patrick.net

If it's cheaper to rent, well, you're paying extra to own and for nothing but a warm feeling, such as you might get by peeing yourself...

Or something...

Yea, I wasn't doing most of it for the fun of it, just necessary maintenance that comes with a fifty year old house with no updates.

But than again, doing most all of the work either on my own or basically labor free with help from friends (the panel costs 200 at home despot, but the pros quote the job at 2k!) Skews my numbers. Sand and refinish 800sqft would probably get over 2k, for me it was 300. I knew the sellers so paid flat fee for the transaction rather than realtor commisions.

New Renter says

Errc there ARE SFR rentals that allow big dogs. Granted they are rare but they do exist. A good landlord will also work with you on improvements to the property. And why would renting prevent you from getting a new W/D?

In any case thanks for adopting!

Sure there are. My parents pay a 50$ premium for their pets. Not sure how landlords insurance policies work for 150lb dogs, but as the mortgageholder, I didn't have to ask anyone. Believe you me, I tell most everyone they're better off renting, and why, financially. As a single guy, renting can be expensive. Some people don't do well with roommates, I've been very fortunate with my borders, and the networking I've done with them and their friends, but I know that's certainly not for everyone

As I stated, if I paid a premium to rent the money to own the mortgage, than I'm one of those idiots that rationalizes it because I like my mini homestead, orchard, garden, throwing parties etc.

Regarding median length of ownership issue - personally I believe that when someone buys a place, they should have reasonable expectation that they won't move for at least 10 years. Thus, it means that if someone is in a tenuous situation such as being in a volatile and unstable field where they can be laid off any time or contract gigs run out all the time, they probably should not buy. Also, it would be nice to see reasons for why people move every 6/7 years on average historically. What percentage is due to distress aka job loss, divorce, etc vs a more positive reason such as their property value went up/they paid off sufficient principal and are looking to upgrade. Simple stating 6/7 years and implying that someone has no choice but to get caught up in law of averages implies blind environmental determinism and in my judgement is a rather negative way to spend existence on this planet.

CDon says

are you willing to rent for the remainder of your life?

If I can save enough money by renting that I can travel when and where I want, take off years at a time from work, and eat the best food and drink good wine, then yes!

And so far it has been exactly that way for me.

Personally, I think thats a great attitude to have. And yeah I forgot about your unique rental situation. In your shoes, I probably would have done the same thing. Still, I worry about your one size fits all advice.

Full disclosure - I came here on the advice of my Sis In Law, a long time adherent to your site. Like many, she was not an investor, and while frugal, she was willing to pay a premium if thats what the market supported.

In the end she was a typical wanna be buyer. Her main concern was buying without fear that a massive price drop was just around the corner, putting her underwater for a decade or more.

One of the reasons she waited as long as she did was your insistence that it was a "terrible" time to buy, in large part because renting was so much cheaper. There was an assumption that the gap would be made up vis a vis massive drops in prices.

To her dismay, that gap did close - somewhat - but it was done via fairly significant rent increases. Even worse, the prices she passed on in late 2009 are nowhere to be seen. The final straw for her however was when she discovered you had been renting since 1999, which (in hindsight) was one of the best times to buy in the last decade plus.

Had she known that from the beginning, she would probably not as been so insistent to "wait" for some unspecified time that her favorite blogger was sure was coming but had not manifested itself in 13 years. Had she known you would be content for renting for life, she probably would have been more willing to recognize that the bottom does not, axiomatically have to co-incide with a price/rent metric that has not been seen in perhaps 25 years or more.

So going forward, you should perhaps be more candid with your unique circumstances and the caveat that you are willing to make choices many people are not.

In sum, there are (or were) a large sum of folks who simply wanted to buy at the bottom, not whether it made sense in some idealized version of price parity that has little evidence of occuring anytime soon.

My circumstances are not at all unique.

It's still much cheaper to rent than to buy in pretty much every nice neighborhood in the SF Bay Area. You can't lose by winning.

Try the calculator, then argue with the numbers:

http://patrick.net/calculator.php

It assumes a 1% decline in price per year and 6 years of ownership by default, which I think are suitably conservative. If you disagree, change the assumptions.

In regards to calculators, I believe that rent increases and home price increases should both be at historical inflation which is 3.1% per year. Essentially what it means is that rents will double every 24 years while home prices should be expected to double every 24 years.

My circumstances are not at all unique.

You present it as your landlord is willing to rent to you in perpetuity. Your landlord does not seem to be interested in raising your rent, which is below market to begin with. It is an enviable position, and entirely unique.

