patrick.net

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a certified financial planner and president of wealth management firm Creative Planning.

Of course a certified financial planner would say that. The more money you have in the house, the less you have to buy the planner's products.

I concur, a house has good attributes but as an investment it’s less than ideal.

But, the concept of borrowed money to own an increasingly valuable house sounds good.

I think you are able to invest $1000 or so per month in stock mutual funds then anything else you can swing financially isn’t too bad.

I did a calculation on our summer house in Martha’s Vineyard built in 1964; if you had invested the cost and added the property taxes you would have over $18 million today. Actually probably much more since I don’t know how fast they raised the property tax since the 80’s when it was sold.

Of course you could have rented it out to recover the taxes, but then you are not enjoying it.

You also owe taxes on the rental income.

I lived in Santa Cruz California since 1982 and I bought mutual funds while my friends bought houses; they struggled and two had to pay off wives to get the house in the divorce.

I forgot: you can reverse mortgage it later on.

I used to believe this more but now not as much. I've rented my entire adult life with my wife and kids, and we're about to close on a house in TN. From my own personal experience as a long-time renter, here are the reasons that owning makes sense for us:
- Renting makes you feel very insecure. We have been kicked out of three rentals because the owners wanted to move back in or sell. This kind of event is very disruptive and stressful on a family, and it makes the children feel unsettled as well.
- In a rental you can't (or even want) to make any substantive changes, so you're stuck with their shitty appliances, carpet, etc.
- Getting a landlord to fix stuff can be a pain in the ass. I had a situation where it was blistering hot and our AC had a refrigerant leak, so the air wasn't very cold. The landlord kept telling us it was working fine but we knew it wasn't. It took so much pestering to get him to fix it because he is so damn cheap.
- I HATE feeling like a child who is submissive to a landlord. I'm a grown man making more than these landlords, but renting from them makes you feel beneath them.
- The annual dread of a rental increase arriving in the mail sucks ass. Every year, I get royally pissed because my rent goes up more than I want or expect, and I'm completely helpless unless I uproot my entire family and scramble to find a new place.
- Now regarding my buying situation, my new house payment (all in with everything) will be ~$5,000/month in TN. To rent a similar place in the same high school or area would be $4,500-$5,000/month. Now consider the tax deduction will save me about $1,000/month, but I assume that will be applied for maintenance. But, consider that ~$1,200 of my monthly house payment (for the 1st year) will be applied toward principal/equity in my house, whereas I lose ALL of the rent I pay....no equity. If you do the math, that means I'm paying tax deductible rent to the bank of $3,800/month vs rent of $4,500 or $5,000 per month.
- To stay in my MUCH shittier CA rental, my rent would've been $4,200 (up from $3,650 currently). State income taxes in CA would be at least $2,300 per month based on my base salary alone, so that's the equivalent of a $6,500 ($4,200 + $2,300) rental or house payment in TN without state income taxes.

So, these were my options. I know I'll be spending a buttload to upgrade my new house and make it the way I want, and also repair it. But, the security of owning a home, never being kicked out, doing what I want with it, etc., it seems way too worth it for me without even counting any long-term value appreciation ESPECIALLY if you buy within your means so you have the cash to upgrade/fix stuff.

My two cents.

porkchopexpress says

I used to believe this more but now not as much. I've rented my entire adult life with my wife and kids, and we're about to close on a house in TN. From my own personal experience as a long-time renter, here are the reasons that owning makes sense for us:
- Renting makes you feel very insecure. We have been kicked out of three rentals because the owners wanted to move back in or sell. This kind of event is very disruptive and stressful on a family, and it makes the children feel unsettled as well.
- In a rental you can't (or even want) to make any substantive changes, so you're stuck with their shitty appliances, carpet, etc.
- Getting a landlord to fix stuff can be a pain in the ass. I had a situation where it was blistering hot and our AC had a refrigerant leak, so the air wasn't very cold. The landlord kept telling us it was working fine but we knew it wasn't. It took so much pestering to get him to fix it because it was expensive.
- I HATE feeling like ...

