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No. of Recommendations: 32

Ok, so my freinds are recommending I buy a house. The housing market is booming right now. I remain unconvinced, so I did the numbers. It looks to me like buying a house is more risky than not buying a house. Is there something I'm missing here? Heres my calcuations. (All these numbers came out of quickens mortgage calculator and the investment growth calculator. All values are in todays dollars.)

Ok, you buy a 270k house. Putting \$20k down.
You finance \$250k. 36month loan. \$1966 is your monthly payment.
This assumes zero points, no PMI, etc. No maintenance costs, no property taxes.

After 10 years, you've paid \$208K in interest and your loan balance is \$222k.
Your house is worth \$445K assuming %5 annual growth.

Your equity is \$445k - \$222k = \$223k.
Your total payments are: \$236k + \$20k down, or \$256k.

You have lost money. You spent \$256k for an asset that is worth \$223k.

Assuming the house rises in value at %10 a year its worth \$730,901.
Your equity would be \$731k - \$222k = 509K.

You have made money. You spent 256k for an asset that is worth \$509K. Your profit is \$253k.

IF, instead, you rented an apartment those ten years at an average rental of \$1,000 a month, you would have spent \$120k in rent. The \$996 monthly difference from a mortgage, if invested for 10 years at %10 would net you \$197,880.

So, it looks to me like the house is the risky investment- if it grows by %10 a year (which is historically unlikely) you will do better by \$50k. (If your property taxes, PMI, maintenance costs and points all add up to \$50k, which seems likely to me, then you haven't done better.)

On the other hand, renting and investing the money would return \$180k. %10 is under the long term rate of return for the stock market itself. Investing in an index fund would historically return %11. This historic return for housing is %3-%4, which is pretty close to inflation.

Ok, lets try this with a 15 year mortgage. Everything else the same: Your monthly payments are now \$2,498.62
After 10 years, you've paid \$299,834 and still owe \$121k. (Total interest is 172K)

IF your house is worth \$445k, you've got \$324k in equity. To get that, you paid \$300k to the bank plus \$20k down. You've made all of \$4k on a \$270k house that appreciated %5 a year!

IF the house appreciates %10 a year, it will be worth \$731k. Your equity will be \$610k, minuse the \$320k you paid you have \$290k. A great profit.

IF you invested the difference (\$1,498.62 a month) from renting for 10 years at %10, you'd have \$307k. Pretty close, but you come out slightly ahead. Even more ahead when you factor in PMI, etc.

But what about taxes, you say! Well, in that last example you'd paid a total of \$170k in interest. If you're at a %39 rate, over the ten years you would have saved \$66k. I am not sure this is close to the added costs of PMI, brokers fees selling the house (%10 right? Thats \$73k right there... and you have to sell the house in order to realize the profit), property taxes, maintenance and other additional insurance over the cost of renters insurance.

OF course, there are risk to these different scenarios, and depending on where you think the stock market is going verses the housing market, maybe my assumptions don't work for you.

If we have bear stock market, the housing market is likely to turn south as well. IF we have a bull stock market, the housing market is likely to turn north as well. It seems very unlikely to me that we would have a bear stock market and a bullish housing market. IT doesn't seem that unlikely that we could have a bullish stock market and a bearish housing market. In fact, some have predicted that this is exactly what will happen- the last 30 years have seen huge growth in the value and building of houses. This is because of the aging baby boomers-- that big population boom wanted houses of its own, right? But now they are getting older and going forward it is the people born after the baby boom that will be buying houses. This means less demand to me as the population entering the prime buying age is going to be smaller.

I just cant see how buying a house is a better deal. IS there something big I'm missing here?

Neo
No. of Recommendations: 17
A home is not truly an investment like buying Microsoft in 1986 was an investment. A home is a place to live. Yes, it may appreciate/depreciate, but unless you are buying along the coast of Malibu, you'll probably never match the returns of the stock, or even the bond, market.

You don't buy a home as an investment like you would a stock, bond, or mutual fund. You buy a home to invest in yourself, your family, a place to hang your hat. Homes are work and with the interest most of us have to pay on our loans, they will end up costing us far more than we could ever sell them for. But they are a nice place keep your stuff (see George Carlin). Plus, being yours, and not a landlords, you can paint that second room bright blue if you choose. You can tear up the front lawn and put down lava rock if you want. You can even go out and buy a dog without consulting with a property manager, signing an amended lease, and paying an additional pet deposit.

Buying a house is not for everybody. If you hate the thought of having to pay a plumber, if you don't like mowing the lawn, or if the thought of the water heater needing to be replaced - at your expense - keeps you up at night, maybe owning a house is not for you. If you like to move every 6, 12, 18, or 36 months, home ownership probably won't appeal to you. But, someday, with dilligence and perserverence, you will own you own home free and clear.

Some people REALLY enjoy being home owners. Not everybody needs to own a home. There is nothing wrong with that. Decide what is best for YOU, not what your friends decide is best for you.

Gary
No. of Recommendations: 11
SirNeo writes:
Is there something I'm missing here?

