patrick.net

SubOink says

There is no tax deduction?

Yes, but it does not have near the impact that people believe it will, and don't forget you have to spend money to get the deduction in the first place.

SubOink says

You are not saving by paying your monthly pay?

Lamest excuse ever for buying a house. Only the horribly financially irresponsible need to be "forced" to save. Yes, the same people that have a higher chance of facing foreclosure.

SubOink says

You cannot rent out a room or a guesthouse?

If you have an extra room in your rental house you can rent it out as well to defray the rent, and how many people are buying homes with the intent of sharing their kitchen and bathroom with a stranger?

The other items on the list are the same lame used house salesperson's tripe.

Robert's article actually had much better method for determining if one should buy.

SubOink says

Rent4Ever says

That first article was hilarious. Tax deductions, forced savings, remodels, renting out bedrooms, FURNITURE!! People actually use these reasons to justify a home purchase?? It's funny and sad all at the same time.

So those things are not true? There is no tax deduction? You are not saving by paying your monthly pay? You cannot rent out a room or a guesthouse? ...Hm...Ok. Keep renting...even though you are the best proof that it does work because somebody out there is renting out THEIR house to you :)

I suppose all are true on the surface, but none come close to validating a purchase in the rent vs. buy decision. That is what is so funny.

Again, it is totally regional. Buying in many places will yield positive financial results. Renting in other places will yield a positive financial result. There isn't any one-size-fits-all solution for rent vs buy. It just happens that a lot of people in here are in the SF Bay Area where it makes a lot more sense to rent in most areas, so most of these discussions are going to get flavored that way.

People who use tax deductions as a reason to buy a house are the same people that come home after spending hundreds of dollars at the mall and explain how they "saved" so much money.

It's a forced savings plan? If you're so incapable of managing your own money that you need a forced savings plan, what the hell are you doing buying a house?

A landlord? No they can't kick you out, but the sheriff can, cuz you lost your job, and didn't make mortgage payments. And that savings plan you had? Yea you just lost it all.

Rent4Ever says

People who use tax deductions as a reason to buy a house are the same people that come home after spending hundreds of dollars at the mall and explain how they "saved" so much money.

Couldn't agree more here. Hopefully you explained it in simple enough terms now we can stop using the tax deduction as the holy grail to house buying. It is a tiny piece of the equation. Not at all close to if the house is appreciating/depreciating.

Rent4Ever says

People who use tax deductions as a reason to buy a house are the same people that come home after spending hundreds of dollars at the mall and explain how they "saved" so much money.

We are talking about pro's and con's. The fact that you tax deduct is a pro.

Rent4Ever says

t's a forced savings plan? If you're so incapable of managing your own money that you need a forced savings plan, what the hell are you doing buying a house?

It's a forced savings plan whether you need force or not. And obviously in order to come up with the downpayment, you had to save before buying. Regardless, part of your mortgage payment is saved. Now, if your mortgage payment is the same as your rent payment then 1) you can tax deduct the interest 2) a portion of that = saved. And those are clear PRO's of buying.

Rent4Ever says

A landlord? No they can't kick you out, but the sheriff can, cuz you lost your job, and didn't make mortgage payments. And that savings plan you had? Yea you just lost it all.

If you can't pay then you get kicked out of your house regardless if you rent or buy. What point is that?
In a nutshell, if you are f-ed in life, you are f-ed. There is no way around that. Renting surely won't protect you.
It's like saying...don't put any money in a 401k and invest because if the market crashes, you loose it all.

*rolls eyes*

SubOink says

Renting surely won't protect you.

The point is that buying does not keep you from being kicked out. Unlike the article suggests.

SubOink says

2) a portion of that = saved. And those are clear PRO's of buying.

The forced saving is at best a push.

