Being Logical and Never Buy a House

by · 68 comments

rent propertyMy wife sent me a link to calculate the cost of renting vs buying a home the other day, which was basically a pitch from a home builder on why owning a home is so great. If you believe the calculations, buying our dream home will save us $1,075,638 after 30 years.

On the surface, it sounds like we’ve got to jump on this home buying bandwagon that everyone else is on. After all, who would turn down 1 million dollars of savings? Looking at it further though, and there are many flaws with the calculation.

First of all, although it has a box to put in a percentage for home value appreciation, it assumes that the property tax amount is the same for the entire 30 years. Unfortunately, this assumption is just wrong. We will probably never get a new property tax assessment every year, but we can bet that property taxes will steadily increase along with the estimated home value in the long run.

Second of all, the calculation assumes no cost associated with obtaining a loan. This is again incorrect. When a loan is made, there are upfront closing fees that just need to be paid. Some people end up taking a bigger loan to cover the closing costs but this is still money paid up front that could be earning interest in our saving accounts.

Third of all, buying a home usually accompanies a huge down payment. This is money that would otherwise be earning interest. This might sound like a small detail, but the down payment could more than double at 3% a year after 30 years.

Finally (there are more, but let’s stop here since I think we see the point), it doesn’t say anything about the higher monthly payment that we have to come up with if we decide to buy. This situation stays the same for years before rent appreciates enough to surpass it. The extra cost of owning a home for the first many years could instead be invested or saved, which would further cut into the perceived savings that the website is leading us to believe.

If we look at the calculation of owning vs renting more carefully, owning a house might actually be more expensive after 30 year if we include the extra cost of maintenance. Hopefully, no one falls for these scams.

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{ read the comments below or add one }

  • Maryland Renter says:

    I just did these calculation for myself today (making my own spread sheet from scratch, not some promotional file). No matter how wildly I tried to skew the spread-sheet in favor of renting, I couldn’t come up with a reasonable scenario where buying wasn’t the better financial move within 3 calendar years. My partner and I currently share a 1-bedroom apartment in Maryland (DC metro area) for about $2000/month, not including parking, utilities, renters insurance, etc. For a $240,000 mortgage ($300,000 home), it would take us about 10 years to actually spend less money by buying vs. renting. But, if you factor in the accumulated equity on the principle balance (compared to rent, which is burned money), we would be “saving” money as home buyers much sooner. Even if instead of buying we invested that $60,000 down payment at a whopping 10% compounded annual return, we’d still come out ahead as home buyers sometime in the second year of the mortgage. That’s also figuring in $8000/year for home maintenance costs ($2000 above national average for this price range) along with grossly overestimated commissions, closing costs, and taxes.

    Again, that’s only because of that small portion of our monthly payments that would be going towards personal equity instead of into a swimming pool filled with money on the back of some landlords second yacht. I hate hearing small-time property investors complain about only having a little extra rental income after covering the mortgage and maintenance, as though they expect to have all of their personal living expenses immediately covered by that one mediocre rental property they bought with an inheritance check.

    • Brian says:

      Did you factor in the time it takes to maintain your house? Mowing the lawn weekly from June to September once per week at 90 mins per mowing session. What about foundation repairs? What about mold remidiation? New roof? The countless trips to Home Depot for tools to make minor repairs? Where will you store all these tools? A Shed? What about every 10 years when your house looks outdated, needs new appliances. I could go on like this forever. Owning a home is a money dump, and even worst, a time killer. I’ve owned, now I rent so I can enjoy my life again. Don’t forget, whatever profit you think you will make on your house, subtract the real estate agent’s commission. There is just so much red tape and hidden costs of ownership, the only way i would buy a house is if it paid me in rental income.

  • Andres Enrique says:

    In my personal experience, renting has always been better than owning, especially since I spent most of my life in the military where moving every three to four years was the norm. I personally witnessed many fellow soldiers going through financial hardships when moving to a new post and either had to sell or rent out their home, and the mortgage payments do not stop! I believe in the power of freedom, to be able to move where the economy is thriving or if you are unhappy in a place. You just can’t pick up and move if you own the house. After I retired from the military I lived in San Antonio, TX in an upscale apartment where I had nothing to worry about and many amenities such as gym, pool, security, free coffee machines, etc… Then after two years an opportunity came to work overseas with a sizable pay raise, and I just picked up and moved. When we retire, we plan to keep renting, move around the world according to our wishes, and live FREE. In the meantime, all the money we are saving is going into our 401K’s and savings plus a couple of investments.

    • David @ says:

      You are living out a good story Andres!

      And thank you for your service! You are doing everything right and you deserve to be financially free when this is all set and done.

  • Lysander says:

    Regarding the “property taxes, HOA, maintenance costs are all rolled into the rent” argument I have to say that is not really true. It is more accurate to say that the owner will rent out a house for whatever the market will bear, meaning the most he can get. That may be enough to cover his costs or (more often) it might not be. Mind you, I’m talking about renting a house vs buying a comparable house, and not renting in a complex, where economies of scale are involved.

    The only way to make a comparison is to see what rents are for houses in the neighborhood you want to live in, and then see what a COMPARABLE house in the same neighborhood would cost to buy, given mortgage, down payment, taxes, HOA, maintenance, insurance, etc. Consider also the 2-4% closing costs and the 6% realtor commission when you sell.