Well, yes. You are comparing the cost of buying a house to the cost of renting an apartment. If you wanted to determine whether it is more cost effective to own vs lease an automobile, would you compare the cost of buying a Mercedes Benz to the cost of leasing a Ford Escort? Try running the numbers again, only this time compare the costs of substantially equivalent accommodations.

Regards,
FoolMeOnce
No. of Recommendations: 3
It depends on where you are. The house is to live in. Its investment characteristics are secondary.
In 1988 I sold a nice 3 bedroom house on a lake in Michigan to move to California. I quickly discovered the \$80K which was at that time a fair price for my Michigan house would, in Orange County, pay the down payment on a crackerbox on a tiny lot with no basement and no garage, just a carport. On the other hand, I could put my \$80K in bonds paying 10% and use it to pay rent on a nice apartment with at least as many square feet as the \$250K house. I bought the bonds and rented.
In 1997 I moved to Virginia. Rental housing in my area was practically nonexistent, and I found a nice house on a lake. In house hunting I had the advantage that I had no house that needed to be sold and could close any time, so could make an offer on the house I wanted without putting in "subject to the sale of...."
into the contract.
The choice of buy or rent has a lot to do with your lifestyle. For the same person, the answer may be quite different when you find yourself in a different part of the country. I couldn't by any stretch of imagination find a house like where I am now as a rental.
Best wishes, Chris
No. of Recommendations: 7
This morning, our local paper carried an interesting article by a syndicated columnist named Leta Herman. The jist of the article was to debunk common myths about renting vs. buying. It is carried on the National Multi Housing Council (NMHC) website found at... http://www.nmhc.org/media/rentvsown/default.html

I hope this sheds further light on your particular situation.

Gary
No. of Recommendations: 2
Hi Neo,

Owning a home is a personal decision and only you will know what's best for yourself. On the other hand, my mortgage payment stays the same for 30 years and I can claim my interest payment on my taxes which is greater than the standard deduction. Both of those alone save me lots of \$\$\$ over the years not even counting the equity growth. Plus, the amount of interest I pay every month goes down and my ownership share goes up.

Not looking at the \$\$ amount, it's just a great feeling, this thing called home ownership. It's a great feeling being able to fix up the place to reflect your taste and to benefit your lifestyle. No need to worry about lease expiration or if someone else buys the building and oops, the new landlord wants you to move because they want their relatives to live in the apartment. It only goes up for sale when you choose to move if you own it.

Like I said, it is a personal decision and don't let anyone else talk you into anything you don't want to do.

Betty ;)
No. of Recommendations: 0

I agree, you have to decide what makes sense for you.

I was really trying to address the single point: The Wise tell us that buying a home is a good investment. That when you factor in the tax advantages its the best place to put your money.

What I'm saying is that it looks ot me like this really isn't the case (at least where I live and at current rates.)

There's the emotional reason for buying a home as well and that has value-- I'm specifically excluding that. If you're looking at it purely from a financial viewpoint, have I missed some big factor that makes buying a home a wise financial move?

I am amazaed that the numbers don't work here where homes are growing in value at %10 a year (an unusual amount)... Have the wise been lying to us all this time?

Neo

PS- I certainly make financial decisions based on emotional factors. I just want to pin down the financial reality first.
No. of Recommendations: 1
Try running the numbers again, only this time
compare the costs of substantially equivalent accommodations.

Actually the apartment in question is one I've rented in the past that my ex is renting now. It is much MUCH larger than the house I would get for \$270k here in Seattle.

Now, theres the whole "my own yard" and "my own garage" factor. If I compared renting a house to buying this house and in included PMI, taxes, closing costs, selling costs etc, I think the numbers would be the same-- it just takes a lot more variables to guess the true costs of a house- I don't know if property taxes are going to get raised again every other year like they have recently and by how much, for instance.

So, I was as close to comparing apples to apples, as I can get.

Neo
No. of Recommendations: 0

Gary-

Thanks. The telling point in the article was that "buying a home is not a financial decision." This is news to me-- I'd believed the statement that homeownership was a great investment. And it probably is for people who are going to be salaried employees of company and live in the same place for a long time.

ITs too bad you can't get a simple interest mortgage. I bought a car over 4 years and each month an equal split went to equity and interest. With homes the first 5 years are nothing but interest- and since most people move out of their homes within 5 years (according to the article you cited) then who's the one that's really renting? It looks to me like both a are rental situations- in one case you rent it from the bank and are responsible for maintenance, etc. In the other case you don't assume the risk.

But then, if you won't move and stay there for the long term then the emotional side of ti makes owning a home a good idea. (Personally, I hate my landlord and hate dealing with her.)

Neo
No. of Recommendations: 2
Neo-

You're welcome.

One thing to consider, in favor of buying a home, is that in thirty years, after 360 monthly payments, you will own the home free and clear (assuming you haven't refinanced, taken out a 2nd trust or an equity line). However, your rent will continue on forever. That is the bad thing about rent...there is no end in sight. With people living longer and longer, you may end up paying rent for 60+ years, and at the end of that, you'll own nothing.

I think that you'll see the general conclusion of rent vs. buy is that it depends on the person (or couple). I would even venture to say that it may even depend on the point in that person's life. For example, a military person, who is climbing the ranks and moves often, may be much better off renting. However, upon retirement, having decided on a final "base" for her/his family for the next 20 - 30 years, maybe home ownership becomes more plausible. Looking back at their life, at one point renting made more sense, and at another, buying made more sense - for the exact same person!

