This is a fascinating comment, but one bit leaves me confused: How come you still have to pay rent?
If you're asking why I don't own a house, its because I'm not quite ready to make that commitment at this point in my life. :) I'm happy with the flexibility of paying rent, and I pay a REALLY low amount of rent (by San Francisco standards) in a nice place. I'm content.
Renting out a property isn't fun either. Finding suitable tenants and dealing with repairs and other silliness, or paying a property management company that's often despised by tenants, isn't necessarily trivial. Rents might not cover mortgage payments in certain economic periods, especially when factoring in additional expenses. The time that's spent dealing with this headache could be better used doing something else.
Lastly, certain types of mortgages might prohibit renting, and I've seen people caught with their pants down over this.
Owning a place is a burden. It can make financial sense to do so in some situations but I'd be reluctant to buy unless I truly felt I was going to remain in one location for a long (>10 years) period of time. I certainly wouldn't feel like I could just rent it out if I wanted to hop, skip, and jump to a new location after a year or two, or less.
Of course, all my experience is based on buying and renting in the UK. It might be different wherever you are.
I strongly doubt whether the increasing price of housing is sustainable. If it's increasing beyond that of inflation, it's a bubble and people simply just aren't going to be able to afford it. People on the upswing of any market become complacent that prices will always continue to rise, but this isn't necessarily true. The future is yet to be determined, and who knows what will happen.
I have known landlords who have had their properties vacant for several months at a time. Their mortgages continued though and this put a lot of pressure on them financially. There's also the issue of tenants that end up not paying, or paying late, etc.
You're not wrong and your strategy has a strong superficial appeal: property ownership with flexibility! Properties can be rented out, it's possible to find great long-term tenants, and it's even possible to break even or make a slight profit as an amateur landlord. Your strategy can be made to work, it's just the costs probably aren't worth it unless you're a landlord with a good number of properties. I'd argue the actual flexibility is marginal compared to renting; if I want to leave my rented property, I can do so quite easily and with minimal moving costs. I do appreciate the cost of this flexibility too though: I'm paying someone else's mortgage with nothing to show for it in the long term. Also, owning has the distinct advantage of control: nobody's going to be a more accommodating landlord to me than me!
[0] This assumes that the property is a second-hand dwelling, not one bought from a new developer, or been renovated, or any of the other exceptions that come to mind.
The reason I think there's still a bubble is that housing costs are increasing faster than wages. More and more of peoples' budgets are being spent on just protecting themselves from the rain and scorpions, and at some point this cost just becomes untenable and a correction, or worse a crash will occur as the market can no longer bear such prices.
I'm very skeptical when I hear someone articulate that prices must always go up in the long term because they have in the past. They might continue to rise for a while, but eventually ... pop goes the bubble!
Just curious, were your parents an influence in how you view property? I imagine here that many 18-30s whose parents bought property would be more likely to buy for themselves.
Thinking about it, the only friends I can think of immediately who doesn't own their own house here (out of say 20-30 people) are still studying or recently finished. And both would be planning to buy within 2-3 years.
Which isn't to say there is not a speculative bubble - the price of real estate may well be growing faster than it should - but just the fact that it's growing faster than inflation doesn't demonstrate this.
As a result, the price of houses in Australia is completely disconnected from the rental returns, and instead driven by speculators chasing capital gains, and/or income tax minimisation by engaging in negative gearing.
They are. What people neglect to mention is that some investments, houses included, fail to pan out, and leave you worse off than you were before. Simply assuming that a mortgage builds useful equity is financially illiterate: If houses were a sure thing, everyone and every institution would buy them.
The really insidious idea is the idea that buying a house is what a mature, responsible person does, and that you can't be a mature, responsible person unless you're paying down a mortgage. This is marginally less potentially harmful to your future happiness than the idea that mature, responsible people smoke five packs of cigarettes a day.
A lot of people bought a house and fell into the trap you describe. A lot of those people didn't have good job mobility in the local area[1].
1) I would love to see a study from about 2000 to now on all the folks that defaulted and what their down payment was combined with the job outlook for their profession.
We give tax breaks to individuals owning their own home that we don't give to institutions or individuals owning homes to rent. It's conceivable that this makes the difference between "sure thing" and a loss.
This isn't at all to say that buying a house is a guaranteed win - look at it carefully before making any sort of major decision like that - but there's not an automatic theoretical refutation.
There are many cases where renting makes more sense, but the factors are multiple: taxes, interest rates, up front equity, property values, closing costs, rental market, etc.
I was certainly aware it wasn't universal - I should probably have called that out more clearly.
> There are many cases where renting makes more sense, but the factors are multiple: taxes, interest rates, up front equity, property values, closing costs, rental market, etc.
Right, that's pretty much exactly my position.
Case in point: I lost over $100k on my previous primary residence. I couldn't write that off on my taxes because it wasn't an investment. If it were an investment property, I could've.