    If you find the two costs per month are about the same, and you don’t mind parting with the down payment, then by all means buy. If however, you find that the rent is substantially cheaper than just the mortgage alone, before even adding the other costs…and very often that will be the case…then I’m not sure buying is such a great idea.

    Because I hear a lot about how the home owner is making the renter pay for all those expenses through the rent, but in fact for houses that isn’t really the case. Most homeowners who are renting out their houses are doing so because they don’t want to sell in a weak market or are “investors” who are sitting on an investment home in the hopes that eventually it will go up in value. While I’m sure they all want a profit, they are in most cases forced to rent out to partially alleviate losses. I’ve yet to see a homeowner manage to make much money renting out his house.

    Mind you, I’m not anti-buying. For a lot of circumstances buying makes sense. I just don’t think it is anywhere near as great an “investment” as it’s made out to be.

    P.S. most houses today are made out of drywall. After 30 years, they look very old and dated and moldy. Unless you are buying a very rare stone or brick house, I wouldn’t want to live in the same one for that long.

    • Moneybags says:

      “Regarding the “property taxes, HOA, maintenance costs are all rolled into the rent” argument I have to say that is not really true. It is more accurate to say that the owner will rent out a house for whatever the market will bear, meaning the most he can get.”

      The market will bear the costs of property taxes, HOA, and maintenance. The market isn’t just the demand side, it is also the supply side. What you are sensing is the fact that the profit margins on rentals are extremely low due to competition. The only time it makes sense to buy a house is when you have found the one you absolutely love, want to settle down, and want to make sure you have controlled expenses.

  • AJ says:

    Most of you are absolutely correct on the costs of both renting and buying. A lot depends on your area. As for tax deductions, it’s true the mortgage interest may not always be allowed just as credit card interest is no longer allowed. Also true, the state taxes and property taxes are tax deductible. However, when it comes to deductions, don’t get caught trying to save a tax quarter by spending a dollar. One must compute the difference between what is deductible and your standard deduction.

    Lets say you have deductions amounting to $10,000. Using 2013 standard deduction amounts, you would use the standard deduction since it’s higher than the itemizing if filing Married, Joint. Buying a home is not saving one dime in the tax department. However, if you are Single, the higher of $10,000 is what your itemizing amount would be. At a 20% tax rate, you would save an additional $780 [(10,000-6,100)*.20] in taxes spending $10,000!

    standard deductions 2013
    Single (not over 65 or blind): $6100
    Married, Joint: $12,200

    figure your standard deduction (2014 is not available at this time):

    You might think I’m not for owning a home at this point. You would be incorrect. I am for buying or renting depending on your goals, resources and current and future family situation. Personally, I rented till I was comfortable in my career and knew I’d found my niche. I didn’t buy till my mid-30’s. Since then, I’ve learned I love different colored walls, large gardens and farm animals. None of those things are generally allowed renting. My home will be paid off in 3 years and well before I retire. The barn and fencing was built to my specifications while also making my house the home I want to not only retire but pass away in. I come home every day and decompress in my personal petting zoo. Can’t beat this life!

    The point is buying verses renting is not just a financial decision. -AJ

    • Nicholas Bohn says:

      Thanks for the last sentence of your comment. I hope everyone who reads this page sees that. Buying vs. renting is not just a financial decision.

      That being said, the buying vs. renting debate as a financial decision is far more complex than anyone has covered here, and I won’t attempt to do it in a simple comment here. I will say this: Some people buy, others rent, some come out ahead and some overspend in both camps. With the right choices (and some luck based on the market and future legislation changes), you can grow your wealth significantly when investing in real estate. If you choose to rent and invest elsewhere (stocks, 401k, your own business, etc.), you have the same possibility. For me? There’s a lot more potential to make money in real estate than in other investments.

  • Jack says:

    With today’s low interest rates, if you buy a property well within your means and eventually rent it out, you will come out ahead. Rental rates have increased sunstantially over the past few years here in MPLS. Also, my property taxes have gone down about 25% over the past 5 years. Home maintenance is a bit of a gamble, but just budget for it because you own land and property which is an asset and historically increases in value. Will owning a property outpace investing in the stock market over the long run? It’s a gamble, but so is investing in the stock market, especially if you are in mutual funds or other fee based financial products. I think the key is to diversify. Owning a home is just another investment. Even if it doesn’t gain as much as stocks over 30 years, it can serve as a sizeable, growing income stream once it’s paid off. Also, there’s something to owning a property. It’s more than an investment in so many ways. I own two properties, have a Roth IRA, 401K, Deferred Stock and some tangible investments like precious metals. Diversify your investments and do not feel guilty for owning property. There have been plenty of successful people who have emphasized real estate in their portfolios and there are too many variables involved and ways to measure to peg one way of investing as ‘the right way’. Refraining from a home purchase may work well for this author, but don’t listen to a one size fits all broad brush approach when planning your financial future. Real estate is one option at your disposal and sometimes the best investment isn’t the one that gives you the maximum financial return, but rather the one that allows you to live your life in a manner that best serves you and your values. Also, keep in mind that all financial investments have a clause in the fine print thst states, “past performance is not indicative of future results”. Who really knows which investment is the best over the next 50 years. Pick one that you think is best for your situation after a responsible amount of education and research.

  • Gary Kerr says:

    Really very nice post on buying house. I read the post and like it very much and of course these things are very essential. Thanking you for posting.

  • Elizabety says:

    This author needs to do a little bit more research. Telling people not to buy because renting will save you money in the long run? Give me a break. Unless the market completely tanks and your neighborhood gets overrun by hoodlums, buying is the better long term option.