How's that for making the waters muddy? Good luck on your decision!

Gary
No. of Recommendations: 0
Neo,

Not sure if this was addressed by you or your repliers. Working late and thought I'd throw this in. Was inflation factored in your comparison? Read somewhere that over time, renting generally is more expensive than owning due to inflation.

Being forced to move from a rental has happened more often than I thought it would to people. Down here in San Francisco, I've heard of stories of friends and collegues having to move out because of the their rentals going on the market. They then are exposed to the pricey rental market here. Our \$1500/month one bedroom is actually a bargain now. Just 1.5 yrs ago we thought it was priced at a high premium.

How about girlfriends? If you live with one now and she splits, would you really want to pay full rent yourself? If you don't live with one now what happens if some girl knocks you off your feet that can't live with you in your place?

Lots of variables as everyone says. Inflation and girls are just two of them.

Good luck with them,
ivan
No. of Recommendations: 3

SirNeo: "Ok, so my freinds are recommending I buy a house. The housing market is booming right now. I remain unconvinced, so I did the numbers. It looks to me like buying a house is more risky than not buying a house. Is there something I'm missing here? Heres my calcuations. (All these numbers came out of quickens mortgage calculator and the investment growth calculator. All values are in todays dollars.)

. . .

OF course, there are risk to these different scenarios, and depending on where you think the stock market is going verses the housing market, maybe my assumptions don't work for you.

. . .

I just cant see how buying a house is a better deal. IS there something big I'm missing here?"

Neo: You have gotten alot of good responses, so I will try and keep this short (and will hopwfully not to redundant).

1. Buying a house is not primarily a financial decision; it is primarily a lifestyle decision.

2. Make sure that you are comparing apples to apples and oranges to oranges. One poster questioned small apartment versus larger house; you also noted the additional complexity regarding interest deductions, real estaet tax deductions, and maintenance costs of ownership.

I would also suggest that while you assumed long term market returns, which is not a bad assumption for long periods, you also assumed that 100% of those funds would be invested in equities until the final comparison date, but Foolishness would suggest that around 5 years before terminal comparison date (or 3 years, if you are really aggressive), funds should be coming out of equiteis and into more conservative investments, otherwise you run the risk of selling into a down market on the terminal comparison date. IOW, funds need in less than 5 years (or 3 years), should not be in the market. Thus, in your comparison to a 30 year mortgage, after 25 years new dollars would not bgoing tinto equities and existing dollars would be starting to come out, leading to a lower terminal value; same for 15 year comparison, but change would happen after 10 years (not 25).

3. As others have noted, part of the "lifestyle" issue can simply be where you are in life. For example, I rented for 5+ years after I graduated from school; I was single; rent was cheap, relatively (and the monthly rent would not have supported a mortgage for anywhere I would have cared to live, even assuming I had a down payment); school loans zapped cashflow; hours at work were long and who wanted to come home to home maintenance requirements. Now, considerably older, and married with children, and I much prefer home ownership. And, I bought before local hosuing prices started to rise, so I have locked my basic housing costs - except for ad valorem taxes (and maintenance, depending upon how you structure your analysis).

Furthermore, buying and selling a home involves high transactional (frictional) costs, and my personal rule of thumb is unless you have some relative degree of confidence that you will remain for at least five years (in order to cover the frictional costs), renting is probably in order, barring convincing facts to the contrary.

4. As another poster indicated, presumably the house is (finally) paid for a some point, but rent goes on forever; sometimes a lifetime analysis is in order and apart from investment return, do not ignore cash flow issues.

Therefore, I suggest that you run your own numbers and look into your own heart and mind and make the best decision for you, at whatever stage of life you are currently in, while realizing that it may well change as circumstances change.

Just my \$0.02.

Regards, JAFO

P.S. Nice to see you on another board.

No. of Recommendations: 2

Gary-

Actually, I think in this society most people who buy end up with less equity than those who rent and invest the difference.

This is because people don't stay in a home for 30 years. They get a 30 year mortgage and then change homes every 10 years, never paying it off and paying %90 of their money in interest. Who can guarantee that their job or family situation won't cause them to move for 30 years?

Anyway, long before a 30 year mortgage is due I will have retired and be travelling around the world. I know I won't be in it for more than 10 years, which is why I used 10 years for my numbers.

This investigation has made me think that people are as foolish about home purchases as they are about car purchases- emotion gets in the way and they justify foolish behaviour with rationalizations. (IE: It will be good to get rid of our high interest credit card debt with a home equity loan!)

Neo
No. of Recommendations: 3
<<Buying a house is not primarily a financial decision; it is primarily a lifestyle decision.>>

Hmmmm, lets use this logic to the other financial decisions in life...

I put several hundred dollars away each month into my 401k plan and to the extent this cuts into my disposable income each month, saving into a 401k profoundly affects my "lifestyle". I should also mention that my 401k plan requires 5 years employment (like most 401k plans) to become 100% vested on the employer match. Obviously, to the extent that I have to stay employed at the same company to become "vested" in the 401k is a "lifestyle decision". Thusly, my peers who choose not to put money in a 401k or who change jobs frequently (never becoming vested) are primarily making a "lifestyle decision".

