Gothamist: Reversal of Fortune? Rent vs. Buy Revisited

work

Thu, 12 Apr 2007 08:35:49 -0500

How are some of you affording the down payment, assuming you're young-ish? Oh wait, that's right...... YOUR GODDAMN PARENTS. So stop whining, you have a pretty sweet deal.

confusedbymath?

Thu, 12 Apr 2007 04:39:32 -0500

"I know I oversimplified here, but what am I missing?" the fact that you pay interest on your note. you assumed a zero interest loan. go play with bankrate dot com calculators for the first 7 years most of your payment is interest. so by 2014, you still owe 228,000 and this is paying 1600 a month. if you bank that $400 a month (1600 to buy vs 1200 to rent). thats $4800X7= like $33,000 so you are already ahead by renting.

DaveH

Thu, 12 Apr 2007 00:49:54 -0500

[10] Very good point, and a home purchase can include an expense level of around 4%, which winds up being probably equal to that 6% on the backend, given the time-value of money and the fact that the latter is on an appreciated property. Coming and going, homeowners really have do take a shot. Of course, my sympathies for anyone selling a six- or seven-figure home can only extend so far . . . :)

it's all a wash

Thu, 12 Apr 2007 00:37:27 -0500

Worth mentioning that owning a home comes with a backend 6% sales charge aka real estate agent commission. And while your rent can jump 15% in one year, so can your property taxes. My parents just got whacked in Fairfield County.

John Maynard Keynes

Thu, 12 Apr 2007 00:21:38 -0500

Right. And if you happen to play in the Madonna / Ashton Kutcher / Gwyneth Paltrow neighborhood, it doesn't really matter, because what you paid $9M for last year you'll sell this year for $10M. This is regardless of whatever the hell else is going on in the city, state, area, or country, and the hell with renters and other "little people".

thriftytechie

Wed, 11 Apr 2007 23:27:17 -0500

Props to the analyses above. Couldn't have said it better myself... So I'll contribute a salient anecdote: I know a couple: one is a dentist and the other is a cardiologist. They can't afford an apartment in Manhattan worth buying. That should tell you something. (And I don't mean that the cardiologist should've married an I-Banker) ;-)

Ed

Wed, 11 Apr 2007 20:16:15 -0500

I'm assuming the 250K is the amount that was put down, not the entire cost of the house? Otherwise the example given makes no sense. Another factor is what do you have in your bank account at year 0. If its exactly 250K, then by using it to buy a house you've just tied that money up, forget alternative investments, and its difficult to get back if you have an emergency. If its less, then you have a pretty big problem right there if you try to use that money to buy a house.

jerry 101

Wed, 11 Apr 2007 17:24:12 -0500

One, a place that costs $250,000 is not the equivalent of a place that rents for $1200. The equivalent would be a place that rents for $600, or buys for $500k in this market. Two, you're not factoring in other costs of ownership. If you're renting and someone breaks (lets say your window gets broken, or your air conditioner breaks down), your landlord covers that cost if you rent. If you own, you're on your own. Maintenance costs in general are born by the owner, the renter doesn't pay separately for maintenance. Property taxes are paid by the homeowner, separately from the mortgage payment. The renter doesn't pay that. Then there are condo/homeowner association fees. Again, renters don't pay those. Most homeowners these days do. So, getting back to your example, lets split the difference. Lets say that you pay $1200/mo for mortgage, someone else pays $1200/mo rent. The $1200/mo owner also pays $5k/yr in property taxes. And $100/mo in association dues. And $1000 a year in maintenance costs. Not to mention higher insurance costs. In total, about $22,000 a year. The renter pays $14,400 a year. Flat. So lets say you sell in 5 years. Alright, time to get something back. Well, lets say your appreciation was 2% a year on a $350k home. First your costs - $22,000 times 5 is $110,000. Your appreciation amounts to about $25k. On a 30 year fixed, most of your mortgage is interest over that first 5 years. Lets be generous and say you paid $10k in principle. That means your net costs are $75,000. The renter paid $72,000 over that same time period. Ooops. You lost. If you're staying put for a long time, buying always wins over renting. Over the short run, in this day and age, not so much.

AmazingJason

Wed, 11 Apr 2007 17:14:32 -0500

I'm not a real estate guru, but I believe you're missing the fact that one won't find a place in the same area for $250,000. Realistically, it's going to be significantly higher, especially if you're looking in or near a higher demand location such as New York City. Otherwise, the rent vs. buy argument is moot. You also have to take into account the extra costs of ownership, which are more significant than people realize. They include home insurance, maintenance, major repairs and improvements, heating/cooling, and water.

Poopie

Wed, 11 Apr 2007 17:09:06 -0500

Chris, you are forgetting property and school taxes. And home repairs.

DaveH

Wed, 11 Apr 2007 17:05:07 -0500

Without fully examining the intricacies of the model the Times put together, it would take into account the fact that even if your rent and mortgage payments were the same, the majority of the mortgage payments to the bank would be interest expense, leaving the amount of principal you would still owe the bank if you sold your house relatively undiminished. Also, they're calculating the significant costs incurred while buying and selling a house as well as the additional expense of property taxes.

timbnyc

Wed, 11 Apr 2007 16:58:13 -0500

"That seems low to me, given the fact that rent increases haven't remotely kept up with price increases in most of the country." Doesn't he mean, that seems high to me?

Chris

Wed, 11 Apr 2007 16:44:39 -0500

This doesn't make any sense to me. Let's say your rent is $1200 per month, or you buy a place for $250,000 with a decent interest rate you'll also be paying around $1200 per month. So for renting for 5 years with no yearly increase you are paying $72,000, same thing for your mortgage. After five years you move out. If you are renting, guess what, that $72,000 is gone, no matter how you slice it. If you own your place and sell it for your original purchase price, you just broke even. You'd have to sell the place you bought for $250,000 for $178,000 to lose the $72,000 you would have lost renting. I know I oversimplified here, but what am I missing?