9 ms·

Is it better to buy or rent?

88 points by matthijs_ 11y ago

lbradstreet 11y ago
I've always wanted a model like this to point people to. I don't have a dog in the buy/rent column, but I feel like most of these decisions are made without a regard for many pertinent considerations. The main one that bugs me is how long you will likely stay in a place. Completely disregarding market effects, if you're not going to hold onto it long then it's probably not going to work out.
saurik 11y ago
16 hours ago: https://news.ycombinator.com/item?id=9741374 https://news.ycombinator.com/item?id=9741374 20 hours ago: https://news.ycombinator.com/item?id=9739544 https://news.ycombinator.com/item?id=9739544 393 days ago: https://news.ycombinator.com/item?id=7783201 https://news.ycombinator.com/item?id=7783201 1775 days ago: https://news.ycombinator.com/item?id=1586757 https://news.ycombinator.com/item?id=1586757 1884 days ago: https://news.ycombinator.com/item?id=1283190 https://news.ycombinator.com/item?id=1283190
- MrBuddyCasino 11y ago
  Important comment from an earlier thread: don't ignore the human factor. Buying instead of renting forces you to live more frugal, which is a reason why people who buy are often better off financially when they retire.
  - nkozyra 11y ago
    > Buying instead of renting forces you to live more frugal As a home owner, I'm going to ask someone to elucidate on this sentiment.
    - jessriedel 11y ago
      The idea is that you are contractually constrained to invest into a long-term asset (the house) on a monthly basis. In principle people who rent are paying less each month and should on average do just as well if they invest that money elsewhere, but in practice they tend to spent the extra money. Once they reach retirement, they have fewer assets.
      - nkozyra 11y ago
        That's probably true for most periods in history, but we're still within a much-receded housing economy. When I bought my house, my rent was a couple hundred bucks more and with insurance + taxes I ended up paying ~ $30 more a month for more than double the space and, of course, actual assets. There are places where this doesn't make sense, and there are times where it absolutely doesn't make sense, but present day is a lot different. My anecdote of paying less (or slightly more) in mortgage + associated versus rent is not all that uncommon these days. The real hidden cost, if you ask me, is the way it changes your sense of mobility.
        Happydayz 11y ago
        Yes, but there is also the opportunity cost of your downpayment, the transaction costs of getting into and out of a house, and maintenance. Oh man, maintenance. Ref - transaction costs. You have to figure it will cost you around ~8% of the value of a property to both get into and out of it. This does not include the cost of movers. With a rental your transaction costs might be $50 for the apartment application fee.
        gambiting 11y ago
        I wish - I'm currently renting a house for 1200 pounds/month(so...1900 USD per month) and the agency took $1000 just to take the property off the market("admin fee" - non-returnable, doesn't go towards the deposit, it's just money down the drain really), then 1 month rent as deposit, and 1 month rent in advance. So really, I spent nearly $6k just to start renting a place. I'm really considering a mortgage, but don't have money for the downpayment. Our mortgage payments would be actually less than what we pay for rent now.
    - refurb 11y ago
      Here is my take.... 1. People think they can afford to buy a place at $X 2. People find a place at $X+Y and say "it'll be tough, but I love this place" 3. People find out actually owning a house costs $X+$Y+$Z and they can barely make their house payments and supporting costs 4. Eventually (after enough mortgage payments) your principal payments become large enough to take on the form of "forced savings" I think this might work for some, but there are plenty of examples where people lose their homes because they underestimated the costs. Someone get sicks and goes on LT disability at 60% of their salary and end up missing mortgage payments.
      - branchless 11y ago
        This is just nuts.
        ha470 11y ago
        Agreed, this is an insane (and insanely stressful) way of saving.
      - Cherian 11y ago
        Even in this case, isn’t there a reasonably good chance the person could have sold it for 10% more than ($X+$Y+$Z)[1] at the time of the crisis? The lender and the loaner will part with the equity based on the mortgage payments over the years. Based on cursory look into Redfin data, homes in the Bay Area are vanishing in 5-12 days, selling at 100-300K above the listed price. [1] I hope we don’t cite recession here.
        refurb 11y ago
        In the bay area over the last 5 years? Sure. Across much of the US? Probably not. Don't forget the average cost of selling a house is 6%. Buy a place for $500K and if the value of the house doesn't go up by at least 6% you've lost money. That doesn't include all the other costs associated with buying a new house (moving costs, etc).
