The Renter’s Manifesto

http://www.mint.com/blog/goals/rent-vs-buy/

by limist • 16 years ago

52 67 16 years ago

earl5• 16 years ago

My experience may be useful only for sf, but I live in the city in a nice (by my definition of nice: 100+ years old, solid wood floors, plaster walls, detailed woodwork, thick aged wooden doors, handmade ironwork) apartment. My landlord would like to sell the place to us, but our rent doesn't even cover the mortgage with a $100K downpayment. By the time you add HOA fees, insurance, taxes, and a 3-5% of value annual maintenance investment, my landlord pays me some $800-$1000/month to live in his apartment. Which is fine by me.

nopassrecover2• 16 years ago

In Australia we have a concept called negative gearing which allows you to deduct that 800-1000/month off your income taxes.

jaybol• 16 years ago

I assume you mean for the landlord to deduct his loss, correct?

russell_h• 16 years ago

Why doesn't your landlord raise the rent?

jackfoxy• 16 years ago

Because it's in San Francisco. Rent control.

_delirium2• 16 years ago

It may be cheaper for your landlord to pay all that than it would be for you to do so, though, so he might not be losing that much. In particular, if he bought in a while ago, he probably pays much less than the official rate for property taxes, due to Prop 13 grandfathering in an anciently low valuation.

trjordan• 16 years ago

Big detail missing here: a standard mortgage is the only way for the average person to make an investment with 5x (or more) in leverage. For a 20% down payment, you effectively get to invest 5x your money into a real estate investment of your choice. The real estate market as a whole is certainly less value-producing than something like tech or chemicals, but Joe Salaried can't easily go out and ask his 401(k) plan to leverage him out at 5x his net worth.

It's not for everyone, and it's certainly a risk (like all leveraged investments), but it does provide an opportunity that very few other common financial instruments provide.

_delirium2• 16 years ago

It's becoming a bit easier for the retail investor to do other kinds of leveraged investments, since a lot are now packaged up into ETFs. For example, NYSE:ROM is a 2x-leveraged basket of technology stocks, and NYSE:TNA is a 3x-leveraged derivative of the Russell 2000 small-cap index. Of course, these are not necessarily a better idea than buying a house.

rjett• 16 years ago

These ETFs you talk about are usually leveraged through some combination of options which means they have significant time-value decay, making them an unsuitable long-term investment.

dirtae• 16 years ago

Leveraged ETFs seek to provide the expected return on a daily basis. They do not provide the returns that you might expect over periods longer than a day, and therefore are only useful for day traders.

http://www.etfbase.com/leveraged-etf-decay/

nostrademons• 16 years ago

Why would you want to leverage up an investment whose expected returns are barely above inflation, though? It's a fairly good bet that the appreciation on your home will be less than the interest you're paying on your mortgage, which makes this a net loss. (Particularly now, right after home prices have seen the most spectacular run-up and bubble in nearly a century.)

hugh39• 16 years ago

You'd do it because you expect that the return on this particular property at this particular time will be significantly above inflation.

I think this would be a reasonable bet in cities which have had particularly strong post-bubble deflation but which nonetheless have strong long-term growth prospects. If I had lots of spare money I think I'd be buying up five-figure houses in suburban Sacramento right now.

bokonist• 16 years ago

Why on earth should the average person make an investment with significant leverage? The only reason, ever, to make an investment with leverage is if there is some arbitrage opportunity that requires a large amount of capital to make money from. But by definition, the average person is not going to be able to identify arbitrage opportunities in the housing market.

The real reasons to invest in housing are: a) diversification (so not everything is in bonds or stocks) b) excellent tax treatment c) excellent political protection d) interest rates that are often lower than the monetary inflation rate (by monetary inflation rate I mean growth in M*V - nominal income growth). However, at this point, all the above factors are already capitalized into the price of housing. So at this point there is not much of an economic benefit to buying housing.

groaner• 16 years ago

The "average person" quite possibly thinks he/she is above average in terms of identifying such opportunities (cf. Lake Wobegon effect).

