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I had a professor who stated often it makes much more economical sense to rent a home rather than own. Even though psychologically one may not think as such and believe home ownership is the “obvious” better deal. He pointed out that many of the ultra-rich, who surely can afford almost any home, actually rent.
Any thoughts?
Your professor probably is not familiar with the tax code.
There are positives and negatives on both sides.
It makes sense to rent if you don’t have enough cash on hand to cover problems that may come up with your house, or if you think you will need to move in the next 3-5 years.
Even if you say Well my house payment would be $800 but my rent is $900 that is not the whole story. If you are renting and the house needs a new roof its your landlord’s problem, If you own its yours!
If you can afford a house on a fixed rate loan where the payment is less then 25% of your take home pay and you have an emergency fund it can be a good choice.
(My wife and I rent, but would like to own at some point)
Any thoughts?
Yes… that you cannot make a general rule about something like this. There are those for whom it is better to rent than to buy, and there are those for whom the opposite is true. Among the factors to be considered are:
Market conditions
Geography
Personal income
How long you intend to stay
Interest rates
Your personal credit
and on and on.
No doubt there are many people for whom it makes more economic sense to rent than to buy. But it’s hardly universally so.
The Wolf
Make yourself a cheshbon.
If you have the downpayment, then it certainly makes more sesne financially to buy. When renting an apartment, every month you pay someone your hard earned gelt, and you gain nothing more than a roof over your head for that month and thats it. When paying a mortgage, the money you pay to the bank for the mortgage, is reapying a loan, and eventually you will own your home. This can act either as a retirement package – you downsize and live off the proceeds, or you leave for the family after 120!
The only bonus of renting is the ability to move from one apartment to another.
Any other plus-sides to renting?
yaff80 — Your calculations are not taking into account the down payment. Although it is true that when you rent you are “throwing away” that money, a big portion of those payments, especially in the beginning are to pay interest on your loan, which is also money thrown away.
On the flip side, you are tying up your down payment, which could theoretically been invested in such a way to make more money than the appreciation on your house. As many others said, this is a very individual financial question. For example, here in Israel banks require down payments of about 35%, so obviously that is a bigger factor than in the US where even with “tighter standards” you can easily put less than 10% down with good credit.
Also there are often additional expenses that come with homeownership, such as property taxes, which must be factored in. The market conditions and interest rates were already mentioned (in recent years many homes lost significant value). Tax benefits are also very individual. The benefits of deducting interest payments will vary depending on your income, size of your family, etc.
I’m not an accountant or financial planner, but I can definitely create scenarios in which it would not “certainly make more sense financially to buy.” Of course there are many psychological advantages to owning a home, but we are talking about the pure finances of it
Grandmaster — why don’t you ask your professor what cases he is referring to?
Grandmaster, I find this so intresting. I would have thought it is so much more worth it to own if you can. I am in a rented apt and every time it comes to paying rent and we scrape together the money, my husband and I wonder why we dont own and pay towards a mortgage. B”H the apt we are in needed almost no maintenance since we moved in.
It certainly costs more $ to buy than to rent. But when you rent , you will never see that $ again, however when you buy, you can later sell and get your $
Renting is certainly better if you expect to move within a few years. And the down payment and closing cost requirements for even a subsidized government mortgage can be shocking.
Some analagy to leasing.
Is it better to lease a vehicle or to buy a vehicle? On a lease, you’re in essence paying “rent” for the car, as you would for a home. It’s money lost. As opposed to a purchase, where you’re investing in the car, which you can then keep or sell after it’s paid off.
Of course, a car decreases in value, whereis a home will increase in value (in most cases), but there is sufficient similarity to warrant some comparison.
Thoughts?
m in Israel: “Your calculations are not taking into account the down payment. Although it is true that when you rent you are “throwing away” that money, a big portion of those payments, especially in the beginning are to pay interest on your loan, which is also money thrown away”.
I stated clearly in my post: “If you have the downpayment, then it certainly makes more sense financially to buy”.
