Renting to get Rich

[Storm]

Interesting article on Reuters today about a professor that did a study on what was a better investment, renting or owning a house:

http://finance.yahoo.com/news/new-ameri ... -rich.html

Money quote:

"It's the American Dream to own a home, but whoever said that didn't do the analysis on it," says Arzaga, knowing he's taking a contrarian stance to conventional wisdom.

Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, "100 percent of the time it was better to rent, rather than own."

That's right: 100 percent.

[moda0306]

Right now in my home I can get a 7-year ARM that will bring my payment to $400 more than I get to rent out the lower-level of my home.  $300 of that $400 would be loan pay-down.

My old apartment is now going for $1,100 per month, and it's about the same size as my main floor, so I live in a much nicer 1,000 square feet than I used to for less.

I probably save a couple grand per year in taxes to boot.

I know my example is a bit of a mix of worlds, and the 20% down I'd have on my home is money that could otherwise be working for me, but I am glad I own right now, if no other reason than the improvement of cashflows with one very good renter downstairs.

Of course, most people that go from their $1,000 per month, 1,000 sf apartment to a 2,500 sf home and don't rent any of it out are going to pay quite a bit more over time.  I think if you compare apples to apples, though... at least where I live... most people will save over time by owning.

[Tyler]

http://www.nytimes.com/interactive/busi ... lator.html

[6 Iron]

I have no trouble believing that for many, if not most, renting may be a better financial choice, but I am dubious of any result of 100%; it sounds more like a Saddam Hussein election than a scientific study.

Interesting article on Reuters today about a professor that did a study on what was a better investment, renting or owning a house:

http://finance.yahoo.com/news/new-ameri ... -rich.html

Money quote:

"It's the American Dream to own a home, but whoever said that didn't do the analysis on it," says Arzaga, knowing he's taking a contrarian stance to conventional wisdom.

Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, "100 percent of the time it was better to rent, rather than own."

That's right: 100 percent.

[MediumTex]

There are intangible aspects to home ownership that are hard to value.

I like being able to change things about my home without asking a landlord.  I like not having to worry about a landlord raising my rent or unilaterally deciding that dogs are no longer allowed.

I also like that home ownership makes the overall neighborhood less transitory, which can make it a nicer place to live.

Ultimately, there are things about home ownership when compared to renting that are sort of like comparing a luxury car to an economy car and pointing out that one is cheaper than the other without pointing out any other differences.

[moda0306]

If somebody is generating enough state income tax that most or all of their mortgage interest and property taxes are deductible, people with a mortgage in high income tax brackets could be looking at a sizeable tax-benefit to their mortgage payment... about 40% of the deductible portion of their payment for high-income homeowners.

If a $2,000 monthly payment on a nice home is about $1,400 taxes and interest, then the tax-benefit of a someone in the 40% fed/state bracket would be $560 per month, or over a quarter of the payment itself.

Not everyone fits into this category, but I think peoople need to bring taxes in to get the full effect...

[Storm]

There are intangible aspects to home ownership that are hard to value.

I like being able to change things about my home without asking a landlord.  I like not having to worry about a landlord raising my rent or unilaterally deciding that dogs are no longer allowed.

I also like that home ownership makes the overall neighborhood less transitory, which can make it a nicer place to live.

Ultimately, there are things about home ownership when compared to renting that are sort of like comparing a luxury car to an economy car and pointing out that one is cheaper than the other without pointing out any other differences.

The intangibles are really the reason you should buy a house.  If you need the space; if you have hobbies that require modifications to the house; if you like being able to choose your own paint colors and appliances; if you want the security of knowing you can live in the same place for a couple decades - these are all good reasons to own a house.

The only thing I wish people would get over is the dinner party conversation that says "a house is always a good investment."  The truth is, for people that are weak-willed and have difficulty saving, a house is probably a good idea because it's a forced savings plan.  But, for those of us that are strong-willed enough to already save 30-40% of our income, it is demonstrably not the best thing we can do with that money.

This is all, of course, assuming that you purchase a house as a place to live, and that you're saving 30-40% on top of your mortgage payment.