  • CaptiveAudience says:

    This article can’t even say for sure if buying is more expensive in the long run. Yes it’s all about the money, never about quality of life. What if you want a menagerie of pets? You couldn’t do it without risking eviction in most rentals. You would be stupid to spend a lot of money on a rental to make it into your “dream home.” Time goes by quickly.

  • monica says:

    Where can I earn 3% interest that you speak of??? Savings accounts are all under 1%.

  • Mrs. M says:

    I love numbers. I love math. But it has limitations. In 1998, when my husband and I were ready to buy a home, and had saved the magic 20% down payment to avoid the PMI, I ran the numbers and still believe that renting will be less expensive over time. Even if you remove the maintenance, and look at just the interest that the bank charges over those years, buying will still be more expensive. As stated by the other commentators, there are just too many costs involved in homeownership–property taxes, utilities, maintenance, liability/home insurance, and the aforementioned incredibly huge interest paid over time to the bank. Even now, having been in the house we bought in 1998 for 15 years, I still believe that just by the numbers, renting makes more sense.

    The funny thing is, I do not regret buying this home because it is a home. When we had our son in 2003, we did not have to move. He has half an acre of garden where he learned to wobble and then walk. Our son will have memories playing badminton, baseball, football, soccer with his parents, cousins and neighborhood friends. He will have memories of the entire family gardening together, planting over 19 trees together, planting vegetables every late spring. My husband and I are avid gardeners–yes, gardening, even bare minimum landscaping, adds to the cost of homeownership, too. But, when we felt like finishing the basement to have space for martial arts, we could do it. I realize this is a money column, but after 15 years in this bought home, I cannot imagine renting even if the numbers tell me to do so. We have less than 5 years left in the mortgage, but that is not what makes me content about my husband pushing us to buy rather than rent many years ago. What makes me OK with buying, in fact more than OK with choosing the option that numerically did not make sense then and now –somehow, we sleep better at night, we never had serious illnesses, we’ve always been in good health thanks to gardening or martial arts, and even to slaving on weekends to change a faucet. We never have a need for psychiatrists or therapists. We just step out in the garden for our therapy. One can argue we save money on health care. On paper, renting wins, but there are benefits to buying that are hard to quantify but are real nonetheless. And yes, I know, this is a money column…one must quantify. If you ask me, rent by all means, if all that matters in life is that one compartment : money.

    • Ruth says:

      You are so right! Home ownership is much more costly than renting, even if you do everything right. But in the long run, the peace that you get from owning your own home is worth a lot more than the money you might have saved.

  • RRRRWWWW says:

    Wow, some interesting comments. I’ll just say this, a 1000 dollar monthly rent and a 1000 dollar monthly house payment adds up to the same amount in 30 years. In 30 years my payments have ended, but you’ll still be paying. The maintenance costs are the same weather you own or rent, you really think your landlord eats the cost of maintaining your rental? Taxes and maintenance costs are figured into the rent payment plus a 10-15 percent profit. If you buy smart, owning is probably the best bet. I realize though that by stipulating to buy “smart” will be beyond the skill set of a lot of people.

    • Exceptions to every rule says:

      I agree. Bottom line is, you’re going to have to pay to live somewhere and with home ownership there is an end point to monthly payments. Of course home ownership doesn’t apply to everyone’s situation. There is a reason the rental market is available – the owner will rent it to you and make a profit – either immediately from the monthly rent or long term after you help him pay it off!

    • Brian says:

      Sorry, but if you think in a scenario where both your mortgage and rent is $1000 for the next 30 years, the homeowner will come out ahead? Property taxes, maintenance, roofing, HVAC, HOA, repairs, property insurance, mortgage interest, loan fees, closing costs, real estate agent commision, etc. I could keep going.

  • Isaac says:

    if you own your house, at least you have more than 30 days if something bad happens.

  • John says:

    what is not mentioned in this article or anyones comments that I’ve seen is the 10% a landlord can raise the rent on you every year. That’s right folks 10% per year if the landlord wants. if you started at $2000.00 the next you could be at $2200.00 the following year at$2420.00 and the next year at $2662.00 PER MONTH!!! it’s a vicious cycle and totaly legal however not added to any cost benefit equation that I have seen here let alone even mentioned.

    What about if you want to upgrade anything in the house? You mean I cant and just have to live with whats there unless I want to lose all the money I put into making my living space nicer? YUP. You dont own the house so any money you put into upgrading and making your quality of life better is gone the moment you move out. That’s not mentioned either. I would much rather own and have the possiblity be wide open for anything that I want to make my quality of life better.

  • Susan says:

    We just sold our house and I feel SO free! Our hot water heater flooded just before we left, and then half the water heaters in the condo building went down after that. Meanwhile, in our lovely new rental downtown, I noticed a couple of minor repairs that needed being done, called up the landlord, and it was dealt with.
    We plan to stay here for about four years while our kid finishes high-school, and then go where-ever our careers or fancy takes us.
    I thought I would love home ownership, but in the ten years we tried it, it made me feel trapped. We resisted the big loans being offered us and tried to buy within our means. But we always seems strapped for cash, putting all our spare money and time into our property.
    We live in a major city where the rent vs buy ratios are way out of whack. We make about 130% of median income in our city, which means we can’t afford a single family any where you’d actually want to live. So we went the condo route.
    Our first condo turned out to be near Section 8 property (in the fancy neighborhood with good schools we’d scrimped and saved for). Constant parties until 4 in the morning, beer bottles thrown everywhere. The first summer we learned the Miranda rights by heart, after hearing cops read them so many nights to sweaty meth addicts hiding in our bushes. Next we tried a condo in an self-managed artist community – lovely people to meet at a party, not so fun to make financial decisions with. “Insurance? Why would that be necessary?”
    When you buy a place you are TRAPPED with those neighbors for 30 years. Love ’em or hate ’em, you can’t get away from them. Ever.

