Monday, March 22, 2010

Costs of renting vs. owning

The National Multi Housing Council (think of them as the anti-NAR) presents its argument for renting (from 1997):
Computing the total expense of homeownership is not easy. The costs vary from person to person, from city to city, and from time to time, because of both market conditions and tax treatment. A recent NMHC research paper (available upon request) offers one method of summarizing this diverse national experience. The study estimates how the housing costs — properly measured — of the typical home buyer in the mid-1980s would have compared with their costs had they rented identical housing.

That research concludes that, when all the costs of owning and renting housing are considered, a majority of all families and individuals that bought a home in the mid-1980s would have saved money by renting comparable housing. Specifically, the study estimates that the average homebuyer in 1985 paid six percent more for housing during his residency in that house than if he had rented.

The costs of owning were particularly high for short-term owners, according to the study. Buyers who sold within four years of purchase on average paid 19 percent more as owners than they would have paid as renters. For these short-term owners, transactions costs averaged 23 percent of their total costs of owning.

These cost estimates make no allowance for the home-owners' time spent in the process of buying and selling, which typically far exceeds the time spent by renters in securing their housing and subsequently moving out.
And they present several home-ownership "myths" (from 2004):
Myth: I'll reduce my tax bill if I buy a house.
Reality: A majority of homeowners reap no annual tax benefits from owning a house.

Myth: Paying rent is throwing away money.
Reality: For the first five years of ownership, you are simply giving away your money to a bank. Nearly one-third of all buyers move within five years before they start building any real equity.

Myth: My mortgage payment will be less than my rent.
Reality: Your mortgage payment is just the beginning. The "hidden costs" of ownership can add up to thousands of dollars a year.

Myth: As an owner, my housing costs will stay constant. I won't have to worry about rent increases.
Reality: Your mortgage may remain constant, but other costs, such as maintenance, insurance and property taxes can go up significantly every year. And if you have an adjustable-rate mortgage, your mortgage payment itself can increase.

Myth: Investing in a house is a safe investment.
Reality: Even in today’s healthy housing market, stocks and bonds often still offer a better return.
Of course, this organization is probably as trustworthy as the National Association of Realtors, but we hear so much of the Realtors' spin that I thought I'd post the counter-argument.


  1. Pussy:

    Any questions?

  2. This comment has been removed by the author.

  3. i rent from a friend who owns the house. He shares the house with me, and I can say i've seen many of these "hidden" costs. A plumbing problem here, a renovation adds up quick. Then on things you don't necessarily spend cash on, you spend you valuable time on. You work 5 days/week, then have to start using your weekends to do yardwork, minor repairs, etc.

    I'm not saying to avoid buying a home, but you have to factor these things into your decision. Renting isn't as bad as "they" say it is.

  4. I do. As another anon said, so whats the answer? Rent forever?

  5. The Pussy,

    The answer is that there is no one answer. People should always make an effort to honestly evaluate their situation.

    In 2005 I was making a turn in my life where I was taking on a given a career task and educational goal which looked to have me locked in for roughly 7-8 years. I had an income which was near the median household income for Loudoun county (where I live). In a normal environment I would likely have tried to purchase a home, but a quick look around me showed an insanity. Despite having a respectable income, purchasing was completely beyond my means. So I found a single family house to rent.

    Prices have given somewhat in the mean time, but I still think they are high (just not as insanely high as they were). There have even been a few homes that I have seen that I would have considered putting an offer in, back at the threshold where I had considered purchasing. The complicating problem that I have is that I am still working within that 7 year window.

    Once I have wrapped up my current work projects and earned my next degree I will need to evaluate what it is that I want to do, and where I want to do it. My current thought is that it may not be in the greater DC area. And if I purchase now (unless it is a screaming deal), I may have a very hard time getting out of the home in the time frame that I want (2012-2014), so I am inclined to keep renting.

    Although the home I am in is a bit ho-hum, I cannot see a better option to have 3+ acres south of Leesburg for $1800.

    Purchasing a home can have real upsides (in a reasonable market), but it also has real downsides. We hear of the upsides all of the time, but when one is considering making as large of an investment this you really must take time to think of what it may cost you beyond just the mortgage payment (taxes, maintenance, flexibility/mobility).

    Perhaps the next time I move it will make sense to buy, but until I am there it is too hard to tell.

  6. I don't know if you're playing the fool to evoke some sort of debate but this is really silly.

    The NMHC is IDENTICAL(!) to the NAR in the fact that they represent the interests of owners. The difference is that these owners are multi-dwelling/multi-unit homes. Of course they will advocate renting. They would be happy if all of you rent perpetually.