Another primarily "lifestyle decision" I made was to live below my means. I save money in NONRETIREMENT accounts in addition to my 401k each month and compared to my peers who "spend it while they got it" my "lifestyle" is profoundly different (i.e. modest).

I also made the "lifestyle decision" to go to college for 4 years with the idea in mind of expanding my employement opportunities on the long term basis. Taking on student debt and forgoing full time employment obviously made my "lifestyle" very different from my peers who chose to work instead of going to college.

After college, I made another major "lifestyle decision". I decided to buy a car instead of leasing one. In order to buy the car, I had to put down a downpayment and my monthly costs were higher over leasing which obviously had ramifications for my "lifestyle". 4 years later, I own the car outright which makes my "lifestyle" very different from those of my peers who are still making lease payments on their cars.

After college, I also made another big "lifestyle decision". I decided to buy a new VCR. Instead of going to one of those "rent to own" places to buy the VCR (where the monthly payments would be extremely cheap but would go on almost forever) I decided to "dig down" and spend the \$150 to purchase the VCR outright. Obviously, to afford this purchase meant no pizzas or going out to the movies that month which had a big affect on my "lifestyle".

And lastly, yes I made the big "lifestyle decision" to purchase a house. My hope is that by the time I retire, I will own the house outright which will have a profound consequences for my retirement plans. As for my friends at the time (year 2036) who are retired and renting a crummy studio apartment for \$1800 a month I will tell them that they made a "lifestyle decision" not to buy a house years ago. At which point, he or she will probably beat the crap out of me.

--Dennis

No. of Recommendations: 1

JAFO-

I know I won't be here longer than 10 years, which is why I used 10 years as my time of comparison.

I agree that it is a lifestyle decisions: 10 years from now I will be living in something I own. The thing is its more likely to be a sailboat than a home. I'm not going to be "renting forever"...

I posted the same query to the living below your means board and got a lot of emotional responses. People seem to feel that because it worked for them, it must make good financial sense. But reading the articles someone on here pointed me to, I discovered that most people never finish their 30 year loans and trade them in every 10 years or refinance. If you do that, you're right back to paying %99 interest.... so I wonder how many people actually own their homes or just rent them for a long time from the bank... while the bank assumes no risk and they assume all the risk.

At least with an apartment, they assume the risk.

Anyway, if I don't sail away, I will buy property... but probably for cash on the barrelhead.

I was hoping that someoen could show me how buying a home and paying on it for 10 years would make financial sense--- I'd really rather do that. But I won't do it if it leaves me in a worse position in 10 years.

Neo
No. of Recommendations: 3

Dennis-

Interesting that all of your "lifestyle" decisions make financial sense except for the last one. Odd are, you won't still be in that house in 30 years.

And anyway, who says there are only two choices: Rent for 30 years or buy now and hope you stay there for 30 years?

What about rent now while the income is greatest, put the max into good equities rather than a home that only matches inflation and THEN buy a home outside of an urban area to retire to in 15 years for cash? (Or sail around the world.)

That's the lifestyle I would like.

Neo
No. of Recommendations: 2
<<What about rent now while the income is greatest, put the max into good equities rather than a home that only matches inflation and THEN buy a home outside of an urban area to retire to in 15 years for cash? (Or sail around the world.)>>

I'm sorry, but "equities" are not "cash". You will have to sell the equities and you will have to pay taxes on the capital gains. Even at the long term tax rate, to sell a few hundred thousand dollars worth of equites you will have to borrow against the house to pay the taxes or spend more of your savings to pay for your taxes. If you sell \$100,000 worth of equities you will pay \$20,000 in taxes. If I sell my house ( i.e. "primary residence") the capital gains are \$0. I am sure you are going to say that capital gains are "no big deal".

Your also assuming that I have a 30 year mortgage. I have a 15 years mortgage which only has a slightly higher monthly cost. The 2036 is when I retire (reach age 65) :-).

Lastly, what will you do if your "good equities" turn out to be losers? Are you saying your some kind of pyschic? We have come a long way now that people think that owning equities is like "money in the bank". Are you assuming the 20% returns we have had in recent years?

(BTW, I have already lived in Oregon for 30 years).

--Dennis
No. of Recommendations: 0
Anyway, if I don't sail away, I will buy property... but probably for cash on the barrelhead.

10 years from now I will be living in something I own. The thing is its more likely to be a sailboat than a home.

Anyway, long before a 30 year mortgage is due I will have retired and be travelling around the world. I know I won't be in it for more than 10 years, which is why I used 10 years for my numbers.

This investigation has made me think that people are as foolish about home purchases as they are about car purchases- emotion gets in the way and they justify foolish behaviour with rationalizations.

SirNeo,

You should print out and save some of your replies. Sounds like someone in their early twenties who just read Atlas Shrugged living on a salary their parents didn't reach until their 40's. Do you really think you can retire in ten years when everyone else in their twenties have the same plan? Just don't think the economy could support all of us retiring and sailing around the world. Boats and little drink umbrella's would cost too much.

