Rent vs. Own

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<p><em>So what I'm saying is that if I theoretically have enough down payment to keep rent and own the same monthly cost, the owning works out better long term. I put down $300K and amortize the other 300K over 15 years, also at 6%. </em></p>

<p>YLG, Hypothetical example. Let's say the NASDAQ performs over the next 30 years roughly like it did over the last 30 years, dot-com bubble collapse, Black Thursday collapse, 80s stagflation and all. Let's pretend the house appreciates at 5% a year too. In thirty years, the $300,000 down payment invested is worth $7.4 million. The house is worth $2.6 Million. On January 1978 the NASDAQ opened at 104. Today it is ~2674.</p>

<p>At 4%, a rate of inflation appreciation over that same time period, the house is worth even less. Roughly $1.9 Million.</p>

<p>Long term, owning the house is better than renting, that's over 30 years and assuming rough parity on renting versus owning costs at start, that is also provided you don't do massive down payments. Even a 20% down it is touchy once the price get's high enough. Even $100,000 turns into $2.5 million over thirty years. That's problem most people have with saving. It takes seemingly forever to get the first $10,000. Then $25,000. Then $50,000. Then $100,000. I call $100,000 the tipping point. Critical mass takes over. You start to see meaningful gains from your investment that are comparable to what you can save. </p>

<p>For these reasons I only evaluate a house purchase in the very short term, 1 to 3 years with a no change assumption on the housing price. When it works there, I'll be able to purchase and not worry about it. Otherwise, what I've found is only one assumption really makes any difference, that is the appreciation number on the home price. It wipes out the assumptions in all the other catagories.</p>
 
Ok, I have one more argument for owning vs. renting: is there a single person on this forum who plans to rent for the rest of his/her life even affordability is not (or would not be in the future) a problem? Speak up, I want to know why. Maybe there is smth about owning your home that brings you closer to living the American dream :)

Besides, if you look at home like an asset, sure it is a risky investment, no question about it. If you look at that as a place to live in, other things matter more (location, neighbors, space, fill in the blanks).

Irvine Commuter: I most likely fit in your 3d category :). About student loans: I feel your pain, but why not pay them off quicker? Sure you have some disposable income now that you're done with law school. Instead of saving it for a downpayment, I'd rather pay off my student loans. Why? B/c after all years of saving for a downpayment, you end up with higher interest rate on your mortgage b/c of the preexisting debt. I was able to get a 5.25% fixed rate on my 100% financing only b/c I did not have any other debt obligations and near-perfect credit score. One time I attended a seminar about managing your student loans, and we're told that you need to pay off your highest interest rate debt first. So, if your student loan's rate is 4%, but CD interest rate is 5%, it is better to invest the money instead of paying your student loan off and vice versa...
 
"I will invest my $300K at a safe 5% and earn $1.3 million over the 30 years. "





Or you could just put it in your pillow and hope the tooth fairy adds to it. Assuming you you can just get 5% over 30 years is a rather silly assumption.





"Speak up, I want to know why"





Because you can move whenever you wish. Even when the rent-vs-own calculations make more sense owning usually doesn't make sense unless you plan to live in the place 5+ years. Additionally, when making decisions about a new job or moving to a new region you will be forced to consider the housing market. If its doing poorly moving may mean losing a lot of money. If on the other hand you rent and put your money in the stock, bond etc markets you can sell/buy when it makes sense without it affecting your job opportunities etc.
 
<p>Blackacre. . .</p>

<p>I would like to pay it off but I got married a couple of years ago and just finished paying off all the expenses from that. I am working on it though. About a third of my loans is federal and at an interest rate of 2.25 percent. However, my private loans are adjustable (1 percent of prime) but still pretty high. Locking them in will cost me a couple of interest points. </p>

<p>As for your argument, check out someof the rentals in West LA, Santa Monica, and Newport. There are a lot of high end apartments who charges $4000 to $8000 a month. Now, it is my guess but I will assume that those people can afford to buy but choose not to (also see NYC.) I think it is a matter of lifestyle. Some people do not want to own and deal with all the hassles of owning. Money is not an issue, convenience is (many of those high end rentals have concierge services). Many people end up buying because they get married and have kids and living in $5000 apartments is no longer attractive. However, plenty of people still do rent when they could buy.</p>
 
<p>Student loan ~3%. I'll pay it off on a regular schedule.</p>

<p>NSR,</p>

<p> Yep right around 100k the money becomes a minor critical mass and right about 1.5M the money almost goes out of your control. Whatever you do, its a runaway reaction. For me i'm of the idea that you need to start saving right away. The money you save will serve you longer than the money you paid off... This is a well known money comparison. You just need to look at the specifics. </p>

<p>Commuter, </p>

<p> I used to have some nice apartments on Newport Coast that I HAD to charge 7k per apartment. I had a 3 year waiting list. Lots of wealthy people just don't want the hassle of having things they have to take care of. If anything all the wealthy people I know of don't want anything to do hassles. They will pay extra (and boy do they pay...) to have LESS hassle. Is that us... well you do the math.</p>

<p>-bix</p>
 
wow, not ever have a place to call your own... being rich is not as easy as I thought :0

and I always thought that the rich hire staff to take care of things (a butler, a maid or two, a chauffeur, a personal assistant and so on)...
 