Their comes a time when some realize buying is just never going to happen. For a single person who can't afford marriage/kids either, and also who has no contractor friends to fix up all the junk that is for sale, keep renting, it's in your best interests. I'm 43 years old, makes no sense to buy, I can rent cheap 1 bedroom or studio units until I can get into senior citizen housing which is fairly reasonable. Perfect example, I sold my house, it was junk, the woman who bought it could barely walk, bum knee, no problems, her parents and brothers came in and did all the work I could never afford. Roof, concrete driveway, landscaping, who knows what else, it needed plenty.

SubOink says

We are talking about pro's and con's. The fact that you tax deduct is a pro.

The name of the article is "10 Reasons to Buy instead of Rent." That doesn't sound like a pro's and con's list, it instead sounds like a tax deduction is a reason to buy.
SubOink says

In a nutshell, if you are f-ed in life, you are f-ed. There is no way around that. Renting surely won't protect you.
It's like saying...don't put any money in a 401k and invest because if the market crashes, you loose it all.

Ahh, if it were only that simple. Only when purchasing a home is your failure to produce cash flow to pay a debt result in you losing ALL OF YOUR EQUITY. This includes your downpayment, and all "forced savings" that you put into the house. No investment portfolio is at risk of being lost completely because of a loss of cash flow. Instead, your 401k and other retirement plans are explicitly PROTECTED from debt collections, bankruptcy, and civil lawsuits. If you were renting and lost your job, now you have a bank full of $$ because you haven't made a downpayment. You are only on the hook at MAX for your outsanding lease amount. Even that you could get yourself out of. Your savings is not at risk.

leoj707 says

SubOink says

Renting surely won't protect you.

The point is that buying does not keep you from being kicked out. Unlike the article suggests.

Actually buying IS keeping you from being kicked out. It's not paying for it, what could get you kicked out anyways. But as long as you pay, nobody is kicking you out. If you are renting, you can pay every month and still get kicked out. That's what the article means.

Rent4Ever says

If you were renting and lost your job, now you have a bank full of $$ because you haven't made a downpayment

Assuming you saved money while renting. If not, then you are toast.

If you can't pay your mortgage, you put the house on the market and sell it. If you sell the house for the same price you bought it, you'd loose the 6% realtors commission. You retain your downpay and equity (-6%)...not a disaster, I know many people that have gone thru that. Obviously, if you bought at the peak of a bubble and needed to sell at the bottom then you lost a lot. Not everything but a lot. But that's very similar in the stockmarket...you buy stocks...and have to sell them at a bottom in order to pay your rent (because you lost job).

SubOink says

Assuming you saved money while renting. If not, then you are toast.

If you can't save while renting then buying a home is definitely something you shouldn't do. Period.

SubOink says

Rent4Ever says

If you were renting and lost your job, now you have a bank full of $$ because you haven't made a downpayment

Assuming you saved money while renting. If not, then you are toast.

If you can't pay your mortgage, you put the house on the market and sell it.
If you sell the house for the same price you bought it, you'd loose the 6% realtors commission. You retain your downpay and equity (-6%)...not a disaster,
I know many people that have gone thru that. Obviously, if you bought at the peak of a bubble and needed to sell at the bottom then you lost a lot. Not everything but a lot. But that's very similar in the stockmarket...you buy stocks...and have to sell them at a bottom in order to pay your rent (because
you lost job).

First of all, relying on a house to be liquid is foolish, it's not. Closing costs? What do those average, (2-3%) Any money you put in thie house? Taxes paid? All that is lost. Remember you are leveraged with a house and that works both ways. Selling a house -6% is actually taking a 30% hit on your downpayment, assuming 20% DP. 60% loss if they put 10% down.

And there lies the reason to think real hard before buying in a downmarket. As just a small % loss of house value is a multiplied loss on your $$

leoj707 says

Lamest excuse ever for buying a house. Only the horribly financially irresponsible need to be "forced" to save. Yes, the same people that have a higher chance of facing foreclosure.

Rent4Ever says

It's a forced savings plan? If you're so incapable of managing your own money that you need a forced savings plan, what the hell are you doing buying a house?

RentingForHalfTheCost says

If you can't save while renting then buying a home is definitely something you shouldn't do. Period.