Leverage is also good from owning a house...very underestimated part of homeownership if done correctly. Most people don't get leverage.

Thing is, leverage works both ways.

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Ramit Sethi, self-made millionaire and author of “I Will Teach You to be Rich,” has made the same argument. Think about it this way, Sethi suggests: “Generally we can assume that over the long term, if we invest in a low-cost diversified index fund, we get about 7%” in terms of annualized returns.

I met up with Ramit once in San Francisco. I'm on the same page as him with respect to stocks vs houses. Even now, with the market down.

You have to make some guesses about the future and do the calculations with your guesses. It might make sense to buy, depending on the details.

I don't like the NY Times anymore, but their rent-vs-buy calculator is still very good:

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Primary residence? With exception of some corner cases, a great long term investment. Saying that despite the fact that I expect a short term adjustment. Rental property? Could go either way.

Patrick says

I don't like the NY Times anymore, but their rent-vs-buy calculator is still very good:

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Subscription wall. (hmm.. I wouldn't expect that you subscribe to NY Times) Does it factor in locality? A rent-vs-buy calculators which doesn't is worthless because it doesn't factor in expected appreciation. Rental prices do. For example, rentals in Bay Area, high as they are, look notoriously more favorable than, say, in Cleveland, if you compare them against purchase price. Until you factor in expected appreciation, which in Cleveland for a while was negative.

Huh, I don't get the subscription wall.

mostly reader says

Does it factor in locality? A rent-vs-buy calculators which doesn't is worthless because it doesn't factor in expected appreciation.

Yes, it does have fields for estimating future rent and price increases.

Patrick says

Huh, I don't get the subscription wall.

Time to check your CC statements? :)

Its not a paywall - just an account wall. Make a free account using your own email, or just use one of the many free temporary email providers like 10minutemail etc...

Takes 30 seconds to register.

clambo says

I concur, a house has good attributes but as an investment it’s less than ideal.

But, the concept of borrowed money to own an increasingly valuable house sounds good.

Maybe in Flyover Country, bro. But here in Patrick's SFBay Area, the high local government pension and retirement medical property tax burden, and recent changes to the federal income tax laws (limiting local tax and mortgage interest deduction) have just about cancelled out any benefit you cite about using borrowed money to purchase a home here.

It's not an investment: it's a place to live. (comment below)

porkchopexpress says

- Renting makes you feel very insecure. We have been kicked out of three rentals because the owners wanted to move back in or sell. This kind of event is very disruptive and stressful on a family, and it makes the children feel unsettled as well.
- In a rental you can't (or even want) to make any substantive changes, so you're stuck with their shitty appliances, carpet, etc.
- Getting a landlord to fix stuff can be a pain in the ass. I had a situation where it was blistering hot and our AC had a refrigerant leak, so the air wasn't very cold.

Yes. These are reasons I had House Fever in my mid-20's. It was not FOMO nor Cool-And-Hip Investment Savvy. It was just to have some stability for my kids, and a paid off place to live before age 60.

porkchopexpress says

I HATE feeling like a child who is submissive to a landlord. I'm a grown man making more than these landlords, but renting from them makes you feel beneath them.

Dude, you were the customer. They needed you and your timely rent payments, more than you needed their asses. Sounds like you bought into the Cool Aid that being a homeowner (debt slave / property tax slave) is a status above not being one. That is silly.

B.A.C.A.H. says

Dude, you were the customer. They needed you and your timely rent payments, more than you needed their asses. Sounds like you bought into the Cool Aid that being a homeowner (debt slave / property tax slave) is a status above not being one. That is silly.

I never got treated like a customer, so it's not silly at all to be independent of a landlord

It's the worst investment in a bubble market. And a no brainer in the bottom market.
A home is not an investment, a necessity is not an investment, it's a consumable. You have to have a place to live. You don't have to have two, and it doesn't have to be a palace.

