You’ve heard all the reasons that people want to stop renting. “I don’t want to waste my money.” Heck, you may have even said them yourself. Many of my friends are reaching that point in their lives where they’re considering buying a home. However it’s unfortunate that so many choose to buy over rent, especially in this expensive market, because many well-intentioned people are buying homes that are actually damaging their finances.

Despite the fact that many people disagree with me that the real estate market is going to deflate, there is a rule of thumb that I use that should give you an idea about how much you should spend on a home even if the market is in a slump.

For every $100 you spend in rent a month, you’d be better off buying up to $12,500 in property instead.

For example, I live in Northern New Jersey, and currently pay $1,000/mn for my 1 bedroom apartment. I would be better of financially if I were to buy a condo that cost up to $125,000. The only problem is that where I live, there’s nothing habitable that I can buy for under $125,000, and if I spend much more than that, it’ll actually cost me more money to buy than rent!!! Unfortunately this is a problem shared by my friends in major cities around the country.

Okay, you’re skeptical. I know it and I don’t blame you. So I’m going to prove to you right now, why my rule of thumb works.

The Proof is in the PITI

The great thing about a home is that you get to build equity. It’s like your home becomes this great big piggy bank and with every mortgage payment you’re saving more money. But, this privilege is not free. Unless you can pay for the entire cost of your house in cash, which is rare, banks offer loans to help individuals purchase the properties in exchange for interest.

Like rent money, mortgage interest is essentially “wasted.” It goes neither to improving the property nor to building equity. It’s simply a fee for the privilege of living in your house. And in addition to interest, you’re also required to pay property taxes and insurance every month as well. All these payments are known as the PITI payment, which stands for Principle, Interest, Taxes and Insurance, and is a single payment you pay to your bank, who then distributes your money to the government and insurance company.

Houses also have additional expenses, such as lawn care, maintenance, and big ticket expenses like a new roof, new appliances, or a new furnace. As renters we don’t have to worry about any of these expenses because most leases include them as part of your rent, meaning no extra money out of your pocket when the freezer stops freezing, and someone will install it for you! A responsible homeowner should set aside some money every month to pay for these expenses when they eventually occur (and they always do).

So there are a lot of extra expenses that are essentially wasted when you buy a home. Wasted in the sense that they don’t build equity, which aside from taxes and appreciation is the only real advantage to owning a home.

So let’s compare renting and buying

Buying a home should not be about what you can afford. It should be about wasting as little money as possible. For example, let’s say you can afford to pay $1,200/mn for a condo, but rents in your area are only $800/mn for a nice 1-bedroom. You’d actually be building more assets if you rented, and saved the extra $400/mn in a mutual fund.

So again, how do you determine when you should rent and when you should buy? When the combined home expenses, interest, taxes, and insurance equals your rent, that’s the point when you can and should buy a home.

I’ve run all kinds of numbers to prove out my theory, and when I look at it 125:1 seems to be the ratio I keep coming up with. If I pay more than that (especially as I near the $1400 level), I would actually be spending more money on my home than if I were renting. Of course this number isn’t totally exact, and unforseen situations can arise so, I’ve also built a comfortable cushion in this ratio to cover the wide range of circumstances.

This ratio is different for each person based on variables such as how much they can afford as a downpayment and local property taxes. For more information on how I calculated this ratio and a calculator to determine your ratio, see my article How much should you spend on a home?

What about taxes, appreciation and multi-families?

Look, I like being appreciated just like the next guy, but this rule of thumb takes into account two assumptions. First, we can’t take into account taxes or price appreciation. With few exceptions, a home purchase should first make financial sense without taking appreciation into account, so that no matter what the price of your home does, you won’t be perched precariously over a financial disaster.

Because personal mortgage interest is deductible on your taxes, your overall tax burden is minimized at the end of the year. Because most of the interest in a mortgage is paid at the beginning of loan, your first year you would receive the greatest benefit. For a typical mortgage on a $125,000 house at today’s interest rates, you’d be spending about $7,400 on interest for the first year (it drops to $7300 in year 2). Of the deductible amount, the standard deduction may chop off a good hunk of that right away, so you’d be saving maybe an extra $1,200 on your taxes, and that’s for only the first year! The longer you have a mortgage the less you pay in interest a year, and the more inflation will eat away at your deduction. In either case, I don’t believe you should spend more money to have a bigger deduction.

In terms of appreciation, I think most people agree that the real estate market is going to slow. I personally believe that we’re going to experience serious price drops in major metropolitan areas, such as here in New Jersey. Renting is just too attractive an option for consumers, and the rents are too low for investors. If the prices of housing at the very least stagnate, we’ll see appreciation of less than 5% for the next few years, if not longer. That being the case, you’d be better off buying a mutual fund making 8 to 12%, even if you’d be affected by long-term capital gains taxes. Unless the real estate market is red hot in your area and you want to flip your property, don’t rely too much on appreciation.

[NOTE] Home price appreciation is magnified by leverage. If housing prices increase 5% and you only put 5% down, you’ve doubled your money your first year on paper. With a mutual fund, though, a 10% return is always 10% no matter how much you invest. In real estate taking control of a property for less than its value is known as leverage, and can lead to serious returns in booming markets. However housing prices are softening in many areas, and selling your home with a real estate agent can cost as much 6% of the value of your home, eating away at your sale price. For Sale By Owner (FSBO – “Fiz’ bow”) will help you avoid those costs, but in a buyer’s market can also lead to a significantly lower sale price. Is it possible to make a lot of money with price appreciation in the next 5 years? Of course. But don’t bank on it unless it’s a sure thing.

Additionally, this discussion only makes sense if you’re talking about buying a single family home (house/condo). When you throw multi-family into the mix, the discussion gets more complicated, so since the vast majority of people start off with a one-family we’ll use that as our basis. Becoming a landlord can be very financially rewarding and hopefully more people will choose that as an option to first-time home ownership.

Wrapping it up

If you take away anything from this article, I hope it’s the fact that there are many expenses involved in owning a home, especially when you’re just starting out and are struggling to afford a place to live. While it may be easy to think that home ownership is a way out of the rent trap, consider how much money (and don’t forget time) you’d actually be wasting every month just to own your home.

Unfortunately in most major cities these days, buying property is so darned expensive it doesn’t make sense for many of us to own until we get married and start families. But how bad is that really? Sure you have to deal with your neighbors, but renting means that someone else worries about your leaky faucet and broken washer, and that kind of good night’s rest is truly money in the bank.

Don’t get me wrong. I think homeownership is a wonderful thing, but think long and hard about the decision before you make the leap. Unless you can find a cheap condo somewhere or live in a market that hasn’t had the kind of price runups we’ve seen in the past 10 years, I think it makes more sense to start saving for your downpayment in a diversified mutual fund, and wait for prices to stabalize.

FAQ on Deducting Mortgage Interest.

Very good article, well written and I agree 100%…My wife and I owned our home for 2 years. I worked 2 jobs (long story for another time), my wife was pregnant with our first child and even though we got a discount on the house it ended up being too much with all the added expenses..I finally got down to one job, less money, and we had to move..We moved into an apartment that 1. is bigger than my house 2. costs about 300 dollars less and 3. NO YARD WORK!!!!! People say we don’t get anything out of renting…..THis is what I got 1. 3 months salary in the bank 2. Burden lifted from fixing things–I am not handy at all 3. Freedom that we can walk away whenever we like–no contract. 4. A roof over my head and a place to restfully sleep at night–priceless!

I agree with your formulas, my wife and I are definatly wiser now and looking forward to see if there is an opportunity to capatalize on homeownership in the near future..of course it has to be what I am paying now though!!!

Great job and keep up the good work!!!!!!!

Great post. I think one of the biggest oversights when comparing buying to renting is the impact of the mortgage in the first three years. The closing costs on the mortgage are upwards to $3k and the interest is the bulk of what you pay in the first 5 years, meaning you are not building equity that fast. When you rent, all your money goes to paying for a roof over your head. When you buy, for the first five years you are paying for the right to own the home; not building a nest egg.

If you don’t intend to live in a house for more than 3 years or so, the ammount you pay on transaction costs, interest and fees will eat up most appretiation.

So I guess it was just a long-winded way of me saying that you are right, buying is not always the best answer.

Great post! I also live in northern NJ and agree with you that renting, particularly in this market, makes sense. (I also rent). The relationship between the “intrinsic” or “rental” value of a home, and the asset, or investment, portion is simply huge.

Rising interest rates tends to reduce asset prices, housing will be no different. The only issue I can take with your argument is that you assume high returns for stock prices over the period. As I have written at my blog, stocks are unlikely to maintain their historic rates of return even if the economy remains strong.

Unfortunately, rising rates will negatively impact stock prices, too, (and if the over-leveraged American winds up in forclosure, there will be negative implications for corporate profitability); a diversified stock mutual fund is probably not the ideal place to put your cash.

I am trying to remain very selective about stock investments and even keep significant amounts of money parked in stable value vehicles, like cash and money markets.

Or you can do what I did.

sell my overpriced condo in San Diego, and buy several homes in Salt Lake City.

I sold my nice 900 sqft condo for 350k. i’m renting it back for 1450/mo.
i bought several new houses in SLC for around 200-250k that I rent out for $1450/mo!
the homes are appreciating and the condo is depreciating!
best of both worlds.

live where you want, invest where it makes sense!

I like that approach. what’s the cash flow on the rental properties? Unbelieveable that someone would accept $1450 for a condo that cost them $350k. They are at a gross rent multiplier of 20! Pretty much impossible to cashflow above 10 or 12, if the lease isn’t triple net, and in your case, i’m sure you aren’t paying the taxes.

I’ve looked at purchasing properties outside of this area, and the numbers can work. Of course, the issue is the properties are often fairly marginal, and I think we are going to have good opportunities to purchase fairly plum properties for good prices, if we have the cash, in the next 12-18 months.

Trump took advantage of the 1990s real estate depression to purchase a building on Wall Street for $1 million. Wall Street! Ok, it needed about 80-120 million in upgrades, but still – its worth $800 million or more today, and you can be sure that it is cash flow positive. pretty solid internal rate of return. I realize, he’s Trump, but still, having cash when no one else wants to buy is the best way to get good investments on the cheap.