On top of that, there are government initiatives to "encourage home ownership" and to protect "homeowners" even if they bet completely wrong or obtained loans they couldn't possibly have qualified for if the lender had any common sense. These will tip the balance in favor of going into the housing market.

mhb• 16 years ago

Felix Salmon on American home ownership attitudes:

http://blogs.reuters.com/felix-salmon/2010/04/06/the-nationa...

hugh39• 16 years ago

There is absolutely no reason to believe that countries with high levels of homeownership, like the U.S., have better economies than those with low levels of homeownership, like Germany.

And yet the US has a higher per-capita GDP than Germany, right?

Besides, homes have to be owned by somebody. If homes aren't tying up the wealth of Joe Workingclass they'll be tying up the wealth of John Richbastard instead.

How much of the low rate of home ownership in Europe can be attributed to property title? If the only housing units available are blocks of apartments on a single deed then you'd expect a low rate of ownership, whereas if the entire country was split into individual-title houses then you'd expect a much higher rate.

EDIT: Wait, I forgot to mention the screwiest thing about the long-term prospects of Germany: it has a birth rate of 1.4 per couple, way below replacement rate. I'm guessing that this could have a lot to do with the housing supply being concentrated towards small apartments and away from large houses.

earl5• 16 years ago

The US does have a higher per-capita gdp (probably; the numbers are subject to a lot of interpretation) but that is in no small part due to the fact that the rest of the industrialized word was mostly leveled in WWII. As of recently, I believe West Europe's gdp growth numbers are comparable to or exceed those of the US. But again, the devil is in the details in these things.

As for birth rates, well... that's a pretty wild speculation. Demographers have a decent handle, as far as I know, on the causes of low birth rates. Do note that America has a declining population ex immigration, and that the birth rate for white people is below replacement rate and has been for 30 years.

hugh39• 16 years ago

Given a market that is in any way sensible, shouldn't buying wind up cheaper than renting over the long run? Landlords don't buy investment property out of the goodness of their heart, they buy investment property because they think that the money they make in rent, plus the capital gain on the property, minus the various maintenance costs etc, should be sufficient to compensate them for tying up hundreds of thousands of dollars in the asset.

usaar3334• 16 years ago

Who says the market is sensible? There's a lot of noise out there. Someone buying property not only has to guess that an area will go up in value, but they also have to factor in:

1) inflation rates (higher inflation is much better)

2) tax changes (e.g. the passage of prop 13 in California helped investment property owners greatly)

hugh39• 16 years ago

Well I'd never say the market was sensible at any given place and time, but I think it tends to fluctuate back and forth somewhere around the vicinity of "sensible". If you decide that renting is going to be cheaper than buying for the rest of your life then you're gambling on the assumption that the market stays on one particular side of "sensible" for decades.

basman2• 16 years ago

Not necessarily, because there are some effective costs that a homeowner pays that a landlord does not. First, the loss of the ability to move easily. Second, the landlord probably has economies of scale on things like time and money spent on maintenance.

barmstrong2• 16 years ago

Some markets (Texas?) are sensible in exactly that way. California is not.

sown• 16 years ago

What about when I pay a lot of my mortgage early? Say, within a few years?

basman2• 16 years ago

In the limit, that's like buying the house with cash up front, which amounts to betting that the appreciation will exceed any investment income. For example, given person A who paid cash for a house a year ago and person B who put that money into an index fund, in most parts of the country B would be much better off right now.

qeorge• 16 years ago

I'm not a homeowner, but I believe most mortgages are "frontloaded", at least to some extent, so you're paying off the interest before you pay off the principle.