You can do anything you put your mind to : )
lol,
ivan

No. of Recommendations: 2
<<
I just cant see how buying a house is a better deal. IS there something big I'm missing here?>>

For the usage of it. Period. You don't expect to make a profit on your car, do you? Heck, you don't even factor that consideration into a lease/buy decision.

As someone recently said, buy a house to live in. Any profits and/or tax benefits are just gravy.

That said, there is a great psychological benefit in knowing that you own your own house (along with the bank, of course). But if you are young and not yet married, it probably isn't a smart thing to do.

Ray
No. of Recommendations: 1
Fisv:

<<Buying a house is not primarily a financial decision; it is primarily a lifestyle decision.>>

Hmmmm, lets use this logic to the other financial decisions in life...

And lastly, yes I made the big "lifestyle decision" to purchase a house. My hope is that by the time I retire, I will own the house outright which will have a profound consequences for my retirement plans. As for my friends at the time (year 2036) who are retired and renting a crummy studio apartment for \$1800 a month I will tell them that they made a "lifestyle decision" not to buy a house years ago. At which point, he or she will probably beat the crap out of me."

Or your friends may have retired long before you because they avoided pouring money into a house; you may want to read posts by "intercst" on The Retire Early board (in Speakers' Corner) about his view that renting and investing the difference allowed him to retire well before 40. There are a whole host of prior discussions about renting versus buying, and 30 year versus 15 year versus even faster pay-off. You might also want to check out The Retire Early Home Page at:

http://www.geocities.com/WallStreet/8257/reindex.html

or

http://www.retireearlyhomepage.com/

Now, as to the specifics, all of the examples that you cite (most of which I did not copy in order to keep this post from being even longer) tend to compare current assumption versus savings/investment and delayed gratification, which is well and fine. But most of them do not "root" you into the community in the same way that home ownership tends, too (except maybe waiting or your vesting period). Also, you do not speak to the fundamental difference (1) between owning a piece of property of doing with it as you wish, subject to existing laws, and renting a piece of property and being subject to all those same laws PLUS whatever additional rules the landlord desires to dream up and (2) owing the property, subject to paying the mortgage, the taxes and the potential for eminent domain and renting the property, which can be taken from you a the expiration of any lease term, even if you have always paid the rent and otherwise complied with the lease (except maybe in NYC and/or California).

IMO, there are real differences that you are glossing over and that are not captured in you other examples. Are you aware that real estate is one of the few areas in which the law (equity) allows for specific performance? Certain personal services contracts are another. Equity permits this remedy in those areas because they are considered unique and not fungible.

Just my \$0.02. Regards, JAFO

No. of Recommendations: 0
SirNeo: "I know I won't be here longer than 10 years, which is why I used 10 years as my time of comparison.

I agree that it is a lifestyle decisions: 10 years from now I will be living in something I own. The thing is its more likely to be a sailboat than a home. I'm not going to be "renting forever"...

I posted the same query to the living below your means board and got a lot of emotional responses. People seem to feel that because it worked for them, it must make good financial sense. But reading the articles someone on here pointed me to, I discovered that most people never finish their 30 year loans and trade them in every 10 years or refinance. If you do that, you're right back to paying %99 interest.... so I wonder how many people actually own their homes or just rent them for a long time from the bank... while the bank assumes no risk and they assume all the risk."

Just a quibble, the bank still has certain risks related to non-payment and bankruptcy and, at least for fixed rate loans, interest rate risk.

"At least with an apartment, they assume the risk.

Anyway, if I don't sail away, I will buy property... but probably for cash on the barrelhead.

I was hoping that someone could show me how buying a home and paying on it for 10 years would make financial sense--- I'd really rather do that. But I won't do it if it leaves me in a worse position in 10 years."

I do not know you well enough, and you would not want to post enough detail about yourself in a public board, to really anser this issue. So much would depend upon (i) your local real estate market, both for owning and for renting, and their prospects for the next ten years, (ii) the strength of your decision that you will be departing within 10 years, (iii) your tax bracket and other investment opportunities, and (iv) what you think about the validity of using market returns for more than 5 years (or 7 years) in light of what I posted in my prior posts about terminal values and equity market risk and volatility.

Sorry that I cannot be more definitive.

Regards, JAFO
(who likes owning his own home, but was one time a long term renter and who does not think that rent is necessarily wasted money)

No. of Recommendations: 1
<<Or your friends may have retired long before you because they avoided pouring money into a house;>>

I just bought a house (new construction) and put 20% down (to avoid PMI). My mortgage plus property taxes and insurance is \$999.00 a month. With the tax deduction my mortgage expenses will actually be \$820.00 a month. To rent a house of similar size (3 bedrooms) in Portland OR is typically \$1100 to \$1400 a month. I am subleting one of the bedrooms to my current roomate (I am not married) for \$335.00 a month so my net mortgate will be under \$500 month. The house is a new construction and has a warranty which will cover maintenance issues with respect to defects in the house. I beg to differ that I am "pouring" money into my house vs. my peers who are renting. I am currently saving 25% of my income, same as when I was renting.

