Is it better to buy or rent?

http://www.nytimes.com/interactive/2015/06/17/upshot/100000002894612.app.html?smid=fb-nytimes&smtyp=cur&_r=0

by matthijs_ • 11 years ago

88 102 11 years ago

I've always wanted a model like this to point people to. I don't have a dog in the buy/rent column, but I feel like most of these decisions are made without a regard for many pertinent considerations. The main one that bugs me is how long you will likely stay in a place. Completely disregarding market effects, if you're not going to hold onto it long then it's probably not going to work out.

saurik• 11 years ago

16 hours ago: https://news.ycombinator.com/item?id=9741374

20 hours ago: https://news.ycombinator.com/item?id=9739544

393 days ago: https://news.ycombinator.com/item?id=7783201

1775 days ago: https://news.ycombinator.com/item?id=1586757

1884 days ago: https://news.ycombinator.com/item?id=1283190

MrBuddyCasino• 11 years ago

Important comment from an earlier thread: don't ignore the human factor. Buying instead of renting forces you to live more frugal, which is a reason why people who buy are often better off financially when they retire.

nkozyra2• 11 years ago

Buying instead of renting forces you to live more frugal

As a home owner, I'm going to ask someone to elucidate on this sentiment.

frobozz2• 11 years ago

I was no more frugal having bought a house, than when I was putting all my money away towards a deposit on a house, probably even less so.

I would have thought that the biggest reasons were (roughly) freezing your shelter expense against inflation, and putting an upper limit on how long you pay for shelter.

i.e. If I rent a £1000PCM flat for the rest of my life, my bill for shelter will continue to be roughly £1000PCM in today's money for the rest of my life.

If I buy a house with a £1000PCM mortgage payment, it will remain roughly £1000PCM for the rest the mortgage (though current low interest rates mean that it probably won't), which, in 25 years time could be worth just over half as much as it is now. And in 25 years time, I won't have to spend on shelter any more. I will have maintenance costs to pay for, but they are unlikely to equate more than £1000PCM in today's money over my lifetime.

So, where M is homeowner maintenance costs, someone with N+M living expenses is more likely to be better off than someone with £1000+N living expenses.

swingbridge• 11 years ago

It's good to get people thinking about all the things included in the calculator. Most people are totally clueless when it comes to the real cost/value of owning. They only see what someone bought a property for and what it sold for some time later.

A home you live in is almost always a net cost. It's not really an investment so much as its a cost avoidance (vs renting). Buying more house than you need "because this is an investment" is almost always a bad idea if you live in the home and thus are the one footing the bigger tax bill, interest, maintenance, utilities, improvements...

ekianjo3• 11 years ago

A home you live in is almost always a net cost.

Plus it "prevents" you from moving somewhere else. Or let's say, it increases the friction of moving somewhere else. Most home owners stay at the same place for the rest of their lives.

jbb5552• 11 years ago

On the plus side, once you've found somewhere you like you can stay there as long as you want. If you rent it's up to the owner how long you can live there

vonmoltke3• 11 years ago

There are a whole lot of other factors that increase friction more than owning your domicile, and those factors tend to be stronger with people who are motivated to buy:

- Deep networks of friends - Strong community ties - Strong local family ties - Children with their attendant social networks - General aversion to moving frequently

Also, the idea that "most" homeowners never leave is antiquated. Nearly everyone I know who has bought a property has bought more than one before 40.

logicchains• 11 years ago

Does this take into account the risk of a housing market crash? For me, the biggest reason for renting rather than buying is to avoid putting all my bags in one basket; I wouldn't buy $500k worth of shares of one company, so spending $500k on a single house seems similarly risky.

refurb5• 11 years ago

You're looking at it the exact right way. Risk is a two sided-coin. If the local housing market does well, you can make out like a bandit. If it doesn't, you can lose a lot of money.

No different than owning $500K worth of share in a public company.

Nothing wrong with buying a house, but people should be careful not to have their net worth all tied up in a single asset (house or not). The one rule I've heard is 90 minus your age. When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement. Too risky.

cowls• 11 years ago

I disagree, this view is too simplistic.

It's very different to owning shares in a company. You have to either buy a house or rent. You cant opt out entirely, whereas you can with shares.

