Photo credit, turkeychik - https://flic.kr/p/4LbfBT

Photo credit, turkeychik

“Beep you, you beeping beep!! I’ll kick your beepity beep!!!”

Hmmm, who is that? I don’t recognize her voice

“I ain’t lying, I can’t have you be talking to my Momma like that”

That’s Carl. Good for him standing up for his mother.

A few weeks earlier Carl had introduced himself by handing me a burger across the hedge separating our houses. He and his buddies were cooking out in the back yard and tossing back a few cold ones on a fine summer day, celebrating his release from prison. He had just moved in with his Momma while he got his life back on track

“Beep you Carl! You can’t have her treat me like this!”

That must be Carl’s new girlfriend. Classy

*BAM!!!* A door slammed, followed by the sound of crying and a car racing off. Then silence.  This would become a regular occurrence.

Several years earlier in a different house, I was finishing some work late at night when the doorbell rang

“Hi Rose, how are you?”  At this hour this must be some kind of emergency.

“Hey Jeremy… Umm… I’ve had a few calls… so, are you aware that the Neighborhood Homeowner’s Association Covenants stipulate a maximum grass height for lawns?”

“No, Rose. I wasn’t aware of that.”  I had been out of town for work and my lawn had grown 1/4 inch “too tall”

“Oh, I see. Yeah, it is in the Homeowner’s Agreement you signed when you bought this house. Do you have a copy? Here, you can have this one”

Carl was a good guy, I liked him. His parole officer was nice too

Rose… not so much.

It would take me years to sell that house and escape from Rose and her ilk; years of weekends spent lawn mowing, painting, landscaping, and performing all of the maintenance that comes with home ownership.

When it came time to say good-bye to Carl and his Momma, I simply handed the keys to the landlord

Rent or Buy?

I probably lost money by renting next door to Carl, and should have purchased that house instead.  After all, owning a house is always better financially.  Just ask… well, anyone

For example, the house I sold outside Chicago in 2000 for $178k ($240k in 2013 dollars.)  In 2013 it sold for… $178k ($132k in 2000 dollars.)  That loss of ~$60k plus the loss of every interest payment and maintenance expense along the way probably hurt.  Good thing they weren’t throwing money away on rent

The owners also never benefited from the so-called tax benefits of home ownership.  That privilege is reserved for rich people with big mortgages.  Rubbing salt in the wound, none of this loss was tax deductible

The couple who purchased my Seattle area home for $400k ten years ago fared slightly better on taxes, saving an average of $60/month.  They also fared better on capital gains, as Zillow estimates the current property value at $500k

“We sold our house for $100k more than we paid for it! What a great investment,” they might say.  “And the gain is tax free, too!”

But after realtor fees (6%, $30k), closing costs ($2k), Washington State transfer tax (1.78%, $9k), painting the exterior ($6k), replacing the cedar shingle roof (per CC&Rs, $30k), and remodeling the outdated kitchen ($10k), their actual gain is only $13k.

Factoring in inflation, they lost money.  Over the same period, my index funds have doubled

Maybe always was too strong of a term

A Case for Renting

The financials always seem to take center stage when evaluating whether to rent or buy.  Google’s first “Rent or Buy” search result is for the NY Times Buy-Rent Calculator.

The financials are important, no doubt.  As is quality of life.  After years of experience and excessive math, I posit that renting improves both

Note that renting simply means habitating a property that belongs to somebody else.  It could be a house/condo/houseboat/barn/closet, and does not preclude having a garden, painting walls, etc…

Renting Improves Quality of Life

You Can’t Choose Your Neighbors

Maybe next door isn’t a half way house for drug dealers and gang bangers.  And maybe your neighbor isn’t an insufferable busy body.  But what happens when 10 people move into the 1 bathroom house down the street?

Personal Time is Precious

Spend the weekend working on a side hustle to earn extra income, or fix the leaky pipe in the basement?  Go for a bike ride with the family, or mow the lawn?

I choose the former every time

Progress Isn’t Always Positive

Neighborhoods change.  Your favorite restaurant closes.  Eminent domain changes the local park into an overpass.

