patrick.net

Agree with this in principle, but have found 2012 numbers to be different than "a loan of a million dollars in cash costs 6.5% interest" and annual rents at 3%.

I'm not sure what interest I would get on a million dollar mortgage, but the rates look lower for 30 year fixed.

Since Bay Area house prices have gone down, I'm estimating that my annual rent, which has not changed for five years, is now closer to 5% of purchase price instead of the 3% I might have estimated back in 2006.

A nice home in south Florida with a pool will rent for about 1500.00 dollars a month. 2000 sq ft home in an HOA. Thats is about as cheap as it gets. But thats average. I know I had rented for the last couple of years.

I purchased. With Mortgage payment /tax's/insurance/etc its about 1000.00 dollars per month for my family.

So it saves me 500 bucks and I can do what I want......having said that I am not mobile anymore and there is something to be said for that !

I dont knock renting because I like to own and rent.....its a toss up!

I have a hard time understanding this rational. I just recently paid 43.5k cash for a townhouse unit that was listed for 250k in 2006. It was an REO owned by B of A. It's a 2 bed 2 bath unit in an 8 unit structure in a gated townhome complex of about 20 structures. It was built in 1989. My hoa is $250 a month which includes trash pick-up, covers the spanish tile roof, water, pool cleaning, landscaping, electric gate maintenance (gated community), etc... There's a club house with a pool table, computers with internet access, and a descent size library. My electric bill this summer from June to September was on average $20 a month. My gas bill was about $6.50. I have a low income discount of 20%. There's a brand new supermarket in a very nice shopping mall 2 blocks from my home. I don't eat fast food to often, but there is also a brand new Jack in the Box and a Carls Jr next to the mall. Across the the street from the shopping mall is a new Walgreens pharmacy. Basically, everything is within walking distance. There's a few shady characters that I see here and there but not bad at all. I've seen a lot worse in most cities in Southern California, ie: Sherman Oaks, Studio City, west LA, etc... And, these places are 4x as expensive as my beautiful neighborhood. I have plans to remodel a few things, recessed lighting, paint, new carpet, etc... But, I see this as part of the fun of making it My home. I have skylights in both bathrooms and hoa is installing new ones this month. They already have them in the club house and they look nice. And, last but not least, my property tax was reasessed (hope I spelt that right). It's $263 every 6 months. In the end, I'm very comfortable there. Most of my neighbors are descent hard working folks that bought near the bubble and have decided to just stay. All my bills, gas, and food run me nearly $500 a month. I'm eating better and the stress of never having my own home for when I retire has disappeared. I'm 42, dating, and stacking approximately $1500 in the bank every month for either another investment property or retirement. I haven't been this happy in a long time. I'm just wondering how you people will spin this one into some kind of a negative. I'll never understand it and will just take it as you being jealous if you do. High 5 to those who did what I did and to others who have renewed hope.

PBS: I'm sure you are doing great, but nowhere in that rambling brag of a post did you give your city or even area of the country. Patrick is writing from the Bay Area in California which is still bubbled and for him, renting makes good sense. Wherever your townhome is located must have had a hard crash. Maybe south Florida? Who knows? You didn't say. Your numbers have exactly no bearing on the consideration a person who doesn't want to live under a bridge in Coastal California must make.
It's nice that you're doing so well, but without some point of reference, your post was just a giant bragfest.

postbubblesucess says

I'm 42, dating, and stacking approximately $1500 in the bank every month for either another investment property or retirement. I haven't been this happy in a long time. I'm just wondering how you people will spin this one into some kind of a negative. I'll never understand it and will just take it as you being jealous if you do. High 5 to those who did what I did and to others who have renewed hope.

Do I take off my boots now?

Ironic too, during your commercial you used a great Freudian slip of descent for decent.

Some of you will love this 2 minute video.

http://money.cnn.com/video/pf/2012/05/29/pf-hd-rent-v-buy.cnnmoney/

peter schiff stated that he doesn't throw money away on food, and that's how you should look at renting - that you're not throwing your money away because you need a place to hang your hat. just like you need sustenance.

'nuff said!

AdamCarollaFan says

peter schiff stated that he doesn't throw money away on food, and that's how you should look at renting - that you're not throwing your money away because you need a place to hang your hat. just like you need sustenance.

'nuff said!

While there is certainly some merit to long term renting in certain areas his analogy fails to account for the fact that you can usually sell your house back.

Now if you can later regurgitate your food and sell it -- perhaps for an even greater prices than which you bought it -- then yeah, nuff said indeed!