  7. Renting is good. If it breaks, you don't have to fix it. No leaking roofs, grass to cut, snow to shovel and taxes to pay. It's maintenance free living!

  8. I have a few houses when I get 2 more I can retire. I took out a secured line of credit on my primary residence aggressively paid it down.

    Then I used that equity to buy another, then people started paying me rent, I lost money one year when renos and renters skipped town. But losses are tax deductable unlike if it's my house.

    So yeah renters are good infact anyone have a house they want to give me so I can rent it back to them AT A PROFIT?

    But soon I'll retire. I doubt any people renting off me will. Plus when I retire I plan on slowly moving into them and selling them so I don't pay capital gains to get all the equity.

    If not I'll leave a big inheritance for my kids. Whereas renters seldom have anything because thats just the way it is. Then their kids will say why didn't we have more money?

    I know a renter who died and left everyone a couple of grand. If you compare it over a decade it might be close but compare it decade after decade. If you bought a house 3-4 decades ago it should be paid off. If you

    Sure if you just have a house your payments and expenses might add up, but if you have a line of credit secured against your house and you get laid off you can go on hiolidays for a month or two. I know some people who have to panic if their pay comes thourgh late because they have no credit. If you can't work you are kicked out of the place you rent.

    It's also a good move not to buy in areas partaking in white flight. Because anyone who lived in Detroit if they were lucky they were amongst the first to flee.


    "I do. As another anon said, so whats the answer? Rent forever?"

    Yes sure...why not? You like paying more?

  10. If you rent forever, you will lose money over buying - that ones a promise.

    However, If you rent for a short term, the answer is not so clear...

  11. Nonsense...there is no clear cut way of saying buying is better than renting over the long term either.

    Why can't people who are pro-ownership understand the concept that spending money on a home and its expenses AND depreciation of a home are the same as throwing your money away?

    Owning a home is like having a child...once you have it or do it, you can't talk badly about it because you're neck deep in it.

  12. Perhaps not "clear cut" but certainly "highly, highly, highly, likely".

    I am 26 years old. I could have 50 or 60 years of living ahead of me. If I do, is there any way I come out ahead renting for 50 or 60 years?

    Like I said, if I get hit by a bus at age 34, renting was probably a better bet. However if I live to be 75-85 years old, owning is far far better than renting.

  13. I honestly think have a lot to learn still. You're in the typical mindset of "I better buy a home."

    I don't think you appreciate the power of saving. I'm almost 40...and my wife and I are a lot better off than most of our friends who have homes.

    It's not highly highly highly likely that you are better off if you buy a home when you are 75-80 years old...that's rubbish.

    If you can save money and enjoy your life while doing so, then that's what you need to do...not worry about buying a home for the next 30 years of your life.

    I can save a lot more money renting that I can buying a home these days. The days that you are thinking of are long gone...especially in metropolitan areas. People simply need to accept that fact and move on. Buying a home is no longer a wise investment not for today or 30, 40, or 50 years from now.

    If you want to buy a home, do so because you want a because you think it's wiser than renting...because it's not anymore.

    Sorry to burst your bubble.

  14. Noz - do the math.

    I can buy a home right now for 3200 a month. Over the next 30 years, I will pay a total of 1.15 million dollars + maintenance + taxes. Lets be generous and call it 1.5 million all told.

    I can rent that same home for 2700 a month. Assuming rent goes up 2% a year on average, over 50 years, I will have paid 2.2 million in rent.

    how is renting better?

  15. I've done the math...believe me.

    First of all, I'm not sure where you get that ludicrously high value for a rental but the homes I find in my neighbourhood that cost $2700/month to rent are well over $900K in cost....some even past a million.

    Now YOU do the math and tell me how much it costs to buy a home that costs around a million.

    Here let me help you...with 20% down....that's $200,000 dollars out of my own pocket, my mortgage with taxes and maintenance is about $5800/month. Without extending property tax and maintenance out until the end of your life (which is a completely false assumption that homeowners somehow think is true), you'll have dished out $2.4MM with your downpayment.

    After that, you'll be dishing out about $1500/month for property tax.,...assuming it doesn't go up.

    So what was your point again?????

    As I said, buy a home because you want to...not because it costs less...because it doesn't.

  16. "Noz said...
    First of all, I'm not sure where you get that ludicrously high value for a rental but the homes I find in my neighbourhood that cost $2700/month to rent are well over $900K in cost....some even past a million."

    Well thats the difference now isnt it? Heres a place thats asking 3K a month to rent. They wont get it, but they will get 2500-2600 a month.