Building construction and incessant jack-hammering go hand in hand.  That will be a nice alarm clock replacement while the new condo building goes up, eventually blocking the view.

There are places I remember
All my life though some have changed
Some forever not for better
Some have gone and some remain
– John Lennon

Climate Change

As sea levels rise, parts of Manhattan will submerge.  California has a water problem of a different sort.  The transition will probably be slow and painful

3 years after Hurricane Sandy, homeowners land owners are still arguing claims with insurance companies.  Property values in Fukushima, Japan aren’t anywhere near all time highs.  Wells are going dry all over California.

Government Policies & the Economy

Political climate and a shifting economy can inflict painful change upon property owners.  Just ask the residents of Muskegon Heights, Flint, & the Tri-Cities of MichiganDetroit doesn’t seem any better.

Needs and Wants Evolve

As a young married couple, we were happy in a Studio.  With an infant, a 1-bedroom Apartment seems to be the right size.  When GCCjr is a young boy, we will expand to a 2-bedroom.  As our needs change, so too will our living arrangement.  As an added bonus, each move is an opportunity to reduce our collection of flotsam and jetsam.  Hoarders never move

The solution many adopt for these changing needs is to buy a 4-bedroom house in a good neighborhood with good schools.  This is somewhat like buying Adult size T-shirts for a toddler, since he will grow into them.  Or buying an SUV because we might one day go off-roading, aka driving through a puddle in the Costco parking lot.

Mobility

Stability is one of those intangible concepts that Realtors love to talk about.  “You’ll want to provide your children with some stability,” they say.  But kids don’t come home and ask whose name is on the Title .  They just come home.

Stability isn’t always a choice. Acts of Gods and Men happen. Divorces happen. Layoffs happen. During times of change, the renter is flexible, nimble, agile, able to chase opportunity.  The homeowner wears concrete shoes.

Anecdotally, every time someone at work bought a house (“Congratulations!”) a coworker would say the company moved their name from the “need to re-recruit” to the “employee for life” list.  He was a bit jaded.  But he also had a point

You Can’t Go Home Again

Each country we visit and each person we meet expands our horizons, changing the way we see the world.  You can’t go back home.

You Can’t Go Home Again
– Thomas Wolfe

Renting Improves Finances

Renting Costs Less

At present, the Economist shows US housing is 20% over valued.  The Case Shiller Home Price Index also shows high valuation.  Prices are even more extreme in the UK and Canada, and in the cities of NYC and SF.  Renting costs less

Our current Taipei apartment rents for ~$1400/month. To buy, it would cost ~$1.5 million.  With a price-to-rent ratio of 89, buying this property would not provide a positive return on investment in this lifetime or the next

In the intro to this post, I shared two examples of houses I sold personally.  In the first, the buyer obviously lost money.  In the second, even with a $100k increase in home price, the buyer lost money.

Even selling a home for a significantly higher price can be a losing proposition

Cash Flow is Predictable

We know exactly what our expenses will be month in and month out.  An exploding pipe, major storm, or failed appliance has zero impact on our wallet

Opportunity Cost

If we had purchased a home 30 years ago, we would recently have become mortgage free.  No more mortgage payments in retirement! Many share this goal, but is it the best financial decision?

Let’s compare purchasing vs renting of the same property and find out

Comparison:
Mortgage: 30 year fixed, 4%, 20% down, 0 points, 0 closing costs; Payment = $382/mo.  $100k property value.  Property taxes (1%), Maintenance (1%), and Insurance (0.25%) increase with property values at the rate of inflation, while the mortgage payment remains fixed.  Total in Year 1 = $569/mo

Rent: Price-to-Rent = 19 ; Rent starts at $439/mo and increases with inflation.  1 month security deposit.  The 20% down payment and any rent/mortgage delta is invested in the stock market

Average inflation over the past 30 years was 2.65% and S&P500 growth (dividends reinvested) was 10%

RentBuy1In this chart, we see that the Home Value (Blue) increases over time, and the Mortgage (Green) decreases, eventually reaching zero.  At first, Rent Expenses (Purple) are lower than Ownership Expenses (Red) due to the down payment and overall higher cost of ownership

About 1/2 way through the mortgage, Owning becomes the clear winner as a greater percentage of the fixed Mortgage Payments is Principal and as Rent increases with inflation

But the picture is still incomplete.  Instead of making a large down payment on a house, the Renter invested an equal amount.  In the early years, the Renter also contributed small amounts to investments so cash flow was the same as the home buyer.