    And when we did the math on our last place place, we realized finally that our 10% down on a $350K condo meant we’d pay nearly $900,000 total in interest, principal, and taxes in 30 years. Not to mention home repairs.
    And if we lost our jobs, what then? Not only might we lose a place to live, like you do with renting, but we also might lose OUR ENTIRE INVESTMENT during a foreclosure. If you are renting and can’t afford it, you can pick up and move somewhere cheaper. Heck, you could move into a campground if you have to. And if you have money in the bank, no one can touch it if you owe it to no-one.
    But once you are chained to a house, you have to sell it or lose out big time – on your investment, your credit, and your good name.
    No thanks.
    We are saving $1000 a month by renting. In a nice place, downtown, where OWNING the same property would cost us between $800k and $1.5 million.
    If someday we can raise the cash to buy a single family outright ( a decent one starts about $400K here) then perhaps we’ll revisit.
    But for now we are reveling in the freedom of being a renter. The world is large, and we love thinking we can go anywhere.

    • John says:

      I see you really want to rent but even after all the negatives you place on owning and all the positves you write about renting in the end you still say you want to buy. Something to be said for that

      • Susan says:

        Hello John:
        Just saw this comment. Yes, I think buying a house can make financial sense if you can pay down most or all of it in cash to avoid interest, if you want to live there for a very long time, and if you feel confident the area will stay high in value when you want to sell. All big “ifs”.
        Luckily we found place where rents are stable (mandated by the city), you can personalize to your heart’s content, and you can easily move up in size or down as your needs change. For example, since writing the above post, my husband became suddenly and permanently disabled and our income dropped dramatically. Though the emotional fall-out was huge, of course, the financial fall-out was minimized by being renters. We simply moved into an even-cheaper unit in the same building. If we’d owned our condo during that period, we would probably have lost it or had to raid our retirement accounts to keep it. (his illness and a series of unexpected events had already depleted our emergency savings, despite insurance and general frugality!) My point is, you never know what life will throw at you, and it’s nice to be nimble in your response.
        I agree that being able to buy “smart” would have been even better – we always dreamt of finding a decent multi-family where the rents covered the mortgage for us. But the numbers on that just haven’t worked in our area for a decade now, so right now renting makes more sense.

        • rowlandw says:

          Don’t buy if you expect your house to, net after all costs, out-perform a prudently invested securities portfolio long-term. (This also assumes that you aren’t forced to sell in order to follow a job.) However, buy if the “psychic dividends” of owning are worth more to you than renting.

  • Something to Think About says:

    Kinda called out here, but what I think needs re-emphasis is that you really have to look at how long you expect to own the home. I’ve seen references that suggest that the average period of ownership for homes is between five and seven years. Some here suggested 5 years as the point at which home ownership makes sense. I think that is woefully underestimated. Here is why…

    Say you just retired, and you have the same time horizon to consider (5 – 7 years). How would you treat the portion of funds you expect to use over that same time frame? My bet is that it would be rather conservative…a mix of cash, high interest savings accounts, CDs, Treasuries, Bonds, etc. That is, mostly liquid assets. This follows sound advice one can find from several sources.

    However, given many (most?) of us (knowingly or not) face the same time horizon (5-7 years) for home ownership, we turn that thinking on its head and roll the dice with housing. Can we really afford to tie up our funds into an asset that is: 1) illiquid; 2) risky; and 3) has a high transaction cost associated with it?

    Illiquid. If your 5-7 years comes up in an average or buyers market, expect to wait days or months for a sale, unless you aggressively price (in which case, your agent will love you – then, be sure to ask them to take a 4% commission). Hopefully, you don’t also have to take a hit. Hopefully, you don’t need the cash immediately.

    Risky. We’ve all been fooled into thinking housing is virtually risk-less. I think we all learned the real truth over the past couple years on this. With a 5-7 year time horizon, there is not enough time to ride a full cycle to put you on the right side again. I doubt anyone truly has the skill to time the market, and if they did, think about it…where do they go for housing? Know anyone that is selling high, renting, then buying when the market is low…thought not.

    Transaction Cost. What kills you are transaction costs (6% “non-standard” commission, and up to 1% closing costs, not counting any possible taxes, costs associated with moving, and with locating and financing your next home). Remember, this is a leveraged asset, so divide that cost by your equity to find the real %transaction cost. With 20% down and with just 7%, in your first year that would be about a whopping 35% transaction cost! It improves with time, as you build equity, but not much, unless you are in a 2004 to 2006 bubble cycle. If this was your 401K/IRA, you’d puke at that horrific transaction cost.

    Sure, the tax benefits mitigate some of this, but, as others pointed out, you need to factor in the maintenance, HOA fees, Property Taxes, etc. for the big picture.

    I think folks should think long and hard before automatically assuming that buying a house is the right thing to do, like our parents and generations past did. It may have worked for them, but it is a different world. With job security on the decline, mobility has now become important, and it seems to me that you need to be nearly as conservative with your commitment to housing as you would be on investments you’d be living off of for a five to seven year period, since you are likely to need those funds for your next move.