[Storm]

Right now in my home I can get a 7-year ARM that will bring my payment to $400 more than I get to rent out the lower-level of my home.  $300 of that $400 would be loan pay-down.

My old apartment is now going for $1,100 per month, and it's about the same size as my main floor, so I live in a much nicer 1,000 square feet than I used to for less.

I probably save a couple grand per year in taxes to boot.

I know my example is a bit of a mix of worlds, and the 20% down I'd have on my home is money that could otherwise be working for me, but I am glad I own right now, if no other reason than the improvement of cashflows with one very good renter downstairs.

Of course, most people that go from their $1,000 per month, 1,000 sf apartment to a 2,500 sf home and don't rent any of it out are going to pay quite a bit more over time.  I think if you compare apples to apples, though... at least where I live... most people will save over time by owning.

Moda, you definitely have a pretty smart setup there, however, one thing you might not have contemplated is the opportunity cost of the time you need to spend "being a landlord."  Let's say I'm an accountant, and I can moonlight doing taxes for $50 an hour.  If I spent 10 hours a month doing various landlord duties like making repairs, etc, that's a $500 monthly opportunity cost that I'm losing and should probably be factored into any net gain you get from being a landlord.

A lot of people think owning rental properties is a get rich quick scheme, but the reality is that it's a full time job if you own more than a few of them.

[Storm]

So I sell my home to my son, and then he rents it to me at say a 5% of value market rate (that rises with inflation).

I have to secure a real 5% return on those funds just to cover the rent.
My son has a investment that (generally) rises with inflation, and is paying a 5% (gross) yield.

100 percent of the time it was better to rent, rather than own

Implies therefore that I can secure a 5% real reward from the proceeds of having sold my home and invested those funds elsewhere !!!

Yeah - right !!

You're assuming a bunch of things - first, that you own your home outright and are not paying any type of mortgage interest, taxes, or fees.  Second, that you can rent the house at 5% of sales price.  In the US most homes in California would be lucky to get 2% of the sales price.

[moda0306]

Storm,

It's the house I live in so I'm not sure how many repairs I'd have to do that wouldn't have to be done anyway, but your point is 100% correct for someone to consider... but I lucked out and literally have the best renter you could imagine... clean, quiet, nice, almost never home, keeps to herself, and pays on time.

I definitely agree that if people are going to err on one side or another, renting certainly offers much, much smaller margins of error, and is the safer choice.

For me, because I love grilling, know taxes, don't mind renters, can do wood floors and have a VERY handy father-in-law, it was a pretty easy choice.

I don't have kids either, so introducing a stranger into the household wasn't an issue.

[Tyler]

Once you account for property tax, insurance, and upkeep expenses, I would have to pay 50-60% more a month (using a 30 year mortgage) to purchase the exact same house I currently rent in the Bay Area. The tax deduction would help, but not enough to make sense.  Sure, houses here can make you good money in the long term, but I don't plan on living here long enough to benefit from that. 

Also considering the volatile housing market in this area, I have no idea why people would buy out here if the decision was based on finances alone. I miss owning a home for all the reasons mentioned, but I'll move out of the area before I ever consider buying a home. 

Actually, that's my double-secret plan for early retirement - earn a Silicon Valley salary in the short term, but plan for a low-cost Texas lifestyle in the long term.  That long-term payoff is a lot more valuable to me than worrying about whether I can redecorate now.  So I guess I really am renting to get rich. 

[shoestring]

I'm a long time renter hoping to one day be an owner.  Truth be told, here's reasons why I haven't made the jump:

1.  Life is too unpredictable.  I've had 4 addresses in the past 8 years.  Note that I'm a fancy white collar type with an advanced degree to boot.  And here's the thing:  I hate moving with a burning passion, every time I do it it's because someone else screwed up.  Residential real estate isn't like a share of 3M stock or a T bill, it's rather illiquid in many instances.

2.  Can't do it on my own terms.  Seriously, I very much want to pay cash, but as a compromise I would allow myself 20% down and a fixed 15 or 20 year note for the rest.  Those are my terms.  Until I can enact them, I will stay the course.