I have always done the same thing; build something up in a niche, wait until I think it reached it's peak, sell it. Most things I did made between $5k-$10k / month and so sold for a nice amount. With that money I bought a house. Sure you lose some 'freedom' (not really as you can rent something anyway), but you always have the security that you can live somewhere rent and mortgage free. If I would have to do it again, I'd buy several run down houses on big plots of land and one smaller modern house.
Anyway; crisis or no crisis; I don't care; I live for free; next to that there is very little you need (in times of downturn that is; if you make enough next to that you can do anything you like). House IS an investment, but only if you just pay cash (IMHO). With that $100k income/year OP had coming in, in college I would've saved over $50k off that. Few years and plop; cash house. Even if you don't want to live in it the rest of your life it's good to have; takes away heaps of stress later on. At least did for me.
after 10 years of renting you will have nothing
If I would have had the money and foresight to buy the brownstone in Brooklyn that I was renting, I wouldn't have even had to bother with the working and saving for 10 years part, but you don't need to rub that in on a Saturday morning.
A really simple calculation with the numbers from http://homeguides.sfgate.com/calculate-30-year-mortgage-bala... I will be nice and assume that the monthly cost of renting is equal to the monthly mortgage payment. Usually renting is cheaper. I'm ignoring the mortgage interest deduction, but also property taxes, homeowners insurance, maintenance, etc.
After 5 years of renting you have: 5 times 12 times -600 = -36000. After 5 years of owning you have: 5 time 12 times -600 + your equity. your equity is $100,000 - ~$93,000 + difference between what you bought it for and what you sold it for. And that last term can easily be negative. It only takes a 7% decline in value to wipe out the first 5 years of principal payments. If your property declines in value 10% and you sell after 5 years you come out behind.
The numbers for 10 and 15 years respectively are 16% and 29%. Now consider that the average home value in places like Stockton fell over 50% during the great recession.
Given the area and amenities I want from a property, I save significantly more money renting and can live somewhere I actually like; unless I decide to commit to the country for 10+ years -- and I would lose my entire cushion of savings for startup runway funding in the process -- renting makes a ton of sense, even though at the base level the equation of "paying money for someone else's mortgage vs paying money for my own" seems a no-brainer.
http://20somethingfinance.com/a-home-is-not-an-investment/
There was another article aimed at startup founders, but I couldn't find it - found this instead.
My current house I paid $567,000 for it and it's worth $540,000 based on my most recent appraisal. Again, paid 1% transfer tax to buy it and if I ever sell it (I hope to God not) I will pay 1% transfer tax and 6% Realtor "tax".
Notice I didn't mention routine maintenance and fixing things that broke during the last several years?
Believe me when I say I wish I would've rented. I'd have about $200,000 more in my bank account right now.
Because you had a bad outcome.
So first w/o getting into the math numbers which I will assume are correct I will say the following.
Looking at any decision strictly by the numbers may make you come to the wrong conclusion and is a reason why it sometimes can be a mistake to look at only one angle (financial or, say, engineering) when making a decision.
For example the housing stock when renting tends to be more transient and less stable than with buying (people coming and going). Now even if you can rent a house in a stable neighborhood (rather than an apartment building) that is primarily owned and occupied by owners (as opposed to renters) you still end up with the issue of a) having to rely on someone else (the landlord) to fix things. b) not being able to make improvements to the property (because you need approval or because why put in a new kitchen to something you don't own?) and c) The neighbors may treat you differently if you are a renter (may or may not happen may or may not matter simply pointing out). You are of course also susceptible to the whims of the landlord rent wise and have the costs of moving if you need to do so.
Owning (as does owning a business rather than being an employee) also comes with certain "psychic" benefits that are hard to quantify and, most importantly, have different value to different people.
Personally (and I've rented obviously) I prefer to own because that way I can do what I want when I want even recognizing that it might cost me more to live that way. I also buy cars I never lease. I like to sell when I want to sell and not have to wait for the term to end. Other people are looking for another type of certainty (that isn't important to me) or perhaps don't have the cash flow or need the cash flow for something else. Everybody is different.
As far as your situation you bought in 2005 and in hindsight you are not happy with the decision. I've had ups and downs with real estate as well (more ups though over time).
"I paid $567,000 for it and it's worth $540,000 based on my most recent appraisal."
Doesn't mean anything until you decide to sell it though.
I have a property (investment) that I bought for about 50k, could have sold at the top for, say, 180k, is worth now perhaps 125k. Unless I want to sell none of that really matters (don't need to finance it or anything) only thing that really changes is the property tax.
"Notice I didn't mention routine maintenance and fixing things"
Once again some people may prefer to take care of this in something they own and not be bothered by it (just like some people don't want to wait for the "tech guy" to come and get the PC running). Personally there are pros and cons to each thing. If the A/C breaks in my house I would rather not have to wait for a management company to scramble a repairman to fix it. Everyone is different.