It's still much cheaper to rent than to buy in pretty much every nice neighborhood in the SF Bay Area. You can't lose by winning.

As I noted above, it depends upon one's objective. If one is willing to rent for life, then yes you are indeed winning, and again, nothing wrong with that.

However, if your objective is to someday buy, the calculator isnt as determinative as the bottom (which may, or may not co-incide with the calculator).

Try the calculator, then argue with the numbers:

Actually, I learned along time ago, not to argue with the math. In 1999 the calculators told me "rent". Today, 14 years later, they still say "rent". As far as I can tell, with even baseline assumptions, some calculators in some areas are destined to say "rent" for every monent in time.

It was thus that I realized the axiomatic adherence to the calcuator will never let you win if your goal was to truly, one day buy. As it turned out, the calculator failed people by saing "rent" in 1999. As it turns out, the bottom doesnt have to coincide with a point where the calculator says "buy". Turns out, in some areas, the bottom doesnt seem to care one way or the other what the calculator says.

Again, it would be nice if you happened to recognize this fact for those people who were simply looking to someday buy - versus following your uncommon path of renting forever if the calculator never worked out.

My circumstances are not at all unique.

It's still much cheaper to rent than to buy in pretty much every nice neighborhood in the SF Bay Area. You can't lose by winning.

Try the calculator, then argue with the numbers:

http://patrick.net/calculator.php

It assumes a 1% decline in price per year and 6 years of ownership by default, which I think are suitably conservative. If you disagree, change the assumptions.

The same thing is the situation in most desirable inner portions of Los Angeles. I wouldn't say it's half...it used to be but then rents temporarily went up and interest rates went down.

At current, a mortgage plus HOA in Downtown LA will run around $500/mo more than an equivalent rental. For me it's only about a $275 difference because I failed to research the recent market enough to realize how far rents had dropped since September. But nonetheless, still cheaper than buying.

Of course if you have $180-250k cash, you can make out like a bandit. But even that's not really much of a concern. Since the banks never processed foreclosures, seemingly EVERYONE who bought from 2002-2010(2009 wasn't anywhere near the bottom here) is underwater and most of them strategically defaulted, and apparently there is a near endless supply trickling out at about 20-30 units a month. So there's no real threat of prices or rents going through the roof.

It's totally hillarious hearing one of my coworkers who invested in one of these units after the "crash" in 2008 say how things are never gonna go down again. But ooops...three more bank owned foreclosures in your building just sold last month for lower than they've ever sold.

CDon said: You present it as your landlord is willing to rent to you in perpetuity. Your landlord does not seem to be interested in raising your rent, which is below market to begin with. It is an enviable position, and entirely unique.
His situation is not unique due to Prop 13. If folks approached renting a home with the same zeal as purchasing a house, they could end up with a similar rental situation.

Landru3000 says

Ha Ha! I bought a year and a half ago and have same story! I'm really, really happy I bought.

People buy in Oakland? With or without guns?

SubOink says

The best feeling knowing...our payment is frozen for 30y. It will never go up.

But you will be paying for 30 years. In 10 years of renting in the bay area many people can save enough to buy a house with cash. Just saying...

CDon says

You present it as your landlord is willing to rent to you in perpetuity. Your landlord does not seem to be interested in raising your rent, which is below market to begin with. It is an enviable position, and entirely unique.

Not that unique. I am one, and know many people in the same situation. I search for a landlord that got their not by choice, and want to maintain the quality of the home rather than squeeze out ever last dollar from rent to someone that will no doubt trash the home. Having the tenant feel like they are getting a good deal makes then care more for the home they are using. I say that from both the tenant and landlord view (own 4 properties).

RentingForHalfTheCost says

SubOink says

The best feeling knowing...our payment is frozen for 30y. It will never go up.

But you will be paying for 30 years. In 10 years of renting in the bay area many people can save enough to buy a house with cash. Just saying...

Hmmm....

Bigsby says

RentingForHalfTheCost says

SubOink says

The best feeling knowing...our payment is frozen for 30y. It will never go up.

But you will be paying for 30 years. In 10 years of renting in the bay area many people can save enough to buy a house with cash. Just saying...

Hmmm....

Actually if we wanna play childish emotional games like OP, I'm very very good with that.