<<But most of them do not "root" you into the community in the same way that home ownership tends, too (except maybe waiting or your vesting period).>>

There are lots of ordinary facts of life that will root you to a community. Do you have a family that lives in the area that you live in now (mother, father, etc.)? Are you married? Will you force your wife or husband to quit their jobs if you decide to move to a different state or city to pursue your career? Do you have kids? Will you force them to change schools for a career gambit? Do you have friends? Do you want to give them up and start all over somewhere else? etc,etc,etc.

<< Now, as to the specifics, all of the examples that you cite>>

My point was that all long term investing involves sacrifices to your freedom and short term finances and will cut into your spa time. Of course all my examples are different but they are all true to the point I was making.

--Dennis

No. of Recommendations: 0
Neo,

You really shouldn't buy a house right now if you can't see the advantages. You're not ready. It's not something anyone should have to convince you to do. It's something you would want to do when you're ready.

Good luck!?

Betty ;)
No. of Recommendations: 2
Fisv:

<<Or your friends may have retired long before you because they avoided pouring money into a house;>>

"I just bought a house (new construction) and put 20% down (to avoid PMI). My mortgage plus property taxes and insurance is \$999.00 a month. With the tax deduction my mortgage expenses will actually be \$820.00 a month. To rent a house of similar size (3 bedrooms) in Portland OR is typically \$1100 to \$1400 a month. I am subleting one of the bedrooms to my current roomate (I am not married) for \$335.00 a month so my net mortgate will be under \$500 month. The house is a new construction and has a warranty which will cover maintenance issues with respect to defects in the house. I beg to differ that I am "pouring" money into my house vs. my peers who are renting. I am currently saving 25% of my income, same as when I was renting."

You may well be the exception that proves the "rule." Your local values - rental versus purchase - appear upside down at the moment; for a long time in Houston, it was easy to rent more cheaply than to buy. Many (most) people who buy do not rent out rooms. Many people also over-extend themselves vis-a-vis home mortgages; there is a reason that the phrase "house rich, cash poor" was coined. Mortgage interest and other deductions are only valuable to the extent they exceed the standard deduction (which you could take even if you had no itemized deduction), so your tax savings may not be as great as you calculate. In addition, you are incurring an opportunity cost WRT to the 20% down payment that is no longer invested in other assets; from the secondary stories I have read, in general, over the long run, equites return 10-11% wheras real estate returns 3-6%, but many exceptions can be shown in various locations and over various time periods. Like politics, almost all real estate is local.

<<But most of them do not "root" you into the community in the same way that home ownership tends, too (except maybe waiting or your vesting period).>>

"There are lots of ordinary facts of life that will root you to a community. Do you have a family that lives in the area that you live in now (mother, father, etc.)? Are you married? Will you force your wife or husband to quit their jobs if you decide to move to a different state or city to pursue your career? Do you have kids? Will you force them to change schools for a career gambit? Do you have friends? Do you want to give them up and start all over somewhere else? etc,etc,etc."

No disagreement, but you do not choose purchase your family; You may choose to marry or to have any kids, but I doubt that those are primarily economic decisions for most people.

AS I have said, there are certainly circumstances in which home ownership can be a good economic decision, but I doubt that it is universally tru 100% of the time (and I generally favor home ownership).

Just my \$0.02. Regards, JAFO
No. of Recommendations: 0
I skimmed your post and I didn't see any calcualtions for rent increases. Where I live, rent has increased faster than the value of homes. Can you get a good apartment for \$1000? What if your family grows, then you will need to rent a house at twice that cost. I would also assume that you wouldn't be living in the same apartment for 10 years, so you need to add in additional deposits, the cost of moving, lost refunds, cost of utility deposits and the any other renter expenses associated wiht the cost of renting.

Also, the pride or security of home ownership can not be added into your formulas, but that is the main reason I am buying. Being at the mercy of a renters market sucks.

Dave
No. of Recommendations: 3
Your story hangs together only on the basis of a few key assumptions, the most important of which are 1) that your rent stays constant at \$1000/month over many years (hint: it won't), and 2) that you'll faithfully invest the entire difference between it and what you'd have paid on principal plus interest on your mortgage in the stock market. While you may be different, the fact is that most people lack this self-discipline -- we like to take vacations, buy nice clothes, subscribe to magazines and newspapers, buy our spouses and children presents, buy cars and SUVs, buy computers and PDAs, buy buy buy. . .

The way life plays out for most people, it's easy to be fiscally disciplined when you're single and in your 20s. But mortgages last a long time -- most for 30 years -- and a lot can change during that time. You'll likely get married, start a family, move once or twice, and change jobs several times. At some point you'll start to wonder, "Why do I look so shabby? Everybody else in my firm has nice suits, and I look like an intern!" Or your wife/husband will start to complain about the tiny apartment you live in (never underestimate the power of envy). You may decide you deserve to have a BMW. Or your kids may need a lot of orthodontics...or figure skating lessons...or a horse. Under those circumstances, it can be comforting to know that your housing cost is nominally constant (which means its true cost shrinks a bit every year).