Right now, very little qualifies.

I think that’s a great too, although a little out of scope for this article. Our situation is that we’re looking to buy for the first time. This has been a great time for current home owners to cash in, especially those who are willing to rent.

In New Jersey, Doug, many properties are renting with similar GRMs. It’s pretty wild. Many of the so-called “investment properties” have negative cap rates! Not much of an investment if it can’t even compete with inflation.

This once high appreciation market now is seeing stagnating and even falling prices, and without appreciation, neg. cap rates cannot be justified. This is the primary reason why these prices have to fall precipitously. If you’re going to sell, now is the time to do it.

I suggest any potential homebuyers to check out my Rent vs Buy calculator. If you think that “eventually” home buying will pay itself off, then you really should check out your numbers at my calculator. I have played with it, and found that there is a breakeven point between buying home & renting. If you go over the breakeven point, you can NEVER recover your initial cost of homebuying. In this market, I think that is probably the case. By the way, I have not fixed the default value of 33% homebuying tax benefit. It should be lower closer to 20% for most people.

There is one more advantage to buying besides interest, the points, still not much of a difference.

I am enjoying renting right now, what some people want for their homes is insane. And don’t get me started on HOA fees if you buy in a community that has them, the HOA’s where I live are $240/mo plus a yearly $550 payment, incredible. Yeah, no yard work but that is some moola.

Great article. I pay $ 500.00 a month for rent. I live in the country on 90 acres with 3 horses, 2 cows, 3 cats, 2 dogs. No fences. Just Almond and Walnut trees (not to mention cherry and peaches).

If I were to purchase this land with the home I live in, my monthly payment would be around $ 7,000.00 a month.

Keep up the great work..

You mentioned that you ran some numbers and kept coming up with the 12500:100 ratio. Could you show me the calculations you did; I’m quite curious as to how you came to your conclusions.

I think the assumption that capital appreciation should not be factored into the decision to buy a property is sound for investment properties but not for primary residences. A home is a long term purchase and the historical long term trend for property is upward. During periods like the worldwide boom we’ve just had capital appreciation can be astounding. And this is important for a number of reasons:
1. Property is a geared investment. Because banks are willing to lend us the purchase price we benefit disproportionately from rises (and falls, but falls tend to be very temporary – the long term trend is up). So while you may get a better return on stocks/ shares & bonds at a given level of investment, you can typically invest more in property.
2. There is a serious cost to not purchasing. Because the long-term trend is up, I’d argue you are taking a serious risk hoping for short-term falls (remember also falls, however brief are in nobodies interest – every major player in the market tries to avoid these). If the fall you are hoping for doesn’t materialise, getting on the ladder is going to cost you even more.
3. If a fall does occur, you may find banks have tightened their lending criteria and that they are reluctant to lend you the money , you need, .to purcahse a falling asset (liquidity crunch).
4. A home (primary residence) is an emotional purchase rather than a business one – don’t expect the valuations of primary residences to reflect what you might calculate as fair market value based on the prevailing conditions in the local rental market.

You forget tax advantages. No capital gains on your house, tax deductible interest. You also only look at the first few years. What about the house you are keeping for ten years. Rents rise, mortgage payments do not.

Expand this over your entire life and back test if as if you started doing this in 1980. You will see the folloies in your math.

Expect your rents to rise so your landlord gets a return on his investment.

I definitely wish I had done a little more financial calculating before my husband and I bought a house. We live in South Jersey, and the prices round here aren’t much better. One thing this article doesn’t attack is how long you plan on living in said house/apartment. I had found this calculator after we bought:

Renting may be throwing away money, but buying a house can be throwing away a lot of money as well unless you a) plan on living there for 10 years or b) buy a fixer-upper and have the skills to do-it-yourself. I do agree with the other comments that a house is an emotional purchase as well. Being someone who likes to work on the yard, likes to paint the walls, make a place my own, eventually get a dog, etc. a house was a better decision for these reasons. But if I had to choose between rent or condo, I’d have stuck with renting.

Renting may be a bad deal overall, but in certain housing markets and situations it might be a very smart move.

I’ve seen too many people that end up stuck in a condo because they don’t go up in value the way single family homes do. I’ve also seen people get into homes too early, before they have enough money down. They get an “exotic” loan and end up stuck. Sadly, it’s the new way to buy a home, it seems.

It’s true: the bandwagoneers never mention that homeownership comes with a smattering of other expenses. Unless you buy a newly constructed home, you’d best assume that everything is going to need to be replaced and build yourself a nice rainy day fund before you ever sign an Agreement of Sale. This is especially true if you lease your property for residential use. Though you may learn to live with a minor roof leak, your tenants will learn to withold rent, and you’ll learn how much a new roof costs (anywhere from $700 to $15,000 depending on the roof’s construction, which can’t be financed in this day and age). As someone that’s answered emergency plumbing issues at 2:00 in the morning (on more than one occasion) while “my tenants paid my mortgage”, my advice is: rent or flip, never own.

I would say both sides have valid points, however a home IS an investment. This being the Single level family dwelling. Not a “Condo”, nor a Multi-Family unit. Single Level, 3 bdrm, multi bath HOME. If you check the market these days (and even prior to the last 5 years) the trend has and will be Single Level Family dwelling to get the most “bang” for the buck.
A house is a big decision, but one that pays off in overall ownership AFTER 5 years.
If you are looking to buy and flip, then good luck to you and I hope you get what you paid. That said, if you have the ability to purchase and stay, after 5 years, you would realize that your investment has paid for itself.

I use my purchase as an example. Home was bought for 150k 6 years ago. Even at 5% (which is the lowest I have seen appreciation) , without doing much other than general maintenance, my home would is worth 190K after 6 years. 45000 earned just by holding the property with a low appreciation.
Now, add improvements – New Windows (10k investment that raise value 2x the cost) – New appliances (which add 5x to the original cost) – New air / heat (which add 3x value to the original cost AND support a tax break on install if the proper fixtures are purchased) and my 6yr investment is now valued at 240k. Thats a 90k return on my investment. After taking out for improvement costs, It totals 65k return (10% / year) and thats also taking into account no further appreciation.

Plus, I get to say WHAT I do to my home. Want to Paint? Do it. Want to rip out the lawn and build a deck (all that does is improve the VALUE)….Do it.

Like I said…Pro’s & Cons. I have rented, and if you live somewhere long enough the RENT is going to go up. Then you are either stuck paying the increase – or having to move to ANOTHER rental and changing you address (the longer you live in one place the better for overall credit) and utilities (deposits). History in finance is very important to banks.

I have a few additional points to make here:

Renting may save more money monthly, but it might be a bad idea unless you are extremely disciplined about saving. Most people that I know tend to do better when it is forced. A mortgage forces you to save. (At least it does for me.)

When comparing costs, be sure to compare apples to apples. In my situation, my rent on a 1BR apt was about 1200 per month, with water and heat included. The condo that I purchased is about 2200 per month but was twice the size. Yes, its still a huge difference in monthly prices.

However – the condo is also in a much more desireable location: near the water. There is a small tax payback at the end of the year. There is much more room – again close to twice as much space. And I can have pets if I want to. And, I have neighbors I like and I can do whatever I want to the space.

And whats more, I am now earning money on an investment of over 200K. Earning money on other people’s money is nice. Even if I was disciplined and saved the extra money and invested it and got a good return and assume that the return on the home is less, the difference is not as significant as you might think. check out these numbers:

For a home – starting at 240000, with monthly compounding interest (4% per year Amounts rounded down to the penny.):

month:1 amount is 240799.99
month:2 amount is 241602.66
month:3 amount is 242408.00
month:4 amount is 243216.03
month:5 amount is 244026.75
month:6 amount is 244840.17
month:7 amount is 245656.31
month:8 amount is 246475.16
month:9 amount is 247296.75
month:10 amount is 248121.07
month:11 amount is 248948.14
month:12 amount is 249777.97

Roughly, a 10K increase in value at the end of a year.

Also, don’t forget, if you take this money, you will have to pay a capital gains tax on it. This is not true when you sell your primary residence/home (at least in my state) based on how long you stay there.

For investing the “difference” in money the same way by saving on rent but lets assume a much higher rate (say 8% Amounts rounded down to the penny.)

month:1 amount is 1000
month:2 amount is 2006.66
month:3 amount is 3020.04
month:4 amount is 4040.17
month:5 amount is 5067.11
month:6 amount is 6100.89
month:7 amount is 7141.56
month:8 amount is 8189.17
month:9 amount is 9243.77
month:10 amount is 10305.39
month:11 amount is 11374.09
month:12 amount is 12449.92

approximately 12,500.

As with any investment, there will be ups and downs. But in my mind, the difference of 3500 is the premium of having a larger place in a better location.

Oh, and in addition to no capital gains, I will also get a large tax benefit – for me, this has increased my tax return yearly by about 2000.

It will not be the same for everyone though. That is for sure. But overall, the amount of money earned for renting and saving is roughly the same as owning.

The difference, for me, is that I can pay a mortgage without really thinking about it. And it diversifies my investment dollars. If I were to save it, it gets put into the same bucket as my retirement money – completely at the mercy of the stock market.

Frugal, I checked out your calculator but could not make it work. Has anyone else had luck with this, or does anyone else have a good spreadsheet breakdown of renting vs. buying

I am in the Boston area, which has some of the highest real estate values in the country. I rent a small 1 bedroom in Back Bay for 1400/month, and a similar unit for sale would be 300k, plus 200-300/month condo fee, taxes etc.

Hard to justify almost doubling my monthly living expense for the right of homeownership

I’ve not checked the figures but in principal agree. There are though other benefits to owning property, including.

a) Freedom to decorate and make structural changes.

b) Security of tenure. Of course that, for tenants varies from territory to territory.

c) A greater ability to raise capital (and at lower cost).

I think a serious bottom line is whether you really want to own, and if you choose to, whether you really like the property you buy. I am willing to pay a premium to own because I really like it, just like some people are willing to pay a premium to drive a fancier car.

But I hope articles like this convince people to at least look harder at all the expenses of ownership – one thing that shocked me when I bought was just how much the bank was willing to give us – far more than our income could justify. If I had taken the kind of mortgage I’d been offered, there is no doubt at all in my mind I would be bankrupt right now. Do those numbers!