        11y ago
  - frobozz 11y ago
    I was no more frugal having bought a house, than when I was putting all my money away towards a deposit on a house, probably even less so. I would have thought that the biggest reasons were (roughly) freezing your shelter expense against inflation, and putting an upper limit on how long you pay for shelter. i.e. If I rent a £1000PCM flat for the rest of my life, my bill for shelter will continue to be roughly £1000PCM in today's money for the rest of my life. If I buy a house with a £1000PCM mortgage payment, it will remain roughly £1000PCM for the rest the mortgage (though current low interest rates mean that it probably won't), which, in 25 years time could be worth just over half as much as it is now. And in 25 years time, I won't have to spend on shelter any more. I will have maintenance costs to pay for, but they are unlikely to equate more than £1000PCM in today's money over my lifetime. So, where M is homeowner maintenance costs, someone with N+M living expenses is more likely to be better off than someone with £1000+N living expenses.
swingbridge 11y ago
It's good to get people thinking about all the things included in the calculator. Most people are totally clueless when it comes to the real cost/value of owning. They only see what someone bought a property for and what it sold for some time later. A home you live in is almost always a net cost. It's not really an investment so much as its a cost avoidance (vs renting). Buying more house than you need "because this is an investment" is almost always a bad idea if you live in the home and thus are the one footing the bigger tax bill, interest, maintenance, utilities, improvements...
- ekianjo 11y ago
  > A home you live in is almost always a net cost. Plus it "prevents" you from moving somewhere else. Or let's say, it increases the friction of moving somewhere else. Most home owners stay at the same place for the rest of their lives.
  - jbb555 11y ago
    On the plus side, once you've found somewhere you like you can stay there as long as you want. If you rent it's up to the owner how long you can live there
    - ekianjo 11y ago
      True, but there's always the risk that where you like living changes over time and becomes HELL 20-30 years down the road. And I have seen this happen among several of my family members. When you rent, sure, you can't stay forever, but you have visibility at 2 years down the road (depends on the country where you live, but where I do the owner cannot get you out for the duration of your lease, and that's usually 2 years).
  - vonmoltke 11y ago
    There are a whole lot of other factors that increase friction more than owning your domicile, and those factors tend to be stronger with people who are motivated to buy: - Deep networks of friends - Strong community ties - Strong local family ties - Children with their attendant social networks - General aversion to moving frequently Also, the idea that "most" homeowners never leave is antiquated. Nearly everyone I know who has bought a property has bought more than one before 40.
logicchains 11y ago
Does this take into account the risk of a housing market crash? For me, the biggest reason for renting rather than buying is to avoid putting all my bags in one basket; I wouldn't buy $500k worth of shares of one company, so spending $500k on a single house seems similarly risky.
- refurb 11y ago
  You're looking at it the exact right way. Risk is a two sided-coin. If the local housing market does well, you can make out like a bandit. If it doesn't, you can lose a lot of money. No different than owning $500K worth of share in a public company. Nothing wrong with buying a house, but people should be careful not to have their net worth all tied up in a single asset (house or not). The one rule I've heard is 90 minus your age. When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement. Too risky.
  - cowls 11y ago
    I disagree, this view is too simplistic. It's very different to owning shares in a company. You have to either buy a house or rent. You cant opt out entirely, whereas you can with shares. By choosing to rent, you are betting on the housing market being stagnant or falling, if house prices shoot up and you opted to rent, you will need to now pay higher rents or a bigger mortgage. So there is risk in renting too If you decided to rent in london instead of buying 3 years ago, you'd be tens of thousands down
    - to3m 11y ago
      Why will rents go up, when they could have gone up already?
      - cloudwalking 11y ago
        Because every day there are more people and more jobs but not more land.
      - 11y ago
jbb555 11y ago
The money is certainly important. But buying is better than renting in many ways. Want to rip out your kitchen and have a new one? Want to pave part of the garden? Want to move a wall? Want to paint it all, or fit blinds? If you own it you can do all that. If you rent you have to ask permission which you might not get. Plus why spend money on somewhere you don't own?
- wazoox 11y ago