Exactly. And even worse, your "forced" savings account pays negative interest in the form of property taxes, insurance, and maintenance. I'll stick with a regular savings account at my bank...even with the rock-bottom interest rates.

We'll see in a year or two...will carry on the conversation then. Somebody will be right, somebody will be wrong.

SubOink says

We'll see in a year or two...will carry on the conversation then. Somebody will be right, somebody will be wrong.

I'd say it's always "wrong" to throw money away, whether it's on

A) rent, or
B) mortgage interest + property taxes + insurance + maintenance

Since most of us are not wealthy enough to "own" a dwelling place outright, we are forced to choose between throwing money away on either A or B.

I'd say the "right" thing to do is choose whichever option throws away less money per month. In most of the USA, you lose less money per month with B than A (assuming you get a small house and not a McMansion). But in certain areas like Boston, NYC, DC, SF, and LA you might lose less money per month with option A than B.

Remember: having a mortgage is also renting. That's what interest is, by definition: rent paid on borrowed money.

In some cases it's cheaper to borrow the house than borrow money to "buy" the house.

wthrfrk80 says

In most of the USA, you lose less money per month with B than A (assuming you get a small house and not a McMansion)

what would you base this on. I would say the opposite, in most of US, you would throw less money on A (rent).

AJ1201 says

what would you base this on. I would say the opposite, in most of US, you would throw less money on A (rent).

2500 in rent or a mortgage of 2500 where 1900 are interest. You do the math who throws out more. On top of it the 1900 are a tax deduction. So are prop taxes. In my case it works out that my tax savings are a bit more than what I pay in prop taxes so I can compare my mortgage to what my rent used to be...way cheaper to buy than to rent if I compare my throw out interest portion of the mortgage and what rent used to be.

robertoaribas says

they only help you to the extent that the exceed your standard deductions.

This is a concept that most people do not comprehend. Every married couple just for breathing gets an 11k deduction. Mortgage interest is only relevant over 11k.

robertoaribas says

SubOink says

On top of it the 1900 are a tax deduction.

Not true... they are ONLY a deduction if you itemize, and they only help you to the extent that the exceed your standard deductions.

I'm not arguing your point, but too many people roam around thinking they can straight deduct mortgage interest, and that isn't the case. For me, I get zero benefit from my mortgage interest.

In my case it makes a huge difference. I am in the upper 20's.

SubOink says

AJ1201 says

what would you base this on. I would say the opposite, in most of US, you would throw less money on A (rent).

2500 in rent or a mortgage of 2500 where 1900 are interest. You do the math who throws out more. On top of it the 1900 are a tax deduction. So are prop taxes. In my case it works out that my tax savings are a bit more than what I pay in prop taxes so I can compare my mortgage to what my rent used to be...way cheaper to buy than to rent if I compare my throw out interest portion of the mortgage and what rent used to be.

You forgot maintenance, insurance, HOA, Mello-Roos, and all that crap that drains a homeowners pocket. I agree with doing the math, but if you taking a stab at doing a comparison then you need to put it all down. Not just some. Renting has the expense of renting, that is it. All other expenses are the responsibility of the owner. At least every rental in the BA I have had.

AJ1201 says

what would you base this on. I would say the opposite, in most of US, you would throw less money on A (rent).

I guess I don't really know w/o looking at price/rent ratios for the entire U.S.

How are things in Shrewsbury, MA? I recently lived in adjacent Worcester for 8 months due to a job. There's a great Indian restaurant right on the Boston Turnpike Road near Lake Quinsigamond.

RentingForHalfTheCost says

I agree with doing the math, but if you taking a stab at doing a comparison then you need to put it all down. Not just some.

Correct. That's why I included the "other stuff" in "option B." I'm not sure why SubOink didn't include the "other stuff."

Rent4Ever says

This is a concept that most people do not comprehend. Every married couple just for breathing gets an 11k deduction. Mortgage interest is only relevant over 11k.

That's true .

But every household have some itemized deduction just for working. Your miles may vary.