By choosing to rent, you are betting on the housing market being stagnant or falling, if house prices shoot up and you opted to rent, you will need to now pay higher rents or a bigger mortgage.

So there is risk in renting too

If you decided to rent in london instead of buying 3 years ago, you'd be tens of thousands down

fennecfoxen• 11 years ago

When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement.

That said, if you actually own your home in retirement you've significantly mitigated against the risk of getting priced out by rising rents if the regional economy heats up. That could be a problem on a fixed income.

thechao• 11 years ago

I know this isn't true everywhere, but the last time I did a similar calculation, based on the historic rate of rents increase in my area, buying the house, then just walking away at the end of 30 years was cheaper than rent.

adricnet• 11 years ago

This is actually sometimes the case, though please double-check your analyses before committing to outliers or "betting the farm". Since it does happen and can work for some people / some places it certainly complicates the simplified dichotomy presented in the OP and this topic.

gjm112• 11 years ago

It's not clear to me that, say, $500k of assorted shares + $500k of house is worse than $1M of assorted shares. You've got more in a single asset, which is bad, but you're diversified into more asset classes, which is good.

The picture is a bit different if that $500k is all your assets or even substantially more than all your assets (a common situation for a first-time buyer with a big mortgage). Which suggests you should rent until you've built up substantial investments of other sorts, and then consider buying.

Historically, I think the variability in price of a single house hasn't been any worse than that of, say, a typical index fund. (Disclaimer: I haven't actually checked the figures.)

Of course, all the above treats houses as just another investment. This is a useful perspective, but you're going to be living in your house too, and questions like "can I redesign the bathroom?" and "if there's a flood or an earthquake, am I liable for fixing/replacing everything?" and "am I bothered by the possibility that my landlord might just throw me out one day?" and "can I get up and move somewhere else with minimal hassle?" may be just as important to you as "what is likely to leave me with more valuable assets 20 years from now?".

JamesBarney2• 11 years ago

I think one crucial difference between buying a house and an index fund is people are usually highly leveraged when they buy a house. Example. Assume you 1. Buy house and put down 100k for 500k house. 2. Buy 100k of stock. 3. Both assets drop 20%

Your stock will have lost 20% of it's value and you'll have lost 20k and 20% of your investment in the index fund. Your house will have lost 20% of its value and now at 400k, you've lost 100k of net-worth and 100% of your investment in your house.

ocdtrekkie5• 11 years ago

But if buying is like putting $500k of shares in a company (this is a really expensive house, man), renting is throwing your cash out the window.

I mean, your mileage is going to vary on location, and a generic thread like this isn't necessarily all that useful, but in my area, a mortgage payment is actually less than a rental payment for a similar place.

So even if it's a "bad investment", I can reclaim at least some of the money I put into a purchase when I sell the place (or make a profit, but no guarantees). But I get nothing when I stop renting.

tinkerrr2• 11 years ago

This is a very common fallacy and I am surprised people still think 'renting is throwing your cash out the window'. It isn't.

With a mortgage, you're essentially leveraging around 1:5, which means you put down your 20%ish and get 100% of an asset. If the asset moves down 20%, your net equity is worth exactly 0. If the asset moves up 20%, you've made a profit of 100% (simplified, not considering the fees and other costs).

The trick to understand this is, if you put your down-payment money somewhere else, like a long-term index fund, what kinds of profits would you have expected? What about the risk, considering you're highly leveraged in a mortgage?

Thus the calculator to do the math for you.

ams6110• 11 years ago

Most of the houses that are really high-risk are at the top end of the market. Don't buy those. Buy mid-market houses, those values are much more stable. And never pay much more than the average house in that neighborhood is selling for, and don't over-improve. The last thing you want to own is the most expensive house on the block, as you'll never be able to sell it.

jbb5552• 11 years ago

The money is certainly important. But buying is better than renting in many ways. Want to rip out your kitchen and have a new one? Want to pave part of the garden? Want to move a wall? Want to paint it all, or fit blinds?

If you own it you can do all that. If you rent you have to ask permission which you might not get. Plus why spend money on somewhere you don't own?

wazoox• 11 years ago

And when the factory employing most of the people in the town closes down, you're stuck with a virtually worthless property forever. Buying may have real downsides when you need to work for a living...

rm999• 11 years ago

Renting is the best option for flexibility. Want to add a bedroom? Want to change neighborhoods? Just lost your job and want to downgrade? Want to move closer to your new job, or an entirely new state? These are all good, common use-cases for renting. BTW, a lot of landlords will let you modify your place - some will even chip in for the costs or pay it all.