  And when the factory employing most of the people in the town closes down, you're stuck with a virtually worthless property forever. Buying may have real downsides when you need to work for a living...
- rm999 11y ago
  Renting is the best option for flexibility. Want to add a bedroom? Want to change neighborhoods? Just lost your job and want to downgrade? Want to move closer to your new job, or an entirely new state? These are all good, common use-cases for renting. BTW, a lot of landlords will let you modify your place - some will even chip in for the costs or pay it all. >Plus why spend money on somewhere you don't own? People have this mentality that renting is throwing out money. It's not - it turns your housing into another explicit cost like food and travel. I like this, I think too many people make the biggest investment decision of their lives (often by orders of magnitude) so lightly. And anyway, when you own, the costs that would go to renting are priced in, like: taxes, upkeep, opportunity costs, and interest payments. There is no free lunch - even the home ownership tax benefits get priced into housing costs.
  - vonmoltke 11y ago
    > BTW, a lot of landlords will let you modify your place - some will even chip in for the costs or pay it all. Where are all these landlords, because the ones I have experience with in Florida, Texas, and Virginia get pissed if you so much as nail a picture to the wall.
    - aroch 11y ago
m0llusk 11y ago
These calculations are interesting, but there are many more factors involved. For example, I am roughly 50 years old, have chronic health problems, and live in an area where both the median and average housing unit prices are around a million dollars. Even with very low interest rates or even cash up front the costs of renting over even better than expected lifespans are very competitive.
todd8 11y ago
There is an important oversimplification that these formulas/programs/spreadsheets often make, and I see it happening here. Consider two alternatives where everything is the same except the amount of money used for the mortgage down payment. The formula assume that money not used for the down payment is invested at a certain rate of return. If the mortgage interest rate is greater than the investment return, then the formula always indicate that the largest down payment possible should be made and if the rate of return for investments is assumed to be greater than the mortgage interest rate then the smallest possible down payment should be made. Its easiest to understand the problem with specific numbers. Assume a home buyer has $120,000 that could be put into a down payment, but that the minimum required is only $20,000. What should the buyer do? Assume that the investment rate of return is 5% and the mortgage rate is 4%. Investing the $100,000 instead of using it for the down payment is essentially borrowing $100,000 at 4% and investing it at 5%. All the formulas/worksheets/programs like this one and even professional investment advisors will end up showing that is better to put down the minimum down payment and investing the $100,000. This ignores the risk between alternatives. Putting the $100,000 into the down payment produces a guaranteed, riskless, return the buyer of 4% per year (by saving him or her the mortgage interest payments on the $100,000). The 5% potential return from investing the money isn't a fair comparison. The comparison needs to be made to a riskless investment (e.g. US Treasury Bills). Currently the riskless rate of return available to investors is approximately 0%. This means that in the current environment the correct alternative is to put the $100,000 extra into the down payment (absent any liquidity concerns). One may say that they are willing to take some risks to obtain a higher rate of return. Modern Portfolio Theory has its detractors, but as far as home buyers are concerned, its implications are still apropos. Having one component of your overall portfolio earning the equivalent of a riskless 4% (by making the larger mortgage down payment) is likely to produce better aggregate returns (on the home and additional equities etc.) at whatever risk tolerance one designs for their overall finances. I have no formal training in finance or investing so none of what I've described here should be interpreted as advice, instead it is intended to spur discussion.
- glomph 11y ago
  There is risk in the mortgage as well though. The value of the house could drop.
nroose 11y ago
This model doesn't seem to consider risk. If you finance 75% of your home value, your equity is 4x as volatile as the market.
nroose 11y ago
This model doesn't seem to consider risk. If you finance 75% of your home value, your equity is 4x as volatile as the market.
suany 11y ago
One factor that's never discussed is the availability of rental inventory. In some cities it's very hard to find a single family home (instead of an apartment) for rent - hence buying becomes the only path to getting the type of home you want.
pjc50 11y ago
