Rent v Buying


#1

I’ve just done a 40 year summary of all my housing costs v what it would have cost to rent. The answer without a doubt was it was way more beneficial to buy, even including all repairs / maintenance. Rental Costs over the period would have been in the region of £292k, the house costs (mortgage & repairs) were £150k. Difference £140k, plus the house is worth £300k. Therefore I am £440k better off!

However, now I am retired all the benefits for renting start becoming more important
Flexibility, no maintenance/ repairs, opportunity cost as large amount of capital held in bricks and mortar.

Any views??


#2

Hi Erith,
I am not surprised by your results. The last 30 years have been phenomenal for the housing industry. Not only was there a massive bubble and favorable demographics (boomers), but when the inevitable crisis came the government propped up good quality housing by cutting interest rates to never-before-seen lows. I don’t want to say ‘there is a day of reckoning coming’: there might be, or there might not given almost everyone has their wealth in housing. But what is for sure is that the next 30 years cannot possibly be as profitable as the last 30 years. It is analogous to a pyramid scheme: when you run out of buyers to feed the beast, the whole thing collapses. Right?
This may be of interest: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/?utm_content=buffer414a3&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer


#3

Thanks Paulie - I have just read the JL Collins article, very interesting. I think the market in the UK has been totally skewed because of over-priced housing… Definitely a bit of a pyramid scheme, we’ve got to the stage where young people can neither afford to rent or buy - a vicious circle. In the 40 years since my house was built it has multiplied in value by 50. When it was built it was priced about 3-4 times an average salary. Now it is 10-15 times an average salary…


#4

@Erith, interesting to hear your story. I am curious - did you include opportunity costs of your down payment and house equity in that equation? That would probably bring them closer together.

This article by Paula Pant provides a good framework for comparison:
http://affordanything.com/2015/11/24/is-renting-better-than-buying-should-i-rent-or-buy/


#5

Thanks for the suggestion CoachCarson - off to exercise my excel skills. That’ll keep me busy for a while… Watch this space. I suspect Opportunity Cost would have had quite a big impact in the last 10 years,because our house price didn’t really change for about 5 years, but we spent quite a bit of money on it.

Also off to read Paula’s article.

Gives me food for thought, for another post, because Opportunity Cost played a big part in our decision to start my husband’s pension last year, even though the amount he would get went up by 10% p.a. for each year he postponed it.


#6

Yeah, excel for personal finance nerds like me can occupy a LOT of time. Lol.

I agree that opportunity cost is such an important factor to consider. I liked this article by blogger JlcollinsNH about opportunity cost related to housing:

Jim is definitely in the “don’t buy a house” camp. I agree with him in most normal scenarios, but I think more people should be ABNORMAL with their housing by doing things like live-in flips and house hacking. Being entrepreneurial with your residence turns the “housing is a bad investment” argument on its head.


#7

Hi, I did the sums again using Opportunity cost on the amount invested in the house. The figures definitely came closer, but still £200k up (rather than £440k). Hence still worth buying (over previous 40 years), But am still considering what is best to do in retirement. It might become one of those cases, where it might not be the optimal solution, but it is the one that works best for your lifestyle. Will continue doing the sums though!


#8

Early Retirement Now! had an excellent, detailed post on the economics of this decision.


#9

I currently live in the UK and heard something similar on the radio about home prices. They said the average house in Cambridge cost over 400k which is 13 times the average salary there :-/ but yet houses are going up like crazy! Seems like this bubble is bound to burst…


#10

Oh wow, you are in Edinburgh! Hah, small world, I own an apartment in Portobello! In ~8 or 9 years of ownership I am still not sitting on any notable equity. Mind you I did buy it back in the days when I knew nothing of finance…via Northern Rock, got my keys a week before they collapsed!


#11

While there certainly have been, and will continue to be, bubbles growing and popping in various local housing markets, I don’t know if I’m comfortable branding the entire market of house ownership as a bubble. For one, you have to distinguish between buying to live and buying to invest. If you’re buying to live, it’s basically a hedge against inflation (as Sam points out frequently over at Financial Samurai), and for most people one that works out pretty well in the long run for most people.

