patrick.net

FunTime says

all for an annual rent significantly less than 5% of a purchase

Okay FunTime, you sound a lot like Patrick. So how much do you pay in rent compared to what you would pay in Principal, Interest, Taxes, Insurance and Maintenance ? Give us more specific details to make a quantitative judgement.

I'd rather not share exact numbers since I'm already sharing more personal information than I want. How about you take the three purchase numbers I gave, the 5% number and figure it out? The additional complication is that if I really bought a house I wanted, it would probably be at least $1.5 million. Totally beyond reach.

Truth-be-told, the couple of times I really looked at taking a loan to buy a house, I was really taken aback by how little I could afford. I know there are a number of finanically independent people in San Francisco who have bought houses and a number who inherited houses but I've concluded there are a good number of people who are just more willing than me to go "all in" on a house.

How about this? When I did the calculation, my annual rent was 4.65% of purchase price. Just work with that for all three(or four, now) purchase numbers.

FunTime says

Truth-be-told, the couple of times I really looked at taking a loan to buy a house, I was really taken aback by how little I could afford. I know there are a number of finanically independent people in San Francisco who have bought houses and a number who inherited houses but I've concluded there are a good number of people who are just more willing than me to go "all in" on a house.

True FunTime, there are other factors like the annual appreciation or depreciation of the home. I ran the numbers on the NY Times rent vs purchase calculator for $135,000 condo (buy at 4% fixed mortgage, 30 years vs rent at $600 per month based on the 5% example) using various scenarios that rent gong up 1% per year, etc. Need also to take into account tax benefits like writing off interest and property taxes

Well, one thing people sometimes forget about:

AMT = no deduction of property taxes for you (or most other taxes for that matter).

For annual house appreciation, I don't expect to do better than the historical U.S. trend calculated by Robert Shiller and associates. I think, given the past decade and my age, maybe my lifetime will even underperform inflation.

I'm convinced there's no tax benefit to buying a house, or as has been suggested by some here that it's a break-even with what gets paid for closing costs or property taxes. I get that the government encourages taking large loans, but I don't think that encouragement is based on the financial well-being of citizen housebuyers. My accountant suggested buying a house at one point to get the tax break. He's right, of course. That's the law. My response to him was, "So I'll spend a million dollars to get a $10k/year tax break?" He seemed to get that and had no reply.

I'm open to the idea that there's some really complicated way of getting all these numbers to work out and get ahead, but the most senior, expert people I've read, like Shiller, seem to be saying that's not how it works. The people getting ahead buying houses are doing so by short term sales. Great, but one of the big benefits of houseowning is supposed to be stability. Short term sales are in conflict with stability.

I went back and tried to figure out how much money I would have made had I bought the loft condo I looked at back in 2003-2004. It's made really difficult by how real sales prices are unavailable, but even looking at the prices I found it didn't look like I'd necessarily have made much money and at that time I really didn't have a downpayment and only qualified for an ARM that I really couldn't have afforded. And that's for a $500k place at the end of arguably the most crime-ridden street in San Francisco!

unclemat says

Well, one thing people sometimes forget about:

AMT = no deduction of property taxes for you (or most other taxes for that matter).

For which I've qualified several years.

My landlord is a multimillionaire and has not raised the rent in six years.
Have you ever looked up your landlord's Prop 13 tax basis? A renter can use Prop 13 to their advantage (as Patrick has).

My problem with price to rent ratios is, in my area, most SFH's have ridiculous asking rents, as it is usually listed by an upside-down owner trying to cover their cost.

I ended up using $/ft2 as my metric - and on that basis I feel that I got a fair price - numbers came out almost the same.

Also, I had a number that I would not exceed - and thankfully I managed to keep under that number when shopping for a home.

I wasn't trying to time the market per se, but I think I timed it fairly well just the same..

I assume that the "AMT = can't deduct property tax" statement applies only to income that exceeds the AMT threshold?