I wrote my comment based on the way the market works in the UK. Here tax is paid the same as a renter or as an owner. It is charged to the occupier. There is a tax however at the time of purchase which is either 1% or 2% depending on the value of the purchase. I would include this in purchase costs, not in the upkeep of a property. We could get a mortgage with a 25% downpayment and the repayments are invariably similar to rent charges, if not cheaper!
Yes houses are ganavim and they eat up money in repairs etc, but its like an animal. The more you feed it, the fatter it gets, the more you receive in return when you sell it on!
I have been in the real estate business for about 20 years, and am a financial planner.
The water is muddied by propaganda from the real estate industry that tells you that you SHOULD buy a house, then a bigger house, then another bigger house. Don’t fall into the trap without running the numbers.
Here’s the real skinny: Housing is a commodity – you need it, and you must acquire it somehow. You can buy a home, rent an apartment, live with your parents, live in a homeless shelter, live on the street.
Each method of acquiring shelter has its own costs and its own benefits. Our job, as consumers of shelter, is to try to get the maximum benefit for the minimum cost.
As for rent vs. buy – renting is NOT throwing your money out the window. It is an excellent way to acquire shelter. It has many advantages: you don’t have to repair the roof, you can move on short notice, it doesn’t take much capital to rent an apartment. It is a very reasonable way to procure shelter.
Buying is generally more costly upfront, gives you more autonomy (some of it imagined) and has many responsibilities. In the short- and medium-term, most people spend a lot more buying shelter than renting it.
If you don’t believe me, just look at my checkbook: $300 for my Home Depot card payment. $350 for insulation at the plumbing supply store. $8000 for a new boiler. $1500 for the replacement of a small part of the roof. Need I go on? If I were a renter, I would just pay, say, $1500 per month, and I wouldn’t have all those extra expenses.
The most expensive way to buy shelter is the way that most people (including many real estate pros who should know better) is to buy homes for short-term stays. Buying a “starter-house” could be the most expensive housing you ever buy.
Every time you trade-up to a newer home, 10% or so of the value of the house disappears into the pockets of real estate agents, brokers, lawyers, bankers, movers. You don’t even know that the money is gone, but it is.
Figure that you buy a “starter” for 250k-live there five years. You think your cost is only your mortgage, taxes and insurance, but no, there’s an additional $25,000 or so in overhead, divided over five years that’s over $416/month going to support the real estate industry. (not that I’m against that, I’m in the real estate industry, I just like my clients not to have to pay that.)
Compare the cost of buying that house with buying a house you can live in for 30 years-there is a much smaller monthly cost for this overhead.
In general, most people here are right. It will be much less costly, in the long run, to buy a home. But, buy the right home, buy the one you can stay in. Don’t buy those short-term homes.
It’s also not only money. People live better in homes they own. It’s harder to lose the home and people feel much better about their home when they own it. But make sure the home you are buying will give you good utility and last for a long time.
The worst trap I see is when young couples are pushed into buying apartments when they really should be renting apartments. They don’t intend to stay once the kids go to school, so it’s usually short term. So, you can buy the apartment, pay the taxes and mortgage and the extra overhead for only $2500/ month when you can rent an apartment in the same building for $1500? It’s better to save up more money for the down-payment on a real house rather than buy-sell-and buy.
Ok, back to the tax incentives.
The US tax code, 26 USC, is highly biased towards home owners.
That is why a straight analysis of the costs will not be accurate.
The interest on your loan, and your property tax, are both deductible. Depending on your marginal tax rate, that could be substantial.
Of course, market conditions change, and it may not be a good idea right now, but generally, home ownership is a good idea, and you should never pay it off, since then you lose the interest benefits.
It is basically a subsidized loan from the IRS.
And lets not forget that any income you make when you sell it is excludable up to 250k for an individual, and 500k for a couple, which means it is also a tax free investment.
dear popa, don’t be lured by that propaganda, either. The subsidy only covers less than 1/3 the cost of the loan, you’re still paying out the other 2/3 or more from your pocket. If you run the figures, you will see that the CURRENT income tax situation favors homeowners, but you must adjust the costs to find the true cost, not make bad decisions because of the deduction.
and, please, do not forget the large percentage of Americans who now own homes that are worth LESS than they paid for them. The excludable profit from the sale of a home is the furthest thing from their minds.
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