So I pretended that "$" meant "£", and entered some plausible UK figures, including recent house price growth of 8% and rental growth of 10%, and it told me I should buy unless I could rent for -£391 a month. Taking out a mortgage is clearly the best investment I ever made.
uberneo 11y ago
Any github link to the actual visualisation would be handy .. looks like crossfilter types http://square.github.io/crossfilter/ http://square.github.io/crossfilter/
amalag 11y ago
Very nice calculator. It is missing a PMI option for loans with a downpayment under 20%. That is a significant expense.
ocdtrekkie 11y ago
It heavily depends on the area. In very urban areas, property is a lot more expensive, and renting is probably the way to go. In my area, it's almost the same cost to buy as to rent. The difference being, you can get some of the money back on your purchase by selling your property, whereas your rent just entered a black hole.
normloman 11y ago
For me, it's better to buy. And that's not a financial decision either. I've just always wanted to restore an old house.
markbnj 11y ago
We rented for the first ten years of our married life, and then purchased. All of the financial arguments aside, don't discount the value of having a place with your name on the deed. We had been forced to move out of two previous townhouses when the leases expired and the owners decided to sell. Knowing that your place is your place (yes, the bank's really, but they can't easily take it from you) is maybe an undervalued benefit.
doc_holliday 11y ago
I think this has been mentioned a couple of times when it has come up, but it would be nice to be able to add / remove local taxes e.g stamp duty here in the UK.
JustSomeNobody 11y ago
Yes. (It was obligatory.)
cletus 11y ago
Some people don't buy to, in their words, avoid being exposed to the property market or some variation thereof. This a fallacy. As long as you need somewhere to live you are exposed to the property market. A good way of looking at this is: not owning is equivalent to having a large short position in the property market. If prices go down, you "win" by not losing money and/or your rent going down. If prices go up, you "lose" because your rent goes up and what you can buy now is less than what you could've before. That's a fine position to take but my point is that it IS a position. You don't necessarily need to own where you live but you should own _something_. It could be in the area you plan to retire to (to hedge against rising prices), an investment property to generate income or whatever. IMHO REITs aren't the answer here. Residential and commercial real estate are different beasts. Commercial real estate is generally a means of generating income. Residential is far more speculative. Some people compare long term returns on property vs equities. These compare reasonably favourably. In all those cases borrowing to buy property is far more favourable. In the US at least you can get 30 year fixed mortgages that are currently hovering about 4% for 80%+ of the purchase price. You just can't get those terms on anything else. Even on day 1 your mortgage payment is ~30% principal at these interest rates. Property tends to be a great hedge against inflation too and higher interest rates and higher inflation seems to be a risk with the amount of quantitative easing occurring in the developed world. Lastly, the ability to essentially fix your housing costs is (IMHO) huge, particularly in major urban centers.
JDiculous 11y ago
I would buy, but Manhattan is expensive as hell and I don't want to live in the Bronx.
derekp7 11y ago
One thing to consider -- avoid the 30-year fixed mortgage if you can. If you are buying, then buy a cheaper property that you can pay off in 5 years or so. Then in 5 years, you can sell that and take out another loan for the next property. Example: I bought my house for 180,000 on a 30-year mortgage, and 20% down payment (36,000). 15 years into it I've barely made a dent. I would have been better off buying a $100,000 smaller house or town house/condo, and I could have paid that off in 5 years with what I'm currently putting out per month (counting lower taxes and insurance on the smaller property). Then I could have sold it, and bought a $160,000 house, and 5 years or so later owned that one outright. This is also a market proof strategy -- if the market goes down, the your current house may lose value (but you're not upside down on your mortgage, because you don't have one after 5 years). But the next house will also be proportionally cheaper too. And if the market goes up, the house you just paid off has gained in value, making for a bigger down payment on the next house.
owly 11y ago
It totally depends on the area and timing. I've bought and sold a number of places for a decent profit (all in cities) AND I managed to hold onto my last one and rent it for a good deal more than the mortgage payment. Renting IS throwing money away, plus none of my friends who rent live in as nice of a place as I do for the same monthly payment. Sure they can move to another city faster than I can, but the longest I've taken to sell a place it 4 months, not a big deal.