IF you make 150K AGI in CA. State income tax and state SDI alone will put you around 12K in standard deduction so your starting point is not 0, it is what is already there plus the MID. In some cases, mortgage interest and property tax are all gravy.

This will obviously not be the case in Texas, FL and AZ, etc.

robertoaribas says

SubOink says

In my case it makes a huge difference. I am in the upper 20's.

lest see: itemized deductions... upper 20's.... standardized deductions.... 11k.
Assume 28k - 11K = 17K state and federal rate let's assume you pay 40% total on marginal income...
.4*17000/12 = $567 a month... a difference to be sure... but not enough to run out and buy a house that is way too expensive compared to renting...

I love it when people state the obvious.

Did I say - go and buy a house so you can save $600/month in taxes? Why put words in my mouth? Reminder: We were comparing 2500 rent vs 2500 mortgage.

And when we are comparing a 2500 rent vs a 2500 mortgage and according to your calculations there is a tax savings of $567/month then I say...its nonsense to say that renting is throwing less money out. When in fact the 1900 (interest portion)-$567 tax savings = total throwout amount = $1333.- + 600(prop tax) = around 1900.- total throwaway money.
$600/month less than renting. We are talking broad strokes here so please don't come back and nickel and dime the calculation. (I am actually only paying around 2k for a house that would rent for 2700-2900). We are only using the examples to make a rough point. And that is, if you can buy the same house for a similar payment, its not a bad deal figuring in all what's said above.

I don't have an HOA that's why I didn't even mention it.

Important is to know that you don't have those 600 available to you. They get force saved into your house. Once you have enough equity you could grab a HELOC or so if you needed to do something major...put in a pool..etc. So there are ways but Roberto knows all about that.

I used 0% rent and price appreciation, 4% mortgage rate, 20% down, marginal tax of 28%, length of ownership of 7 years, after tax return on investments of 3%. I used 2400/mth rent because that works well with 500K mortgage at 4% which is basically 2400/mth on a mortgage. Here are the results. After 7 years the renter is ahead by over 40K. You are forgetting lots of costs on the owners side, and then the return from the 20% downpayment on the renters side. If you make a claim then you should use all the math.

RentingForHalfTheCost says

I used 0% rent and price appreciation, 4% mortgage rate, 20% down, marginal tax of 28%, length of ownership of 7 years, after tax return on investments of 3%. I used 2400/mth rent because that works well with 500K mortgage at 4% which is basically 2400/mth on a mortgage. Here are the results. After 7 years the renter is ahead by over 40K. You are forgetting lots of costs on the owners side, and then the return from the 20% downpayment on the renters side.

Rent is better than owning so long price of house didn't appreciate by $40K (+ 6%? + other costs?). As to whether house price would be up or down, to me, is just speculation. If I'm a first-time buyer (owner-occupied), so long I can afford to pay the monthly mortgage, I would buy it.

RentingForHalfTheCost says

I used 0% rent and price appreciation, 4% mortgage rate, 20% down, marginal tax of 28%, length of ownership of 7 years, after tax return on investments of 3%. I used 2400/mth rent because that works well with 500K mortgage at 4% which is basically 2400/mth on a mortgage. Here are the results. After 7 years the renter is ahead by over 40K. You are forgetting lots of costs on the owners side, and then the return from the 20% downpayment on the renters side. If you make a claim then you should use all the math.

Since you are so into not forgetting any costs...the above example doesn't include rent increase, the cost of moving as I don't know a lot of people that rent the same house for 7 years. I personally never have, so I would have moved already 3 times...$2k cost to move all our $hit everytime. (so times 3)

It also doesn't include that the landlord keeps security deposit at the end of the lease for those repairs, or a portion of it because your dog peeed on the carpet and your son threw up at the walls :)

You are not on the hook for maintenance as a renter but when you move out the landlord often gets at least some portion of the security deposit and if he is an a-hole...all of it.