3.  You have to game the credit system for a year or longer beforehand to get your best deal.  I have kind of a problem because I don't use a lot of credit, I have a decent score but I don't have an amazing 750+ score.  I'm aware that there are ways to game the system to drive your score up, but they require some very counterintuitive actions.  That’s an idea for another thread.

Owning confers more utility than renting, it is simply more luxurious.  That’s my motive, really.  That and I like the idea of maybe being able to pay for a place I could live in years of my life when I’m likely to earn money, and not having to come up with the monthly payments later in life when I’m more likely to be unable to manage them.

[Storm]

I'm a long time renter hoping to one day be an owner.  Truth be told, here's reasons why I haven't made the jump:

1.  Life is too unpredictable.  I've had 4 addresses in the past 8 years.  Note that I'm a fancy white collar type with an advanced degree to boot.  And here's the thing:  I hate moving with a burning passion, every time I do it it's because someone else screwed up.  Residential real estate isn't like a share of 3M stock or a T bill, it's rather illiquid in many instances.

2.  Can't do it on my own terms.  Seriously, I very much want to pay cash, but as a compromise I would allow myself 20% down and a fixed 15 or 20 year note for the rest.  Those are my terms.  Until I can enact them, I will stay the course.

3.  You have to game the credit system for a year or longer beforehand to get your best deal.  I have kind of a problem because I don't use a lot of credit, I have a decent score but I don't have an amazing 750+ score.  I'm aware that there are ways to game the system to drive your score up, but they require some very counterintuitive actions.  That’s an idea for another thread.

Owning confers more utility than renting, it is simply more luxurious.  That’s my motive, really.  That and I like the idea of maybe being able to pay for a place I could live in years of my life when I’m likely to earn money, and not having to come up with the monthly payments later in life when I’m more likely to be unable to manage them.

Your reasons mirror mine.  This is the longest amount of time I've lived in one place since I started my professional career; around 7 years.

I would really like to see that "how to get a good credit rating" thread you mentioned in #3.  I have basically the same problem - my credit score hovers around low 700s simply because I only have an auto loan and 2 credit cards which I pay in full every month.  Apparently I don't have a good credit score because I don't really use credit.  It's funny that in order to get a really good score you need to maintain a revolving balance and not just pay it off in full every month, so I'd be very interested in ways to boost my credit score without paying interest, if that is possible.

[cowboyhat]

I think shoestring makes a good point. Once you finally own a house you are only on the hook for taxes, insurance, and upkeep. If you are renting you are paying for those things too, but also return on the owner's investment. The point is that when you finally really own a house your cash flow needs are reduced by the cost of the mortgage. Unless you have to move, reduced need for cash flow makes you more financially bullet proof, which is the point of PP investing.

[MediumTex]

A house that you own is a bit like a lottery ticket that you can live in.

I once won about $30,000 playing this lottery, but in several other tries I have only obtained shelter.

[Storm]

I think shoestring makes a good point. Once you finally own a house you are only on the hook for taxes, insurance, and upkeep. If you are renting you are paying for those things too, but also return on the owner's investment. The point is that when you finally really own a house your cash flow needs are reduced by the cost of the mortgage. Unless you have to move, reduced need for cash flow makes you more financially bullet proof, which is the point of PP investing.

Actually, you should be thinking of the opportunity cost of the equity in your home, if you own it free and clear.  Let's say I have a $100,000 home, owned free and clear.  Is the rent saved worth $10K a year + taxes, insurance, and upkeep?  Let's say $13,500 a year considering 0.5% insurance, 1.5% taxes, and 1.5% upkeep?  Because, if it would cost you less than $13,500 a year to rent that same house, you'd be far better off taking a 100% loan against the house and putting it in the PP.

This is a simple example, but on the east and west coasts, it gets far worse.  To buy a nice house in a nice neighborhood, it would cost me $800,000 here, plus about $10K a year in taxes, another $10K in maintenance, etc.  Yet, I can rent the same thing for $3000 a month.  $800,000 in a PP can make over $6K a month, conservatively (actually $6,200 at 9.3% CAGR).  So, who's smarter?  The guy who owns his $800K house outright?  Or the guy who rents it from him and puts all his savings in the PP?

Opportunity cost.  That's the key.