88 points by matthijs_ 11y ago

I've always wanted a model like this to point people to. I don't have a dog in the buy/rent column, but I feel like most of these decisions are made without a regard for many pertinent considerations. The main one that bugs me is how long you will likely stay in a place. Completely disregarding market effects, if you're not going to hold onto it long then it's probably not going to work out.

saurik 11y ago

16 hours ago: https://news.ycombinator.com/item?id=9741374 https://news.ycombinator.com/item?id=9741374 20 hours ago: https://news.ycombinator.com/item?id=9739544 https://news.ycombinator.com/item?id=9739544 393 days ago: https://news.ycombinator.com/item?id=7783201 https://news.ycombinator.com/item?id=7783201 1775 days ago: https://news.ycombinator.com/item?id=1586757 https://news.ycombinator.com/item?id=1586757 1884 days ago: https://news.ycombinator.com/item?id=1283190 https://news.ycombinator.com/item?id=1283190

MrBuddyCasino 11y ago
Important comment from an earlier thread: don't ignore the human factor. Buying instead of renting forces you to live more frugal, which is a reason why people who buy are often better off financially when they retire.
- nkozyra 11y ago
  > Buying instead of renting forces you to live more frugal As a home owner, I'm going to ask someone to elucidate on this sentiment.
  - jessriedel 11y ago
    The idea is that you are contractually constrained to invest into a long-term asset (the house) on a monthly basis. In principle people who rent are paying less each month and should on average do just as well if they invest that money elsewhere, but in practice they tend to spent the extra money. Once they reach retirement, they have fewer assets.
    - nkozyra 11y ago
      That's probably true for most periods in history, but we're still within a much-receded housing economy. When I bought my house, my rent was a couple hundred bucks more and with insurance + taxes I ended up paying ~ $30 more a month for more than double the space and, of course, actual assets. There are places where this doesn't make sense, and there are times where it absolutely doesn't make sense, but present day is a lot different. My anecdote of paying less (or slightly more) in mortgage + associated versus rent is not all that uncommon these days. The real hidden cost, if you ask me, is the way it changes your sense of mobility.
      - Happydayz 11y ago
        Yes, but there is also the opportunity cost of your downpayment, the transaction costs of getting into and out of a house, and maintenance. Oh man, maintenance. Ref - transaction costs. You have to figure it will cost you around ~8% of the value of a property to both get into and out of it. This does not include the cost of movers. With a rental your transaction costs might be $50 for the apartment application fee.
        gambiting 11y ago
        I wish - I'm currently renting a house for 1200 pounds/month(so...1900 USD per month) and the agency took $1000 just to take the property off the market("admin fee" - non-returnable, doesn't go towards the deposit, it's just money down the drain really), then 1 month rent as deposit, and 1 month rent in advance. So really, I spent nearly $6k just to start renting a place. I'm really considering a mortgage, but don't have money for the downpayment. Our mortgage payments would be actually less than what we pay for rent now.
  - refurb 11y ago
    Here is my take.... 1. People think they can afford to buy a place at $X 2. People find a place at $X+Y and say "it'll be tough, but I love this place" 3. People find out actually owning a house costs $X+$Y+$Z and they can barely make their house payments and supporting costs 4. Eventually (after enough mortgage payments) your principal payments become large enough to take on the form of "forced savings" I think this might work for some, but there are plenty of examples where people lose their homes because they underestimated the costs. Someone get sicks and goes on LT disability at 60% of their salary and end up missing mortgage payments.
    - branchless 11y ago
      This is just nuts.
      - ha470 11y ago
        Agreed, this is an insane (and insanely stressful) way of saving.
    - Cherian 11y ago
      Even in this case, isn’t there a reasonably good chance the person could have sold it for 10% more than ($X+$Y+$Z)[1] at the time of the crisis? The lender and the loaner will part with the equity based on the mortgage payments over the years. Based on cursory look into Redfin data, homes in the Bay Area are vanishing in 5-12 days, selling at 100-300K above the listed price. [1] I hope we don’t cite recession here.
      - refurb 11y ago
        In the bay area over the last 5 years? Sure. Across much of the US? Probably not. Don't forget the average cost of selling a house is 6%. Buy a place for $500K and if the value of the house doesn't go up by at least 6% you've lost money. That doesn't include all the other costs associated with buying a new house (moving costs, etc).
        11y ago
- frobozz 11y ago
  I was no more frugal having bought a house, than when I was putting all my money away towards a deposit on a house, probably even less so. I would have thought that the biggest reasons were (roughly) freezing your shelter expense against inflation, and putting an upper limit on how long you pay for shelter. i.e. If I rent a £1000PCM flat for the rest of my life, my bill for shelter will continue to be roughly £1000PCM in today's money for the rest of my life. If I buy a house with a £1000PCM mortgage payment, it will remain roughly £1000PCM for the rest the mortgage (though current low interest rates mean that it probably won't), which, in 25 years time could be worth just over half as much as it is now. And in 25 years time, I won't have to spend on shelter any more. I will have maintenance costs to pay for, but they are unlikely to equate more than £1000PCM in today's money over my lifetime. So, where M is homeowner maintenance costs, someone with N+M living expenses is more likely to be better off than someone with £1000+N living expenses.