Lets see...I was rent free living with mom and dad until my late 20's. The. I rented a guest house for a couple years at $400/mo and that's basically the equivalent of free. So lets call it free. Then I shared a 3bd/2ba house with two other people and that was $500/mo so almost like free as well. Then I rented a large room in a mansion(well I dunno...whatever you call 5500 sq ft.) for $725/mo for 5 years. And that's not free but it's less than a studio in any decent part of LA costs. Utilities, cable, and cable Internet included too. Heck, one of those years I worked enough OT that I almost made 100k that year. So I was able to save a bunch.

So I've only been paying real rent for around 2 years. And someday(honestly hope it's not soon) ill get to retire and live in a 2800 sq ft home with ocean view and 5min walk to the beach in coastal OC. All for free. And I'll even get that whole prop 13 thing grandfathered in. Awesome. Lol and I won't have ever paid any part of a mortgage nor will I have rented for 30 years.

Imagine that.

I'm not clear on the point you are trying to make.

One round of WAGE inflation . . .

SFace says

One round of inflation will destroy the rent case and two will blow it away

deflation will blow away owners, two will put them living under a bridge. Works both ways. This country can print money until all the trees are gone, and inflation will be little threat, when you have more than 20% under or unemployed. Try increasing rates, the only effect will be you end up with lots of inventory. I've got relatives in the retail business and today's regular prices were yesterdays sale prices

E-man says

What's so hard to understand? You can leverage 4:1 up to 30:1 with real estate. A typical 3% annual appreciation/inflation will give you a 12% to 90% ROI.

IRentingForHalfTheCost says

deflation will blow away owners, two will put them living under a bridge. Works both ways. This country can print money until all the trees are gone, and inflation will be little threat, when you have more than 20% under or unemployed. Try increasing rates, the only effect will be you end up with lots of inventory. I've got relatives in the retail business and today's regular prices were yesterdays sale prices

I don't understand why people are arguing over and over and over again on the same thing (maybe in slight different forms) on this forum. Like I said, it depends on your crystal ball.

1. Scenario 1: deflation dominates, all prices including rent drop, cash is king, renters who SAVED win out.

2. Scenario 2: strong inflation gets hold, owners win big, renters get blown away.

However, although I see scenario 2 much less probable (due to the gas price bottle neck,) it is a no brainer for me to purchase a house in CA (a non-recourse state) when the PITI is comparable to rent.

It is a scary thing when you see that your property value is less than what you owe the bank. This fear has caused many people to default on their mortgages and/or wish they were renting.

Rather than focusing on property value, which will rebound given enough time, focus on having a place to live. If you like your home and can make the payments (even if they are high), you still have a place to live. If your house goes into foreclosure, you will have to live somewhere and will be paying rent (who’s to say it won't be at or above what you are paying now). Plus, you will have a foreclosure blight on your record.

1.US stocks/US bonds have outperformed real estate since 2009
investing in stocks/bonds over the last 3 years will have made much more than investing in real estate, even if you had invested at the bottom of the real estate market

2. if in 2009, you could look into the future and knew the rates of return of RE and equities in 2012 (talking about indices; not specific houses or specific stocks). most people that were looking to grow their net worth would pick equities.

3. historically stocks/bonds outperform real estate.
over the long term (next 1, 2 and 3 decades), stocks and bonds should continue to outperform real estate. if you care only about increasing net worth, the smarter bet is stocks/bonds over real estate; even in the bay area.

4. i save over $4k/month (on a pretty typical white collar bay area salary) and rent. my investments grew significantly more than my savings over the last 3 years.

We bought in early 90's, all cash no mortgage. Right away obviously it was a big hit financially. But not having to pay interest over years made this work out over years. It's not like it's free, taxes and fixing old stuff does add up.

This would have been a bad proposition if we had high interest mortgage, interest was really high back then since the value of our property today is almost same as it was in the early 90's. Of course everything can go any way. If we spent all that money buying stocks we'd be millionnaires today too, but hey who would have known that BOA would drop to 4 and GE would drop to 6 in next 15 years? No one had a crystal ball.

E-man says

You can leverage 4:1 up to 30:1 with real estate. A typical 3% annual appreciation/inflation will give you a 12% to 90% ROI.

And a 3% annual depreciation will wipe you out.

People forget that so quickly.

Hysteresis says

4. i save over $4k/month (on a pretty typical white collar bay area salary) and rent. my investments grew significantly more than my savings over the last 3 years.

You are in the market recovery period. Good time to be in high growth portfolio. But don't be passive, if you see economy slow down in next few years, get more conservative to do well during the low end of bell curve.