    Something to think about.

  • Angelo says:

    Still haven’t bought a house yet myself. I went down that road in 2007, and crunched all the numbers myself, and found it to be a “bad deal.” I also came up with a rule for myself: if I can’t buy it within 15 years, I need to save more.

  • A Good Example says:


    My wife and I still live in our Luxury Rental at the Beach paying the same $750.00 per month and LOVING it more than ever. I drive around now and notice all the foreclosure signs everywhere on the mini mc-mansions that I would shake my head wondering how anyone could afford a $1,000,000 house. Now you see the reality of all that No Money Down nonsense.

    We just renewed our lease for another year and Once Again, our rent has NEVER INCREASED even now on our FIFTH YEAR. Sure, the current economy has something to do with our rent not going up a single penny in 5 years. Some of these units here are renting for lower than the $750 we pay but I don’t want to move because I have my own furniture and electronics and most of the other rentals are all furnished. I love unfurnished apartments because it fells more like your space when you have your own furniture suited to your taste.

    The Key to renting is to rent a Very High End unit that is managed by a big corporation with deep pockets. The nicer the community the better when it comes to renting. Of course you don’t want to pay too much, don’t rent a bigger place than you need but the key is go upscale because they will really take care of the tenants.

    I thought I would update, We recently had the Washer+Dryer in our unit go out. Did I have to buy a new one? NO, I simply make a call and we have an Brand New $1000 Washer+Dryer delivered and Installed FREE OF CHARGE.

    I love renting.

    • John says:

      you found a sweet deal but I guarantee you that you are a very small percentage if even a percantage of what is going on in the rental world. In California your story is so rarely the case. Good for you I wish everybody could have the blessing you do but you have to agree you hear about slumlords 1000 times more than you hear about stories like yours.

    • Clementine Isabella Sophie Florence Cecelia Marie Grace Emily Charlotte Smythe-Worthington says:

      Normal people can afford a million dollar house, I bought my house about 6 years ago and it is located in the Upper East Side and cost me 10 million

  • S.K. Bachman says:

    People have been whipped into a frenzy by the real estate/ banking industry to “BUY NOW” or . As long as you have to take out a loan to “own” a home…you DON’T OWN IT. So your home appreciates in value, what do most people do? Take out a home equity LOAN that must be PAID BACK to the bank. Why? Because the BANK owns the home, when you don’t own it outright.

    Another scenario…you decide to purchase another home with the proceeds from the sale of your previous home. If your current home has “appreciated in value”, chances are, prices have risen across the board. So you’ll still need to take out a loan which only keeps you in the debt cycle.

    It’s not rocket science.

    • Greg says:

      S.K. I totally agree with you. Further, what is the first thing most people do when they buy a new house? Answer: Rip out the old kitchen cabinets and put in new ones. So there’s $15K down the tubes. I don’t want to hear that it really increases the re-sale value because it is simply not true. Likely the next homeowners will hate your cabinets and rip them out too. Then, inevitably, about a year after buying your slice of the American Dream, there is a major problem with (take your pick) electrical, plumbing, foundation, mold, roof, etc. The Realtor/Credit industry always hides the true costs of owning a home. Once you tally all of the costs on a spreadsheet, a lot of people end up in the red. Of course, the R/C industry completely ignores that side of the ledger.

      • John says:

        anything I have ever done as far as remodeling is becasuse i wanted to. I dont want to rent a house where I have to “live” with what I got. It makes me happy to see the things I have worked on or completed. I dont want to come to a place where I look at stuff and say, “oh well at least it’s not mine”. I have pride in my home and I want to have a better quality of life. thats an intangable not mentioned.

  • Deirdre says:

    The FACT of the matter is…you DON’T own anything until it’s paid off, period. During the so-called real estate boom, people were encouraged to buy, buy, buy and use the artificial equity like a neverending ATM. Well, fast-forward a few years and you see where it’s gotten us economically.

  • A Good Example says:

    Another example:

    Lets say someone is taking home AFTER TAXES $25,000 a year. (You would need to earn about $37,000 a year to do this)

    They can RENT and spend $750 a month on housing = $9000 a year.

    OR They can OWN and spend $1500 a month on everything that goes with home ownership = $18000 a year.

    If they rent, they have $16000 a year left over to invest with, play around with, have a fun life with. No need to BORROW money from banks, you have plenty of cash to live on. You can live DEBT FREE and have fun in life.

    If they OWN they only have $7000 a year to live on after paying for the house. SO like most home owners they put everything they have into their house so to make up for the lack of income they BORROW off the equity to make up for it and LIVE IN DEBT paying interest forever.

    Tax deduction for interest payments?? GET REAL.. You pay $1.00 in interest to deduct .10 cents from your tax bill.

    • Anon says:

      Great post and great examples… Its really sad that so much of the “gotta-buy, gotta-buy” real estate crowd (mostly members of the real estate/credity industry) control so much of the public information on this topic. I love watching CNN/MSNBC/Fox etc and seeing some “real estate expert” preaching the real estate bible with their zombie eyes and constant refrain about the “American Dream.” What a pile of bollocks.. You know what my American Dream is? Being wealthy and financially free…not being on the verge of bankruptcy inside a house I can’t afford that is stressing me out. Home Ownership = American Dream. Puhlease. Just a BS ad slogan from the real estate/credit industry.

