compare rent to home mortgage amounts and you can see quite clearly that to rent is to commit oneself to a life of perpetual poverty. “