Its not uncommmon to pay ~2x the principal in interest. So I couldn't say for sure, but I don't see it having a huge impact.

teuobk• 16 years ago

Mortgage payments are usually calculated to be equal over time. Therefore, a greater proportion of the early payments goes to interest, but a greater proportion of the later payments goes to principal. Payments in excess of the set payment amount are generally applied to the principal. Thus, making payments in excess of the set payment amount early in the life of the loan will reduce the principal faster than expected, and the total interest paid for the loan will be reduced.

earl5• 16 years ago

Then you're placing bets on inflation vs home price appreciation that are, at best, difficult to predict.

philwelch3• 16 years ago

The mortgage is structured for a given term. If you pay off a 30 year mortgage in 2 years, you're still paying 30 years worth of interest. There's no gain, in fact, you lose because you lose the time value of money.

Paying straight cash for a house, or buying a house on a small fixed interest and a short term already baked into the mortgage, can gain you something. Paying off an existing mortgage early gains you time and the psychological benefits of not worrying about making the mortgage next month. If you're about to die, it lets your descendants take their time selling the house if they can't afford to make the payments.

gaius2• 16 years ago

That is not true. Well, it might be in some specific cases but in the UK at least it's perfectly normal for a lender to impose no penalties for early- or over-payment. Our mortgage market is extremely competitive however (that amplified the effect of the housing bubble).

chime2• 16 years ago

Every now and then I see articles like these. It always seems to me that the author is simply trying to justify the fact that they rent. Renting vs. buying is a very personal decision and has a lot more to do with lifestyle and personal choices than financial soundness. I bought my house in 2005 at almost the top of housing market in Florida. I paid $145k for my house and told everyone about how smart of a financial decision I was making. I've spent $15k in home improvements and my house is now worth $125k. Oops. However, my mortgage is still very low and I can easily afford it regardless of the current worth.

Now the question is, if I could see the future back in 2005, would I still buy this house? If all I could see was the housing crash of 2008-2009, then of course not. But if I could see the great times I've had in this house which includes absolute peace and quiet, friendly neighbors who don't change every other month, and the feeling of a little place by the beach to call my own, I would indeed buy this house. Buying a house has a lot more to do with making it a home than just a shelter for cheap.

Nobody knows the future. I could have rented this exact house and instead of benefiting in the long run, I could have ended up losing more money if rent prices skyrocketed. All I know is that for people who can afford to buy and afford to rent, money has very little to do with buying vs. renting.

timcederman• 16 years ago

I think renting does make more fiscal sense, but there are so many reasons to own your own place beyond finance.

Retric4• 16 years ago

Renting vs. buying is a very personal decision and has a lot more to do with lifestyle and personal choices than financial soundness. Says someone that bought a home.

I want to walk to work and there are no homes for sale in my area. So even if I make 500k / year home ownership would still bring significant negative for my lifestyle. When you consider commuting costs, home ownership is both risky and far more expensive for most young people.

hugh39• 16 years ago

Sounds like a peculiar area if it doesn't have any homes for sale. Still, there must be just as many areas which don't have any homes for rent, right?

vl• 16 years ago

Well, you are talking about $145k, in Bay Area or in Seattle, for example, you can't buy any house at all for this price. Would you still buy this house if it would cost you 600k?

hugh39• 16 years ago

Exactly. It seems to me that the only people who really need to worry about the economics of renting vs buying are those for whom houses are very expensive; either because they live in an expensive area or because they have low incomes. If you can buy all the house you need for $150K and you're earning at least, say, $50K then by all means go ahead and buy a house for the lifestyle reasons. But if the house you need costs ten times your annual salary then you need to think a lot more carefully.

chime2• 16 years ago

Like I said:

> All I know is that for people who can afford to buy and afford to rent, money has very little to do with buying vs. renting.