You must install JRE, because I use Sun’s java library to create those. Over 20 people have saved this Rent vs Buy Calculator at I’m pretty sure it works. It is very possible that your company prevents the browser from running java codes. At my company, it is true. If I use IE, I cannot use my own calculator. If I use FireFox, then it works. But at my home, both IE and FireFox works.
I find my own calculator very useful, because it gives you a very clear picture, and you can see immediately whether rent or buy makes more sense.

If you think that renters are throwing away RENT MONEY, then the corresponding truth is that home owners are throwing away MORTGAGE INTEREST paid to mortgage company. Even when you paid off all the mortgage, there is still the same OPPORTUNITY COST from having the money in home equity instead of investing the money at other places. Bottom line is there are costs for both owning and renting, except that when you rent, it is so much easier to convince you and yourself that you are throwing away money on the surface.
Because every individual scenario is different, the only advice that I can give is still input all of your numbers into my calculator (see my comments above, hate to put another stupid link) or someone else calculator, and figure out the costs and breakeven points for yourself.

The thing is, there are non-financial reasons why someone might want to own a home. It’s not all about the numbers.

When you rent, you have no rights over the place. You can’t paint, plant a garden, or make any other kinds of changes to it, without explicitly getting the landlord’s approval, which may or may not be forthcoming. Some landlords will throw a fit if you so much as put a nail in the wall to hang a picture, much less want to paint a room something other than institutional off-white, or plant a tree in the front yard.

And even if you luck out and get a landlord who is OK with things like that, it’s not necessarily in your best interests…

First of all, you have no idea how long you may be staying, so you could be sinking a lot of work into something you’ll lose sooner than you think. In one place, I put a ton of work into turning the weed-choked front yard into a beautiful garden. I was out there every day working on it. Three days before I finally moved out, the landlady had contracters rip it all out and pave over the yard with interlocking brock, because she said that while the garden was lovely, she couldn’t trust that future tenants would take care of it properly.

Secondly, the more work you put into fixing up a place, the nicer it looks, and the more likely your landlord will decide that means they could now get more money for it from someone else and throw you out. This has happened to people I know.

Basically, when you rent, you don’t really live where you’re living. You’re just staying there — a guest in someone else’s house. You can’t put down roots. You can’t afford to fall in love with a place, because you have no idea how long you’ll be allowed to stay. You don’t really have a home, in any real sense of the word — just an endless series of temporary campsites.

I am getting heartily sick of that, and that’s why I’d really like to own a house.

If you plan on investing your money you might try common sense when you compare returns.

You say that you should invest the $400 saved in a mutual fund returning 8% where as real estate will “only” appreciate at 5%. This is obvious from a superficial glance. I’m going to simplify the returns to show the err in your assumptions. At the end of the first year you will have saved $4800 and will have made $384 @ 8%, I am assuming a full year returns with the $4800. In the same first year, the $140,000 condo will have only appreciated at 5%. Now to buy that condo, you maybe put down two years rental savings ($9600 –$4800 @ 2years). Now your return of 5% on $140,000 condo is $7000. Now consider that you put down $9600. What is your return on investment (exculding the cost of upkeep)? 72%, yes 72% compared to 8%. I would say you probably should invest in a mutual fund if you can’t figure out that a 5% return on real estate is 9X better than an 8% in a mutual fund.

On the surface, this makes sense in the short term, and it’s definitley a welcome perspective.

However, you need to take into account that in the current cycle, rents are low relative to housing (purchase) prices. This is an imbalance that I expect will be painfully corrected along with the other housing bubble corrections, negatively for renters (those who are not covered by rent-controls). I was in Sil Valley during the Net bubble, and so I remember what THAT was like.

I am currently renting (Berkeley, CA – controlled) and have struggled with this question for the last three years of the bubble. I’m rather glad I didn’t succumb to the urge to buy at these hyper-inflated prices, though, especially since my rent is way below market and purchase prices here are INSANE.

That said, I am still sorry I didn’t buy something when I first moved here, as historically RE prices in this market only go up long term, no matter how you slice it — bubble or no.

He has some valid points in his article, like renting is cheaper than buying in an expensive market — this is true since rents typically don’t rise as fast as values in a hot real estate market since leases can be yearly and one may see monthly increases in value.

He is also right in that there are more expenses in owning a home than in renting, although if you were to rent a single family home, you would probably be responsible for yard maintenance, snow clearing and small repairs, so he is only partially right.

The big problem I have is his argument about price appreciation. If you buy in a hot market, at some point the party will be over and maybe over the next 5 to 10 years, price appreciation may lag since real estate may have gone up too high in some markets and property types, due to overexuberance of purchasers. He alludes to this and he is right in that respect. HOWEVER, his talk about only achieving 5% property value appreciation being inferior to 8 to 12% mutual fund ignores (or forgets) that most — if not virtually all — first time homebuyers, or younger buyers (who are presumably his reading target audience) will have a mortgage. This leverage is key in determining your return on investment.


25% downpayment on a $200,000 house is $50,000.

Assume 5% appreciation over 5 years =

27.7% compounded appreciation.

$200,000 x 27.7% = $55,400. 15.5%, this is more than doubling your $50,000 investment in 5 years.

Over 10 years = 62.9% compounded appreciation.

$200,000 x 62.9% = $125,800. 13% annual return.

Both of these figures beat the upper end of 12% that the author used in estimating mutual fund returns. By the way, most people do not achieve 12% annually on their mutual fund investments. They chase “hot,” meaning advertised, mutual funds that invariably lag after a fresh pile of money is dumped in by people following the performance that is not later duplicated.

This does not take into account mortgage paydown or the situation where one buys mortgage insurance to reduce their downpayment.

Just for laughs, here are the returns on investment for 10% down and 5% down:

5 year
5% down ($10,000) 41.3% + 14.3% return on paydown = 55.6% total return on investment
10% down ($20,000) 28.4% + 8.3% return on paydown = 36.7% ROI

10 year
5% down ($10,000) 27.9% + 16.3% return on paydown = 44.2% ROI
10% down ($20,000) 20.9% + 8.3% return on paydown = 29.2% ROI

*Mortgage paydown of about $45,000 for the 10% downpayment over 10 years or $48,000 for the 5% down over 10 years. Over five years, the 5% down mortgage will have been paid down over $20,000 and the 10% down mortgage will have been reduced by almost $30,000.

Adding those mortgage paydown amounts makes one wonder why everyone isn’t using mortgage insurance.

These are Canadian examples, but you get the idea. In the US, mortgage interest is tax-deductible, making these returns even better!

I agree with the article. One think it fails to mention though is the fact that the money one would be spending on a hefty mortgage rarely goes into investment.

That is, people stretch for a home that leaves them with a mortgage maybe double what they are paying for rent. They are “house poor”, but are forcing themselves to save some money, albeit in a crappy investment (given the current housing conditions). Most people, when staying in an apartment, don’t use the extra money to invest; they go out to eat more, buy nicer cars etc (terrible investments, if they can even be called such).

Nishan, you simpleton.

I would say you probably should invest in a house “if you can’t figure out that a 5% return on real estate is 9X better than an 8% in a mutual fund”, only in la-la land of made up figures and 400 dollar rent, constant housing appreciation, and most importantly interest free loans.

You have it figured out. You go pay 7% down on a house, keep it for a year, and cash in for that 72% ROI. Let us know how it goes. Why not two, three, one hundread houses? Heck, I’ll loan you the money and only ask for 36% (guaranteed) interest on it. You’ll be on easy street…

You sarcastic wit, you.

oh yea of little faith, leave the poor boy alone.he speath the truth!

i both my first investment property for $270k, paid $5k closing costs cash.
was negative on the rent $100/mo for 12 months= $1200.
sold it for $350k after 12 months.
profit = 350-270k = 80k
amount invested = 6200.
thats a 12 times return.
but i stil think your home is not an investment and there are many places you shouldn’t be investing in right NOW.

Hi there,

This is the first article I read on this blog, but I’m sure it’s not going to be the last! I’m glad that you guys put this blog together, it helps a young geek in training tremendously.

Thanks, and keep up the good work!

Nishan Karassik is correct. He’s not talking ROI on amount invested but ROI on actual cash invested – there is a difference. ROI is profit / money invested. Cash ROI is profit / money spent to upkeep investment.

For an example of CROI, we will assume a buying a house for 100k at 7% interest. We will also look at renting a house and investing spare cash in a mutual fund for a year. Lets say an appreciation of 10% for both investments (pretty generous but for simplicities sake).

Person With Loan
Interest payments a year: 7,000
Appreciation @ 10% on 100k: 10,000
CROI = 3,000 profit / 7,000 = 42.85%

Doesn’t take into acount other expenses etc.

Person Renting
Amount invested in a mutual fund over a year: 7,000
Appreciation @ 10% on 7k: 700
CROI = 700 / 7,000 = 10%

Doesn’t take into account the fact that the renter probably wouldn’t have an extra 7,000 left over to invest after rental costs.

Blind freddy can see that buying a house is giving more ‘bang for it’s buck’ as an investment vechile in this scenario.

Why is the CROI for a loan investment more? Because of the power of leverage. In periods of growth, those investments that are leveraged will always outdo those investments which aren’t.

So in fact, Nishan isn’t necessarily arguing about buying a house vs renting a house but more so explaining that using leverage is a better option (and used a house for his example) than not using leverage.

The downsides of leverage is when prices stagnant or fall and also the possible opportunity costs associated with having money tied up in an investment.

You forgot to account for several other important facts:

1) If you buy, at the end of 30 years you no longer have to pay rent *or* a mortgage. For a 25 year old with a life expectancy of ~80 years (and increasing), that means you will have 15 years where you won’t have to pay for your housing costs.

2) Rent will increase due to inflation. When a $1,200 monthly rent increases by just 4% a year, 30 years later it becomes almost $3,750 ($44,908.58 per year). At this point you will have paid more than $800k in rent, and you are going to have to keep paying rent for the rest of your life.

