July 27, 2007

Renting is hazardous to your wealth. Oh, really?

Are You Throwing Away Money by Renting? Maybe Not

It’s something we’ve all been told for so long we don’t even question it: if you’re paying a mortgage, you’re making an investment; if you’re paying rent, you’re making a mistake. But is it true? Are you making your landlord rich at the expense of your own wealth? The answer’s not as simple as you might think – for a lot of people, and in a lot of situations, paying rent is the smartest thing you can do.

While housing prices soared, rents merely chugged along.
Between 2004 and 2006 home prices nationwide rose 16%, while rents inched up just 1.2%.

If you can satisfy your needs by renting a house at $1000 a month instead of paying a $2500 a month house payment then that’s $1500 a month you can invest in the stock market or elsewhere. Add the $10,000 or $20,000 you would have put up for a down payment and that investment turns into a healthy nest egg. After a few years if you decide it’s time to buy a house then you have enough saved for a healthy down payment.

29 comments:

Anonymous said...

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Not yet it ain't!

area 51 said...

Good baby advice for the DOPES and DOLTS.

armed said...

So instead of loosing money in the market you save up first then lose it in the market. That makes a butt load of sense.

Sometimes life is messy said...

Good call. People also have gotten snookered with the mortgage interest deduction. Pay banks in stead of govt and also inflates what people are willing to pay. Nothing like having the government and the banking industry looking after what is best for us....ha,ha,ha, ha.........The other pet peeve is that people now lack nuance its black or white. Renting sometimes makes sense and yes buying has to make sense. A 700k condo in miami/phoenix/west palm--never makes sense.......

Anonymous said...

Can we just clear the air and state For The Record that it is usually a certain person's nesting instinct (gone wild) that drives the purchases.

The Suzanne video is more fact than fiction...

Anyone agree?

Anonymous said...

oversupply of housing will hit the rental market. rents will fall. meanwhile home foreclosures serve as weapons of wealth destruction, destroying neighborhood comps.

Stuck in So Pa said...

"Can we just clear the air and state For The Record that it is usually a certain person's nesting instinct (gone wild) that drives the purchases."

Good grief yes! It also doesn't help when the parents on both sides are urging you on. Having done it, or having it done to them earlier in their own lives, parents can be worse than miss nesting instinct when it comes to being relentless about home buying, whether it makes sense or not, P/E be damned!

mrmx said...

I'm paying $550 a month and that includes heat-- in minnesota! i'm now 60% cash; 25% stocks; 15% bonds and 0% real-estate. I'm glad that I moved about 60% of my 401k holdings into bonds. The monthly interest payments have been offsetting my market cap declines.

Anonymous said...

Again..it depends on the market. Living in NYC rent is not even close to a bargain...and rents are still going up because there is a less then a 1% vacancy rate.

If you live in a city like Miami you would be a damn fool not to rent.....rent & prices are about to tank.

Natural Eyebrows said...

We're about to see a new phenomenon break out: tenants bailing out their landlords by buying the rented property. As more L/L's run into trouble, tenants will step forward with offers that make a lot of sense.

For the tenant: no moving expenses, no guessing about the condition of the property since he has the knowledge of the property that only comes with living in it.

For the landlord: No down time servicing the mortgage on an empty house while he looks for a buyer, and (usually) no broker's commission.

Anonymous said...

The fact of the matter is that here in DC/NOVA, first time buyers are few and far between simply because prices have gotten way out of hand. In fact, most of us live paycheck to paycheck just to pay rent- forget about paying more to buy, it's just out of the question.

Mike in Folsom said...

Just a quick clarification:

If you're renting, doesn't that mean someone owns the property?

Anonymous said...

Anon said:"Can we just clear the air and state For The Record that it is usually a certain person's nesting instinct (gone wild) that drives the purchases".


LauraVella said: "I totally agree. Women have put presure on their spouses to buy into this market. I Have seen it with my own eyes. I feel sorry for husbands who have tried to explain basic economics to a wife that only understands the "keeping up with the Jones theory". It's a loosing battle.

Anonymous said...

I figure those who started to rent at the housing peak are paying rent equal to house price depreciation; give or take. (Comment doesn't not apply to all) Blowing money on rent is not a bad thing considering most do so for a temporary period of time. It is also a roof over you head, so there is value to it.

Recently, we are all driven to believe that housing serves only one purpose...an investment. That's the problem. How about buying a house so you can live in it and stay out of the elements. The best one-liner in this blog ever was someone who stated something like, "I forgot why I'm supposed to buy a house."

Eric said...

The rent on my 4 bedroom house is half that of buying a similar house in in the NoVA area. I told the landlord that I'd move if he raised my rent. I haven't seen an increase yet.

Anonymous said...

Must have McMansion now. Cannot wait a few years. Price doesn't matter because real estate always goes up.

House Sold Yet, Jason? Oh, Too Bad. said...

Anonymous 7:12 a.m., don't try to put all the blame for the housing bubble on women. Half the time the unwise house purchase was made by a swaggering guy who then made everyone sick by bragging about how much he was going to flip it for.

If a couple bought a house because the woman wanted to "nest", they're probably going to stay put for thirty years and can ride out the fluctuations.