I did the math when I was doing taxes this year. If my wife and I were to someday purchase a $750k house with 20% down, we would blow $32,625 on mortgage interest (@3.875%) and property taxes. I already itemize, and adding in the aforementioned two expenses would have saved me an additional ~$7,20 in taxes. So, spend $32,625 and save $7,200. In other words, spend $4.50 to save $1.00. My current annual rent is ~$20k for a 2/1.5 townhouse style apartment a mile from work and a brisk walk from downtown Mountain View.

Rent only increased 3% on me last year because I am a good tenant. Eventually it will exceed the cost of a house, assuming nothing weird happens. Anyway, this probably explains why I am not in a mega hurry to buy. As long as a house I get is within 10 miles of work, it's cool. A "mandatory" 100 miles of riding my bike every week has some appeal actually. Given that my car has not really been running at all in the last 12 months thanks to some complications with a custom engine I had built, I already average 60 miles per week on my bike.

OK, losing focus here. It's all about "quality of life" and lifestyle in the end. Period. At least for people with normal jobs that aren't interested in speculating ("investing") with RE anyway. Some people like doing that, and we have a few of them here that frequently provide an investor perspective on things. Most people, though, just want to live in a house because it may provide added stability and offer lifestyle enhancements.

No, if you are paying AMT you cannot deduct property tax. Mortgage interest, yes.

Well in that case it looks like a case of spend $6 to save $1.

bmwman91 says

It's all about "quality of life" and lifestyle in the end. Period. At least for people with normal jobs that aren't interested in speculating ("investing") with RE anyway. Some people like doing that, and we have a few of them here that frequently provide an investor perspective on things. Most people, though, just want to live in a house because it may provide added stability and offer lifestyle enhancements

Quite true. If it facilitates a better (or even 'more efficient' if you work from home) standard of living or quality of life, then it can't be all about the beans.

(I am curious what happened with your custom mill...)

mortgage rate was around 8% in 1999 so it's not a fair comparison. it's all about monthly payments.

not to mention:

prices never went back to 1940's level:

http://www.multpl.com/case-shiller-home-price-index-inflation-adjusted/

EBGuy says

Have you ever looked up your landlord's Prop 13 tax basis? A renter can use Prop 13 to their advantage (as Patrick has).

I've not. I'll have to look into it. Thanks.

SFace says

In your example, you are probably missing the benefit of CA tax by about 2K. So your permanent cost is around 24K + insurance and maintenace +the downpayment.

Correct, I missed the CA part. So the "discount" isn't as lousy as originally calculated, but it's still around 4:1.

SFace says

the way I see it.

Everything in life is about "value" and the cost to attain that "value".

Value is in the eye of the beholder. It's easy to say I'm single, I can sleep in my car and cost nothing. A house has no value to me. It's another thing when you have a wife, 2 kids and other. The value is worth a lot more when there are more heads involved.

If you don't have a standard in how you want to live, you don't have a standard in life. Once you figure out your standard or goals, then you have an idea what it takes and how to get there and make the right plans.

In that case I guess my wife and I are still figuring things out. We don't know if kids are something that we want. Our interest in houses stems purely from our own personal desires, although it would also provide some benefits for kids if we went that route.

I assume that I am misreading your post, but it sounds like you are making the claim that "people that don't see home ownership as the end-all be-all goal in life have no standards."

SFace says

The value is worth a lot more when there are more heads involved.

Or a lot less, depending on your standard.

Mark D says

1. Not adjusted for inflation correctly. Adjusted for the ever changing definition of CPI, and utterly inconsistently adjusted because of that.
2. What does it matter if wages, even in nominal terms, are less than what they were in 1999? Wages determine demand, not inflation, and certainly not arbitrary CPI levels.