3) Meanwhile, a house will appreciate due to inflation. Even if you pay a lot more in monthly expenses to buy a house when you first start out, 30 years later you will still be WAY ahead. Currently $2000 a month will get you a $300k mortgage (at 5.75% fixed rate, you can get ~4% if you go with a variable) costing you $ 1,750.72 a month, and leaving you $250 a month for other expenses. In 15 years, your $1200 a month rent will rise to over $2000 a month and you will have spent a total of $263,403.52 but your property value will be $0. Meanwhile, if you had spent $2000 a month on a house, the house will have appreciated to a value of ~$500k. Even if you were paying an “interest only” mortgage and hadn’t paid down that $300k mortgage at all, you now have $200k in equity in your house.

Leverage is an important concept, one which makes serious money every year. Cash-on-Cash Returns can be an important factor when looking at buying a house in an appreciating market.

However, please bare in mind that this only works in an appreciating market and at the right price. If you pay too much for a property or you make the wrong bet on which way the market is heading, you could be headed for a rude awakening.

If you believe 10 or 15% price appreciation a year is realistic in your market, I think you’d be wise to consider buying and flipping when the market peaks. Otherwise, make sure the property makes sense on a cashflow basis so that your downside won’t turn you belly up!


Excellent proof of your point. Your point, of course, being: Borrowing money at 7% and making 10% on it is a good deal. I stand corrected. Tomorrow, I house shop.

Interesting points, but I still think I disagree. While paying a mortgage might be more than paying rent, you have to admit that a significant portion of that will come back to you when you sell if you hang on to the property for a few years at least. Even if the house doesn’t appreciate, you will get something back, so even if you’re paying only interest your first two years and your payments equal the price you would pay in rent, by year three, your payments are essentially dropping. By year three in an apartment, they’ve gone up even for those of us in rent control areas. I’ve read several articles like this and in theory, they make sense, but the few people I’ve known who have bought property here in Los Angeles even when the market was high, are now sitting on property that appraises for nearly $100,000 more than they bought it for. In practicality, I’m seeing people I know profit from buying property, while my personal financial situation has improved very little from renting.

you’ve obviously never bought a house before. even with a fully amortized payment on a 30 yrs fixed, the first several years you’re only paying 10% of you’re mortgage payments towards principal payments.
if you’re house doesn’t appreciate, after you pay closing costs, escrow fees and a brokers commission, you will have to pay money to get out of the house. in some cases nearly 8% of the house’s value.
if you’re area has been going up in value for the past several years, you much better off renting. Despite owning over a dozen houses I rent too.

Assuming that you take out the personal factors, it’s not very useful to argue which way is better without putting in some numbers. I still suggest everyone to plug in numbers into my calculator at, and see the results for themselves. I personally believe that housing market in general has PEAKED. It either goes down, or stay stagnated for more than 5 years. However, the coming 2 years will be very TRYING for renters. They may see housing prices don’t go down yet, but simultaneously see their rents go up because of inflation. Rents will be going up for sure because of inflation. I suggest all renters to lock in their rents for a longer period.
Renters are not suckers. The real suckers are the ones that buy into the housing market at the highest peak, hoping to earn a quick buck, but only to wake up 8 years later still as a house slave.
The above is just my personal opinion. However, lower transaction volume in housing market these days usually is a precursor to the drop in price. Use your own judgment, and be extra careful.

A couple of factors to consider:
If you own outright or have a fixed mortgage, you’re largely inflation-proof when it comes to housing costs.
If you lose you job and can’t pay rent/mortgage, it’ll take longer for the bank to repo the home than it will for your landlord to toss you out.

Owning a home (primary residence) will put you ahead of the renters over the long term (20+ years) However, in today’s market, renting is definitely better than buying. Anyone who bought real estate in the last 2-3 years (especially on either coasts) can be in really big trouble if the economy goes into a recession in 2007.

I commend the author on the refreshing view, and on making people think about their financial decisions. I do not agree 100% with the conclusions, but I will say this: You always must look at the cost of what you’re buying. I’m an active investor and see people constantly buying stocks such as Google because “It’s a good company”. Yes, that may be true. And GOOG is very profitable – but at what cost is that investment a good idea? You wouldn’t say, “This Sony television is an excellent TV,” and pay $500,000 for it.

As mentioned in many comments, the period of time you believe you’ll spend in the home is very important. The initial cost is also important. Someone mentioned the leverage on homes: $5k invested shows large returns because the basis for your home is $200k. Something important to remember is that it works similarly on the down side. That is, if the market does correct (and it will – remember “irrational exuberance”?), then even a 5% loss on your $200k basis is 200% of your initial investment. And for many people who leverage themselves, that can mean that you’re stuck in the home, even if jobs get worse in your area, etc. Also, while I don’t know that this is the case, remember that your mortgage is secured by the value of the property. If that property value drops enough, it’s entirely possible that the mortgage company will come asking for something else to secure their investment. Because let’s be honest – people with mortgages don’t own homes. They’re just minority partners with a bank that owns their home.

That said, I’m fortunate enough to own my home outright. It’s not common, but I’ll mention that it is less risky and therefore can be less rewarding. However, if you live in a homestead state (Like Texas), one thing it offers you is complete protection of your assets. All of the money locked up in my house is just that – locked up.

Lots to consider. But again, I truly appreciate the fresh view.

I would just like to add the old adage that living costs ideally shouldn’t be more than 50% of a person’s income, and for a home owner, this includes mortgage, property taxes, insurance, upkeep, utilities. Otherwise, a family isn’t going to have enough disposable income to fund retirement, kids’ college funds, etc. My sneaking suspicion is there are far too many people with no retirement savings, no emergency fund, and carry debt on credit cards and leased cars that are secretly hoping their appreciation in real estate will carry them through. If that’s your situation, you’re speculating and your home is an investment. Very dangerous, and now would be a great time to diversify, downsize, and put your money into some more realistic investment vehicles. If your house is worth a lot on paper but you have an interest only loan, living paycheck to paycheck with little to no other investments, you’re actually “house poor”” and technically no different than a leveraged .com stock broker trading stocks on margin in 1999.

Make no mistake, recent gomebuyers will soon get a rude awakening as adjustable interest rates keep rising making payments unaffordable. Just a 10% correction will put most of these marginal buyers into bankruptcy court. Even at current rates most are being squeezed and don’t even know it yet. Fed Chairman Bernanke will have to make a decision, keep interest rates low to salvage the housing market, or, let interest rates rise to encourage foreigners to hold and invest US dollar investments. We cannot have both! In my view, hyperinflation will be the result, interest rates, set by the market, will hike upward just to keep this farce of a prosperout economy goiing for a little while more. Currently, our country consumes about 80% of the worldwide available investment dollars. Once inflation takes off and investors realize their investments are not keeping up with inflation, let alone a return, they will exit the dollar enmasse. In short, due to our lousy central bank, out of control spending by all forms of government, wild buying and speculation by consumers accumulating unsustainable levels of debt, coupled by virtually no personal savings will result in a deep recession or worse in due course. Where I live, I expect home prices to fall over 50%. Why would I buy a depreciating asset when I can rent and have no other expenses?

What the above ROI calculations show is that leveraging works. That is, when an asset is appreciating at higher rate (10%) than the margin (7%) one’s real return is more than the appreciation.

Big whoop. Now try the same calculation with different appreciation and margin rates, including with smaller appreciation.

The +3% difference between appreciation and interest is anything but guaranteed. If it was guaranteed, banks would not be loaning you money at the lower rate, they would be buying and selling houses to bank in on the higher rate themselves – it’s a better investment from their perspective.

Plus those sell-after-one-year ROI calculations didn’t factor in the 6% realtor fees, which kill flippers in normal markets years.

Or you can do what I did.

sell my overpriced condo in San Diego, and buy several homes in Salt Lake City.

I sold my nice 900 sqft condo for 350k. i’m renting it back for 1450/mo.
i bought several new houses in SLC for around 200-250k that I rent out for $1450/mo!
the homes are appreciating and the condo is depreciating!
best of both worlds.

live where you want, invest where it makes sense!

I find the numbers a bit strange: It costs the same amount to rent out a 900 square foot condo as it does a much larger SFH? Granted, it apparently did cost more. This may be explained by the properties being in two different areas: A condo downtown may cost more, and command higher rent, than a SFH out in the sticks.

So the way that the condos may be “depreciating” while the homes “appreciate” may be a function of (I hate this term) of comparing apples and oranges. It may be possible that prices have peaked in the downtown area while there is still room for growth in the suburbs. Also, city condos and suburban homes have different markets: Singles who don’t care if the city has a lousy public school versus families that want the larger homes.

In either case, both the condo AND SFH’s are way overpriced using the rule of thumb above: The amount of house that should be bought on $1450 rent with the 100:12500 rule is about $181,000. Much less than the $250K purchase price. So there is still plenty of room to go down! (And in the long run, rents will follow purchase prices down just as rents followed purchases prices up even if not at the same rate.)

As an aside: I just went to SLC 2 months ago and did some skiiing. People are really nice in the area and the skiing is incredible.

I looked for something like this when we were moving eariler this year. Our catch is that my husband is in the military.

On the plus side, we get a housing allowance if we choose to live off base. So, hey, someone else’s money, got to be good to use that to buy a house, right?

But…we’ll be here for 3 years at the most. Could be one or two years. It’s hot here so our last electric bill was over $300. We didn’t put much money down and got a 30 yr mortgage, so we’re paying lots of interest and not much else.

If the housing market keeps going up like it has been here, I think it will end up being a good move.

I think another point to consider is what improvements you do on the house. This place wasn’t worn down, but it wasn’t well-maintained either. I hope that by making not-too-costly improvements, we’ll end up offering a well-maintained house which is more appealing and therefore will be worth more.

Oh, and we bought around the holidays and probably will be moving in the summer (typical time for military moves) so that could also benefit us.

One thing about comparing house investing to mutual funds is that a house produces nothing, so its value will follow inflation in the long run. Yes, there are wild ups and downs (when you include inflation). If you invest in a company that actually uses the money to buy capital equipment that can make things, then you have added valeu to the chain and should be able to share in the profit. So if you really want to compare houses to the stock market, you can compare houses in the last few years to stocks bought on margin in the tech bubble- then see who wins.