Plus why spend money on somewhere you don't own?

People have this mentality that renting is throwing out money. It's not - it turns your housing into another explicit cost like food and travel. I like this, I think too many people make the biggest investment decision of their lives (often by orders of magnitude) so lightly. And anyway, when you own, the costs that would go to renting are priced in, like: taxes, upkeep, opportunity costs, and interest payments. There is no free lunch - even the home ownership tax benefits get priced into housing costs.

vonmoltke3• 11 years ago

BTW, a lot of landlords will let you modify your place - some will even chip in for the costs or pay it all.

Where are all these landlords, because the ones I have experience with in Florida, Texas, and Virginia get pissed if you so much as nail a picture to the wall.

saiya-jin2• 11 years ago

There are locations, and I live on one of them, where finding an accomodation, even with stable long term 150k USD/year single pet-less guy is a few month effort of chasing 100s of appartments, until one will work out. You are nto in position to actually pick anything.

On this thread it's visible that people try to promote their own decisions in this topic (and we all have been into it deep down). Let me put mine - I took loan 8 years ago, in a different country, on a small appartment that when looking back, wasn't the best idea (but neither really bad). Mind you, it was in 2007 :) Surprisingly the price didn't drop below the one I paid, but the pressure to bring every month enough cash to make it through was... not nice. THe perspective to have similar setup for next 20 years was a bit sould-crushing though (it was 50m appartment, so nothing to raise your family in).

But, this pressure forced me off my lazy but, I temporarily moved to another country to earn more and pay it off asap, realized that this country is SO much better than previous one (which wasn't my home anyway), so I decided to stay. 5 years forward, probably the best decision of my life (and there were heaps of people saying I should settle where I am instead of move).

batou3• 11 years ago

It's a trade off.

I live in London, UK in a flat I rent for £950 pcm. This would cost me £379,000 to buy, at the very least as it's a relatively nice area.

I could scrape the deposit and get a £379,000 mortgage but the insurance, maintenance and other costs on top would result in zero disposable income.

Currently I have £1750 left over every month which is nothing but bags of freedom to do whatever I want.

If I was to drop dead on Monday, the last great event wouldn't be getting Magnet in to do my kitchen, painting the living room ceiling and sitting in all weekend eating Tesco Value food. It would be chilling next to Lake Geneva in Lausanne with my other half which is exactly what I'm doing.

Live life now before it's over.

Edit: This is based on the advice of my wife's grandparents who are just about hanging on at the age of 84 and 86 respectively. They had to cancel their cruise this year due to poor health and openly admit that they worked way too hard for a house. They have a nice £1m house in London and a pile of savings but it's worth nothing to them now because their health is gone. It's empty as the children have left and they realised the memories were more important than the bricks.

So, sod buying a house. I'll live an irresponsible yet fulfilling life now.

erichmond• 11 years ago

Phenomenal comment. Hopefully people read this and contemplate it. I've gone through an intense period of my life with respect to life and death, and a couple of years ago I only thought about "doing the right thing", now I ensure I enjoy each day I have, because nothing is promised and possessions are ultimately useless.

knodi1232• 11 years ago

it's definitely a balancing act, where the balance point depends on your own personality and proclivities. However, I think we can all agree that a formula involving London home prices is not going to be very representative of the rest of the world! ;-)

giulianob2• 11 years ago

Not sure if it's a difference in location but where I live it would cost me more per month to rent a similar property than what I own. If I wanted to save, I'd have to rent a smaller place instead.

saiya-jin2• 11 years ago

you know, some of us DO hangout around lake geneva (or any other pretty place), have most of weekends done like there's no tomorrow (mountains, adventures, traveling etc. practically every weekend) and still manage to invest into whatever they prefer (right now selling flat in Prague, and considering one in Chamonix). That's my sweet spot in life right now. We'll see how long life will keep me in it, before throwing into something wild, as usual :)

It's not irresponsible to spend money on traveling and adventures. You get back much more than nice time there and couple of photos and souvenirs - you are exposed to new environment, people, culture etc. and you'll grow inside in a subtle, yet steady way. On the other hand, usual "buying stuff you don't need to impress people you don't care about" is useless, and won't even bring any long term happiness.

saturdaysaint• 11 years ago

Want to live somewhere else without making a life-altering financial transaction that could lower your net worth tens of thousands of dollars?

eueueu2• 11 years ago

Property will always increase over the long term. Unless you're moving every 6 months this isn't a good reason.