  • A Good Example says:

    My wife and I rent a very nice upscale condo near the beach that is located in a golf course community.

    We have rented this same unit for 4 years, the rent has NEVER ONCE increased during that time. (we have also never once been late with the rent during that time)

    We RENT our condo for $750 a month. Our only other bill is our power bill which has never been above $60 a month even with us running everything 24/7 full blast. Cable, High Speed Internet, Water, Garbage Collection, Pest Control, and ALL MAINTENANCE is INCLUDED in our rent.

    SO we are paying $800 a month to live here in LUXURY and SECURITY with FREE maintenance. We pay NO Taxes, NO insurance, No Maintenance, FREE Cable, FREE High Speed Internet. We recently needed to have our AC unit replaced, we called maintenance and within 4 days we had a Brand New Very high end AC unit installed and working beautifully. The Cost of this new system? $4300.. Cost out of my pocket?? ZERO because I rent. If we OWNED then I would have had to pay this myself, instead the owner pays it.

    I NEVER have to spend a second of my time on Landscaping, painting, repairs, etc.

    Anyone who owns in my community pays HOA fees. For my particular unit the HOA fees are just under $350 per month. This includes landscaping, cable, internet, etc.

    So by renting my wife and I do not pay: Property Taxes, Insurance, HOA Fees = $350 a month here, Maintenance of any kind including appliances, Water/Sewer, CABLE, INTERNET.

    If we owned a house we would be paying WAY more than the $9000 a year we spend on housing.

  • Pat says:


    Good points and thank you for the response. I guess the answers are ultimately market-specific. A lot of people in my area have no equity because they entered into these interest-only mortgages. So, they are still on the street if they can’t pay up…(but more likely back with Mom and/or Dad).

    Further, if they sell the house now, many of them would have to sell significantly under the purchase price, so there is no help there.

    In my area, the delta between rental rates and mortgage payments (for the home we rent) is roughly $1,500.

    I recognize that this means that a lot of people made a lot of money over the years in real estate. I’m not arguing with that point. The problem that I see is that the last 5 years or so (in my market) seemed to be similar to a game of musical chairs. Things were great while prices kept appreciating, but now the music has stopped and a lot of people are scrambling. I never understood how housing appreciation could stay at a steep trajectory indefinitely, while salaries were at a very modest incline. The delta between those two trajectories was greater and greater every year until recently. There was just bound to be a time when people were no longer willing to pay such a large percentage of their salary for their mortgage payments.

    I agree with your last point. However, it seems like it all depends on appreciation. If I invest the delta for the next five years, and the housing appreciation flatlines (or only modestly rises…or declines), I am better off at the end of those 5 years than if I bought the house…assuming the investments appreciated. The delta alone in my area would be $90,000 over those 5 years…$1,500 x 12 months x 5 years). (Again, that’s with zero growth). That seems to take the argument back to the stock market v. real estate debate. Which goes on and on and on…

    Thanks again for your response…I appreciate it and welcome any other responses.

  • Ryan says:

    Pat, you can either borrow against the equity you’ve built up (risky), or you can sell the house to recover the equity. Both should give enough “quick” cash to let you rent for a few months while you figure things out. Of course, the whole argument should be moot since you should have several months of expenses saved up somewhere.

    As for investing the delta, rental prices are partially based on what the landlord is paying for their mortgage. That money delta is really a time delta expressed in dollars; the change in rates between when they bought and what the current market is.

  • Pat says:

    I don’t understand the post that says, “If you’re renting, and you lose your job, you could pretty much be homeless after a few months of bad luck.” In my view, if you have a mortgage, and you lose your job, you ALSO could be pretty much homeless after a few months. Can someone please explain this myth to me? I hear it all the time, but it makes no sense. When you “buy” a house, you are really entering into a different species of rental agreement in many respects. Sure you can make structural changes, paint the wall, drive in nails, etc… but, it is an illusion that you “own” the house…the Bank owns it…a fact that you will painfully learn if you miss a few mortgage payments.

    Further, the important point that is being missed here is that if you invest the delta between the rental price and the sale price, there is little gained by “buying” a house in my estimation. I think there is a lot of pure propaganda that goes unquestioned. The real estate industry is tied at the hip the multi-trillion dollar credit industry. They have literally thousands of agents and lobbyists out there dispensing the Kool Aid. The subprime mortgage mess is just an offshoot of the larger problem which is that the credit industry is continually looking for new ways to turn you into an indentured servant. Be wary…they are serpents, and they never sleep. Just my $.02.

  • Bret Frohlich says:

    I am going to have to respectfully disagree and recommend buying versus renting for the long term.

    The most important points are rents are going to keep going way up and as Ryan accurately said, it’s after 30 years that there is no comparison.

    If anyone is interested in a more detailed analysis, I have written a post called “Worst Financial Advice I have ever Heard”.

  • luz says:

    You really save big when you buy your own house. Renting cost a lot and saves you nothing for yourself.

    • Mike says:

      Buying a house is not the best investment. If you want a place to pay off and live it is and a average or stable way to save some money. I have rented at the same place for 10 years and rent has never gone up. I have invested the difference of closing costs, insurance, house maintenance which has averaged about $3,ooo ayear for new furnace, air conditioner, painting and plumbing, refrigerator etc., taxes and hoa fees into a money market fund. That money invested with other savings invested over 30 years with compounded interest and a average of 10 percent a year will be worth 3 million or more. How much will your $200,000 home be worth in future dollars? No where close. I can then buy me with cash a nice home anywhere I want and save an additional $63000 to $100,ooo in interest. Unless you are in the real estate market or flipping homes it is not a great investment but it is nice to live in.