JR: I used the authors figures, not any that I made up. The $400 was the amount of savings that he claimed could be had by renting. The 5% increase in housing appreciation was also from the author’s statements. Though if you took at 1% appreciation, you are still doing better than the 8% in the quoted mutual fund. No where did I say anything about keeping an investment for only a year, common sense reins when making investments. After all you must consider things like transaction costs, capital gains, which weren’t even considered in the analysis, making the housing purchase argument stronger. Thanks for the compliment, “Sarcastic wit”. Maybe you meant twit, in which case I rescind my thanks. One piece of advise though, JR, learn about leverage whether that is loans from a bank vs all cash, stock options vs stock itself. This will make you money. And don’t, if you can help it, have an investment horizon of only a year.

I am not arguing to blindly purchase a house in any market. I am arguing to look at your return on investments in a true way. I do own my own home, which has appreciated greatly. I have purchase another home with the appreciated asset, but I my home was my first investment, not my only investment. It is ultimately a place to live. I am mostly invested in stocks, which along with options have retruns well above the housing market in the last few years even considering leverage (I learned my lesson and don’t invest in High-Tech stocks or in markets I don’t know much about). Housing has been a great investment vehicle over the past and will in the future, though maybe softer, but the key is to live below your means, invest in what you know and if you know nothing, study and learn.

I’m not trying to be preachy, I am only trying to share what I have learned.

In my experience Banks in general are not very good at picking investment vehicles. Why should they when they can lend $10 for every dollar held? That is their leverage. Banks don’t buy houses, businesses or other management/knowledge related vehicles because that is not their expertise, MBA programs and bank managers are not investment advistors etc. In fact try to start a business with a traditional bank loan. Good luck the only way they will loan you money is through an SBA program and even that is difficult for most banks who don’t specialize in that type of lending. The SBA backs 80% of the loan and the Bank backs 20%, guess how much the bank wants to give you an SBA loan-20%- they can’t loose. They are in the business of lending money not investing. I don’t want banks to start investing my deposited funds, they aren’t any good at it and they know it.

PolishKnight , you’re getting mixed up.

i sold a condo and bought a house 950 miles away. it not just the condo that is depreciating – its the entire area. in Salt lake city, everything is appreciating, not just SFHs. however since SFHs are so much cheaper than condos in San Diego, i bought them instead of condos. a comparable house in san diego would be in the 800k+ range.
rents in SD haven’t kept up with home prices which is why i sold. it doesn’t make sense to own when you can rent for a lot less than the owners mortgage payment.

Overvaluation is a big problem, and not to be underestimated. It’s not only a problem for Northern NJ, but for a number of other metro areas as well. There have been a number of articles from a number of sources about this. (CNN Money, Forbes, and Business Week come to mind). In particular in my area, Washington, D.C. the housing market is estimated to be over inflated by nearly 40%, and prices of condos are expected to drop nearly 30% due to a glut of them entering the market, while the price of a single family home could possibly drop by 15% for similar reasons. This from the Washington Post.

As it stands I’d pay in the neighborhood of 260k for a small one bedroom or studio condo, with townhomes starting at 400k in this area. To start to see anything close to reasonable prices I’d have to commute at least two hours in and two hours back, and even then I’d still probably be strechting myself financially, both for the mortgage and the additional car related costs.

My only other option is to move into some of the less “choice” areas of the city and hope that the crime rates fall and other families and young professionals move in, in addition to assuming that the market is not about to adjust. For me, at this time, in the place buying just doesn’t make sense.

Thank you for pointing out some of the costs and disadvantages of buying vs. renting.

You ignore a couple of points, however.

I suggest you read this report, which does a great job of figuring out the actual cost of buying (and owning). Only when you have this number can you decide whether or not it is cheaper to buy or rent. (Also, is cost the only thing that goes into deciding whether to buy or rent? No.)

Inflation is a big incentive to buy, yet you ignore it.

If you buy today, you have locked in a place to live at today’s prices (assuming you get a fixed-rate mortgage loan). If you rent, you are at the mercy of the value of a dollar – with inflation running 2-3% per year, you’ll probably have to pay more, each year, over the next 30 YEARS.

Plus, you talk about the maintenance cost of owning. Sure, but it’s an average of 2.5%.

You choose to ignore the tax benefits – huh??? You get a deduction for interest, PLUS you get to deduct property taxes. The typical homeowner can deduct 25% of all interest and tax payments. Plus, any profits on a sale are usually completely tax deductible (up to $250,000), so a sale is usually ALL PROFIT.

There is an additional risk to own vs. rent, which has been calculated at about 2% of purchase price.

If you look at that government report, you’ll see that there are a lot of figures to crunch to figure out the true cost of owning.

An economist is better able to analyze this than a blogger, don’t you think?

John K – great job sharing the report. Something caught my eye, however, and that was the charts at the end, where it was clear that since 2000, the cost of owning has skyrocketed, when compared to renting. In many markets, particularly places like San Diego, the ratio of prices to rents has spiked sharply higher and well outside of the hsitorical range.

The reason for this is understandable, with the downward trend of interest rates, many would-be renters looked to “lock in” low cost financing and became home-owners instead. What is really interesting about this, however, is that as interest rates and inflation have trended lower over the entire period studied 1980-2004, the ratio of home prices to rents has remained pretty constant, only spiking since 2001. We should expect that the trend would have been a gradual divergence over the period, as money became cheaper allowing leveraged assets like real estate to appreciate, while rents stagnated along with lower inflation.

This is not what happened, because before 2001 most people took the rational approach that it wasn’t worth it to spend too moch more, after tax, to own than to rent. This is a bubble. The reason for this bubble is the understanding of most people that the Fed took extraordinary steps in 2001-2003 to create liquidity. Since everyone understood this was temporary, they figured it was better to “lock in” at a higher nominal price at a low interest rate than to wait until the market and rates had normalized. Thus, they were willing to pay a significant “owning premium”. Chris’ whole point has been, on purely economic grounds, that premium is not likely to be worth it, since it means paying large amounts of mortgage interest, and tying up huge amounts of capital in a non-performing “asset”, which will also be subject to might higher ancillary expense, such as taxes.

Owners risk the possibility that under a more normal interest rate regime, there will be no buyers. While owners can, in priniciple, “wait it out” this can take a VERY long time, 10 years or more in some cases. In fact, in real dollars, certain markets, like Houston, Texas, have never recovered the hights they reached in 1985, when other short-lived government incentives, like 15 year depreciation, also led to a price bubble and subsequent crash when the temporary stimulus was removed. Not all owners can wait 20 years, and so they may very well be forced to take a leveraged loss.

Nishan, the key element of this calculation is appreciation. Your comments may well be valid for appreciation of 5%, but that very assumption may not be valid.

I live in San Diego and over the last three years, I’ve had friends badger me endlessly to buy a house now, before it’s too late. So far I’ve held out and I’m getting very glad that I did.

The underlying assumption of virtually every argument I’ve heard in support of buying real estate is that it will keep appreciating.
+ God is not making any more land. Demand is increasing and supply is not, therefore it will never go down.
– True over the long term. However, how long can an asset class with a historical appreciation of 10% keep appreciating at 30% before reverting to the mean?
+This place has a nice climate and everybody wants to live here
– Somewhat true, but it ignores the reality that not everybody can affort to. How many people are just dying to move from Alabama to San Diego so that they can earn $60k/year and live in a 1200ft, $500k apartment? If builders keep building and people keep moving out because they can’t afford housing, what will happen to the supply-demand curve?

The reality is that house prices cannot keep rising for very long unless either i. wages increase, or ii. interest rates go down.

Jobs are still flowing to China and India, so don’t count on i), in the US, even if inflation picks up
As for ii), we don’t know what’s going to happen, but I would bet against interest rate cuts any time soon.

Finally, let’s put some numbers on reality. I’m paying $1800 to rent a place that Zillow valued at $605k in November. Right now, it has a Zestimate of $544k. That’s 1.4% appreciation over the last year and -10% appreciation over the last 8 months.

Would you like to do your ROI calculation again, also taking into account property tax, maintenance, closing cost and agent fees?

How long would you say one would need to stay in this house to break even?


Please, at least be honest with yourself. You didn’t buy three years ago, you aren’t buying now.

Odds are great that you will never buy, you definitely don’t see the type.

You could analyze it three days to Sunday, but you just don’t seem the type.

You are over-analyzing the entire situation. Did your parents (or anyone’s) make their decision to buy or not buy, twenty, thirty or sixty years ago based on ROI, appreciation, etc?

No, they based it on their belief they needed a place to live and to raise a family.

And, another thing, there is no “-10 % appreciation” on your place – it wasn’t for sale and it isn’t for sale now. The appreciation is based on purchase price vs. sales price, not some fantasy appreciation zestimate and/or list price.

Do you armchair travel, too?

I agree with a majority of the article and believe that more and more people will have wished they read this article in the next few months. However, I do think you’re minimizing the tax impact of owning a home. Along with your mort. interest you are also able to deduct prop. taxes, state income taxes (if you live in a state with them) and it opens the door for other deductions (charity,etc). Let’s be honest, nobody itemizes unless they have the mortgage interest to get over the st. deduction threshold. Also, when you sell your home any gain (as long as you lived in it for 2 years) is tax free. The money you’re saving and putting in a mutual fund is taxed at best at 15%, more if you have short term gains and any dividends or interest you receive in a year are taxed at your marginal rate.

My family relocated from the mid-west to the west last December. We owned a modest home in a modest priced city for 4 years. Even after paying the broker and all the other expenses we walked away with a check for 50K, totally tax free. This is a modest amount compared to what many regions of the country have experienced. The key is that along with the quality of life issues (I’d rather have my own place for my kids to grow up) the equity is a forced savings. How many people do you know that have the discipline to put away a grand a month and not touch it. I know one, and he has no life.

All that being said, I agree that where we moved to the housing market is ridiculous and my wife and I are very happy renting here, for now. Water finds it level.

I think the costs of home ownership are understated and the cost savings of renting are understated:
If you own a home, in addition to the expenses listed, here are some of the Major Expenses (there are many minor expenses – like gutter cleaning – that add up too):
Insurance (if renters have insurance, it only covers their property in the apartment. They don’t need to insure the apartment itself)
Don’t usually pay all utilities. Don’t have liability if someone trips on the stairs. Have much lower costs if they have to move. Spend much less of their own time on maintenance.