Having lived in SF previously, Patrick's post is probably correct in that market.

In Sacramento, it may be better to buy than rent today, but it may still not be ideal to buy houses just yet, in Sacramento houses have gone up almost 20%. There is tons of inventory in Sacramento, I know because I have been renting in the same new build for the last 5 years and more than half the houses have remained unoccupied or unsold for 2-5 years. Banks are definitely squeezing limited housing to the market and manipulating supply by holding back the damn as shadow inventory. Prices keep going up up up. But really, 20% in a year. That's not right.

Local demand did not drive up prices, investors did: Berkshire Hathaway/ Warren Buffet/ Prudential/ Blackrock/ plus many other REIT's came in and bought thousands of houses in just one year, that's what drove up prices, investors, not owners, definitely not owner occupied home owners. Income has not gone up in Sacramento, in fact, it has come down on average due to job loss, lack or high paying jobs, government furloughs, etc.

I do believe there is a bubble brewing in Sacramento again. That still doesn't mean that it will pop soon, the banks are manipulating supply big time. The markets in AZ or other states I know nothing about so I have to respect others opinions. I can only speak about my current market, and IMO.

By the way, I am currently in the market for a house in Sacramento, , so I know it sounds like I am contradicting myself. But this house in a live-in. I just need to move to bigger space with my growing family. It's not nesting syndrome. I just need more space.

My realtor tells me he does believe there is a forming bubble in Sacramento but that he thinks it will be 4-5 years before it pops.

renting is often much cheaper per month than owning the same thing

Depends on where you live and how you live. I just bought last year after renting for 5. Whatever pencils out better I go with. When renting is cheaper I put the difference between renting and owning in the bank, most people don't.

Buying is really only better if you can get the house cheap enough. Emphasis on cheap enough.

I ran the numbers for a Fortress house in 09, assuming 2% increase in rents and house price annually. Including principal paydown, prop tax, income tax reduction, opportunity cost of down payment. Renting was better than owning for about 8 or 9 years. But after that owning was better.

Since then, rents and house price have gone up more than 2%, but my 7% cost for opportunity cost was low as well.

Many people (not Patrick in this case) compare apartment rent to house ownership, which is not valid because people usually prefer house to apartment. Or they have an objection to paying $4500 rent for a house, even if it might actually be a better deal.

The biggest factor really is how long you intend to stay. If you want to move in a few years, renting is better. But also, you might be forced to move when the landlord sells. If you intend to stay for 10+ years, then owning is usually better.

It's also an investment in the local community; meaning, if you think SFBA is headed for cannibal anarchy, then renting could be better. If you think the local economy will grow over time, then owning could be better.

I think anyone who says "renting is throwing your money away" is making a "blanket statement" which is only applicable to certain budgets.

For example, we have lived in the SFBA for over 30 years married. We could not afford the prices of homes all these years but our jobs kept us here. Thus, we saved our money by renting a small 1 bedroom apartment and now that we are close to retiring, will move from the SFBA and we can now buy a home which, if our health lasts, will be in for at least 20 plus years. it is comparable to rent, if not less, and the maintenance/repairs are factored in as well.

Where it is difficult to "continue to rent" is when you retire. As some of my family rented all their lives, and then at 85 years old were kicked out of their rental (a sale by landlord) and could not afford the current rents and fortunately, had a daughter to go live with.

We did not want to be in that position at that age; but we also unfortunately, could not afford the SFBA housing prices. So again, we rented, saved and are planning to buy with 20% down, low interest and maintenance and a good house price as we are leaving the SFBA.

So I believe it is always best to check your economic situation and be realistic with your finances and your lifestyle choice. Some would always hate living in an apartment or house and have to deal with a landlord, so buying would be an option.

So sometimes renting is the best; sometimes owning; you are only "throwing your money away" if you do not understand basic finances and be realistic.

Agree it is cheaper to rent in the bay area than buy. Sacramento may be cheaper but figure in a 3 hour commute each way to the bay area adds up unless one can work remote most of the time.

SJ says

Agree it is cheaper to rent in the bay area than buy. Sacramento may be cheaper but figure in a 3 hour commute each way to the bay area adds up unless one can work remote most of the time.

My rent is $1720/mo. To buy right now is $450K plus $600/mo HOA.

Apples to apples, same size sq ft in a similar building.

I'll stick to renting.

This is downtown Los Angeles.