People don't consider their lifestyle standards. There are people who rent luxury, and have zero to show for it. So if it takes that person $5K to $10K to live large in a rented Luxury suit. Then if that same person were to spend 1.5 million on a house or condo, and he were to live it in for 5 to 10 years. He would have paid the same had he rented a place. Down here in South Florida, you'll pay $5K to $16K on an expensive place. It really doesn't matter what your living quality is, the same scales no matter how much you paid for your house. If you figure ten years what you would be paying in rent. If you're in it for 10 years, then you broke even by this point. You could practically give the keys to a bum and walk away, and you didn't lose any money.

If you're trying to buy a house, any house, at any price, and flip it in a few months. That's where things go sideways.

Tenpoundbass says

A home is not an investment, a necessity is not an investment, it's a consumable. You have to have a place to live.

That's how I'm now thinking about it. I need a place to live for the long term so why not get a tax deduction, pay myself back in principal, and make it the way I want it without getting kicked out.

porkchopexpress says

it's not silly at all to be independent of a landlord

I agree. That's why I was obsessed in my mid-20's of "owning" my residence.

What is silly is to have an inferiority complex to one's landlord.

porkchopexpress says

so why not get a tax deduction

Yep. But you hafta leave the Golden State to get the full deduction.

B.A.C.A.H. says

porkchopexpress says

it's not silly at all to be independent of a landlord

I agree. That's why I was obsessed in my mid-20's of "owning" my residence.

What is silly is to have an inferiority complex to one's landlord.

I disagree. You’re paying for their mortgage plus profit. Fuck that.

B.A.C.A.H. says

porkchopexpress says

so why not get a tax deduction

Yep. But you hafta leave the Golden State to get the full deduction.

I am. Off to TN

porkchopexpress says

What is silly is to have an inferiority complex to one's landlord.

I disagree.

Having an Inferiority Complex to anyone for anything is silly.

porkchopexpress says

porkchopexpress says

so why not get a tax deduction

Yep. But you hafta leave the Golden State to get the full deduction.

I am. Off to TN

Good move. Congratulations. We may join you, not to TN, but to a more financially prudent state than here.

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Say you live in Brooklyn, New York, and pay $2,500 a month to rent. If you buy your own place, you might pay $5,000 a month between your mortgage, taxes and other maintenance costs, Mallouk gives as an example.

This is an example of fucked up market. In such a market renting makes more sense, duh.

Eric Holder says

This is an example of fucked up market. In such a market renting makes more sense, duh.

Yeah.

I looked on Zillow up my own dinky 53 year old stucco sh*tbox on a dinky lot in an undesirable neighborhood of 95148 (San Jose). It said $1.2 M.

It said "refi estimate" $6600 per month. I suppose that includes PITI but not a dime for maintenance on a 53 year old sh*tbox.

I suppose the Santa Clara County tax bill for a $1.2M purchase will be a bit more than $1k per month. Yes, I know, base rate is 1.000%, but there's a lot of Junk Fee assessments piled on.

It said the rent Zestimate® is $3600 per month. I know several renters. I think that's in the ballpark but a little high. Whatever. Suppose $3600.

It means the Greater Fool who would buy this place would pay an ownership premium of $3k per month, - that's an ownership premium of about 80% over renting. With the cash burn of $1k per month to fund local government retirement benefits.

Moreover, recent changes to the federal tax laws limit the deductibility of the mortgage interest and property taxes. So many ®ealtors over the years "coached" me on how wise and savvy homeownership would be for the tax breaks. F*ck them.

If I want to buy a starter home for $500,000 at a 30 year mortgage rate of 3%, then my monthly payment is $2108. The bank determined I can afford that monthly payment.

Now with the rate at 6%, my monthly mortgage is $2998.