My own thumbnail tally seems to show that you need significant appreciation to make buying a home worthwhile.

The relationship between house prices and rents varies a lot by community. Rents have lagged a lot lately in most cities. With rising interest rates and slowing appreciation, buying a house is defnitly no longer a no brainer.

Does anyone think that renters don’t pay the costs of the houses that they live in? Landlords will, over time, adjust the cost of renting to cover the cost that they incur – utilities, upkeep, taxes and mortgage. If they don’t, owners as a group will lose their properties in large enough numbers to banks who will then resell them to those who will charge rent that reflects the true cost of ownership.

In my experience, most people who find housing prices too high really are arguing that they’re too high in the nice gentrified or trendy areas. But in most big cities, those areas become that way because speculative owners analyze and recognize the potential that exists in currently less desirable areas. This doesn’t mean that because an area is undesireable today it will be one day: which is the same as saying that investors of any sort need to be informed and astute, and prepared to take risks. Renters don’t. If you lack these qualities, then you have the option of paying the mortgage for someone who was, and writing articles about how what you did is, despite the economic realities of the last two centuries, really the best way to do things.

Interesting article, thank you.

My parents bought their house in Richmond, California (San Francisco Bay Area) – which led the nation one year for murders per capita – not a great area, bad schools, but anyways. They bought their house, a small 1200 footer for 170K in 1991. For most of the 90s, they were underwater, houses in the area were going for 140K-150K. They sold it for 525K in 2005, and the person they sold it to flipped it for 650K in 2006.

I wouldn’t buy their house from them at those prices. Sure, you buy a house to live in, but you’d have to be an IDIOT to buy that house at those valuations. It’s a small house built in 1957 in a lousy neighborhood on 0.15 acres that needs work, not close to anything. Those prices are going to drop like a rock – easily cut in half in less than 5 years. Hope the buyers got a 30 year fixed loan, because they’ll be in the house that long before prices ever return to that stupid purchase price.

There are a couple of things that have been overlooked here. First of all, most states have programs for first time home buyers. My wife and I bought a $100k house with no money down and an interest rate of 4.65% (fixed!).
Another important factor is the quality of landlord. I’ve had some good ones, and I’ve had some bad ones, and it’s amazing how slowly a year can seem to pass when you have a bad landlord.
But here’s the big thing for me: after my mortgage is paid off, I don’t have to pay any more! Yes, I know I will still have to maintain it and pay taxes on it, but I suspect that will pale in comparison to what rents will be like in 25 years.

I always said that renting was just a waste of money and you have nothing to show for it. This kinda opened up my thoughts to explore whats best for me in the coming future…

John K,

I noticed that you chose to attack me, not any of the points that I made. That’s fine by me, but it would be more useful to all of us if you would elaborate on why you disagree with me.

None of us can tell the future, so we’ll have to wait and see how this plays out.

Regarding this particular house, you’re right. It is not for sale now and was not for sale last year, so its value is mostly hypothetical. However, Zillow’s Zestimates are based on prices that comparable homes were actually sold for (similar to Kelley Blue Book values for autos) and as such are not completely disconnected from reality.

As for the armchair travel comment; I’ve worked in multiple countries on multiple continents, but that’s hardly relevant to the subject, is it?

omnivore – the strange thing about this housing market is that many people purchasing houses are in fact purchasing thme for prices that they know will have carrying costs higher than rents (negative cashflow). This has happened before. In the 1980s when the highest marginal rate was 50% and the government allowed 15 year depreciation, many high income professionals purchased negative cashflow real estate, because the tax writeoff for the losses plus the depreciation more than covered the monthly outlfows. (I.e. purchase property, rent for $400, pay carrying costs of $500. You are out $100 per month, but got to write this off, getting back $50,, plus depreciation of another $500 per month, which handed you another $250, for a net, after-tax gain of $200).

Tax reform in 1986 cut the top marginal rate to 28% and capped passive losses at $25k, with a phase out for high income people. All of a sudden, lots of real estate was not very valuable, because it couldn’t cover costs, and now you couldn’t claim the tax writeoffs to turn your negative cashflow property into a positive one. The next 10 years saw a crushing depression in home prices in many parts of the country.

The whole point of this thread has been that buying is not ALWAYS the right answer. Because some people are living under the misconception that it is, they are desperate to purchase, driving the markets to new heights that are completely divorced from the fundamentals. The sad thing is, unlike the stock market bubble, which was mostly unleveraged, and therefore didn’t wipe most people out (though it was sure painful). This bubble is in a highly-leveraged asset class, and probably will wipe out lots of folks who should have just kept waiting and saving.

Doug Pedersen:

I don’t think that there’s a disagreement. If you read my post, you’ll see that I did in fact suggest that investors need to be informed and astute. My secondary point was that the time is not the only factor: place is also important. There are always overvalued areas and properties where you can lose, even in a hot market. So I was suggesting what most real estate agents would tell a prospective buyer, and particularly a first time-buyer: flexibility of location will often be a primary determinant of medium to long term value.

The situation you describe, by the way, applies to the US, where write-offs are structured very differently than here in Canada. As far as negative cash flow goes, most first time buyers who purchase with the intention to rent out part of their property are assessed on a mixture of cash flow and personal covenant. In most jurisdictions, mortgage insurance typically involved in first-time high ratio mortgages would not be available for rental-only so it would not apply.

Nevertheless, even those who rent in private homes deal with a rental market where commercial rental rates are a primary determinant of market value. Banks assess GDS based on income from rental units, so increasing costs like energy and borrowing tend to affect all units regardless of the presence of a personal covenant assessment being included.

Oh my, I’ve never seen this many RE permabulls on a single web page. I couldn’t figure it out, then it hit me: The demographics of this site. The commenters are all too young to remember hard times in the RE market.

Here’s my favorite: “Does anyone think that renters don’t pay the costs of the houses that they live in? Landlords will, over time, adjust the cost of renting to cover the cost that they incur – utilities, upkeep, taxes and mortgage. If they don’t, owners as a group will lose their properties in large enough numbers to banks who will then resell them to those who will charge rent that reflects the true cost of ownership”

Rent isn’t dictated by how much a screwed flipper has to charge to become cash flow positive. Rent is dictated by supply and demand. If a screwed flipper can’t cover the monthly nut, they’ll lose the house to the bank who will auction/sell it to someone else who will be subject to the very same laws of supply/demand. I did a PITI calculation earlier today on the property that I rent for $1650/mo. It was over $3200/mo on a 100% LTV 30 year fixed at 6.6%. Change the loan to an 80/20 at 7.6% and 9.6% (quite possible given the Fed moves lately) and the monthly burn rate is now $4k.

Sorry Charlie… Rent in the OC ain’t coming close to $4k/mo on a 1,000 sq ft condo for a LONG time.

In a declining market that remains priced way above rent fundamentals, a LOT of houses sit empty.

JR said:
olorinsledge, Excellent proof of your point. Your point, of course, being: Borrowing money at 7% and making 10% on it is a good deal. I stand corrected. Tomorrow, I house shop.

I get the feeling that’s sarcasm – if not, cool. While that’s only a 3% net return, it’s a 42% cash on cash return. And that’s for any asset your invest in, not just a house.
But it all comes down to this: In an appreciating market, whatever that market might be, leveraged will always win over non-leveraged investments. That market might be shares, bonds, property, land, resources, hens teeth etc. People say, “Ahh you assume appreciation!” Well of course I’m assuming appreciation – putting your ‘spare’ cash into a mutual fund after paying for your rent is assuming appreciation too. The thing is this; in an appreciating market, those not in it miss out… it’s not exactly rocket science is it. So in a property boom, renters lose out.
If a market is falling and you’re in it, well you’re losing money non-leveraged and with leverage you’re losing even more money. If we’re talking property and you’re a renter, chances are you don’t really have much to worry about, so you’re winning or at least break even.
It’s all about due diligence. Bringing it back to the context of this post – renting and putting money into a mutual fund is a great idea (providing the share market is up) when the property market is falling or stagnant. But if the property market is hot, then you have to weigh up whether it wouldn’t be better to buy instead of rent… in most scenarios, it would be better to buy.

Last year, I took note of the concept that, overall, real estate is just a marginal investment but has very exciting “boom times” and “boom places” (from the article at

We purchased our house at the “optimum time”, “optimum place” (So. Cal. beach area, 1986). Just for kicks, I whipped up a quick spreadsheet and compared net gains for buying, as we did, versus renting. Granted, I used a 10% return (possibly high) for invested cash, and didn’t include the mortgage interest deduction. The net result was surprising – almost exactly breakeven for buying versus renting/investing. (True, I also didn’t include equity build-up, but that won’t help us until we have our loan paid off in another 10 years – and a flood or earthquake would drastically upset the balance sheet.)

When I included the mortgage interest deduction, buying was a couple hundred thousand dollars better – but I’m predicting values will “settle” by at least that much over the next few years.

Anyway, the point I’m trying to make is that, no matter how much we’re brainwashed to buy and borrow, even in the best market conditions, it’s a close race and the renters aren’t far behind.

Great article, if you are into counting pennies in the short term. Virtually any property investment will pay off big time long term.

“Virtually any property investment will pay off big time long term.”

Not true – there are occasional opportunities in real estate but, as with the stock market, they are only obvious in hindsight. Also, just as long-term stock market data doesn’t usually include companies that became obsolete or went bankrupt, long-term real estate investment data rarely factors in those investors who were forced out of the market because of cash flow problems. Get ready to watch thousands of foreclosures as speculators are unable to refinance over the next few years.

“Virtually any property investment will pay off big time long term.”

The long-term annual appreciation rate of Real Estate is about 3.5%. In inflation-adjusted terms (ie real dollars), the annual appreciation rate is about .5%. Those who make money in RE do it by timing the market, snapping up bargains, etc — The same way that people make money in other asset classes.

A friend emailed this article to me and gave me a little comfort. My wife and I have rented ever since we got married (7 years), but in that time, we have moved 6 times. We are about to move again, because of my wife heading to med school. So I suppose that renting for us has been a good idea.

I haven’t read all the posts, so maybe someone addressed this already – but here are a couple of red flags with renting that I would like to raise.