On the other hand, if a couple bought a house because the man was convinced he was a financial genius, then it's probably not the only stupid investment he made (and possibly not the only overpriced over-mortgaged house he's bought). When it doesn't sell, he's going to waste even more money on superficial changes (granite countertops, etc.). He'll have his ego irrationally tied up with what he can sell the house for, and so won't ever lower the price. Eventually, they'll lose the house as his mastery of the stock market is also proven to be an illusion.

The latter is the situation that inspires schadenfreude. Nobody wants to see a family out on the street... unless it's the family of that asshole at work who wouldn't shut up about how brilliant he was and how much money he was going to make.

Anonymous said...

loosing money? The 9th grade educated renters speak yet again.

Anonymous said...

Renting CAN be a good idea.

Owning CAN be a good idea too.

All depends on where you live. Where I live owning and renting costs the same. With owning you get a tax deduction and are forced to save every month by paying down principle.

In LA or Miami anyone buying a condo for $700K or a 1500 sq ft home for $800K when they could rent it for 1/2 price is nuts.

Anonymous said...

If I "bought," I'd be paying about as much in property tax, maintenance, and insurance as I do now in rent and the interest would be about three times my rent.

It's not stupid to want to avoid the debt servitude hamster wheel.

Anonymous said...

Natural Eyebrows said...
We're about to see a new phenomenon break out: tenants bailing out their landlords by buying the rented property. As more L/L's run into trouble, tenants will step forward with offers that make a lot of sense.

For the tenant: no moving expenses, no guessing about the condition of the property since he has the knowledge of the property that only comes with living in it.

For the landlord: No down time servicing the mortgage on an empty house while he looks for a buyer, and (usually) no broker's commission.

July 27, 2007 2:12 PM

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I've got a standing offer to buy my rental. My LL had said no, he's quite content owning the home for now and I can't blame him. 85 years old, totally renovated, excellent schools, 1 3/4 acre wooded lot backing onto a river, all this and only 5 miles from downtown.

Despite what HPers like to assume, not everyone is desperate to sell.

Anonymous said...

Anonymous said...
Again..it depends on the market. Living in NYC rent is not even close to a bargain...and rents are still going up because there is a less then a 1% vacancy rate.

If you live in a city like Miami you would be a damn fool not to rent.....rent & prices are about to tank.

July 27, 2007 2:12 PM

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Yeah but how much condos/coops cost to "buy" in NYC? I'd bet it's no bargain either.

Shakster said...

That's Hard-UP.Who is behind it more? The Banks ,or the RealTwolls?

james dean said...

Renting has advantages that only the saavy, traveled renter will appreciate.

I have lived all over the earth: in big cheap suburban houses with 4 floors 2 dogs 3 cats and 2 friends subleting, 1 block from the harbor in prime historic districts crowded with bars (when I was single), huge apartment with balcony and free utilities 1 block from my office building/subway/all urban amenities; small modern house with 2 decks backing to the nicest stretch of parkland in DC and 10 minutes to work; in Santa Cruz (Cali) 1 block from highway 101 with 2 hotties; free in UK amongst hedgerows and horsefarms; free and deeply discounted in the homes of lonely friends and family; in the Applacian mountains on a 60 acre homestead; in college town party house with 5 of my buddies. Shall I go on?....I could.

I honestly get bored after 1 year. You can't imagine what you have sacrificed for your shrinking equity. Life is more than numbers.

james dean said...

Anonymous said...

I've got a standing offer to buy my rental. My LL had said no, he's quite content owning the home for now and I can't blame him. 85 years old, totally renovated, excellent schools, 1 3/4 acre wooded lot backing onto a river, all this and only 5 miles from downtown.

Despite what HPers like to assume, not everyone is desperate to sell.


THIS IS A GREAT POST AND PROVES MY POINT EXACTLY (THOUGH NOT EXACTLY WHAT THE BLOGGER INTENDED TO PROVE)

HOW MANY PEOPLE WHO HAVE BOUGHT IN RECENT YEARS LIVE IN A HOME THAT IS totally renovated, excellent schools, 1 3/4 acre wooded lot backing onto a river, all this and only 5 miles from downtown????

I VENTURE TO SAY....NONE!

ENJOY PAYING THE MORTGAGE (AND GASOLINE) ON THAT OVERLEVERAGED COOKIE CUTTER HOME ON 1/6TH ACRE IN THE EXURBS. OH, AND BE SURE TO WAVE TO NEIGHBORS FROM YOUR KITCHEN WINDOW. LOL.

Anonymous said...

CNBC had a short interview talking about how wall street bonuses will probably be cut back this year due to the on-going mortgage fiasco fallout....maybe some rent relief is finally on the way for New Yawkuz.

Macaca
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Anonymous said...
Again..it depends on the market. Living in NYC rent is not even close to a bargain...and rents are still going up because there is a less then a 1% vacancy rate.

If you live in a city like Miami you would be a damn fool not to rent.....rent & prices are about to tank.

armed said...

Anonymous said...
loosing money? The 9th grade educated renters speak yet again.

July 27, 2007 6:34 PM

Thanks fer stating the obvious perfess'r. Gotta get up early to put one over on you.

Anonymous said...

Anonymous said...
loosing money? The 9th grade educated renters speak yet again.

July 27, 2007 7:34 PM
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And the pre-k wails again

Anonymous said...

Mike in Folsom said...
Just a quick clarification:

If you're renting, doesn't that mean someone owns the property?

July 27, 2007 3:56 PM
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Its possible but more likely that not the person who things they are the owner is just renting money from the bank.