But all said and done...even if your example was right - I'd buy the house if the difference is only 40k over 7 years. I would call that the price for living in my own home where I can do what I want.

In reality it doesn't work that way though. If you have to move and don't find another house for 2400 but for 2600 , its already wack. That calculator is SO biased on the renter side and doesn't figure in real life situations.

$35k Maintenance...come on! $600 a month??? You gotta be kidding.

That calculator is totally bogus and useless...nobody knows the future, therefore you can't calculate exactly what the difference is. What if Uncle Harry Dies and leaves me a $100k inheritance? What if grandpa fixes my garage door for free?

Trying to be thorough on something you don't know makes no sense to me.

Again, if your example was right, I'd still buy.

RentingForHalfTheCost says

I used 0% rent and price appreciation

But why stop at saying that inflation is dead? Why not just forecast deflation and rental prices to decline along with house prices by 3% per year? That should show any even greater profit for the renters. After all, rent for you and Patrick hasn't gone up in the last 10 years, so it hasn't gone up for anybody in the bay area. All of those folks who are complaining about 15% increases are delusional whiners who have bad landlords, and you guys can pick up and move to another similar place at the same rent anytime you want, right?

Also, fwiw, most homebuyers in the bay area are going to be in at least the fed 28% marginal bracket and the 9.6% state bracket. And for many (most?) the 9.6% is not going to be deductible because of the AMT, so you probably want to use a number more like at least 35-38% for tax rate.

And then of course Patrick's comparison calculator is bogus since it ignores the 2% cap on prop tax appreciation, but oh yes, I forgot inflation is dead and never coming back.

You really should tell all of those idiots buying TIPS at a negative net yield to inflation that there isn't going to be any inflation, you being so much smarter than the collective wisdom of the financial markets (who are clearly filled with deluded economists). You do also realize that since you are able to forecast deflation so clearly that you should be able to make an easy leveraged fortune in the commodities markets, right?

RentingForHalfTheCost says

I used 0% rent and price appreciation, 4% mortgage rate, 20% down, marginal tax of 28%, length of ownership of 7 years, after tax return on investments of 3%. I used 2400/mth rent because that works well with 500K mortgage at 4% which is basically 2400/mth on a mortgage. Here are the results. After 7 years the renter is ahead by over 40K. You are forgetting lots of costs on the owners side, and then the return from the 20% downpayment on the renters side. If you make a claim then you should use all the math.

$35k in maintenance and $9000 in insurance is grossly inflated.. I pay $600 a year for home insurance on my $400k home. If i put $35k into my house over 7 years... I would have a new roof, new a/c, new windows, remodeled pool, and paver driveway... That would surely increase the resale of my home.

robertoaribas says

I'll take a small monthly loss to keep my toys and lifestyle :-)

Just listen to what you said, you made a major financial decision, knowing you were going to lose a boatload of $$ just so u can keep some pets, stuff and your cousins stuff? You are not alone, most people need a house or a bigger house because of all their stuff/toys. This is absurd to me. Id rather retire years earlier.

To your credit you listed items that are experience based, but I'm sure a couch, dining table and beds all played equal roles. I think people could do well to question the need to own so much stuff. Afterall, you just showed that the stuff actually owns YOU.

SubOink says

Since you are so into not forgetting any costs...the above example doesn't include rent increase,

I assumed 0% rent increase just like I assumed 0% housing price appreciation. My assumptions are not as generous for my own decision making. I would assume a -4% on both. That make renting a slam dunk. Why the rent decrease you say? Because the shadow inventory will eventually appear as rentals. Simple suppy-demand issue. Why the -4% on housing depreciation? Because that is the trend and now that the gov't has run out of bullet it is the best case (worse case is more like 6-8%). Good luck out there. You play your side, and I'll play mine.

SubOink says

Again, if your example was right, I'd still buy.

There in lies the brain washing about housing in this country. We are so used to thinking owning is such a great thing that we are willing to lose retirement years in order to do it. To each his own.