The home price would have to come down to $360,000 in order for the monthly payment to be near $2108 (for the 6% rate).

That means a drop of $140,000 (from $500,000 to $360,000 or 28%).

That is why I am figuring housing prices need to come down about 30%.

I think in a way the Fed is doing this to bring housing prices back to just above 2020 levels. They’ll keep rates steady for a while and then make adjustments as necessary.

For the ones who bought at 3% interest rate for a mortgage in 2020 to 2021, I don’t think this matters much if they plan on staying in their homes for at least 7 years.

https://www.dailybulletin.com/2022/06/29/california-renters-could-save-112000-vs-owning-over-5-years/

California renters could save $112,000 vs. owning over 5 years

B.A.C.A.H. says

Eric Holder says

This is an example of fucked up market. In such a market renting makes more sense, duh.

Yeah.

I looked on Zillow up my own dinky 53 year old stucco sh*tbox on a dinky lot in an undesirable neighborhood of 95148 (San Jose). It said $1.2 M.

It said "refi estimate" $6600 per month. I suppose that includes PITI but not a dime for maintenance on a 53 year old sh*tbox.

I suppose the Santa Clara County tax bill for a $1.2M purchase will be a bit more than $1k per month. Yes, I know, base rate is 1.000%, but there's a lot of Junk Fee assessments piled on.

It said the rent Zestimate® is $3600 per month. I know several renters. I think that's in the ballpark but a little high. Whatever. Suppose $3600.

It means the Greater Fool who would buy this place would pay an ownership premium of $3k per month, ...

Then there is the itch to do "home improvement" which most of weemenz develop immediately after moving in (even though they liked the house as-is just fine up until you signed on the dotted line).... No such thing if you rent. You think granite countertops are "out" and marble are "in"? Tough cookies.

B.A.C.A.H. says

I looked on Zillow up my own dinky 53 year old stucco sh*tbox on a dinky lot in an undesirable neighborhood of 95148 (San Jose). It said $1.2 M.

SELL!!! Sell it while you can!

zzyzzx says

California renters could save $112,000 vs. owning over 5 years

But they'll spend it on frivolousness instead of saving it.

Onvacation says

zzyzzx says

California renters could save $112,000 vs. owning over 5 years

But they'll spend it on frivolousness instead of saving it.

you only live once. on death bed you will never regret having a good life.

zzyzzx says

https://www.dailybulletin.com/2022/06/29/california-renters-could-save-112000-vs-owning-over-5-years/

California renters could save $112,000 vs. owning over 5 years

Exactly. It all depends on the numbers.

The prices in coastal CA are generally too high to justify buying vs renting the equivalent.

Onvacation says

zzyzzx says

California renters could save $112,000 vs. owning over 5 years

But they'll spend it on frivolousness instead of saving it.

"Half of my money I spent on women, booze and fast cars. The rest I wasted".

Onvacation says

B.A.C.A.H. says

I looked on Zillow up my own dinky 53 year old stucco sh*tbox on a dinky lot in an undesirable neighborhood of 95148 (San Jose). It said $1.2 M.

SELL!!! Sell it while you can!

Do you live in California? Do you know about Proposition 13?

If you can lock in a decent price, rate, and plan to live there 7 plus years, you'll do much better owning. Doesn't matter if renting is cheaper in the moment unless you might buy and then move quickly. Owning will beat renting 10 out of 10 times over 7-10 years. Also, very few are disciplined enough to invest the savings of renting versus owning.

Fact is you're still paying the landlords PITA at minimum. Likely a 20% mark up. Out side of CA and Prop 13 as BACAH mentions, rent is generally more expensive than owning. No chance in hell I could rent my house for $1,200. It would be 2,200-2,600/mo. I'm paying down the principle and can still save or invest the remaining $1k/mo.

Patricks basis for this site still holds water. But it's primarily a California or East Coast phenomenon. Where I'm at there's no point in renting if you don't have to.