RentBuy2After 30 years, the home owner has no mortgage.  After 30 years, the Renter has a portfolio worth more than Twice as much as the House.

Based on the 4% Rule, the Renter could fund his current monthly rent of $961 and have an extra $688/mo to spend as they wish.  Alternatively, the Renter could purchase the house they have lived in for 30 years for cash and still have $257,000 remaining

Everything about this comparison is extremely generous to the purchase scenario.  The Renter lives in the same property for 30 years, rather than moving based on housing needs and job opportunities.  The owner never sells, and never gets tired of linoleum floors or the avocado colored refrigerator, and never buys a lawn mower or ladder.  Typical mortgage rates in 1986 were 10.89% with 2.3 points, and closing costs on my last home purchase were 1.5 points.  Long term Price-to-buy ratio is closer to 21.5 (per Fed, page 20.) and over 30 in cities like NYC and SF.

Let’s make it even more advantageous for the home buyer.  Maybe the house has appreciated faster these past few years due to cheap debt, raising the value an extra 40% per the Case-Shiller Home Price Index.  Renting still wins

Everything in our analysis is tilted to favor buying, and renting still wins.

Objectively, buying costs more than renting Click To Tweet

Landlords Get All the Tax Breaks

Why would somebody rent out a property for less than it would cost to buy it?  That makes no sense

Well, some landlords aren’t that good at what they do.  Case in point, Mr and Mrs NYC just penned a deal to sell their Manhattan home and rent it back from the new owner.  They will spend $1,000/month less for living in the same property, eliminate all maintenance responsibility, and have all of their equity available for more promising investments

Why would anybody agree to these terms?  Three words: leverage, subsidies, and (irrational?) exuberance.

Leverage and subsidies alone can make Real Estate a slow and steady long term path to great wealth.  It can also lead people to make short term gambles that can benefit renters

The US Government provides huge subsidies to landlords.  Need a new light bulb? Write it off. Need to drive to Home Depot to buy said light bulb? Write off the trip.  Insurance, basic maintenance, current expenses… all written off.  And the Granddaddy of them all: depreciation.  Nearly $4k of income can be earned tax free for each $100k in building value.

But wait, there is more.  All expenses for mortgage interest, property taxes, closing costs, etc… are all tax deductible immediately and with no need to Itemize.  Which reminds me…

The Home Mortgage Interest Tax Deduction is a Lie

Less than 1/3 of homeowner’s benefit from the deduction of mortgage interest.

More interesting than how many people benefit is who benefits.  A nice middle class family in the 15% tax bracket might save an Andrew Jackson or a Benjamin Franklin every month for the first few years of home ownership.  But a Senator might save $1,500/month at the 39.6% marginal rate on his new DC Mansion

The Middle Class often buys houses based on size of payment, per the common advice of, “Buy the biggest house you can afford.”  Since every How Much House Can You Afford calculator includes estimates for a tax benefit, the result is just higher housing prices.

For the rich, the interest tax deduction is a great subsidy.  For everyone else The Home Mortgage Interest Tax Deduction is a lie .  People in SF and NYC get their mortgages subsidized by the rest of the country

Hacking the System?

If owning were a priority, there is probably a way to have the best of both worlds.  Find a great friend and purchase two identical condos in the same building, or buy land and build two identical homes adjacent to each other.  Then rent from each other

Renters For Life

Perhaps if housing prices were to drop more than 50%, we could get a 0% down mortgage with an interest rate roughly equal to inflation, and maintenance costs were close to zero, we would consider purchasing.  But we already have that, it is called renting

With a superior quality of life and stronger financials, we will happily and gainfully be Renters for Life

What do you think, Rent or Buy?

Retire Early.

Travel the World.

Let's do this.

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