Also, I have owned and own. Just not in the BA currently because. Owners can starve when they all start looking at my cash stash with eyes of envy. Back off! Get your own!

robertoaribas says

I'll take a small monthly loss to keep my toys and lifestyle :-)

I'll be happy to take your monthly loss, my gain so you can keep your toys and lifestyle. :-)

fizbin says

You do also realize that since you are able to forecast deflation so clearly that you should be able to make an easy leveraged fortune in the commodities markets, right?

Already happening. My email has 'gold' in the username and I set that up back in 1995. Enough said. I view my gains there largely at the expense of the people getting milked out of their savings by the corrupt housing market. When you see corruption, try to get on the other side of the table. ;)

http://finance.yahoo.com/q/bc?s=GLD+Basic+Chart&t=my

RentingForHalfTheCost says

I assumed 0% rent increase just like I assumed 0% housing price appreciation. My assumptions are not as generous for my own decision making. I would assume a -4% on both.

Just curious, but what do you assume for return on cash investments for your own decision making? Your estimate of 3% is pretty high; safe stuff like CDs and even municipal bonds don't pay anywhere near that, and stocks could go in any direction.

If you make those returns zero in your example, both of the positive numbers below "Rent paid" become zero and renting/buying becomes almost a wash, and thus the argument in favor of renting becomes dependent on the guarantee of positive returns on investment.

(I'm a panicky, hyper-conservative saver who would probably assume -0.5% return on investments -- unexpected bank fees, early withdrawal fees, and the like -- just to be safe, ^^;)

Michinaga says

Just curious, but what do you assume for return on cash investments for your own decision making? Your estimate of 3% is pretty high

In a market of free money you get nothing on your savings or t-bills, but corporate American is making a killing. Any company with a good product and global channels is basically printing money. Using a dividend company strategy while selling covered calls gets more than 3%. For my own decision making I actually use 5%, but didn't want people freaking out here. If you think companies like KO, WMT, ATT, COP, PG are going to stop making money then I would only put money in my survival skills and lots of ammo. ;) However, if you believe like me, that corporation are the only growing market out there, then you can get 5% pretty safely. There is never no risk, or no sure thing, but it is all about the cycle we are in now. It used to be companies had to pay for capital and they still found a way to be profitable. Now they get paid to take capital, it is a different game.

What is being manipulated (bond yields) to try to save the housing market, is benefiting the dividend investors big time. I never thought my KO shares would be growing faster than companies like Cisco, Intel, Microsoft, etc. But that is the market we are now in. There are many people trying to benefit from it, and then many that want the old market back because they are left with the playing chips nobody wants anymore.

So, you say 3% is high, I say it is low in today's environment. I could be wrong, but I am willing to trust myself over other people views. Always have. I do my fair share of reading and studying and in the end, I only have myself to blame for any mistakes I make.

BoomAndBustCycle says

If i put $35k into my house over 7 years... I would have a new roof, new a/c, new windows, remodeled pool, and paver driveway... That would surely increase the resale of my home.

If you kept all your house receipts it would blow your mind. I did when I owned around the BA for 5 years and the number was astounding. I am a cheapskate as well. Here is a list of my expenses with ownership

- gardener each week
- gardening supplies (seeds, fertilizer, trees, etc.)
- pool service each week
- pool maintenance supplies (chlorine, filters, broken or worn equipment)
- AC repairs
- replaced Hot water heater
- fence treatment
- garage concrete floor and driveway treatment
- smoke damage to fence from nearby fire
- sprinkler system maintenance
- Damaged window replacement from storm
- yearly gutter cleaning and maintenance
- solar landscaping lights replacement
etc. etc.

Add it all up and the number makes sense to me. If I didn't keep all the receipts then I would think it was excessive as well.

BoomAndBustCycle says

I pay $600 a year for home insurance

You probably only have the bank portion insured at that costs. Earthquake? Mudslide? Nope, Nope. If I have 1/5 million dollars in an asset I would want some security that I don't lose it in one bad predictable event. You get $600/yr coverage when you pay $600, which to me is not enough.