swingbridge 11y ago

It's good to get people thinking about all the things included in the calculator. Most people are totally clueless when it comes to the real cost/value of owning. They only see what someone bought a property for and what it sold for some time later. A home you live in is almost always a net cost. It's not really an investment so much as its a cost avoidance (vs renting). Buying more house than you need "because this is an investment" is almost always a bad idea if you live in the home and thus are the one footing the bigger tax bill, interest, maintenance, utilities, improvements...

ekianjo 11y ago
> A home you live in is almost always a net cost. Plus it "prevents" you from moving somewhere else. Or let's say, it increases the friction of moving somewhere else. Most home owners stay at the same place for the rest of their lives.
- jbb555 11y ago
  On the plus side, once you've found somewhere you like you can stay there as long as you want. If you rent it's up to the owner how long you can live there
  - ekianjo 11y ago
    True, but there's always the risk that where you like living changes over time and becomes HELL 20-30 years down the road. And I have seen this happen among several of my family members. When you rent, sure, you can't stay forever, but you have visibility at 2 years down the road (depends on the country where you live, but where I do the owner cannot get you out for the duration of your lease, and that's usually 2 years).
- vonmoltke 11y ago
  There are a whole lot of other factors that increase friction more than owning your domicile, and those factors tend to be stronger with people who are motivated to buy: - Deep networks of friends - Strong community ties - Strong local family ties - Children with their attendant social networks - General aversion to moving frequently Also, the idea that "most" homeowners never leave is antiquated. Nearly everyone I know who has bought a property has bought more than one before 40.

logicchains 11y ago

Does this take into account the risk of a housing market crash? For me, the biggest reason for renting rather than buying is to avoid putting all my bags in one basket; I wouldn't buy $500k worth of shares of one company, so spending $500k on a single house seems similarly risky.

refurb 11y ago
You're looking at it the exact right way. Risk is a two sided-coin. If the local housing market does well, you can make out like a bandit. If it doesn't, you can lose a lot of money. No different than owning $500K worth of share in a public company. Nothing wrong with buying a house, but people should be careful not to have their net worth all tied up in a single asset (house or not). The one rule I've heard is 90 minus your age. When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement. Too risky.
- cowls 11y ago
  I disagree, this view is too simplistic. It's very different to owning shares in a company. You have to either buy a house or rent. You cant opt out entirely, whereas you can with shares. By choosing to rent, you are betting on the housing market being stagnant or falling, if house prices shoot up and you opted to rent, you will need to now pay higher rents or a bigger mortgage. So there is risk in renting too If you decided to rent in london instead of buying 3 years ago, you'd be tens of thousands down
  - to3m 11y ago
    Why will rents go up, when they could have gone up already?
    - cloudwalking 11y ago
      Because every day there are more people and more jobs but not more land.
    - 11y ago

jbb555 11y ago

The money is certainly important. But buying is better than renting in many ways. Want to rip out your kitchen and have a new one? Want to pave part of the garden? Want to move a wall? Want to paint it all, or fit blinds? If you own it you can do all that. If you rent you have to ask permission which you might not get. Plus why spend money on somewhere you don't own?