Also, I think you're stacking the deck against home ownership a bit. First, I don't think you're taking into consideration the full size of the tax subsidy (property taxes as well as mortgage interest are fully deductible). Second, if you're so disciplined as to invest every nickel you save by renting, then we have to assume you'd do the same with the tax savings from those deductions. To have a fair comparison, you should compound those benefits at the historical rate of return on stocks.

Finally, in your discussion of risk and bull vs. bear markets, it appears you are implicitly assuming the returns on real property and financial investments are perfectly correlated: they are not. Because of this, you can gain useful diversification by putting part of your assets into real property. Would your house necessarily hold its value when the stock market tanks? No. But your overall portfolio will likely be more stable, relative to an equities-only portfolio, if it includes a well-chosen house in a market that isn't too over-valued (a tidy \$200K 4-bedroom in Minneapolis would likely be a better investment than a \$650K dump w/ 3 bedrooms in San Mateo). Burton Malkiel's "A Random Walk Down Wall Street" has an excellent discussion on this whole issue that I would recommend.
No. of Recommendations: 2
Neo,
For the most part I agree with you. Don't know how
old you are but I wish I had 'done the math' 5 years
ago when I "bought" (yeah right? miss one payment
then you find out whose it is!!) my home.
The only thing you didn't factor in, is the tax
return that Uncle Sam gives you on mortgage
another point -- that folks who claim that they
bought a bigger house, larger mortgage, in order to
get the tax break --- definitely didn't 'do the
math' like you did.
If you haven't bought a house yet, I think you are
right on track, O foolish one!!!! NUMBERS TELL THE
FACTS!!!!!

Pete.
No. of Recommendations: 1
It is really nice to see that someone other than me feels this way about buying a house. I'm renting an apartment right now where I pay \$855 in rent. My wife and I are in the process of buying a house that will raise my monthly housing payment to almost \$1600. I wish I could get her to buy your argument. No such luck. It's the American dream remember.

Time to get away from the couple next door that has a fight every weekend at 3 a.m., the parking lot that you can never find a space in, the rental office that takes forever to respond to your maintenance request, I can go on.

In the end it really comes down to feeling like you actually get something and not this sense of giving your money away every month...like insurance.

As for your friends, they just want somewhere new to hangout. It makes no financial sense, but it makes you feel a whole lot better when you do.
No. of Recommendations: 0
The main argument for rental vs. ownership seems to be that if you take the extra money you save on rental and invest it you come out ahead. I agree with this premise completly. But who says you have to buy a 270K house. What about a small 2 or three room cottege that would compare in size more correctly to the 2 to 3 room apartment that you would pay the \$1000 per month for. This way you could invest the money you saved from buying the 270K house. In otherwords, you could have your house and own it too.
No. of Recommendations: 1
You missed the house, Fool.
No. of Recommendations: 0
I may be wrong, but I highly doubt that you can rent a \$270K home for just \$1000 per month.
No. of Recommendations: 0
What an incredible story that you have told! It's a comparison of apples and peaches. It's incomparable to relate a rent rate of \$1,000/month to a \$2,000-2,500/month house payment. They aren't even close to the same size/type/style. If you compare like size/type/style, the numbers will look very impressive for home ownership. Add in the return on investment, you'll buy two new houses!!! Good luck house hunting!!!
No. of Recommendations: 6
Making a major purchase just because lots of other people are doing it NEVER, EVER, EVER, EVER makes sense!!!!

Here are some things to consider:

* People tend to buy more home than they need ... then they rationalize their stupid decision to themselves, their families, their friends. Why? The Realtor showing them homes DEFINITELY has a motivation for selling them more home. The lender has a motivation for the largest practical loan balance ... But, who has the motivation for a smaller home in this picture ... no one, really --> As a rule, PEOPLE BUY BIGGER HOMES THAN PEOPLE NEED! (Disclosure: I'm a licensed real estate broker.) Don't listen to people who are motivated to take your cash or who've made stupid mistakes that they like to share ... listen to yourself.

* If you buy extra room, eventually you are going to fill that extra room with furniture / other crap that you don't currently need and wouldn't consider having if those rooms weren't sitting there empty. Much of middle class American culture is built on hyper-acquisitiveness. There are few things that stop this. Advertisements certainly do not! The tax code certainly does not! The people around you do not! Severely limiting your living space is one way to impose this discipline. Frequently moving is another way to do it.

* A home involves a lawn, gutters, basement issues ... and a host of other stupid maintenance chores. Consider very carefully how much HIDDEN expense and commitment of time home ownership will entail. Make a long list of everything that you will LOSE when you buy a home. Since few home owners don't have "projects" they are working on, most of this loss will be in the area of what people consider to be "free time" ... extremely inaccurate language, in my opinion ... if your "free time" is not worth more than the time you spend working ... then WORK MORE or do some serious thinking ... is the highest and best use of your time mowing a lawn, fixing the gutters, etc.?

* A home is an EXTREMELY ILLIQUID investment ... recently homes have been selling too fast -- this will not continue!!!! People forget that when an economy stagnates or sours --> you CANNOT SELL A HOME ... at almost any price. Beside the illiquidity considerations, home ownership will hamper your ability to advance within your career ... because that HOME (even though it can be sold) will always apply a brake on your movements. Moving all that stuff that's in that house, getting the house sold and tying up all the loose ends WILL stop you ... don't be fooled by relocation reimbursements -- someone pays for those, someone's salary offer is reduced because of that reimbursement. You can guess whose salary that would be.
No. of Recommendations: 0
There is a major flaw in your reasoning. You cannot 'rent an apartment' comparable in living accomodations to the house for \$1,000/mo. It will cost more like \$2500/mo.