FunTime, you said your annual rent was 4.65% of the price. Say the price is $1m. Your rent is then $3,875/mo. With this scenario, you will be financially ahead buying in 3 years and beyond. This assumes: 3.5% interest rate, 3% rent increase/yr, 2% house appreciation/yr, 2% inflation, 40% overall income tax, 20% down, 1.35% property tax, $5k/yr insurance and maintenance.

wave9x says

3% rent increase/yr

WTF? I don't know anyone who rents and has even gotten close to that. I have been renting since the internet bubble and into the 2006-2007 housing frenzy and stayed at a couple of places for 3+ years and the rent never increased at all. Plus, if you are afraid of increases you can rent in a rent-controlled environment, where you prob get an avg. increase of 1.5% per year max. That's similar to saying house prices haven't gone up in the last 2 years ;)

Hey mell,
3%+ rent increases are very real in the Silicon Valley. I was LUCKY and "only" had mine jump by 3.9% last year. I moved into this apartment because my previous one tried to crank it up 10.7% on us, and after we left they brought new tenants in on a lease for 47% more than what we were paying (yes, 47%...this was summer 2011). Now, prior to that I actually got the that place to keep it flat one year and lower it by 2.7% another.

I am seeing rents here flatten out, albeit at about 25% more than they were ~2 years ago. Rental inventories are growing a lot as investors are bringing a lot online. I don't expect drops in rents since there isn't squat to buy out there, so people HAVE to rent.

The squeeze on the middle class is ON.

wave9x says

3.5% interest rate, 3% rent increase/yr, 2% house appreciation/yr, 2% inflation, 40% overall income tax, 20% down, 1.35% property tax, $5k/yr insurance and maintenance.

Yeah, that's definitely where the calculators come down to some judgement calls. I've tried using the best historical numbers I've found and some scenarios do show buying a house as an advantage over renting a house. But what numbers really make sense to you?

I'd push on the 3% rent increase, for example.

What's even more difficult to understand is how that 20% downpayment, which would be all or most of the money I'd get from investments which can quickly liquidate, is best spent on a house. Time is the variable to solve for when optimizing for exponential growth, so if I spend all that money that I've been saving for so long already, don't I effectively cut off the end of the exponential curve I've been on? Now if that exponent is small enough, the house might be a better place to put all the money, but currently all that money is invested in way more than one thing. Buying a house just seems like ruining a good thing by taking my savings and handing it to a bank in the form of interest. Not to mention, I'd be buying something worth more than my net worth. Is that ever a good idea?

bmwman91 says

3%+ rent increases are very real in the Silicon Valley. I was LUCKY and "only" had mine jump by 3.9% last year.

My experience in San Francisco since 1999 has been luckier. I've never had mine raised more than however the annual guideline is defined for places older than 197x.(I really don't understand a lot of the rules, but have never thought I got burned by them. My income increases have been much higher than rent increases) That's meant less than 2% increases and that only happened maybe five times in the first 7. As I said, I've currently had not one dollar of rent increase for six years. (/wood knocking)

bmwman91 says

Hey mell,

3%+ rent increases are very real in the Silicon Valley. I was LUCKY and "only" had mine jump by 3.9% last year. I moved into this apartment because my previous one tried to crank it up 10.7% on us, and after we left they brought new tenants in on a lease for 47% more than what we were paying (yes, 47%...this was summer 2011). Now, prior to that I actually got the that place to keep it flat one year and lower it by 2.7% another.

I am seeing rents here flatten out, albeit at about 25% more than they were ~2 years ago. Rental inventories are growing a lot as investors are bringing a lot online. I don't expect drops in rents since there isn't squat to buy out there, so people HAVE to rent.

The squeeze on the middle class is ON.

No doubt the fattest increases happen when new tenants move in, but if you are a good tenant with solid credit you have quite some leverage. I'd move out if they'd pull that on me. Of course, they count on the inertia, esp. with family and such. I only lived in the south bay for less than a year so I cannot speak for that, but you can find plenty of nice rentals in SF that stay relatively stable. Sure, competition has increased, nothing a good credit score can fix. Even better, if you have cash on hand, you can prepay and actually negotiate no increases or even bring the rent down a bit. Cash is still king in the cash flow business and landlords love pre-payers or people locking in longer-term leases ;)

wave9x says

Say the price is $1m.