About to move to a large 2/2 condo elsewhere in LA area. $1695/mo. Exact same condo in that area is $500K with 300/mo HOA. At least thats where current solds are at.

Next city over which is just as safe(but where schools unfortunately are not an option), small 2/1 SFR are in the high 300's. Place I'm moving to, buying makes zero sense. One town over, buying makes all the sense.

Just depends where you are living and what rents:price ratio is.

Buying food is throwing money away too

The factors that determine whether it is better to rent or own are based on future unknown factors: rent escalation, interest rates, tax, future selling price, etc. etc. So there is no known calculation other than input bias.

having said that, patrick did look to buy in 1999. Renting was probably a 250K-750K mistake. Almost all homeowner in Menlo Park are better off then any renter there.

Why the massive difference in schools between middle class suburban areas in CA?

Is it the too-low property taxes?

patrick shoulda bought in 1999
and then again 10 years later in 2009 (instead he wrote book saying buying is dumb)

based on this pattern his next chance to buy well in bayarea might be 2019 (only six more years of renting , not bad!)

PockyClipsNow says

patrick shoulda bought in 1999

and then again 10 years later in 2009 (instead he wrote book saying buying is dumb)

based on this pattern his next chance to buy well in bayarea might be 2019 (only six more years of renting , not bad!)

lol...and the house would be paid off by now -

SubOink says

PockyClipsNow says

patrick shoulda bought in 1999

and then again 10 years later in 2009 (instead he wrote book saying buying is dumb)

based on this pattern his next chance to buy well in bayarea might be 2019 (only six more years of renting , not bad!)

lol...and the house would be paid off by now -

yeah he REALLY FUCKED UP IMO. I would like it if he were to post his personal financial info from 1999 to now (net worth growth, investments)
If he had managed to go from say 20k net worth to 1m from 1999 to now then that would give his 'dont buy' line more credit.

I have gone from about 80k to 1.2m net worth in this time frame and 90% of the gains were from buying then SELLING real estate (just a handful of homes, so only the genuis stock pickers could do this i think, those guys are a rare minority of traders i think. whereas in RE basically everyone wins (or loses) at the same time).

CDon says

Now if you can later regurgitate your food and sell it -- perhaps for an even
greater prices than which you bought it -- then yeah, nuff said indeed!

THAT'S COMEDY!

egads101 says

dodgerfanjohn says

My rent is $1720/mo. To buy right now is $450K plus $600/mo HOA.

Apples to apples, same size sq ft in a similar building.

I'll stick to renting.

you weren't smart enough to buy 2 or 3 years ago? You know, when the same type of condo would have been 200K give or take?

wow that sux! same monthly payment and a $200k equity gain you missed out on OUCH!

Actually $350k, unless I had $200k cash at the time(there were buildings that were and still are all cash) due to HOA. And considering I couldn't live there anymore I guess I could rent it out now at break even before expenses.

You're right Roberto, I'm not bright enough to predict 28% 3 year gain. Oh well.

Due to the rapid run up in prices,
LA is now an even more awful town for livability- since people who bought at the bottom will be 'stuck in thier home' due to the rapid prices rises and have shitty commute 4eva. Now when short sales and foreclosures were everywhere that was a golden chance to buy in a prime location. Were back to the long commute to get cheap rent/house situation (which is normal I guess)

SFace says

The factors that determine whether it is better to rent or own are based on future unknown factors: rent escalation, interest rates, tax, future selling price, etc. etc. So there is no known calculation other than input bias.

having said that, patrick did look to buy in 1999. Renting was probably a 250K-750K mistake. Almost all homeowner in Menlo Park are better off then any renter there.

This is the smartest post in this thread.

New renter, homes meeting minimum qualifications(schools + commute) were in the 200-300k range in 2000.

Now they are 650-800k. Never dropped lower than $450k at the most(most of the homes remained above 600k).

Of the people I know bought recently, I'd guess one has a higher household income than any of her neighbors and she is single and had been saving for 15 years while renting. Another...I'd guess household income is more than anyone living within a half mile radius. The final one...their income is about 2.5 times the household income of that city and it's a 2/1 under 1000 sq ft. It is under 400k but would not rent out as cash flow positive.

dodgerfanjohn says

New renter, homes meeting minimum qualifications(schools + commute) were in the 200-300k range in 2000.

Now they are 650-800k. Never dropped lower than $450k at the most(most of the homes remained above 600k).