1). There is an assumption that the landlord/management company that you rent from will be quick and courteous about repairs and maintnenance. Anyone who has rented much will know that the sales staff will be attentive to your concerns about these issues – maintenance staff can will have a slightly different outlook.

When something happens, say a plumbing issue, unless it threatens the value of the property it never seems to be a priority. Generally, your emergency (like not having hot water) will be viewed as an inconvenience and I don’t know about you guys, but to my wife, no hot water equals emergency.

2). ( I know someone mentioned this) Rent does increase, and I mean as much as $100 to $200 a month (when contract period was up).

3). So, you don’t like the management or they want to jump up your rent or the neighborhood/complex has gone to crap – okay so find another place and move.

So let’s look at the costs of moving…rental truck, do you have enough friends and family to help – no, well hire some hands to load/unload. Fuel for said truck. If you are lucky and the end of the lease falls on a weekend, great – instead of relaxing, you get to move. But if it’s during the week, you are going to use at least one day of vacation etc toward the move. If I only make $52k/year that means it just cost me $200 of my time, not to mention my spouses

Ownership and/or management of properties can change hands very quickly and suddenly. What is good today may be crap tomorrow. If it turns to crap and you just HAVE to get out from under, breaking your lease is going to cost you (plus moving).

Just some thoughts.

These are good points that you make. I’d like to address a few of them…

Generally, your emergency (like not having hot water) will be viewed as an inconvenience and I don’t know about you guys, but to my wife, no hot water equals emergency.

Most (all?) jurisdictions have habitability standards that must be met, otherwise the property owner will be out of compliance with the law. I don’t know if hot water counts, but landlords are usually pretty quick to address this stuff. Losing an on-time paying tenant who doesn’t generate noise complaints and etc is bad for business!

Rent does increase, and I mean as much as $100 to $200 a month (when contract period was up).

Historically, rents in most metro areas are more stable than RE prices. I know this is definitely the case in SoCal.

If it turns to crap and you just HAVE to get out from under, breaking your lease is going to cost you (plus moving).

This is pocket change compared to the transaction costs of buying and selling a home. Yes, homeowners will also need to head for the hills sometimes — bad neighbors, HOA difficulties, nearby development, etc.

This person is leaving out a lot of information. Don’t believe everything you read. First the interest on your loan is a tax deduction, whereas your rent is not. The biggest point he missed however is the fact that depreciation can MAJORLY impact your bottom line. He didnt mention but it completely negates this article. Buy…the VAST majority of financial advisors vehemently disagree with this guy.

most financial planners – i’d say over 50% are lousy.

this topic has been beaten to death but the simple truth is that if you buy an overpriced asset that is set for a correction you will lose money.

if you mortgage is twice what the house would rent for its, overpriced.[assuming you put down 10%]. you’re better off renting because spending a dollar to save 30 cents is stupid.

most of the commenters who are pro-buying sound like renters and are not thinking like investors, which is what this site is about.

Right; don’t believe everything you read.

Deducting mortage interest results in a 10-30% (depends on your tax bracket) discount on your interest payment, but nothing more. These days, in many areas, rent is still far less than the discounted loan payment.

Depreciation is more than just a tax deductible (for rental properties only!) ledger item. It is a physical occurrence – houses wear out and components need to be continually replaced. Bought a kitchen lately? Here, it’s about $30,000 to $100,000.

Most financial advisors consider real estate to be a riskier investment than stocks. Traditionally, financial advisors have advised against real estate investments that don’t return at least 10% of the purchase price, after expenses. Few rental properties generate that kind of cash flow at today’s prices.

Those considering buying a house should never rely upon continuing appreciation, low interest rates, or a quick sale at any point in the future. Only those who can comfortably and enjoyably hold on through thick and thin will eventually come out ok; and with some luck, maybe even come out great.

KO, you have it completely…..RIGHT!

Those considering buying a house should never rely upon continuing appreciation, low interest rates, or a quick sale at any point in the future. Only those who can comfortably and enjoyably hold on through thick and thin will eventually come out ok; and with some luck, maybe even come out great.

As I said in my comments way back in the beginning, two of the big benefits are: 1. Mortgages FORCE you to save something. So, assuming that you are like many people and don’t have a ton of discipline, the mortage can help you save. (Of course, an automatic payroll or checking account deduction can do the same thing). 2. There is an intangible value that you can usually get from owning something (pride perhaps?) that you dont get when you rent. 3. Finally, if you are willing to stick it out for 30 years (assuming you do a normal mortgage and don’t remortgage) you will actually own where you live outright. This can save you upwards of 15-25 years of “rent” if you do it when you are young.

Can someone explain the math below. For example if I bought a house worth $100,000 and it appreciates 5% it will be worth $105,000 at the end of year 1. If I put 5% down originally then I got a $5,000 or a 100% return on my investment. How does that double my investment per the paragraph below?

NOTE] Home price appreciation is magnified by leverage. If housing prices increase 5% and you only put 5% down, you’ve doubled your money your first year on paper

You started with $5,000 equity in the house. At the end of year one you gained an extra $5,000 in appreciation, for a total of $10,000 in equity. If it were possible to hold the property for a year with no expenses and sell with no expenses, you would have doubled your investment.

In real life, $5,000 would be spent on a 5% interest-only loan and the other $5,000 would have been spent on real estate commissions and closing costs.

With only 5% down and 5% appreciation, you’d be very lucky to break even after one year, even assuming that your time is free.

When everything goes right (minimal acquisition costs, favorable loan terms, minimal holding costs, good appreciation, strong seller’s market, and then minimal selling costs) it’s easy to double your money in just one year by buying real esate.

But, when everything’s going right, it’s even easier to double your money playing blackjack.

I couldn’t figure the attraction, until I read his June 1st post, which began…

“However, please bare in mind…”

Just joking. I just spent the week with my 16 yo neice and her friend. Talked about how they could finance their whole retirement just by saving the money they would like to spend on expensive cars. “Yeah, that’s great, but I still want a Range Rover.”

From what I see, a lot of young women like the big car, big house, big debt program. But, of course, Lisa is reading this instead of My Space so she’s probably the exception.

Well, I just sold my house yesterday and I’m renting a home. I have no debt, the interest from my invested home equity will pay for all my monthly expenses (CD’s are paying over 5.5%). I’m renting a 2 year new million dollar home and I’m thinking I’ll be renting for a while until the market cools off. If one plans to live in an area for 5 years or longer, I think you should buy. I was a little upset having to pay 4.5% in commissions to my real estate agent when I sold my house…$50,000 seems like a lot of money for what my agent actually did.

Thanks for the post above. It helps me immensely in the research that I am carrying out.
I am a realtor myself and follow most of the posts with regard to Real Estate Boom.
In most of the posts, there are spins on demographics and interest rate.
Historically, the ratio of housing price to annual income
has been 2.1, with very little variation. In many parts of the country, this ratio is now approaching 10.5!
Our stock/housing pattern appears remarkably similar to the one Japan had 20 years ago. First the stock market busted.
Right after, the real estate market rallied, and it busted too
It is my belief that there is a wider human psychology involved and people are feeding on the basic fear and greed
Your Miami Realtor

We are selling our home in the D.C. area and want to purchase in the NJ or CT area. We have plenty of equity and can afford a substantial home. I think it may be wise to rent for 12 months and then buy. My thinking. In 12 months I believe the bubble will burst and homes in this area will lower by more than 10%. I then can purchase a $600k home for less than $500k. Even if interest rates double as they have in the past I am financing $100k less and when the rates cycle down again the value of the home I purchased will go up and I have a much smaller mortgage to pay and now have even more equity in the home. Thoughts?

Ed, I am no expert, but I think it is a good idea to rent for a little while. But I would be lying if I said that I thought that there was going to be a burst. It seems to me that the market has been cooling down for quite a while in my area (Massachusetts) and that the bubble is not *bursting* but rather just deflating. The same is happening with the interest rate hikes. In the end, last month might look a little different than the month before, but not much different. When you spread changes out over 9-18 months, it is really difficult to “time” a market. So I think that your idea of jumping in after 12 months seems flawed in that respect. But, I wouldn’t necessarily say that it is awful to rent for a period of time first before you buy to see what is going on. Just realize that market-timing is not easy.

Also, you are noting that you will have 100k less to finance, even if rates double.Am I reading your question right – that you are considering an Adjustible Rate Mortgage? I think that is what you are saying – without saying it. And I will go on record saying that I think those things are poison. Here’s why:

1. Inflation rates are crazy right now. So the salary you earn can afford less and less consumer goods. The result is that you have to spend more and more money to buy the same goods – leaving less to pay your mortgage and save for retirement.

2. Interest rates are going up with no expected end in sight. It is likely that they will stay at a high level for quite some time. It is likely that if something happens to you, the debt will become unmanageable.

3. Unless you have a fantastic job and are 100% sure of your job security – its risky. People are more and more demanding of companies now. Raises are often smaller and income doesn’t go as far as it used to.

As a final note – I don’t think owning a huge, expensive home is always the best idea. Furthermore, in strict terms of diversification, consider how much money is in your retirement fund. Personally, until i have about 30% of my home’s value in my retirement fund, I really dont want to upgrade my house. Just seems to risky to be that lop-sided in terms of asset allocation. You might want to consider that.

It’s just as hard to time the real estate market as it is to time the stock market. There’s a possibility that values will continue to increase and a stronger possibility that values will decrease for the next ten years.

The right time to buy is:

When the price of a home is less than, or equal to, the value received by you, personally

When the anticipated cash flow is comfortable without any farfetched assumptions, like price appreciation or a reduction in interest rates

And (the point of this article), the net benefits of buying are greater than the net benefits of a reasonable alternative

i posted a somewhat related post on my blog.

use the mentioned links to track the changes in your market. RE markets move very slowly so you should be able to see if the prices are going downwards or not. If they are trending down, then they’ll continue to do so for quite a while.

Interest rates may raise, keeping your monthly payment constant, but you’ll owe less money on the house.

Some good info in the last couple of posts.

Let me add that I think the “wait-and-see” approach is a good one. The year-over-year median has yet to reflect price declines (except in a few isolated instances) but I can tell you that we’re starting to see some real price reductions in all market segments here in SoCal and in many areas across the US.