      • roy walker says:

        Rentals require the same upkeep as an non-rental. Taxes have to be paid on both as well. Do you think that as a renter you aren’t paying for these things? A 1000 dollar rent payment and a 1000 dollar mortgage payment add up to the same amount in 30 years, except the renter owns nothing.

      • Alex says:

        The home I grew up in cost my parents $25,000 and they sold it 15 years later for 800k. I saw it sold again about 10 yrs later for 1.2 million.
        I bought a little home in Dec. 2009 for 175k, have added upgrades of about 20k and it will sell now for about 230k. So, 35k increase in value in 4 years on 175k is not bad. 20% earnings on investment. It sure beats the stocks and mutual funds I own.
        So, in many places real estate can be a very lucrative investment. Plus, if I had this money somewhere else, I would also be paying out a monthly amount for rent to help pay off someone s else’s mortgage. This way I pay myself off, have a place to live and have money being earned over time. ALL rents need to be higher than that owners costs, so the owner makes out best. I think if you plan to only be somewhere a very short time does it make sense to rent. I plan on buying more, then having renters pay off those mortgages for me. So, please for a lot of you….keep renting!

      • Johnny says:

        If your rent hasn’t gone up in 10 years, your landlord may have the place paid off already. And, he thanks you for buying him a house. I rented for several years, and every single one of my landlords wanted to raise the rent after the one year lease was up. I was able to bluff one into lowering the rent by asking one month before the lease was up if he could lower the rent because I was having money problems, and he said he couldn’t lower it but he would leave it the same one more year. This was my actual goal, to not have it go up. I then bought a new house, lived in it several years. My mortgage with taxes and insurance was lower than the rent on my last house by 200 bucks, for a larger house. As it was new, there was no real maintenance to worry about. I did have to paint it last summer, then I sold it in January of this year. Back to the rental for a year. Over the last 6 years I was able to put back enough money to buy some land, and now that the house is sold I can spend this year renting while I build a house to retire in.

        You can rent all your life if you want, and buy the landlord’s house for him, but I’d prefer buying a house for me, not someone else.

        Incidentally, the last house was bought because it was in a good school district, the next house is out in the country because I’m now an empty nester and I don’t need a large house near a good school anymore. Just need a small place for me and the ‘ol lady, and if the kids come to visit they can camp out in the living room.

  • lena the thinker says:

    Buying a house is like an investment. It lessen your expenses like renting and the like.

  • The Bald Monkey says:

    Praveen is right about that. If you are looking at buying a house then moving in less than 5 years, you need to stop that line of thought right now.

    Unless you are planning to make major improvements to the home for the sake of flipping it for a large profit quickly. A friend of mine does just that in the Memphis, TN area and makes a good living on it.

    But for the casual guy who is looking to buy for a home and not a project. Look long term or don’t look at all.

  • Praveen says:

    I think that, for the long term (at least 5 years) you are always better off buying than renting.

    Even if the appreciation and tax breaks just cover your closing costs and interest, and you end up out your real estate taxes and maintainance costs.

    The taxes and maintainance, when spread out per month, will be less than the monthly cost of renting the equivalant property.

  • Mayank Rocks says:

    The biggest problem of buying a house is the “down payment” Once you are able to give the down payment, it is really a good option. Because you only pay kind of a rent(Home Loan interest payment) and soon you will have your own property. And don’t forget, real estate prices keep booming.

  • Ryan says:

    I’d forgotten you guys (Americans) get to write off your interest. That makes it even better to buy than rent, I’d say. But being a Canadian, I’m not familiar with what other differences there are..

  • MSMomsmoney says:

    Have to say, I totally disagree with you.

    I rented for many years. Rents go up every year, when you rent, don’t like it you move, hence moving expenses, deposits (that you rarely get back), etc.

    You build NO equity when you rent. You have no stability when you rent.

    I am paying close to the same amount in my 15 year fixed rate mortgage for a modest 3 bedroom house, then I was paying for a 2 bedroom apt. 9 years ago.

    The difference being yes I have to fix my own household problems(plumbing, gardening, appliances, painting, etc.) And yes I have a fund I budget for those items.

    Yes I get to choose what appliances, plumbing, gardening, painting, I WANT to have, rather than someone else choosing for me…

    Rent increases–where as since I have re-fi at a lower interest rate, my monthly payments have decreased. Every apt. I have ever lived in, the rent went up every year.

    Had I invested the orginal downpayment I put on my home(less than 20%), I would not have come anywhere near what I currently have in equity in my home. (purchased my home in 1999 and even with the crappy market now, my home value has doubled since the original purchase price).

    Real estate taxes, and mortgage interest are tax deductible. Rent is not.

    Of course, in 15 years, my only household payments will be home renovations, taxes and insurance. Far less than what I would paying in my area to rent an apartment, let alone a house.

    Of course, there is the having a stabel neighborhood (your neighbors tend to move in rentals), the school district is better, etc.

    I firmly believe that my financial life, and my quality of life, would be worse off, if I had not purchased my home, and continued renting.

  • The Bald Monkey says:

    You seem to make valid arguments here, but just for the sake of my own curiosity, are you factoring in at all the tax deductions you get to take from all the interest you pay on that big loan?

    And I have to agree with Ryan, after I pay off my 30 year loan, I have my house fully paid for and don’t have to pay for it ever again. You just can’t say that about renting anything.