Of the people I know bought recently, I'd guess one has a higher household income than any of her neighbors and she is single and had been saving for 15 years while renting. Another...I'd guess household income is more than anyone living within a half mile radius. The final one...their income is about 2.5 times the household income of that city and it's a 2/1 under 1000 sq ft. It is under 400k but would not rent out as cash flow positive.

Fine, if renting is a better deal AND those people are sitting on a massive capital appreciation the solution is clear - sell and rent.

Save your sympathy for people who bought at the peak, not at the trough.

dodgerfanjohn says

About to move to a large 2/2 condo elsewhere in LA area. $1695/mo. Exact same condo in that area is $500K with 300/mo HOA. At least thats where current solds are at.

DodgerFanJohn,
It's not totally obvious that renting is better in this case.
Annual rent = $20340 (today)
Owning costs:
Interest. 30yr mortgage is 4.34%. While you can't get 0% down, it's reasonable to look at the interest on the total amount to account for opportunity cost of down payment. $21700
The principal isn't an expense since it's paying down the loan. now, if there is a cashflow problem that's different.
Fed tax reduction. I'll assume 28%, AMT rate. -$6076
CA tax reduction. Assume 8%. -$1736
Property tax. 1.1% = $5500
HOA: $3600

Total cost of ownership: $22988 per year
So it does cost more per year. But, it's quite reasonable that rents go up over time, which would even it out. Especially with some appreciation.

Then it really comes down to lifestyle choices and predictions. You might not mind moving to snag a rent deal; then renting is better. You might not mind getting a 30 day notice from the LL, which has happened to friends of mine. Or you might anticipate an increase in income leading to desire to move to an sfh in the future.

Or you might want to have the ability to improve your living surroundings, in which case owning is better.

anyhow, run the numbers for your own situation. It's not obvious that owning makes zero sense, but it's not a slam dunk either.

Where are you getting that mortgage cost on a $400k loan? And isn't that rate sort of on the low side? And why are you assuming rents will continually go up?

dodgerfanjohn says

Where are you getting that mortgage cost on a $400k loan? And isn't that rate sort of on the low side? And why are you assuming rents will continually go up?

Hi,
I looked on yahoo.com and saw the average rate for 30 yr. In my experience it's pretty reasonable to get a zero-point zero/low-fee loan for that average. Depends in FICO and shopping around. So the rate seems achievable to me.

As egads later says, rental rates generally go up over time, unless the local area degrades. Generally a bad idea to buy if the area is declining. Egads, there's probably places in the US where rents are lower now than 10 years ago. But I'm assuming that a place that DodgerFanJohn is looking at with $500k condos is not such a place.

I just looked on Provident and a $400k loan with 75% LTV has 4.25% for negative point/neg fee (essentially zero cost because those rebates then are spent on appraisal etc).

So 4.34 seems quite doable for someone with a good fico and a down payment.

This type of mentality works only when the markets are extremely over priced, and when trying to compare a run down apartment with a modern house.

Lots of us say "I haven't seen a rent increase in X years!!!" My tenants all came from large corporations where they jumped rents by over $300/month after a year. They don't care, they'll do whatever works for them. Most of us are here because our rents ARE cheaper than owning, but that doesn't mean it holds true for everyone. If you want a nice modern apartment, you'll pay a fortune. I used to rent for $1100, 6 blocks away there were places the same size going for $3200 but modern. Renting for me made sense, if I was paying $3200 in rent, I could have likely made a purchase for a similar sized condo with the same modern amenities for WAY less than $3200.

Find a cheap house, and rent it for it's value, and compare it with buying a house at the top of the market? That doesn't jive.

PockyClipsNow says

so only the genuis stock pickers could do this i think, those guys are a rare minority of traders i think. whereas in RE basically everyone wins (or loses) at the same time).

It doesn't take a genius. It's easier than buying a house.

It's much less socialized, which is what makes it more lucrative. People buy houses thinking of them as investments, despite the statistics showing they are not investments. Of course, if you're buying houses strictly for investments and not living in them, then you have a lot more freedom to buy and sell them as you want and based on current prices. Still more difficult than selling stock, though. With stock you can sell part of a position. Houses are such an all or nothing proposition. Which is why you have big winners, big losers, and mostly people who are closer to just breaking even despite having spent a lot of their money on the asset.

We live along the coast in SoCal. Bought in 2011 for $799K (4/3 2100 sq ft). We were renting a place that was 4/3 3100 sq feet from 2007-11 at $3800, which for our area was a very good deal (although not as nice as our place now). Most similar places in our area (if you can find one) now are renting at $4K/month plus, with many in the $4300/month range.