This topic has been gone over several times on the board already. Taking out all of the "intangibles", both positive and negative, to renting vs. owning, the breakeven point comes down to a multiple of somewhere between 160 (IR's #s) and 200 (my #s) times rent. This takes into account the tax benefits, equity-building (well, at least my #s do), and the cost of money when buying a home. It does not assume any depreciation or appreciation (not even at inflation-rates) of the home's value. So, if you can buy a home that rents for $2500/month for $500,000 or less, then it will cost you less over the long run. The problem is, currently in Orange County you cannot buy that home for $500k or less, so that is why people feel it is cheaper (currently) to rent than to own. At some point, that may reverse, or at least the numbers may make more sense next year or the year after.



Some others may be trying to time the market bottom, which is easier to do if you're not under pressure from family. :)
 
I think they are other things to consider besides the "American dream". For example, the ability to work at other places, the ability to start a new business, etc, etc. Buy a house in OC, and you will be pretty much locked into your current life style. You will need a stable job to pay the monthly bill, and you can't really move. Take myself as a example, I was offered a much better job overseas than in the US, so I just took it and moved oversea. Like Dr said, it is about trade-off. No one approach is the best, one has to judge one's own life style and goal to see which approach is the best.
 
I am currently a renter and still have six month lease left. However, I have found a house I like and want to make a move. Wondering what kind of incentives I need to give my current landlord in order to get out of the lease earlier.
 
Check your lease for an early termination clause. If you are honest with your landlord (private landlord?) and give them as much advance notice as possible, they can look for a replacement tenant. You can also look for a replacement tenant, but he/she/they must meet your landord's requirements (credit rating, employment, etc.).





You can offer incentives to a new tenant such $500 off the first month's rent if they sign a new lease (or take over yours) by a certain date.





Check one of the renter's legal guide from a library to see how to do it properly. Also, this <a href="http://www.caltenantlaw.com/breaklease.htm">website</a> is interesting.
 
wanttobuy: what's so special about this particular house that it makes you want to break your lease, when you probably realize that if you wait six months, you'll have a lot more to choose from and, at the same price point, be able to purchase a nicer home? And you won't have to pay a lease break fee?





Just wondering.





ism
 
Yeah wanttobuy...just finish out the 6 months, then when it's time for renewal ask for the remainder of the lease to be "month to month".
 
Thanks you guys for the advice. The builder has the year end sale and the price falls in our budget. We like the house, community and the area. It makes me to pull the trigger.
 
Wanttobuy: how will you feel in six months if the builder is now advertising the bigger models in the community for less money? If you're not too upset about that, or of the very real possibility that you will lose all your down payment to depreciation (and then some), and you intend to stay for at least 7-10 years, then I guess you really are ready to buy now.
 
It is hard for ME to time the market bottom. Since I am planning to stay in the house for a while and the price is within my budget, it makes my decision easy.
 
wantobuynow,





I hope you will offer the builder less than their asking price. We've seen on this forum some who have tried to low-ball and while they have not necessarily been successful, it was clear that the builder was willing to go lower than their asking price and incentives.





Couldn't hurt to try and see if they accept your lower offer or counter.
 
OK, if you insist on buying....make it part of the terms of the purchase that the lender pay off the remainder of your lease !
 
"It is timing. Not the asset. And not renting vs. buying. It is timing. It is timing. It is timing."





Awesome awgee. Words to live by.





The rent vs. buy equation is extremely complicated and depends on all sorts of variables that are both highly personal (tax situation, need for mobility) and difficult to predict (future interest rates, future investment returns, future tax policy). That being said, there are times when the equation is clearly more balanced towards buying than usual and times when the equation is more balanced towards renting than usual. We are currently in one of the latter. Very deep in. But even so the equation will certainly balance towards buying for at least some people.





I call shenanigans on anyone who says you can't time the market or that it's not worth the trouble. Anyone who was thinking of buying a SFR in OC 2 years ago and didn't has probably already saved over a hundred grand, or about 2 years worth of take home pay for a typical OC household.
 
<p>bigmoney - thank you. That is what I am trying to say, in my complicated way. The rent/own equation is a lot more complicated than either side allows. The 160 or 200 x rent may be a general rule, but it doesn't necessarily apply. Important variables are - current age, planned retirement age, duration of the mortgage, available down payment. I am leaving the intagibles out of it for now, including the need for mobility. If you may need to sell within a couple of years, then don't buy. That is obvious. </p>

<p>Tyler, I agree that 5% return is on the low side. Again, I'm looking at this totally risk free. Even the safest money market accounts are not entirely risk free (mortgage backed securities anyone?) But a 5% CD is a pretty safe bet unless Wells Fargo folds... could happen, but minimal probability.</p>

<p>And yes - this is all theoretical since the down payments that make it work are huge. Who has $300K to put down. But if you do, and the market is close to the bottom, I say it is a good move. Or will be a good move once most of the "correction" has taken place. </p>
 
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