Of course selling your house and buying a new one will take a few months, so it does restrict your mobility in that way.

todd8• 11 years ago

There is an important oversimplification that these formulas/programs/spreadsheets often make, and I see it happening here. Consider two alternatives where everything is the same except the amount of money used for the mortgage down payment. The formula assume that money not used for the down payment is invested at a certain rate of return. If the mortgage interest rate is greater than the investment return, then the formula always indicate that the largest down payment possible should be made and if the rate of return for investments is assumed to be greater than the mortgage interest rate then the smallest possible down payment should be made.

Its easiest to understand the problem with specific numbers. Assume a home buyer has $120,000 that could be put into a down payment, but that the minimum required is only $20,000. What should the buyer do? Assume that the investment rate of return is 5% and the mortgage rate is 4%. Investing the $100,000 instead of using it for the down payment is essentially borrowing $100,000 at 4% and investing it at 5%. All the formulas/worksheets/programs like this one and even professional investment advisors will end up showing that is better to put down the minimum down payment and investing the $100,000. This ignores the risk between alternatives. Putting the $100,000 into the down payment produces a guaranteed, riskless, return the buyer of 4% per year (by saving him or her the mortgage interest payments on the $100,000). The 5% potential return from investing the money isn't a fair comparison. The comparison needs to be made to a riskless investment (e.g. US Treasury Bills). Currently the riskless rate of return available to investors is approximately 0%. This means that in the current environment the correct alternative is to put the $100,000 extra into the down payment (absent any liquidity concerns).

One may say that they are willing to take some risks to obtain a higher rate of return. Modern Portfolio Theory has its detractors, but as far as home buyers are concerned, its implications are still apropos. Having one component of your overall portfolio earning the equivalent of a riskless 4% (by making the larger mortgage down payment) is likely to produce better aggregate returns (on the home and additional equities etc.) at whatever risk tolerance one designs for their overall finances.

I have no formal training in finance or investing so none of what I've described here should be interpreted as advice, instead it is intended to spur discussion.

glomph• 11 years ago

There is risk in the mortgage as well though. The value of the house could drop.

Azew• 11 years ago

There isn't though, this calculation doesn't consider valuation of the home at sale time. What this considers is, how much could that money earn you in investments vs how much will you save in interest payments over the life of the loan.

What this does assume is that you'll live in the house long enough for the interest savings to catch up with investment gains.

knodi1232• 11 years ago

that's not really part of the equation.

If you make the minimum down payment, and the value of the house drops, you're still on the hook for the full value at the time you took out the loan.

Once you've secured your mortgage, your payment plan (and therefore debt) has nothing to do with the value of the house.

Nelson69• 11 years ago

Isn't that only a risk if you need to sell the house at a time when the value is below what you paid?

Buying houses for shorter terms is just more risky, period. The housing market can crap out in catastrophic ways. Just like the stock market. The risk aversi

It would be an unrealized loss if you were living in a house with a mortgage bigger than the value of the house, so long as you pay though, you've still got a house to live your life in.

frobozz2• 11 years ago

Another point is that the idiom "a penny saved is a penny earned" is incorrect when it comes to loans and investments, because you pay tax on income. A penny saved is worth more than a penny earned.

If I borrow at 4% and invest the same sum at 4%, then I'm guaranteed to lose money on the deal. How much more your investments have to yield, in order to break even on a loan-to-invest strategy depends on the degree of tax liability that your investments are subject to.

nroose• 11 years ago

This model doesn't seem to consider risk. If you finance 75% of your home value, your equity is 4x as volatile as the market.

suany• 11 years ago

One factor that's never discussed is the availability of rental inventory. In some cities it's very hard to find a single family home (instead of an apartment) for rent - hence buying becomes the only path to getting the type of home you want.

pjc50• 11 years ago

So I pretended that "$" meant "£", and entered some plausible UK figures, including recent house price growth of 8% and rental growth of 10%, and it told me I should buy unless I could rent for -£391 a month.