But those days are done. For the past 5 years, renting would've been much better than owning in most areas of the U.S. I don't see that changing any time soon.
Your "not a loss until you sell" is a myth. The reality is that assets have a book value and that book value should reflect reality. Assets can also be used for leverage - good luck telling the bank you're trying to borrow money from that your assets' current value "doesn't mean anything". You're arguing the "feelings" argument of investing which is vastly inferior to the mathematic reality of investing.
In many 2nd tier markets renting has gotten much more expensive over the past 5 years, though. A mortgage payment is less than rent in Minneapolis, for example. The rentals suck and it's hard to find one. Renting a nice place is surprisingly expensive, approaching Seattle costs.
I am not talking primarily about "investing". I'm talking about owning a home vs. renting a home not as a way to make an investment. Consequently the "feelings" (if you want to call it that) as well as the practical aspects of ownership (such as improvements and control) are important to some people. But not all. Depends on many factors. Which is what I said in my parent comment.
You are saying "For the past 5 years, renting would've been much better than owning in most areas of the U.S."
If you incorporate a time frame into investing anything can seem like a good or bad investment. For example using a 10 year time frame or even a 3 year time frame (before the RE market tanked). Different results? I'm sure you are not unhappy about the 500,000 you did make which if you had shifted the time frame would not have happened.
I am not taking issue with what you are saying. I thought I layed out the case whereby there were other non-economic reasons that someone might make a particular decision to own vs. rent.
As far as bank value and leverage I am well aware of that. Just like I am aware that if you are in a divorce an appraisal can come into play even though you are not selling anything (one party might retain the residence and be subject to a high or low value that may or may not benefit). Also the fact that people tend to spend more money if they feel rich and that their RE (which they have no intention of selling) is more "valuable". And so on.
Buying is not for the faint of heart, the easily stressed, or anyone who's even slightly uncertain about the direction of the next 5-10 years of his life.
Some people just don't want the headache. And you don't know how big a headache it really is until you've taken the plunge. I know more than a few former homeowners who have sworn they'll never buy again, regardless of whether it makes financial sense.
Unless you have cash, the failure scenario in case of buying is extremely nasty. Also, there's a lot of administrative and maintenance related work that, in case of rented, is not my problem anymore.
There are quite a few areas of expertise required to manage a property, and if you don't have them yet it can cost you (both in money and time).
Sure, you can hire someone else to do repairs. But how will you know what repairs are required (do you ask the roofer if this is a patch job, or if a new roof is needed)? How do you know what a given repair or renovation should reasonably cost? How do you find trustworthy contractors? The ones everyone recommends will be busy through next year, more or less, and the unknowns are exactly that.
What tasks can you reasonably do yourself (without experience) as opposed to hiring someone? I.e., shower grout, replacing a light fixture, installing a dishwasher/stove, installing shelving, replacing a door lock, putting weather stripping around windows, small painting jobs, etc..
My wife & I had a few years with significantly lower income. If we had been renting, we would have rented a cheaper place for those years. But we own a house -- so we basically just spent a few years unable to afford to maintain it properly.
More recently, we now have kids and have been thinking of leaving the area entirely -- moving to a different city, or possibly leaving the country.
But to sell or rent the house, we should finish renovation/repairs first. And the selling market isn't great now, but becoming a landlord -- especially remotely -- would require a whole new set of skills.
I've learned a hell of a lot (mostly through error) over these years, but these are not all skills I have wanted to learn, or how I've wanted to spend my time; the fact of buying the house forced an awful lot of experiences after it.
If you rent, you pay someone else to handle all that. If they do a poor job, you look for a better place (and it's not fun to find a new place and move, but it's not a huge deal).
Unfortunately, every decent house i find is only available for purchase but not for rent. Seems the houses available for rent are for people that don't care too much for having a nice home. At least that's how it feels to me at the moment.
What would you advise to someone in my position?
What this means is, renting out is at least a side-business to someone, and they usually either at least somewhat care for customer experience (YMMV, of course), and either do a lot themselves, or hire people to help along if they don't.
On the other hand, while in Poland renting is common, it's treated as temporary, and most landlords only have a single place that they treat as a side income, or just a way to keep the cost of having an empty flat "for later" down. That makes the entire experience way worse — for example, contacting them is essentially an emergency measure. OTOH, they usually care less about what you do to the flat (so, they're more likely to be okay with drilling holes or painting walls into odd colors — if you rent serially, you may have only a week or less between tenants, if you just kick people out and move in yourself you probably take a full redo into account).
You can often have someone do that for you.
If they do a poor job by doing too little maintenance, your renter will let you know about it.
If they do a poor job by doing unneeded or unimportant maintenance, and/or charging you too much for the tasks they're doing, your renter will be perfectly happy... so how will you know?
Granted, it's important not to obsess about this stuff -- if they're cheating you just a little bit, it's not worth worrying about. But if you don't know what you're doing, they may be able to cheat you pretty seriously, and you won't know.