Yeah, we'd all be rich if we could see into the future. Strange that.

Anyway, you can apply leverage to stock too. What matters is the risk-adjusted return, not absolute return. If you've increased your risk via leverage, those higher returns in real estate are not as real as they look.

The risk of leverage in stock purchase has been always higher (much higher) than fixed mortgage. A margin call can wipe out your account right away.

FortWayne says

Hysteresis says

4. i save over $4k/month (on a pretty typical white collar bay area salary) and rent. my investments grew significantly more than my savings over the last 3 years.

You are in the market recovery period. Good time to be in high growth portfolio. But don't be passive, if you see economy slow down in next few years, get more conservative to do well during the low end of bell curve.

pretty decent advice. periodically adjusting allocation is a good idea; although it's quite difficult to implement even if you have a sound strategy (and many don't have one).

Lets for a moment assume that real estate appreciates at historical inflation rate of 3% while stock market appreciates at historical rate from 1926-2011 which is 8%. Per 72 rule, it would take 24 years for the home to double in value while it would take 9 years for the stock mutual fund to double in value. That is assuming that average holds. Lets assume that a buyer puts 20% down on a $500K property and has $100K in cash. Lets assume that a different person instead invests $100K into a mutual fund outright and does not buy on margin since most "regular" people don't do this. In 24 years, the homebuyer has a home that's worth $1 million. The mutual fund equity investor will have the following scenario - 9 years from now - $200K portfolio. 18 years from now $400K portfolio. 27 years from now - $800K portfolio. Thus despite the fact that on average equities return more than real estate due to leverage the homebuyer will come out ahead if histrorical returns hold. I believe that this analysis should only apply when deciding to do buy vs rent analysis. For those who already own a home and are wealthy enough to have tons of other funds and are considering whether to invest them into rental properties or equities, I would do equities simply cause they are more liquid and to me being a landlord would be a headache. My conclusion - buy primary residence instead of being a lifelong renter, but invest in equities/bonds instead of real estate when it comes to additional decisions.

dublin hillz says

...

your analysis is missing --ALL-- of the large costs associated with financing a house.

use patrick's calculator or nytimes rent/buy calculator for more accurate numbers.

RentingForHalfTheCost says

The big assumption is I am able to keep getting 12% after tax return on my investments, which I believe I can.

Getting 12% after tax ongoing??? In Texas there's a saying. "The man's pissing on my boots and telling it's raining". I smell urine, not spring rain.

Hysteresis says

dublin hillz says

...

your analysis is missing --ALL-- of the large costs associated with financing a house.

use patrick's calculator or nytimes rent/buy calculator for more accurate numbers.

If one believes that historical averages are likely to repeat themselves in the long term, then the principal part of the mortgage payment should be considered forced savings and should not be counted as a "cost." It is more of a cash flow issue so the pertinent question is "am I confident that I can make the required payments." Which means that the biggest threat to making payments is a life altering negative event such as job loss, etc and the good idea is to have substantial liquid savings if that were to occur so that the situation can be handled adequately and without stress. Also, I am a big believer in mortgage prepayments which in bay area can easily save you hundreds of thousands of dollars over the life of the loan and factor heavily into buy vs rent equation.

While it is certainly possible that someone can rent under market (pay equivalent of property tax + maintenance or property tax + HOA) it is very unlikely to have such a benevolent landlord who does not care to make any profit. At very least, they will want to make some profit if they lease the place out. But you guys have to admit, this situation cannot apply to rental martket as a whole. There are too many renters to even fathom to fit into this scenario. Vast majority of renters live in apartment complexes where rent increases are a direct and a realistic threat year in and year out.

dublin hillz says

While it is certainly possible that someone can rent under market (pay equivalent of property tax + maintenance or property tax + HOA) it is very unlikely to have such a benevolent landlord who does not care to make any profit. At very least, they will want to make some profit if they lease the place out. But you guys have to admit, this situation cannot apply to rental martket as a whole. There are too many renters to even fathom to fit into this scenario. Vast majority of renters live in apartment complexes where rent increases are a direct and a realistic threat year in and year out.

It is possible. I'm sort of in the same situation. The home I'm in is in a gated community in Irvine, and a similar model sold in the high 800s this year. The HOA is nearly $300, and the effective tax rate with MR is 1.5%.

My rent: $2400 a month. This is my 3rd year of not having a single rent increase.

