I rent a house for $4600/mo. To buy this same house in the same neighborhood, it would be roughly $1.6m, tho prices are starting to fall a little on these higher cost neighborhoods, so let’s say $1.5m for a deal.
With a 20% down-payment on a 30 year fixed rate loan, it would be close to $10000/mo (including insurance and property taxes).
Also, the lions share of your mortgage goes to paying down interest for the first decade or so.
So let’s say $1k goes to principle per month. You’re still burning twice as much money owning as renting.
The only financial upside is that you may be able to sell for more than you paid. Minus Realtor fees, whatever renovations / maintenance you made over the years, etc.
The current market is insane.
Edit - so I’m not talking in complete generalities, I glanced at the interest/principal ratio. No idea how accurate this is.
After a year of mortgage payments, 31% of your money starts to go toward the principal. You see 45% going toward principal after ten years and 67% going toward principal after year 20.
That is the state of the buy v rent trade-off on that house TODAY. In 10 years, the rent on that house will go up but the mortgage will stay the same. Regardless of the equity you build in owning (which can be leveraged for other things even if you don’t sell), your “rent” stays fixed while renting goes up every year.
Companies are able to take longer term stances and can sustain short term losses. They buy a house and keep it for 10 years, long enough that those losses transition to profits.
That’s making done huge assumptions that you have no way of knowing will be reality.
Rent may go up. It may go down.
Housing prices may go up. It may go down.
Locking yourself into a mortgage for “fixed rent” may end up closing you hundreds of thousands more than apples to apples rent. Taking the above scenario, you’re paying about $360k more in the first 10 years than you would renting, if rent prices don’t go up over that time period.
Yes, both rent and housing tend to go up over time. But who knows what the immediate future holds anymore. Housing prices are starting to contract. There’s more push for high density housing, which people generally think will lower rent (I disagree, but I’m against the grain here).
One thing I’ve learned from economists is that despite all their expertise, they’re very bad at predicting big events that have huge impacts on the economy. And we’ve been getting a lot of those the last few decades.
Oh come on, that’s being extremely, EXTREMELY… I can’t find the word. Not pedantic, not pessimistic, and not near sighted. Whatever the term is for when you take the absolute extreme edge case to try making a point.
Rent will always go up over time due to inflation. Yes, you might have dips for a year or two, but landlords will always raise the rent based on inflation at the minimum. And regardless of big drops in house prices during economy crashes, your mortgage does not go up over time outside of adjustments to taxes and insurance. Even when there was the worst housing crash in US history in 2008, my rent never dropped. My rent kept going up every single year by the maximum amount the city allowed under rent control. Housing prices dropped, which allowed me to buy a house. And in your case where you talk about losing $360k due to buying instead of renting over 10 years, you are ignoring that $245k will be going to buying down the principle (amortization calculations for a 6% loan on $1.5M for 30 years). You spent $552,000 at a bare minimum, assuming no rent increases (impossibly unlikely), and have 0 to show for it. The owner spent almost exactly twice that but has $245k in equity on top of whatever equity had grown from house prince inflation over 10 years. Every year it gets better for the homeowner, especially when you hit 30 years and have paid off the house… while you are still renting.
In reality, when I bought my house 12 years ago my mortgage was $3900 (with taxes and insurance) and rent would have been $4000. Now, my mortgage is $4100 and rent is $6000.
Now, I’m also ignoring the money that can be made investing the money you save renting vs buying. But if we use your assumptions, then there is no guarantee you’ll make money investing your money.
How would your point of view differ if you had bought your house right before the crash? Your entire outlook on the wisdom of paying yourself via principal vs a landlord seems to be based on your particular (lucky) circumstance that you got into the market at a time where your monthly cost for mortgage was comparable to rent prices at the time. So locking it in time was a good decision.
That is not the case anymore. I have presented numbers to support that argument, even if it’s overly simplified for simple calculations.
And you’re seemingly ignoring the distinct possibility that housing prices may tank, at which case locking your rate at twice comparable rent would be a terrible situation.
Right now, my money is parked in other investments. We are keeping an eye on the housing market, but paying $300k as a down-payment for the privilege of doubling my monthly housing cost does not seem like a financially prudent decision, when my money is making more in its current investments. And given that if we took a loan out now, we’d probably refinance for a lower interest rate at a later time, reseting the interest/principal schedule anyway.
This is the reality of the market right now. Your outlook is not applicable in today’s paradigm.
How would your point of view differ if you had bought your house right before the crash?
Just fine, because I kept it for longer than the recommended time that good mortgage brokers tell you to plan for evening out costs and riding out dips. It would have cost me an extra $300k to buy it before the crash, plus the four years it took to recover from the crash before prices started climbing again. In the four years that housing prices were dropping (2008 to 2012), my rent went up, not down. Sure it didn’t go up very much in those 4 years, but it didn’t stay flat like my mortgage would have (I don’t know if the property tax went down during the time due to assessments dropping, but I don’t think they did). And I wasn’t paying down principle like on the mortgage. Yeah, my house value would have only doubled in 10 years instead of tripled, which only means I wouldn’t have been able to leverage the equity to buy a vacation property that I still haven’t built on.
Also, remember that the stock market ALSO crashed during that time. It took nearly 5 years for the stock market to recover from the 2008 crash.
Finally, the guy who tried flipping it just before the crash made some questionable decisions on what changes to make for his flip, some of which I have had to undo. If he had just kept the house as it was and lived here instead of trying to be a flipper making a profit, he would have been fine after 5 years. But since I owned it instead of renting, I was able to change the house as I saw fit to be happier living in it.
I rent a house for $4600/mo. To buy this same house in the same neighborhood, it would be roughly $1.6m, tho prices are starting to fall a little on these higher cost neighborhoods, so let’s say $1.5m for a deal.