If you’re buying to invest, there’s a whole host of other factors to consider, but even then I think there’s a couple of easy precautions one could take and avoid being hit too hard by a potential pop. Focusing on cash flow is one (rents are generally quite sticky), keep sufficient liquidity, and secure yourself against rising interest rates if you finance.

There are also very good reasons not to own your home, but personally I do own a home. This is because I value the feeling of putting down roots, and the increased sense of control over my own living space. As far as equity, it’s been a very good investment, with a near 40% value increase in about two years. That doesn’t really affect me in any way that much matters though, as I don’t have any plans of moving to a lower cost area. And the price increase has been similar for bigger homes as well, so as far as upgrading to a bigger / nicer home locally, the price increase has actually been negative.


#12

Interesting discussion, something I’ve always had a difficult time answering for myself personally.

I rent a $200,000 home in Las Vegas, my rent is $1,200 a month which gives me a price to rent ratio of 13.85. Mathematically, looks like buying comes out ahead but the overall picture isn’t so simple.

For one, I really hate the idea of debt. Life makes so much more sense being debt free. I like waking up and knowing that I choose to go to work because it’s what I love doing, not because I NEED to. Huge distinction which determines the longevity and attitude of my career. A peace of mind is priceless.

Two, I can take risks. I’m 27, and I work for a relatively small company. That means everyone is very close and knows each other’s situations in life - both personal and financial. For me, buying a house would mean locking myself down and losing all bargaining chips. Want a raise? A day off? Better bonus structure? Too bad, you’ve got a house to pay for - suck it up 'cause I’ve got you by the balls. Without such a big commitment on my shoulders, I’m free to negotiate and keep growing while being able to take big risks. This is ** YUUUUUGE** :boy: Also, can you say with 100% certainty you’ll be at your job/career for the next 15-30 years? Maybe. Maybe not.

Three, financially speaking, I’m not so sure buying a house comes out ahead. I take a lot of pride in things I own which translates into spending money on stuff I normally wouldn’t have. For example, even though my rent is $1,200 for my 200k house, I know it’s not the house I’d buy. The ones I was looking at are in the $450k range - because I’m a showoff and I need a big house right? Also, I need fancy furniture from restoration hardware (who doesn’t want an airplane wing work desk?), a giant 15ft screen for my projector, and better flooring because I’m an anal interior designer. Point being, the things I own end up being very expensive, whereas when I rent - I don’t care as much. Less pride = less shit to spend on. Maybe this doesn’t represent you, but that’s how I am.

SO…I may pay a premium for renting (arguable), but the mindset of control, work purpose that’s true to me (not to the banks), and flexibility for personal growth and mobility are worth it to me. I’ll be putting off buying that fancy house - and when I have a 500k portfolio if I still want that house - I can buy it. But most likely, I’ll just travel the world and be a badass - free from stresses and worries.


#13

My son bought a 2 bed apartment in Cambridge in Apr 2014 for £220k. he sold it in Sept 2015 for £275k. Now that is what I call a decent return for 18 months!. Mind you he had to pay £550k for a similar one in the centre of London (Finsbury Park)


#14

Hi Paulie - Your timing was interesting, to say the least! Although the Edinburgh market has improved again over the last few years. I am a bit surprised you haven’t gained a bit of equity in the last 18 months, but you’re right the market was at best flat from 2008 to 2014.


#15

I haven’t done the math on this one, but homeownership was a horrible decision on my part. It didn’t help, of course, that I bought my home at the height of real estate (February, 2007). It was a reasonably priced home ($203,000), and over the course of several years, saw the value of that home decrease all the way to $130,000.

Add in the homeowner’s association fees, maintenance, taxes and realtors (to buy and sell), and that house was nothing more than a money pit. I could have EASILY come out ahead if I had rented for that entire time.

And this doesn’t include the opportunity cost of homeownership, either. I lived about 40 minutes away from work and quickly grew tired of the commute. If I was renting, I would have moved somewhere closer to work. But since I owned that place, it was a much more involved process that I just didn’t want to undertake. I was stuck with that place, losing money hand over fist, with a long commute to boot.

I guess it goes to show you that in real estate, timing is everything. If you buy at the right time and in the right place, then money can definitely be made. But, I certainly didn’t.