  • Mike Huang says:

    Hmm…interesting points brought up in this post. I’ll make sure to remind my self of this. Thanks.


  • Gabriel Rodriguez says:

    Very nice analysis Ryan. You’ve got a lot of good points.

  • Ryan says:

    The whole debate between buying vs. renting is very market dependant. I would probably not buy right now, where I live. But I’m not buying now, I bought 4 years ago.

    If I were to cash out now, I would make an easy 60-70k profit (after all the costs). My mortgage payments are similar to the rent my friends are paying for smaller places. The only difference is my payments will remain roughly the same or go down, and there’s will rise indefinitely.

    Since I’m already “in the market”, it’s relatively easy for me to move around, as long as I do it at the right time. A mortgage term isn’t much different than a lease in that respect. The difference is, I can upgrade my accommodations without increasing my monthly payments (if I do it right), but if I were renting, the payments would go up every time.

    The fact of the matter is, renting is a business. The owner has to cover the costs of maintenance, taxes, and financing, in addition to making some sort of profit to make the whole thing worth while. Don’t think for a second that the price you pay for rent isn’t more than what the owner is paying to own. The thing to remember is that time is the major differentiator, not logic. And don’t counter with “he had a big down payment”, because in the business of renting, that’s the “wrong way” to do it.

    Prices are up, rent, prices are down, buy. Once you get in, you can move when the prices are high.

  • Joe says:

    Fortunately for me, I didn’t nickel and dime property taxes and closing costs and bought my condo as opposed to renting.

    After only 2 years I cashed out $40,000 in profit after fees and mortgage payments while the people who rented left with nothing but higher rents. I’m sure glad I wasn’t “logical”.

  • stngy1 says:

    To reiterate what’s been said, the one thing never factored into these calculations is the maintainance associated with owning. You cannot possibly guesstimate the costs of repairs, replacing appliances, furnishings, insurance, and so forth. Even if you own long enough to get rid of the mortgage, the expenses will ratchet up just when you REALLY can’t afford them.
    You also cannot anticipate the changes in the character of your neighborhood. For many people, what was once a nice bedroom community has turned into a suburban slum. Its tragic, but happens to many many neighborhoods over a lifetime.
    Even having owned our home for 20 years, I would never recommend either of my kids buy a house (at least in the next 5 years or so). Its insanely, and unpredictably expensive.

  • Ryan says:

    I plan on living longer than the next 30 years myself. What does the calculation show for 50 or 60 years of owning vs. renting?

  • Tim says:

    Don’t forget about the cost associated with maintaining your home. This can add up quickly.

  • Gabriel Rodriguez says:

    great blog man.

    However, I dont really agree much with you on this topic. Everyone should own a house to call home.

    If you’re renting, and you lose your job, you could pretty much be homeless after a few months of bad luck. However I’m sure you’re covered with insurance from the bank in case you’re in the middle of a loan and you lose your job.

    Also, the fact that the article considers the property tax to be the same over the next 30 years could be compensated with the fact that a person’s salary also increases every year.

    Anyways, keep up the great work, i really enjoy reading your articles.

    • Mike says:

      Where the heck do you guys rent, my rent hasn’t gone up in10 years. If landlords keep raising rent as you say people will leave and rent somewhere else or buy a home. Secondly, are you saying people who rent in big cities or anywhere by choice aren’t happy unless they have a home? They just don’t want the hassles or commitment of a 30 year boat anchor. They help people who own homes pay their mortgage and investments. Also you don’t own anything the bank does until that last payment and you have paid $200,ooo in interest. You could make way more investing and paying cash for a house, if you desire when you retire. The biggest myth is the tax deduction. I get the same tax deduction by investing in pre tax dollars. If you pay 12,000 in interest a year, you don’t get 12,000 of your taxes, that comes off your earnings which might lower your taxes 1000 or so dollars.. The standard deduction is almost as much as your interest deduction. I will make a deal with anyone. Give me the interest you pay to invest during the year and I will pay the difference in taxes to the IRS for you and be a few thousand dollars richer. If you want a home great!! But it isn’t the best investment, ask hundreds of people in Vegas how they are doing with payments for a 400,000 home on a home that is now worth. 193,000 and tell me how losing $200,000 in interest and $200,ooo in equity is a great bargain!!!

      • rowlandw says:

        Also, don’t count on Congress leaving the home mtg deduction alone. It will very likely be phased out as they look for new revenue w/o directly raising taxes.

      • L green says:

        I’m with you on this one!!! I’m renting when I move again

      • Tela says:

        Exactly! The most brilliant I investor refused to buy a home because she didn’t want to pay taxes and wanted the ability to move freely when needed

  • Fiscal Musings says:

    I don’t put too much stock in these types of future calculations. However, I’d much prefer to buy than rent. And you can buy a place and pay the same monthly payment that you could rent something for. It may not be quite as nice or as spacious, but you can find something that will work.

    You have to wonder if it’s worth renting a nicer place, or owning something you can live with. Just a few thoughts.

    • Riverdale says:

      I agree with you….the home we paid less than $40,000 for about 30 years ago was in a good neighborhood and now is in a neighborhood of million $ homes….the old ones like ours sell for about a million and the new ones taking over sell for over 2 million….one on the next block is listed at over 6 million …it hasn’t sold yet… value has sky rocketed…they don’t make any more of it……….when buying real estate….the old saying was location location location….it still is the most important factor in buying

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