wazoox 11y ago
And when the factory employing most of the people in the town closes down, you're stuck with a virtually worthless property forever. Buying may have real downsides when you need to work for a living...
rm999 11y ago
Renting is the best option for flexibility. Want to add a bedroom? Want to change neighborhoods? Just lost your job and want to downgrade? Want to move closer to your new job, or an entirely new state? These are all good, common use-cases for renting. BTW, a lot of landlords will let you modify your place - some will even chip in for the costs or pay it all. >Plus why spend money on somewhere you don't own? People have this mentality that renting is throwing out money. It's not - it turns your housing into another explicit cost like food and travel. I like this, I think too many people make the biggest investment decision of their lives (often by orders of magnitude) so lightly. And anyway, when you own, the costs that would go to renting are priced in, like: taxes, upkeep, opportunity costs, and interest payments. There is no free lunch - even the home ownership tax benefits get priced into housing costs.
- vonmoltke 11y ago
  > BTW, a lot of landlords will let you modify your place - some will even chip in for the costs or pay it all. Where are all these landlords, because the ones I have experience with in Florida, Texas, and Virginia get pissed if you so much as nail a picture to the wall.
  - aroch 11y ago

m0llusk 11y ago

These calculations are interesting, but there are many more factors involved. For example, I am roughly 50 years old, have chronic health problems, and live in an area where both the median and average housing unit prices are around a million dollars. Even with very low interest rates or even cash up front the costs of renting over even better than expected lifespans are very competitive.

todd8 11y ago

There is an important oversimplification that these formulas/programs/spreadsheets often make, and I see it happening here. Consider two alternatives where everything is the same except the amount of money used for the mortgage down payment. The formula assume that money not used for the down payment is invested at a certain rate of return. If the mortgage interest rate is greater than the investment return, then the formula always indicate that the largest down payment possible should be made and if the rate of return for investments is assumed to be greater than the mortgage interest rate then the smallest possible down payment should be made. Its easiest to understand the problem with specific numbers. Assume a home buyer has $120,000 that could be put into a down payment, but that the minimum required is only $20,000. What should the buyer do? Assume that the investment rate of return is 5% and the mortgage rate is 4%. Investing the $100,000 instead of using it for the down payment is essentially borrowing $100,000 at 4% and investing it at 5%. All the formulas/worksheets/programs like this one and even professional investment advisors will end up showing that is better to put down the minimum down payment and investing the $100,000. This ignores the risk between alternatives. Putting the $100,000 into the down payment produces a guaranteed, riskless, return the buyer of 4% per year (by saving him or her the mortgage interest payments on the $100,000). The 5% potential return from investing the money isn't a fair comparison. The comparison needs to be made to a riskless investment (e.g. US Treasury Bills). Currently the riskless rate of return available to investors is approximately 0%. This means that in the current environment the correct alternative is to put the $100,000 extra into the down payment (absent any liquidity concerns). One may say that they are willing to take some risks to obtain a higher rate of return. Modern Portfolio Theory has its detractors, but as far as home buyers are concerned, its implications are still apropos. Having one component of your overall portfolio earning the equivalent of a riskless 4% (by making the larger mortgage down payment) is likely to produce better aggregate returns (on the home and additional equities etc.) at whatever risk tolerance one designs for their overall finances. I have no formal training in finance or investing so none of what I've described here should be interpreted as advice, instead it is intended to spur discussion.

glomph 11y ago
There is risk in the mortgage as well though. The value of the house could drop.

nroose 11y ago

This model doesn't seem to consider risk. If you finance 75% of your home value, your equity is 4x as volatile as the market.

nroose 11y ago

This model doesn't seem to consider risk. If you finance 75% of your home value, your equity is 4x as volatile as the market.

suany 11y ago

One factor that's never discussed is the availability of rental inventory. In some cities it's very hard to find a single family home (instead of an apartment) for rent - hence buying becomes the only path to getting the type of home you want.