If I could afford to buy a $600k house and afford to rent a similar house in the same location, whether I buy or not would depend on my personal choice (which is to buy, not rent). If I can't afford to buy, then why even get into a debate. Of course I will rent.

tpz3• 16 years ago

Agreed.

re: "It always seems to me that the author is simply trying to justify the fact that they rent." - this always seems to be the case. The few renters who seem to do well financially would also do well financially as homeowners but for some reason have convinced themselves that the numbers work out better for renting. Maybe it does for those people, maybe it doesn't. I'll come back to that point in the next paragraph. In the meantime, however, the vast majority of renters one might speak to are just pissing away money, are no further in terms of savings than those with mortgages, and have none of the equity built up that those with mortgages have, even those who are pretty new to their mortgages.

Now, back to whether or not those "smart" renters are any better off. First off, I'll readily admit that my single data point is just that, but it bears consideration nonetheless. I bought property in 2005. In a neighbourhood with some growth potential, in an overall market with generally upward movement. Nothing bullish, just generally upward movement. In fact, that movement had been slowing a bit at that point, and continued to slow somewhat more afterwards. We all know what happened next. I sold early this year. I wonder how many smart renters could have done this _well_, even given the shitty few years I happened to own before selling: I paid $500 more per month than what I would have paid to rent the same space (in other words, put me up against a smart renter with $500 to invest each month), for a total of $30,000 "invested" progressively over those five years. I sold for a net profit of $125,000 after all fees, commissions, etc. In a hesitant market still recovering from the nasty troubles we all know too well.

Find me a renter with that kind of ROI on their investments over the last 5 years and I'll congratulate them over a nice lunch which I'll be happy to buy for them.

(crickets)

Yeah, I thought so.

earl5• 16 years ago

The fact that you got lucky and timed the market doesn't mean other people should attempt to do the same, or that they will have any success doing so.

rue• 16 years ago

> I sold for a net profit of $125,000 after all fees, commissions, etc.

Where does that "value" come from? The entire real estate market is built on the premise of property valuation continuously raising - causing and eventually surpassing inflation. This is without even accounting for the actual exploitation/gaming of the system.

Everyone has already forgotten, or chosen not to think about it in favour of short-term gain.

zacharypinter• 16 years ago

"Find me a renter with that kind of ROI on their investments over the last 5 years" is asking the wrong question.

While it's true that there are wins to be made in real estate (and I congratulate you on your successful outcome), there are also losses. Not only did you pay $500 more a month, you took a risk (the degree of which depends on your circumstances) that the home would rise in value. Had it not done so, you'd be stuck paying $500 more a month in addition to other potentially large losses.

Renting is (generally) lower cost, lower risk, lower potential ROI. Buying is (generally) higher cost, higher risk, higher potential ROI.

sage_joch• 16 years ago

I've been debating whether to buy for about a year now, and you make an excellent point. For me, it boils down to the choice between a sense of freedom and a sense of home.

prawn• 16 years ago

(Speaking from the Australian market, so there might be a few things that make the situation different for you.)

If you want to make major improvements or tweak your home, then home ownership beats renting. If you don't plan to live somewhere for more than five years (and transactional costs in buying and selling are harsh, as in South Australia), then renting could be your best option. If you lack financial discipline, then buying can beat a combination of renting and investing in shares.

Of course, you can always buy one place, rent it out and then rent another place yourself.

barmstrong2• 16 years ago

I tend to agree with the article - especially in California it makes no sense to own a home at current prices, rent is a great deal and most landlords with a mortgage have negative cash flow.

In some other markets, like Texas, it's possible to own rental real estate that cash flows.

So this is the strange position I'm in where I own houses to rent but rent the place I live.

patrickk• 16 years ago

Here's a very useful tool from the NY Times that calculates whether you would be better off renting or buying a house (financially speaking):

http://www.nytimes.com/interactive/business/buy-rent-calcula...

Takes into account variables such as monthly rent, house price, down payment, property taxes.... and it has a sweet graph that shows over time where you are financially better off renting or buying. Pretty cool.

Great for anyone who is between two minds about what to do, or is considering investing into a depressed market.

The Renter’s Manifesto

Related Stories