With a 20% down-payment on a 30 year fixed rate loan, it would be close to $10000/mo (including insurance and property taxes).
Also, the lions share of your mortgage goes to paying down interest for the first decade or so.
So let’s say $1k goes to principle per month. You’re still burning twice as much money owning as renting.
The only financial upside is that you may be able to sell for more than you paid. Minus Realtor fees, whatever renovations / maintenance you made over the years, etc.
The current market is insane.
Edit - so I’m not talking in complete generalities, I glanced at the interest/principal ratio. No idea how accurate this is.
https://www.americanfinancing.net/mortgage-basics/mortgage-payment-explained
I don’t know what the ratio is in the first year, maybe 100% interest?
So at a monthly payment of $9800, $7864 of which is towards mortgage, that’s $2437 / mo towards principal from years 2-9.
So essentially you’re burning $7363 instead of $4600 for the hope that your house increases in value when you sell it.
Fiscally speaking. There are a lot of other pros and cons to owning.
That is the state of the buy v rent trade-off on that house TODAY. In 10 years, the rent on that house will go up but the mortgage will stay the same. Regardless of the equity you build in owning (which can be leveraged for other things even if you don’t sell), your “rent” stays fixed while renting goes up every year.
Companies are able to take longer term stances and can sustain short term losses. They buy a house and keep it for 10 years, long enough that those losses transition to profits.
That’s making done huge assumptions that you have no way of knowing will be reality.
Rent may go up. It may go down.
Housing prices may go up. It may go down.
Locking yourself into a mortgage for “fixed rent” may end up closing you hundreds of thousands more than apples to apples rent. Taking the above scenario, you’re paying about $360k more in the first 10 years than you would renting, if rent prices don’t go up over that time period.
Yes, both rent and housing tend to go up over time. But who knows what the immediate future holds anymore. Housing prices are starting to contract. There’s more push for high density housing, which people generally think will lower rent (I disagree, but I’m against the grain here).
One thing I’ve learned from economists is that despite all their expertise, they’re very bad at predicting big events that have huge impacts on the economy. And we’ve been getting a lot of those the last few decades.
Oh come on, that’s being extremely, EXTREMELY… I can’t find the word. Not pedantic, not pessimistic, and not near sighted. Whatever the term is for when you take the absolute extreme edge case to try making a point.
Rent will always go up over time due to inflation. Yes, you might have dips for a year or two, but landlords will always raise the rent based on inflation at the minimum. And regardless of big drops in house prices during economy crashes, your mortgage does not go up over time outside of adjustments to taxes and insurance. Even when there was the worst housing crash in US history in 2008, my rent never dropped. My rent kept going up every single year by the maximum amount the city allowed under rent control. Housing prices dropped, which allowed me to buy a house. And in your case where you talk about losing $360k due to buying instead of renting over 10 years, you are ignoring that $245k will be going to buying down the principle (amortization calculations for a 6% loan on $1.5M for 30 years). You spent $552,000 at a bare minimum, assuming no rent increases (impossibly unlikely), and have 0 to show for it. The owner spent almost exactly twice that but has $245k in equity on top of whatever equity had grown from house prince inflation over 10 years. Every year it gets better for the homeowner, especially when you hit 30 years and have paid off the house… while you are still renting.
In reality, when I bought my house 12 years ago my mortgage was $3900 (with taxes and insurance) and rent would have been $4000. Now, my mortgage is $4100 and rent is $6000.
Now, I’m also ignoring the money that can be made investing the money you save renting vs buying. But if we use your assumptions, then there is no guarantee you’ll make money investing your money.
How would your point of view differ if you had bought your house right before the crash? Your entire outlook on the wisdom of paying yourself via principal vs a landlord seems to be based on your particular (lucky) circumstance that you got into the market at a time where your monthly cost for mortgage was comparable to rent prices at the time. So locking it in time was a good decision.
That is not the case anymore. I have presented numbers to support that argument, even if it’s overly simplified for simple calculations.
And you’re seemingly ignoring the distinct possibility that housing prices may tank, at which case locking your rate at twice comparable rent would be a terrible situation.
Right now, my money is parked in other investments. We are keeping an eye on the housing market, but paying $300k as a down-payment for the privilege of doubling my monthly housing cost does not seem like a financially prudent decision, when my money is making more in its current investments. And given that if we took a loan out now, we’d probably refinance for a lower interest rate at a later time, reseting the interest/principal schedule anyway.
This is the reality of the market right now. Your outlook is not applicable in today’s paradigm.
Just fine, because I kept it for longer than the recommended time that good mortgage brokers tell you to plan for evening out costs and riding out dips. It would have cost me an extra $300k to buy it before the crash, plus the four years it took to recover from the crash before prices started climbing again. In the four years that housing prices were dropping (2008 to 2012), my rent went up, not down. Sure it didn’t go up very much in those 4 years, but it didn’t stay flat like my mortgage would have (I don’t know if the property tax went down during the time due to assessments dropping, but I don’t think they did). And I wasn’t paying down principle like on the mortgage. Yeah, my house value would have only doubled in 10 years instead of tripled, which only means I wouldn’t have been able to leverage the equity to buy a vacation property that I still haven’t built on.
Also, remember that the stock market ALSO crashed during that time. It took nearly 5 years for the stock market to recover from the 2008 crash.
Finally, the guy who tried flipping it just before the crash made some questionable decisions on what changes to make for his flip, some of which I have had to undo. If he had just kept the house as it was and lived here instead of trying to be a flipper making a profit, he would have been fine after 5 years. But since I owned it instead of renting, I was able to change the house as I saw fit to be happier living in it.