Our mortgage is 30 yrs at 4.25%, $3077/month, of which $900 every month pays principal. I pay $9600/yr in prop taxes, and spend another $1400 in insurance/yr, and also put about $3K/yr in maintenance. No HOA. This all equals $1166/month ($14K/12 months). I also put about $16K in improvements.

I get the tax deduction of about $9000/yr. My principal paid over 24 months is $21,600.

So if I look at the past 24 months, I have paid:
$73,848 in mortgage payments+$19,200 in prop taxes+$2800 in insurance and $22,000 in maintenance and improvements = $117,848

Take out $18,000 for tax deductions so about $100K spent in 24 months. Also, we had $21,600 in principal payments in forced savings. We then have paid $78,400.

But wait--our place is now worth $930-$960K. So even if I take out 5% in real estate commission, we have been making money for the past 2 years of $21,600

Versus $96,000 in rent going to a landlord....

A net difference in my favor of about $117,000, if I cashed out tomorrow.

In my case, renting is not the better deal.

Just signed another year lease for $1550/month for 2800 sq ft 4bd/2bath in Austin (Round Rock School District). This will be year 4. The first year we paid 1450.

Property taxes alone on the house are $6000/yr.

Now why would the landlord keep renting to me when rents are much higher in the current market?

More to the point, why have I lived in nice, big homes for the past 20 years (in Seattle, Austin, and Park City, Ut) and never paid more than 1650/month.

Why have I never bought a home? Why do I always seem to beat the averages? Because good renters are hard to find. I treat my homes like I own them (just without any of the maintenance costs on myself).
Landlords love that and have ALWAYS given me great deals.

I'll never buy. Never. My investments have always out performed housing, even during the housing boom years.

How much was an average house in your area 15/20 years ago? How would your current rent compare to that payment? What about your rent in 30 years time? I can see how renting appeals in the short-term, but over a lifetime? Plenty of home owners also have capital to invest. It's not an either or for a lot of people, especially for the more middle aged amongst us. I've rented for most of my life as I've been an expat for the vast majority of my working life. If I'd been living and working in London from the early 90s and spent the entire time renting there, I'd be kicking myself now. That would be the case in many, many other places as well. Is it not true for you given the time frame you mention?

egads101 says

You haven't a clue what you are talking about. Just because people who bought from 2004 - 2007 got body slammed hardly generalizes to the rest of history.

Well, I was thinking of the housing price data since 1890 that Shiller is so well known for having analyzed. I agree that 3 year periods are not relevant to that discussion. That includes 2010-2013.

However, if you want to have a discussion about timing markets and getting lucky, then those short-term periods would be relevant. You often confuse the two discussions, but you've made it clear that you are largely in a "time-the-market" strategy of action and think your calculations have made you successful. That's great and others have experienced the same thing. Just be careful, because the larger set of data says that only lasts for short periods. Again, I'm thinking mostly of the studies and papers of Shiller's I've read. You're right that I don't have a clue. I'm hardly a student of economics as it was not my area of study and is not my profession. That's why I play it pretty safe when it comes to spending multiples of my income.

Waitingtobuy says

A net difference in my favor of about $117,000, if I cashed out tomorrow.

That's the problem, though. Buying a house is supposed to be an act of stability, but yours is an excellent example of how it would destabilize someone's thinking. Because of the leverage and the ridiculous investment games being played with housing, the swings are currently really big. Much bigger than most people would see in stocks because you can't borrow hundreds of thousands of government money to invest in stocks.

Predicating your success on the current status is flawed thinking until you actually sell. Same with stocks. Sure, it's nice to know stock is worth a certain amount on a certain day and a person can get caught up in that thinking too, but the key is whether or not you will substantially increase your net worth over time.

Because of the time value of money, I think it's especially difficult to increase your net worth over time by borrowing a huge amount money to buy a house. That's a big hole to overcome and sets you back lots of years depending on the ratio of the price of the house to your income. In many cases, it's no big deal because people can buy the house they want for a low multiple of their income. In other cases it basically means working until you retire just to end up owning a house.

I've been looking at net worth numbers and they generally don't seem to suggest that owning a house is helpful. If such a large percentage of people own houses, why isn't a similar percentage of people in a higher net worth category?

The forced savings is the benefit to most people. People know how to make their house payment.

Waitingtobuy says

But wait--our place is now worth $930-$960K.

This is like the renter saying, "But wait, I took the $22000 a year difference from buying and invested it all in Netflix and Tesla!"