You property owning barons can do the math yourself. I'm pretty sure I'm saving a lot of money by not buying this house. :)

When I read peoples posts on these matters, it seems like many forget that, if not for the taxpayer stepping in and plugging the chazm in the ole dam, everything housing AND financial would have been wiped all the way out.

Using OPM other peoples money is right, lol!

High five

Goran_K says

My rent: $2400 a month. This is my 3rd year of not having a single rent increase.

$2400 is definitely more than just property tax+HOA. This amount likely comprises Interest + Property Tax+ HOA.

dublin hillz says

$2400 is definitely more than just property tax+HOA. This amount likely comprises Interest + Property Tax+ HOA.

It's close.

Rent amount per year: $28,880

Tax: $875,000 * 0.015 = $13,125
HOA: $280 * 12 = $3,360
3.6% jumbo (or about $700 month over 360 payments): $8,800

HOA/Tax/Interest = $25,285

We're talking about $300 a month profit, and that's assuming everything is paid off! (this house was built in 2001!) If it's not, then all bets are off.

Don't forget maintenance (my water heater was replaced in September), and any "special assessments".

All I know is I'm here for a while, and I am saving money from what I was paying in rent. Plus my taxes keep going down.
Last night my wife and I were discussing how on Zillow and Trulia they are saying our house is valued back to where it was when we bought. While the county appraisers office has it 40K lower. In any event I'm still not upside down, as I'm not selling, my payments are fixed for the next 30 years so it's a non issue.

My Wife asked if our house went upto 300K and we sold it for that, that means that 150K profit would be ours? I said yeah, but by then, where in the hell would we go. If our house would be worth 300K that would mean an even better house would cost 400-500K and up of course.
This isn't a board game, we're staying where we are.
I could see a scenario where we buy a new house and rent this one out as two units, someday. But this is not some investment vehicle with hopes of flipping into bigger a exposure. This is easy, that is not.

That's a good attitude to have. As a place to live, I think it's all a personal choice.

As an investment, I think $875,000 homes are horrible.

RentingForHalfTheCost says

I agree, more like $3500/mth savings.

I am not sure how I would save 3500/month by renting? Since the refi I am saving more money monthly than when we were renting. Something like 350 a month more than when we rented.

Please lay down your math of how you are saving $3500 a month?? Living with the parents for free would be the only option but who wants to live with the parents for 10 years??

I have just one question for you all:

Is it cheaper to rent or to own the house you bought over the median holding period of 6 years? Remember that half of all buyers own for even less than 6 years.

Thats a non sense assumption I think. I know way more people that have been in their houses for more than 10 years. Most of our neighbors (except the renters) have been here for more than 10-20 years or even longer.

I think if you have a job that calls for constant moving then...don't buy. I personally work from home and can live pretty much anywhere as long as within a 1hr drive to the city where I have an occasional meeting. So, I am not moving anytime soon, if ever. Will only change around / update the house around over time...and completely mold it to my taste and liking. Been looking forward to that my whole life. We so much hated rentals, always in bad shape and never a landlord that doesn't want to just update in the cheapest possible way...need a new floor...how's that linoleum working out for ya guys? - argh!
It's such a crappy life quality and we used to travel a lot and spend a lot more money outside of the house because we hated being home. So in essence, we saved way less in those times than just comparing rents to mortgage.

To each is own.

But even in your assumption of 6 years patrick. I could move if I wanted to because as of right now, I could rent the house out for $500 more a month than what we pay. So if I wanted to move to Florida, I rent out this house and move...just like anybody else.

dodgerfanjohn says

All of the above feature a commute of at least an hour to the westside or DTLA and as such peaked lower, and crashed harder than closer in areas

Who says you need to commute to the West Side??
TO for example has its own job infrastructure.

Look at traffic in the morning. The 101 going towards TO is PACKED, bumper to bumper. It seems like a lot of people from LA are traveling that way. puzzles me but thats a fact. Every morning. The side going towards LA is empty.

On the flip side of the coin.
I really wish like hell, all of the rent I payed on the same house for 11 years, went to my current mortgage.

That's $158,000 I'll never see again. In fact, it's $2K shy of what I paid for my house, that I'm paying a mortgage on.

$1200 a month
X12
X11 = $158K

$432K will be what I end up paying on my house if I take 30 years to pay it off. That's only a 160K loan. But it's the same I would pay for rent, provided my rent never went up due to inflation in that 30 year period.
Never happen.

Plus there's a bonus, I will actually end up with a house I own out right free and clear in 30 years or less. That would also never happen as a renter, renting the same house for 30 years.