Taking out a mortgage is clearly the best investment I ever made.

uberneo• 11 years ago

Any github link to the actual visualisation would be handy .. looks like crossfilter types http://square.github.io/crossfilter/

amalag• 11 years ago

Very nice calculator. It is missing a PMI option for loans with a downpayment under 20%. That is a significant expense.

ocdtrekkie5• 11 years ago

It heavily depends on the area. In very urban areas, property is a lot more expensive, and renting is probably the way to go. In my area, it's almost the same cost to buy as to rent. The difference being, you can get some of the money back on your purchase by selling your property, whereas your rent just entered a black hole.

normloman• 11 years ago

For me, it's better to buy. And that's not a financial decision either. I've just always wanted to restore an old house.

markbnj• 11 years ago

We rented for the first ten years of our married life, and then purchased. All of the financial arguments aside, don't discount the value of having a place with your name on the deed. We had been forced to move out of two previous townhouses when the leases expired and the owners decided to sell. Knowing that your place is your place (yes, the bank's really, but they can't easily take it from you) is maybe an undervalued benefit.

doc_holliday• 11 years ago

I think this has been mentioned a couple of times when it has come up, but it would be nice to be able to add / remove local taxes e.g stamp duty here in the UK.

JustSomeNobody• 11 years ago

Yes.

(It was obligatory.)

cletus• 11 years ago

Some people don't buy to, in their words, avoid being exposed to the property market or some variation thereof. This a fallacy. As long as you need somewhere to live you are exposed to the property market.

A good way of looking at this is: not owning is equivalent to having a large short position in the property market. If prices go down, you "win" by not losing money and/or your rent going down. If prices go up, you "lose" because your rent goes up and what you can buy now is less than what you could've before.

That's a fine position to take but my point is that it IS a position.

You don't necessarily need to own where you live but you should own _something_. It could be in the area you plan to retire to (to hedge against rising prices), an investment property to generate income or whatever.

IMHO REITs aren't the answer here. Residential and commercial real estate are different beasts. Commercial real estate is generally a means of generating income. Residential is far more speculative.

Some people compare long term returns on property vs equities. These compare reasonably favourably.

In all those cases borrowing to buy property is far more favourable. In the US at least you can get 30 year fixed mortgages that are currently hovering about 4% for 80%+ of the purchase price. You just can't get those terms on anything else.

Even on day 1 your mortgage payment is ~30% principal at these interest rates.

Property tends to be a great hedge against inflation too and higher interest rates and higher inflation seems to be a risk with the amount of quantitative easing occurring in the developed world.

Lastly, the ability to essentially fix your housing costs is (IMHO) huge, particularly in major urban centers.

JDiculous• 11 years ago

I would buy, but Manhattan is expensive as hell and I don't want to live in the Bronx.

derekp7• 11 years ago

One thing to consider -- avoid the 30-year fixed mortgage if you can. If you are buying, then buy a cheaper property that you can pay off in 5 years or so. Then in 5 years, you can sell that and take out another loan for the next property. Example: I bought my house for 180,000 on a 30-year mortgage, and 20% down payment (36,000). 15 years into it I've barely made a dent. I would have been better off buying a $100,000 smaller house or town house/condo, and I could have paid that off in 5 years with what I'm currently putting out per month (counting lower taxes and insurance on the smaller property). Then I could have sold it, and bought a $160,000 house, and 5 years or so later owned that one outright.

This is also a market proof strategy -- if the market goes down, the your current house may lose value (but you're not upside down on your mortgage, because you don't have one after 5 years). But the next house will also be proportionally cheaper too. And if the market goes up, the house you just paid off has gained in value, making for a bigger down payment on the next house.

owly• 11 years ago

It totally depends on the area and timing. I've bought and sold a number of places for a decent profit (all in cities) AND I managed to hold onto my last one and rent it for a good deal more than the mortgage payment. Renting IS throwing money away, plus none of my friends who rent live in as nice of a place as I do for the same monthly payment. Sure they can move to another city faster than I can, but the longest I've taken to sell a place it 4 months, not a big deal.

Is it better to buy or rent?

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