To be perfectly honest, I’m over homeownership. I just don’t want to deal with it. Even if I could make money, I just don’t care. I don’t want to be tied down. I want the freedom to move. I don’t want to deal with maintenance.

If we ever move back into a traditional “sticks and bricks” home again, we will almost definitely rent.


#16

Every case is different, so it’s great you did your own numbers! I live in Sydney, and buying a house is not an option for my partner and I at all due to the prices. I’d prefer to live close to work so I can ride/walk instead of drive, but the average house price in that area is AUD$2 million. My partner and I don’t earn nearly enough to borrow that kind of money. For us to buy a house, we’d have to live on the outskirts of Sydney, over an hour away (without peak hour traffic) from work and family. Also, that house would be small, old and in a suburb known for its crime rates yet still be over 12 times our annual salary. Our mortgage would be huge, despite low interest rates of about 4.5%pa.

Rental prices are actually dropping here, so we’ve chosen to rent. The economists are indicating there may be a bubble and it will burst in the next 5 years (but who knows for sure?). Until we can buy a place without having to pay off debt for eternity, we’ll be renting.


#17

You bring up some interesting points, which really hits home how different mindsets people can have. I certainly get the no debt-argument, and it makes sense. But for me, it’s the other way around. I get that peace of mind from knowing that I (eventually) own my home, and that I’m not at the mercy of getting approved by a renter, rent hikes etc.

The social safety nets are also more pronounced in my country than they are in the States, and I know that even in the event of losing my job, there’s no immediate risk of it leading to me losing my home. That probably lessens the impact of your second argument regarding risk, for me. I’m also located in the area that contains the vast majority of employment opportunities in my field (and pretty much everything else), but I certainly see the flexibility argument.

Anyways, it’s very interesting to read other approaches to this. I like the fact that there are no fixed answers that are valid for everyone, and that it’s possible to discuss the differences :grinning:


#18

scary prices - I would also rent if i were you! Our first house was only 3 times one income plus half the other. They wouldn’t lend on any more than that.


#19

I’ve done the math of rent vs. buy four different times when I was living in four different states (MA, CA, TX, CT) and the net net of my analysis is that it is financially better to own, but money is not the only currency to measure by.

From a dollar perspective, in the states mentioned, it was smarter to buy vs. rent as long as I stayed in the home more than 3 years. Every time, by a lot of money (30% or more, up to 50% in CA). Not only price appreciation helped make ownership better, but tax benefits and ancillary costs (garage, storage unit) too.

I think what we are realizing is that many times other currencies are just as important to us: freedom to travel or move, reducing the hassle-factor, freedom from worry or anxiety of ownership, freedom from home repair responsibility, taxes, HOA, etc. Also life style. Its harder sometimes to be spontaneous or opportunistic with home ownership.

Where I live now, (Austin, TX), in financial terms only, we have experienced a 6% annual home appreciation for the past 30 years. That doesn’t sound like much because it is slow and steady, but on a $300,000 home, with 20% down at the time of purchase, after just four years of ownership, that’s roughly a 21% ROI and almost a 100% ROE, including home purchase closing costs and minor maintenance. This is a major wealth building component.

When asked, I tell people to wait to purchase a home until you can meet some minimum financial milestones so that your home purchase doesn’t leave you vulnerable or make you house poor (20% down so no PMI, etc). In the early years, live beneath your means, save up your money, build a nest egg. Then purchase a home that is well within your means, make it nice, take care of it and stay in it as long as you can. IF you can keep all your home related costs (mortgage, utilities, HOA, taxes, insurance, etc) to less than 20% of your take home pay, you have a real good shot of building real wealth and living financially free to still pursue your dreams and goals.

Thoughts?


#20

That’s the most important point, isn’t it? Knowing yourself well enough to decide what suits you best before you start calculating the financial aspects of it

I agree with your point, but not necessarily with your cut off. 20% or less than take home is quite ambitious, I would imagine, in most cases. Especially if you’re factoring maintenance costs as well. There are also other considerations such as the state and age of the house (which will affect expected maintenance costs), income expectations and similar. A lower percentage is generally better though, naturally :slight_smile: