Comment by hhw | Hacker News Reader

Comment by hhw | Hacker News Reader

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Except your example conveniently leaves out:

1) Property Taxes Between 0.18% to 1.89% in the US. Let's assume the mean of the two for 1.035%. In the first year, that would be a payment of $5,175. Over 30 years, using the same 3% inflation to calculate the future value of an annuity, that works out to $246,202.78

2) Opportunity cost of down payment. Assuming a 20% down payment of $100,000, the future value of that money would work out to $100,000 x 1.03^30 = $242,726.25, or a gain of $142,726.25

Note that this is already quite a conservative return. A well-balanced portfolio over the last 10 years, even taking into account the disaster of 2008, would have easily exceeded 6%.

3) Maintenance/Upkeep At $2,000/yr and 3% inflation, the future value of the annuity would work out to $95,150.83

So, the cost of owning in your example is actually: $783,370 + $246,202.78 + $95,150.83 = $1,124,723.61

and the cost of renting is: $1,141,809.977 - $142,726.25 = $999,083.727

Oh, and one more thing, the $783,370 figure doesn't take the time value of money into account, but your total rent paid figure does. In order to balance this out, we'd need to take a look at the future value of an annuity for your mortgage payments of $2176.03/mo or $26,112.36/yr, which actually works out to $1,293,862.17, bringing the total cost of ownership to $1,635,215.78.

So you're kind of just tossing all kinds of big numbers out. Would you mind walking through your calculations?

$26,112.36/yr * 30 years = $783,370 not 1,293,862. And then suddenly we're at $1,635,215? Where in the world did $341,353 come from?

Rent takes into account time-value because rent goes up, mortgage payments don't and it's very easy to make them go down. Mortgages actually stay fixed today and into the future at a worst case, and can actually become cheaper over 30 years, while rent almost never does.

edit are you comparing the cost of buying a home vs. the cost of starting an annuity at the same price as a home? If I had $500,000 to start with I'd just buy the house outright and not mess with a mortgage at all. Now I can pump up whatever investment instrument I want.

More importantly, you typically can't withdraw from an annuity until you hit 59 1/2. If you're at that age and have spent the last 40 years paying rent, you've already made some bad investment decisions.

It's a future value of an annuity calculation. http://www.ultimatecalculators.com/future_value_annuity_calc...

You do have to take into account the time value of money with the mortgage payments still, because $1 today is worth much more than $1 30 years from now. It's the difference between nominal dollars and real dollars.

Conversely, even though rent goes up in nominal dollars, it stays the same in real dollars (or even goes down as a house becomes less marketable over time).

... And in the end, for that trivial difference of $125,000 over 30 years ($350 a month) - you get to stop making mortgage payments on the house. And you can sell your investment in the house at any point during or after those 30 years.

You never stop making rental payments.

Worth it.

Or you can gift it to your children who never have to pay anything but property taxes on the property for their entire lives. Or they could sell it as part of your estate and buy a house somewhere else. Home ownership can lead to generational wealth.

See my follow-up comment, the difference is actually $1,635,215.78 - $999,083.727 = $636,132.053

Depending on the residual value of the building and the land value in 30 years, that may or may not be worth it. My point was just that the example was highly biased, not whether it's better to rent or to buy.

Note also that if you sell, you will have to pay realtor commissions and a capital gains tax on the nominal value.

Can you provide any examples of homes that aren't worth at least the original purchase price in absolute dollars 30 years later? Most of the homes, at least in my area, that are 30 years old are worth multiples of the original price in absolute terms. In fact, my first home was about 40 years old when I purchased it and even after the housing crash was worth about 15x what the original owner payed in absolute dollar terms.

Many homes can end up being teardowns after 30 years. That means that not only is the house itself worth nothing, but there'd be significant expenses to demolish it as well, effectively making the value negative. So it's possible to just end up with land value less demolition costs. How much of the current value is based on building and how much is based on land, depends on the property. There's also many circumstances where a house can be sold below 'market' value or forced to sell under poor market conditions such as divorce, death etc. Many people greatly overestimate the liquidity of housing. The paper value of a house is meaningless until it's actually sold for that amount.

15x what the original owner paid in nominal dollars doesn't give nearly enough context as to the real return. How many and which years was that over? What was the rate of inflation over this period? How did the Dow, S&P, or <insert stock market index here> do over that same period? And that's kind of beside the point.

Like I said earlier, I'm not arguing in favour of either owning or renting. I'm just making the same point as the submission, and that is to use full, accurate numbers to make informed decisions. If more people did (and everyone should), we probably wouldn't have such extreme bubbles and crashes.

And at the end of that time period, the homeowner owns a house outright which is worth $1.2MM ($500K * (1.03^30)) and the renter owns nothing.

To your points: Property tax is factored into rent so you are paying it one way or another.

Your return on your 'down payment' has to be well above average to make up for your otherwise 100% loss on rent.

And there is insurance you can buy at about $400/yr that will take care of most of your maintenance and upkeep.

Right, property tax is already included in rent, as is upkeep/maintenance. Therefore, those needed to be added to the ownership costs to make it an apples to apples comparison.

Interest is 100% loss also, so what's your point? The cost of both are already factored into the calculations.

$400/yr insurance is not going to cover anywhere near the full cost of maintenance and upkeep.

> Interest is 100% loss also, so what's your point? The cost of both are already factored into the calculations.

Everybody knows that. That's why you can take positive action to minimize interest outlay over the lifetime of the loan and reduce that loss. From refinancing, to shorter loan terms, to early principal pay down. You can't do anything analogous as a renter. Interest is only a small part of the total mortgage payments, while rent is a 100% loss always.

> $400/yr insurance is not going to cover anywhere near the full cost of maintenance and upkeep.

Maintenance and upkeep on my house costs way under $400/year.

What are you actually including in that $400/year though? Are you taking full maintenance and upkeep costs into account?

A new roof and new coat of paint will already blow your budget. Your pipes will also need replacing after 30 years, as would your hot water heater, among a plethora of other expenses that come up.

So yeah, if I had to replace all of my appliances, get a new roof, repaint all of the interior and include having bi-weekly yard maintenance for 6 months a year then over 30 years I'm probably looking at over $400. But nobody does that unless you've bought a lemon.

Roofs last about 25 years except in very unusual circumstances that insurance covers, our appliances are 10 years old but work fine. I could probably do with a new washing machine, but it's okay. I won't pay more than $500 for one anyway. I'll cross fingers and hope that my hot water heater and heating a/c make it 20 more years. If not, it's not like the cost to fix comes anywhere near the 100% a month in rent I'd be throwing away so my landlord could replace everything with refurbished second rate equipment.

Nobody replaces pipes after 30 years except for leaks or lead.

But let's differentiate normal maintenance from repairs (just like with cars, oil changes from engine replacements). If I had to guess, I'd say my monthly maintenance on my house was under $50/mo? Amortize the repairs I've put in over the last 10 years? I've probably put in $1000 in work or less than $3/mo over 30 years. So I have a lot of room.

The smartest thing to do is buy a home under the condition that the previous owners do all that work right before you move in and absorb it out of their equity.

Look at it another way. You're already paying for this stuff built into your rent. If luck happens and nothing breaks, that's money the landlord pockets and you don't have anymore. If you own it, it's just extra money you can use to pay down your principle, reduce your interest losses and pay off your mortgage faster.

My point is this:

The problem with the comparison of what you can invest if you don't buy a house is that you have to have the cash for plowing into other investments and still pay for a place to live.

The only money you really have to play with is the down payment and closing costs to make up for the month to month loss of equity and difference between renting and mortgage+incidentals (renting is usually still costlier since owners like to make a profit) in the rent-vs-buy comparison.

As for maintenance costs:

I've had my air conditioner, garage door, stove door, heater, and dish washer all fixed over the last couple of years.

Granted, you have to pay $80 for the repair visit but it is better than paying $1K to get my garage door repaired.

The only things it doesn't cover are normal wear and tear. So, yeah, it doesn't cover the full cost but it goes a long, long way.

If the carrying costs of ownership are higher than rent (which they are in a lot of markets), it's fair to include that difference as amounts that can be invested. I personally do not think of forced savings as a benefit; if someone cannot exercise enough self-control to put aside part of their income to invest, they should probably think twice whether they're ready for one of if not the most significant, long-term financial decisions of their lives.

A down payment is usually a significant chunk of money, and should definitely be factored in.

Also keep in mind that when you get a mortgage, you are effectively debt leveraging, which although magnifies your gains will also magnify your losses. So the idea that real estate is inherently safer is not necessarily true. Whereas most people think of buying stocks on margin as being insanely risky, they don't think twice about doing the equivalent with housing. And stocks have historically consistently outperformed housing.

>I personally do not think of forced savings as a benefit;

That is true only if the alternative is doing something financially productive. In this case the alternative is spending the money.

You are seeing the house as an investment. Your analysis is spot on when talking about a house that is not the primary residence. But it fails when applied to the primary residence because the money is being spent on housing either way...

Why is the alternative necessarily spending the money? If those funds can be taken to the bank each month to pay off a mortgage, why can those same funds not be taken to the bank to deposit into a retirement/savings/investment account?

This analysis is specifically taking into account that money is spent on housing either way. Otherwise, we'd be comparing the ROI of purchasing a house and renting it out as a business in comparison to other forms of investment.

>If those funds can be taken to the bank each month to pay off a mortgage, why can those same funds not be taken to the bank to deposit into a retirement/savings/investment account?

Because you have to live somewhere.

Right. What I'm talking about is the differential between the carrying costs of ownership, and the cost of renting, which is what's often referred to as 'forced savings'. Nowhere am I saying you don't have to pay rent. If renting costs less than the carrying costs of owning (which it often is), you can take those cost savings to the bank to be invested. This should also be factored into the cost comparisons.

Owners of rental properties wish to make a profit. Therefore renting is more expensive, month to month, than owning a property even after factoring in all costs involved.

The only time this isn't true is if the owner has a very old mortgage or outright owns the home.

As a landlord, unless you are expecting to lose money on your property, you'll pass through things like property taxes and other fees onto your renter. Even if the market makes it so that you can't do it today, eventually, over a few years of increasing the rent every year or two, you can make it happen and then eventually profit.

In other words, renters are likely paying these things, but it's all built into the rental price.

For example, I could comfortably charge about $1000-1500 a month more to somebody renting my house than what I pay for it right now. In a few years, when I pay it off, and it costs me nothing but property taxes and maintenance. I could move to another house and rent this one out and use their rental fee to cover most of the mortgage cost on my new house.

If you're going to do a complete calculation, you also need to factor in the value of the tax write-off from the buy side. Depending on your income and marginal tax bracket, that could be significant enough to swing this equation in favor of the buyer.

But you can't rely on things like the mortgage interest deduction staying place beyond each current period it is passed/allowed.

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