One thing that really works about the calculators is that if I move that price up and down I get a really good or bad feeling for where all the other numbers sit. So if I move that million dollar price down to $650k, all the other numbers start to seem very comfortable.

Actually sold, could not afford it, tax/maintenance burden was cost inefficient for one person while wages stagnated.

FunTime says

So if I move that million dollar price down to $650k, all the other numbers start to seem very comfortable.

Maybe, more clearly, "all the other numbers start to seem very comfortable even in a wider range of percentage points."

If you set rent increase to 2%/year, i.e. same as inflation, you will be ahead buying in 3 years. If you set your rent increase to 0%/year, you will STILL be ahead buying in 3 years. And what are the chances your rent will be fixed for 30 years? My old $2200/mo rental from 10 years ago is now renting for $3900, an average increase of 8%/yr.

Put it this way - you are borrowing for barely more than the rate of inflation. Also, you are able to deduct the interest from your taxes, so you are pretty much getting the loan for free. Maintenance, property tax, and the opportunity cost of not putting your down payment in stocks or something are the main costs. Those don't outweigh the cost of renting.

wave9x says

If you set rent increase to 2%/year, i.e. same as inflation, you will be ahead buying in 3 years.

I see now that I've not been changing the effective tax rate high enough. I think '40' is too high, but that changes things considerably. And you're using the default "4%" of annual rate of return on other investments? I'm more confident of that number being low than the house numbers being low.

wave9x says

barely more than the rate of inflation.

But you get how "barely more" times a big number is a big number right?

wave9x says

so you are pretty much getting the loan for free.

I work in Sales/Marketing and that sounds like Sales/Marketing. That's one of my big problems with house buying. Many will have you believe that not only do some things come for free, but the very most expensive things you'll ever buy come for free. That scares the shit out of me, because that ain't how people work.

Barely more than inflation is not more than the cost of renting. How about this then, being very conservative:

30% income tax
7% ROI
3.5% interest
20% down
1.35% property tax
House prices and rents rise with inflation (2%)
5k/yr house maintenance and renovation
1k/yr homeowners
Cost of buying 1%
Cost of selling 6%

You're ahead buying in 4 years. You will need an ROI of 11% to make renting a better deal. Good luck with that.

In comparison to the above scenario, my property taxes are lower, house appreciation higher, rent increases higher, income tax higher, and ROI lower. All of these parameters favor buying even more.

Even if his rent never went up, i.e. 0% rent increase, he will STILL be ahead buying in 4 years. Sorry that angers you, donjumpsuit, I'm just doing the math.

donjumpsuit says

2003. $2650, split between two people. House in Point Richmond 3/2.
2005
$3000 split between two people. House in Point Richmond 3/3.
2007 $1750 split
between two people. House in Davis. 3/2
Current $1900 split between three
people. House in Fremont.

Living with roomates and most people who live with roomates rent has significant drawbacks for obvious reasons. For me it was fun in the dorms and all but I also lived that way for 2 years after college and lack of privacy and certain other inconveniences really starts to get annoying as one gets in their mid 20s and older. Yes, it is a great way to lower renting costs, but it is much easier to live with girlfriend or even solo accounting for individual temperament of course.

wave9x says

5k/yr house maintenance and renovation

1k/yr homeowners

Cost of buying 1%

What justification did you use for making these lower than the default?

FunTime says

5k/yr house maintenance and renovation

Actually, I made a mistake and think this is the default. cost of buying defaults to 4%

Of course you can't predict the future, but that doesn't mean you should take a random course of action and hope for the best. You can make educated, conservative guesses as to what inflation and other factors will be based on historical data. I think saying 2% inflation with house values and rents matching that is pretty conservative and is biased towards renting if anything. House values and rents have gone up much more than inflation in my area over the past 10 years.

4% cost of buying is way too high - that would be $40k in closing costs on a $1m place.