    By contrast, heres a similar house in the same development for 530K

    Neither one is perfect, but you can see how it doesnt take long for rent to get real expensive around this area.

    So thats the difference. If price vs rent was so out of whack like it is for you in LA, I would be a lifetime renter too. However, dont come here onto a blog that places "special attention to the Washington, DC area housing bubble" and tell us what cost less when its clear you dont know anything about the pricing structure in the DC area.

  17. You make it sound like you live on a different planet....cherry picking a place to show your example isn't going to change the facts that renting is still cheaper than a long long long shot. So spare me the "DC area is different" BS. Been there done that.

    I'm not going to argue with you. If you want to drop a load of money into buying a place, by all means, knock yourself out.

    Best of luck with that.

  18. So I point out a place that works just as I said and you accuse me of cherry picking? I can see why you are not well liked around this blog...

  19. Would you like me to point out dozens that prove my point? Or would you still like to pretend your single example is a typical result and not cherry picking?

    I can see why no one would take you seriously.

  20. Yes, I would. I am particularly interested in Lou & PWC, so find some there that are more typical than my "cherry picking".

  21. It'd also be interesting how many hundreds of other examples you can "come up with" yourself since you think it's so typical and not "cherry picking."

    Honestly though, if you are so sure of yourself, why on earth are you here plugging your agenda? Rather, spend that energy and money buying a place or a matter of fact, I'd suggest the same for as I suggest for everything you can real quick....price are going to through the roof!

  22. Noz, if you want to plug your agenda, send me the examples you said you would (lou & PWC preferably).

  23. It's really hard to take you any way other than a joke when your own example is two numbers you pulled out of your derrière. You do realize that right?

    The onus actually falls on you....but nice try trying a the back flip.

    I'll look a few places up when I have time...I wouldn't wait if I were'll be priced out forever.

  24. Onus on me?

    Who here said "Would you like me to point out dozens that prove my point?"

  25. Yes it is on came on this board spouting that you have it figured out and it's cheaper to buy than rent...and then give out two numbers that you pulled out of your ass....would you like me to do that too?

    Once more, if you have it figured out, don't waste time here debating with me.

    The ultimate proof in the pudding is that if VA properties are so cheap and they are worth buying, then seriously....pull every cent you have and buy as many properties as you can...hec even borrow from your credit cards and be risky. Don't sit here twiddling your thumbs with me.

  26. Noz said...
    Would you like me to point out dozens that prove my point?

    March 27, 2010 8:14 PM

  27. Are you two done bickering? You're never going to convince the other. Do what's right for you and your situation. End of discussion.

  28. Oh and marginalizedactiondinosaur, I'm 33 and am already retired. I don't own a single piece of real estate and I don't intend on it. I like being able to skip from area to area every few years and meet new people. Sure I could buy a property at every location I've lived before, but why would I want to concern myself with that when I'd rather be out meeting girls?

    To all of you renters who are sick of hearing about how real estate is the "one sure path to wealth", don't buy it. I've done just fine with buying bank and technology stocks during the respective bust years and living cautiously, as my parents taught me.

    Best of luck in whichever path you choose, be it rent and save or purchase and build.

  29. Here's a renting vs. buying a home report from US gov't agency.

  30. J Demas said...
    "Here's a renting vs. buying a home report from US gov't agency."

    That report is NOT from a U.S. government agency. It's from an industry trade group.

  31. "I find in my neighbourhood that cost $2700/month to rent are well over $900K in cost....some even past a million.

    In your area I can see why it is a much better deal to rent than buy. I personally feal every area and every persons situation is different and needs to be treated so. I beleive that the myths listed are correct, but at the same time they do not show the whole picture. Yes, it is true if you buy a place and move in a few years you will most likely lose money because of the costs associated with buying and selling. On the other hand if you buy a place and stay in it you can make out well in the end. It all depends on the area and how long you stay in it. I purchased a condo 2 years ago for $465k. Over the last year the average sale price in the complex between $430-480k depending if the unit 2 or 3 bedrooms. The units in the building are being rented out are being rented for between $2500-3300 a month. When I was renting I was paying $2k a month for a 1 br in a much older complex down the street which is about the cheapest you can find. In any case givin the cost of maintence, taxes and everything combined I am probably paying about $200 more a month than the average renter. However, in about 15 years when I pay the place off my only expenses will be taxes, condo fee and maintence which totals under 1/6th of the cost of renting. At that time I would also have a house I can sell if I ever wanted the money.

  32. It really depends. If you buy your house CASH, then all of a sudden it becomes quite appealing in the face of rental costs.