pjc50 11y ago

So I pretended that "$" meant "£", and entered some plausible UK figures, including recent house price growth of 8% and rental growth of 10%, and it told me I should buy unless I could rent for -£391 a month. Taking out a mortgage is clearly the best investment I ever made.

uberneo 11y ago

Any github link to the actual visualisation would be handy .. looks like crossfilter types http://square.github.io/crossfilter/ http://square.github.io/crossfilter/

amalag 11y ago

Very nice calculator. It is missing a PMI option for loans with a downpayment under 20%. That is a significant expense.

ocdtrekkie 11y ago

It heavily depends on the area. In very urban areas, property is a lot more expensive, and renting is probably the way to go. In my area, it's almost the same cost to buy as to rent. The difference being, you can get some of the money back on your purchase by selling your property, whereas your rent just entered a black hole.

normloman 11y ago

For me, it's better to buy. And that's not a financial decision either. I've just always wanted to restore an old house.

markbnj 11y ago

We rented for the first ten years of our married life, and then purchased. All of the financial arguments aside, don't discount the value of having a place with your name on the deed. We had been forced to move out of two previous townhouses when the leases expired and the owners decided to sell. Knowing that your place is your place (yes, the bank's really, but they can't easily take it from you) is maybe an undervalued benefit.

doc_holliday 11y ago

I think this has been mentioned a couple of times when it has come up, but it would be nice to be able to add / remove local taxes e.g stamp duty here in the UK.

JustSomeNobody 11y ago

Yes. (It was obligatory.)

cletus 11y ago

Some people don't buy to, in their words, avoid being exposed to the property market or some variation thereof. This a fallacy. As long as you need somewhere to live you are exposed to the property market. A good way of looking at this is: not owning is equivalent to having a large short position in the property market. If prices go down, you "win" by not losing money and/or your rent going down. If prices go up, you "lose" because your rent goes up and what you can buy now is less than what you could've before. That's a fine position to take but my point is that it IS a position. You don't necessarily need to own where you live but you should own _something_. It could be in the area you plan to retire to (to hedge against rising prices), an investment property to generate income or whatever. IMHO REITs aren't the answer here. Residential and commercial real estate are different beasts. Commercial real estate is generally a means of generating income. Residential is far more speculative. Some people compare long term returns on property vs equities. These compare reasonably favourably. In all those cases borrowing to buy property is far more favourable. In the US at least you can get 30 year fixed mortgages that are currently hovering about 4% for 80%+ of the purchase price. You just can't get those terms on anything else. Even on day 1 your mortgage payment is ~30% principal at these interest rates. Property tends to be a great hedge against inflation too and higher interest rates and higher inflation seems to be a risk with the amount of quantitative easing occurring in the developed world. Lastly, the ability to essentially fix your housing costs is (IMHO) huge, particularly in major urban centers.

JDiculous 11y ago

I would buy, but Manhattan is expensive as hell and I don't want to live in the Bronx.

derekp7 11y ago

One thing to consider -- avoid the 30-year fixed mortgage if you can. If you are buying, then buy a cheaper property that you can pay off in 5 years or so. Then in 5 years, you can sell that and take out another loan for the next property. Example: I bought my house for 180,000 on a 30-year mortgage, and 20% down payment (36,000). 15 years into it I've barely made a dent. I would have been better off buying a $100,000 smaller house or town house/condo, and I could have paid that off in 5 years with what I'm currently putting out per month (counting lower taxes and insurance on the smaller property). Then I could have sold it, and bought a $160,000 house, and 5 years or so later owned that one outright. This is also a market proof strategy -- if the market goes down, the your current house may lose value (but you're not upside down on your mortgage, because you don't have one after 5 years). But the next house will also be proportionally cheaper too. And if the market goes up, the house you just paid off has gained in value, making for a bigger down payment on the next house.

owly 11y ago

It totally depends on the area and timing. I've bought and sold a number of places for a decent profit (all in cities) AND I managed to hold onto my last one and rent it for a good deal more than the mortgage payment. Renting IS throwing money away, plus none of my friends who rent live in as nice of a place as I do for the same monthly payment. Sure they can move to another city faster than I can, but the longest I've taken to sell a place it 4 months, not a big deal.