Granted, $30k off of last summer’s selling price of $500k (for example) isn’t a huge reduction, but this is real money that has to be repaid at some point. If the $500k unit can be rented for $1700/mo, the renter of that unit just saved a pile of cash versus the buyer.

Inre market timing: While I agree that timing is generally a dubious strategy, it makes sense to stay out of a market that has wildly departed from its fundamentals. As it stands, inventory is rising, credit is tightening (look for new lending regs in 60-90 days that will make toxic time-bomb loans harder to get), homebuilders are still building, population growth is flat in many areas, sales are down, and foreclosures are up. There are many forces contributing to downward price pressure right now. Until the ballooning inventory gets under control, homes will not continue to appreciate at a rate that will justify their purchase at this time.

I’d like to see some research comparing market trends with the number of market trend articles.

When the market is going up (for real estate that was 1986-1989 and 1999-2005, and for the stock market it was 1995-1999) there are numerous articles by people who have it all figured out.

When the market is going down, few people want to talk about predicting trends.

In a climbing market, it’s hard to lose and everybody’s an expert with a clever explanation for their success. In 1994, a house was just a house and it was hard to find much written about real estate trends. It was the best of times to buy, but maybe that’s because people were buying properties to live in, not as a form of gambling.

With ever changing data samples and an infinite number of variables, there aren’t many meaningful statistics regarding real estate cycles.

In 1995 we rented a 2 Br house for $450 a month, a few months later the landlord offered to sel it to us for $85K.

We declined their offer since the mortgage payment would have been about $600 a month.

3 years later they sold the house for $145K and kicked us out.

Were we smarter by renting?

BTW the guy they sold the house to, added a 3rd Br and remodeled the kicthen, new shingles on the roof, a little landscaping and re-sold the house within 6 months for $250K.

We learned our lessson and bought a 4 Br dump from a motivated seller for $100K, spent $5K on fixup, and 5 yrs later its now valued at $290K.
Glad we didnt keep renting.

In some markets its better to rent, (like now) and renting is about the only way you can maintain some privacy,if you rent a garage apt from a private individual, and it doesnt require changing all the utilities in your name.

In hindsight, you played your cards almost exactly right, but don’t confuse good luck with accurate forecasting.

Everyone’s kicking themselves for not buying more property between 1993 and 1997 but if you remember, most people were still suffering from shell-shock following the market collapse that began in 1990.

Now, as then, real estate should be evaluated without depending on appreciation. If the decision to purchase makes sense financially, it doesn’t matter which way the market is going.

Congratulations on the lucky timing of your purchase, but don’t take it to mean that all buyers will have the same good fortune. Compare it to the purchase of tech stocks in the late 1990’s. Everyone was an expert, right up until 1999.

It all goes back to that Buffet quote. “Be fearful when others are greedy. Be greedy when others are fearful”

The time to be greedy is coming.

If you;re buying for a primary residence, it doesnt have to be lucky timing, just wise buying with watching trends.

If you are buying for a primairy residence and plan to stay a while, the gain is only on paper and is meaningless, my primairy residence has tripled in value, big deal, if I sold it I would have to spend all of it and then some to buy the house across the street, so it really means nothing unless you sell and move to a location with lower priced homes.(& lower wages)

But even if the value of my house drops to less than what Ipaid for it 6 years ago, again, its on paper, until I sell its meaningless, and I still have 3/4 acre with a 4 Br house on it.
Or 7 acres with a 1Br on it or whatever.

Its still there and useable, unlike when you really gamble, and hand your real money over to a total stranger who gives you a scrap of paper promising to maybe, someday pay you back an amount that is determined by how much the companies lie about their profit.

No stock market for me, thanks.
Maybe Buffetts Berkshire, but thats it.

But you make your money when you buy, not when you sell.
With both primary residences and rental property.

Its gotta cash flow from day one or I ain’t buying it.
And anyone who buys a property to rent, knowing they are gonna lose money every month is a moron.

ANd you dont want to buy at the top of the market.
I have money Im itching to invest in more property, but I’m waiting,,

In , say 12-18 months, all those people with varible rate loans will lose their house, and after the lender gets it back and it sits empty for months and gets vandalized a few times, and the city places a lien aganst the property because the city has to hire someone to mow the grass every week, then the lender will sell it to someone for a good deal.

I try to never pay more than 70% of retail for anything, houses, cars, TV’s whatever.

No reason to pay retail, there is always a motivated seller out there somewhere, who will sell for 30% off market value.

But Buffet is right, “Buy when everyone else is selling, and sell when everyone else is buying.”

All you gotta do is read, when 80% of the people buying condos & houses are not planning to live there, the greater fool therory is at work big time, and you should stay away. & sit on your money a while.

The good thing about renting is that if the neighbor from hell moves in next door, or your in-laws start shopping for a house nearby, you can hit the road.

But the advice about locking in a long lease is odd, I have a friend that has 30 rental units and he does month to month only, much easier to evict them if you wat them out, and if a rtennant wants to move, and still has 18 months on the lease, they are gonna just walk anyway, so the lease is worthless.

Its also sad to hear the old mantra over and over, “Your home is your biggest asset/investmentt”

A: its not an asset, its a liability, an asset pays YOU money every month, and

B: If your home is your largest asset, that just means that you dont have ANY other assets.

A: its not an asset, its a liability, an asset pays YOU money every month, and

B: If your home is your largest asset, that just means that you dont have ANY other assets.

Agreed. It’s not [usually] an investment, it’s a forced savings plan.

That is, unless you buy using a suicide loan that doesn’t amortize. In which case you’ve purchased a cumbersome futures contract on your local RE market.

its not really a forced savings plan until you “cash out”. and unless you’re planning on living in a tent, there’s no point to that.

it really shouldn’t be considered as an asset. instead you should put some effort into finding out suitable investments and investing in those instead.

buying a rental property that cashflows is a better savings plan. it should pay for itself. I have 2 homes in indiana on 30 yr amortizing loans. i paid around 20k down and they generate around $100/mo cashflow after all expenses. in 30 yrs they’ll be paid off and worth a lot more. I bought them at a 40% discount to begin with.

Thats a real investment. Not an over-priced house in an area thats about to crash.

I live in So Cal where no one would purchase a home if your 12500:100 ratio was the rule. In a decent location, renting a one bedroom 1000 sq.ft. home will cost you around $1,200. 12 times 12500 is around $150,000. There is no way a one bedroom home will ever cost as little as $150,000, let alone $450,000.

I know too many elderly people that did not purchase a house and lost money in investments. You can lose money in high risk investments, and you will only receive 4% in solid low risk investments. That’s not enough to survive or even waste your money on. You can’t lose on making the purchase, the housing market always increases.

You need to think about buying a home with multiple bedrooms. Find a roommate if you need to! No matter if you buy in the worst of markets, you will make a large return on buying in the long run. Find a way to make it work and buying is the most solid way of investing your money without risk of losing it. I don’t know about you, but I do NOT want to be that elderly person who can’t find a job because of my age, who rented their home based on your philosophy and has absolutely no equity, and lost a lot of their money on financial investments that promised large returns.

Great argument though.

I keep a close eye on the So Cal market, and guess what? No one (almost) is buying. Saw four deals in the last month that finally sold at 15-20% lower than 2005 prices.

One was a nice three bedroom home in Thousand Oaks that sold for just over $500,000 and the market hasn’t even “really” started dropping yet! Four months ago several similar homes sold at over $650,000. That same home, on a beautiful cul-de-sac with great neighbors, will be at the $450,000 you mention in no time and might even get close to the 12500 factor in the next few years.

Many who bought at the last peak, end of 1989, were down 30-50% in 1994 and didn’t come back above water until 1999. And 1989’s price run up didn’t come close to the one we just went through. For people buying right now, based on last time, I think a 10 year recovery is optimistic.

Read the article I mention in post #92, above. And check out the long term appreciation rates for five “bubble-proof” markets from 1949-2006 at
where they cite a national average appreciation rate of 2.3% and 3-5% for their five selected markets. Real estate is not a sure thing, just another (and sometimes pretty good) way to save and take advantage of compounding returns.

Real estate buys should make sense. Investment properties should produce a return that competes with other financial instruments and homes should cost just slightly more to buy than to rent. These fundamentals get thrown to the wind during the emotional boom times, but when buyers become dispassionate, the market always gravitates back towards those determinants of a property’s “true” value.

This is a great writeup. Especially with all of the loan programs out there today. Understanding how to calculate the actuality of the situation is essential. Alot of people in these recent times in many areas have lost sight of the long term due to counting on equity appreciation, which is fine as long as it continues. When the luck runs out though, it is imperitive to understand what you have pointed out.

very interesting commentary. John makes some good points that the long term trend with property is upwards, and that perhaps you need to consider appreciation in your calculations. Aswell, home buying is not always about the pure finance of the decision, there is always some emotional aspect.

But, perhaps that is the point here, try to make unemotional decisions about your money, if you want to come out in front.

However, not adding the potential for appreciation in your discussion makes it a little loose.

Because, as kathaclsym wrote if you buy a fixer-upper and can work on it yourself and gain good appreciation.. or simply live in your house for 10 years..

I have to disagree Chris, even if people are wasting some of their PITI on fees to the bank some of the money goes into their property, whereas with renting none of your money is tied to equity. I will say that the minimal amount of equity you will receive as a result of owning may not be worth the trouble of securing a loan however.

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[…] So when I read the InvestorGeek post “Misconception: Renting is for Suckers”, my heart was filled with interest. You’ve heard all the reasons that people want to stop renting. “I don’t want to waste my money.” Heck, you may have even said them yourself. Many of my friends are reaching that point in their lives where they’re considering buying a home. However it’s unfortunate that so many choose to buy over rent, especially in this expensive market, because many well-intentioned people are buying homes that are actually damaging their finances. […]

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[…] Now, feel free to jump all over me for the assumptions I made if you want to. This is intended to be a simple example using low, but comparable numbers.  One thing I would like to emphasize is that variations in rents, interest rate, home appreciation rates, tax rates, and market performance can change the result of this evaluation.  For another writeup on the rent vs buy debate, head on over to InvestorGeeks and read Misconception: Renting is for Suckers. […]

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