I thought that might come up. Here are the numbers: Average U.S home appreciation, 1987-2005: 5.36% (NAHB) U.S median home price (Mar 2006): $232,500 Home price after 30 years at 5.36% compounded: $1,113,514 But how much did the homeowner have to invest? Home cost: $232,500 Interest paid: $275,609 Realtor's commission (1%): $2,325 Property tax (1%): 2,325$/yr x 30 years = $69,750 Home insurance (U.S. Avg): $677/yr x 30 years = $20,310 Maintenance & Repairs: $5000/yr x 30 years = $150,000 Interest deduction (30%): -$2,756/yr x 30 years = -$82,680 Total cost after 30 years (incl. down payment): $667,812 Net profit: $1,113,514 - $667,812 = $445,703 Based on the average home appreciation from 1987-2005 of 5.36% per annum, you would increase your investment by 66.5% in 30 years after costs. That averages out to 66.5% / 30 = 2.22% annual return on investment over 30 years, which doesn't even keep pace with inflation. Links for data- Home insurance: http://www.iii.org/media/industry/additional/2005homeoutlook/ Maintenance & repairs: http://www.realestatejournal.com/buildimprove/20001003-fletcher.html Home appreciation, 1987-2005: http://www.nahb.org/page.aspx/category/sectionID=131
Now compare that from a renters perspective, and it looks quite a bit better. When you rent, that money is completely gone.
Let's see now: If I buy I make a profit of $445703. If I rent the same house for say $1500 per month, increasing 5% per annum for the next 30 years, I spend approximately $1,195,869. No tax deduction! OldTrader
Actually, incorrect. Let's take the $515,000 you don't pay on interest, taxes, insurance, and home repairs and put that money in the S&P 500 which has averaged about 8% a year and let's compound that money over 30 years and see what that equals. We get $5,182,268.30. Now let's subtract what we pay for rent $1,195,869.00 and we get a gain of about a net profit of 4 million vs a profit of $445,703. So we make 8 times as much money renting and investing the proceeds in the market. Now I know, I know, the math isn't completely accurate because the $515,000 is spread out over 30 years in total cost. So we can't just invest this lump sum over 30 years for most people. But if we assumed we had the cash on hand, then these numbers are completely applicable. The bottom line is this, owning is a shitty deal unless you are investing in property and have the tenant paying the overhead. Otherwise it's all about opportunity cost. So unless you catch a runaway bull market in real estate like we had recently, it just ain't happening.
Always good to see the renter crowd come out. In the real world, single people are now buying homes because they don't like living in the cardboard box(apartment). The utility of people today is much greater than that of the past. Who in their right mind wants to waste their life living in a box while continuously flushing money down the toilet (renting) and not having anything to show in the long run? Welcome to ET.
The argument is going right over your head. Not surprising. Investing in rental properties is actually a great deal, living in and paying your own mortgage is not. Finance 101. Has nothing to do with renting vs owning but rather the allocation of capital. BTW, you can rent a 10k sq foot home on the north shore of Chicago. Renting is not always analogous to a card board box in Queens.
That's quite an "assumption" you made...you just happen to have $515,000 available for investment! Why don't we "assume" the more normal case, ie the guy has very little. According to Martin, the total cost of this house is $667,812 over 30 years, or $1855 per month. Looks to me like in the beginning the renter is "saving" $355 per month. Now, if you want to take that and compound it, get back to us with the figures. Make sure to subtract out the 5% annual increase in rent for 30 years, because it doesn't take long for the renter to be paying more than the buyer. However, if you know any renters with a spare $500K laying around, let me know eh? OldTrader
This argument falls flat because in most markets renters can afford to rent bigger apartments or homes than they would be able to afford to buy.
Look, it's pretty simple actually. If your rent is < the sum of (interest, property taxes, insurance, and home repairs), then it's better to rent. Because all that money in the bracket is gone, it's not coming back. Once we strip the cost out we are left with a pure speculation bet on the future price of real estate with a lot of leverage thrown in. BTW, even in your example, if we just take the let's say $400 a month we save in rent and add 400 a month to that principle and compound that money at 10% a year, we come up with $875,000. Still twice as much as the money you make owning. And this is with only $400!!!!!!!!!!! BTW, there are many people who have a spare 500k lying around. I know many people who have sold their homes and are not interested in rolling into a higher priced property, so they are now renting. Good day.