The is no free lunch anywhere. It costs money for shelter. The challenge is to buy shelter at a cost that fits your individual financial and quality of life objectives.

Property taxes are always higher on commercial property (apartments) than residential houses. Those are included in the rent. Likewise on maintenance costs. Homeowners doa lot of minor repairs tehemselves, while apartment owners have to contract those to others.

The 'bet' is really on how residential property in your particular area will appreciate/depreciate relative to other investments over the time horizon of interest. Buy in an inflated (HOT) market and you are unlikely to do well over say 10 years. Buy in an area just starting to 'bloom' and you are more likely to do better- but the risks of early top out are higher. With real estate, the truism is Location,Location, Location.

Market forces completely invisible to the homeowner can drastically alter profit potential. Interest rates and macroeconomic forces are wide spread. Loss of (or addition of) a major desirable employer (or industry segment) can drastically impact local housing values. See Seattle vs Boeing before Microsoft, San Diego vs McDonald/Dept of Defense, Silicon Valley vs X.coms, Houston vs energy industry,etc. It is not a simple economic calculation!

Remember, when hunting for elephants, it is not productive to follow the piles of droppings, you have to get out in front of the herd!

Remember also, profits on sale of your home are now tax exempt for all practical purposes, while those on other investments are often taxed at high incremental rates.

No. of Recommendations: 1
Neo,

You forgot to take the 20K downpayment into consideration when calculating investment returns from the rental option. I figure that you would have an extra 20K invested for ten years on top of the monthly investments. That 20K at 10% be be an additional
\$51,874.85. This is assuming you immediately dump the cash into a stock investment rather than dollar cost averaging.

I don't have the time to do the rest of the calcs. but this factor will further strengthen your renting arguement.

Dan
No. of Recommendations: 0
mzbruns:

I agree with most of your views, but they also apply to renters as well.

Here are some other things to consider:

* People tend to buy more home than they need...* Rental agents, too, have a motivation to sell you more space than you need.

* If you buy extra room, eventually you are going to fill that extra room...* Same is true of rental space.

* A home involves a lawn, gutters, basement issues ... and a host of other stupid maintenance chores... * Very true, and those same chores must be done for renters by someone (your rental agent?), resulting in higher rental/ maintenance fees (albiet there may be some economies of scale for the rental agent depending on the type of rental unit). The higher rent requires the renter to have additional income, resulting in reduced "free time" factor (or reduced disposable income).

* A home is an EXTREMELY ILLIQUID investment* This is very true and should only be undertaken by a Fool with a long term outlook. But even here, there is concern for the renter. What if I just signed a 12 month lease and my employer wants to transfer me across the country? There is some risk for renters here, too.
No. of Recommendations: 1
You're not missing a thing, in financial terms. The only intangibles you have omitted is being held hostage to the rental market, where prices can increase tremendously based on supply and demand. But, by and far, real estate tends to be the riskiest investment. Now, if you have a family, the quality of living issue will have a value which will easily outweigh the potential gains in the market. Plus, you have a steady cost, which when adjusted for inflation over the years, is less and less every year. Rental costs tend to go up every year. There is this piece of mind issue which also adds to quality of life.

Bottom line - if you are single, or an on the go childless couple, I would forgo the home purchase as long as you religiously invest the savings wisely, and don't spend much time in your apartment. This is a personal decision.

TB
No. of Recommendations: 4
This is for Neo. Neo, you are missing something. You are treating this purchase like it is an investment. That's smart of you and I salute your diligence. What investments does one make in the stock market where you borrow money to make the investment ? We're not supposed to borrow money at 7.5% ammortized over 15 years and dump the money into good equites like stocks in the NOW 50. There are a lot of people out there that do borrow money to make investments. It is not a good practice. Your comparative analysis is not on stable premises - hang in there though, I'm going to help further along here. Your enthusiasam is too good to ignore.

Second, you are getting a place to live. That has to be worth something. Good rule of thumb for buying a home: Take your gross annual compensation, multiply by two and that is the maximum mortgage size you should have. I believe in getting fixed rate thirty year mortgages. This way you get the lowest possible monthly payment. You lock in your purchasing power in today's dollars for thirty years forward. You can always make extra payments towards pricipal. One extra payment a year should shorten your mortgage by at least ten years.

Third, homes are not investments. They end up being investments for some people. This is not financial planning but the result of not having done anything else with one's money over the years. People need to log on to the Motley Fool and start building a future.

I have some good ideas for you. Why don't you see if you can buy a duplex or triplex ? Live on one side and rent the other side out. Allow your tennant to make your mortgage payment for you. If you do it right, your rental income may cover your entire monthly payment. You suck in some nice write offs too. For example, you can depreciate the property over 27 years using the Modified Cost Recovery Method of Depreciation. You will also get to file a schedule E which means that you get to write off your property taxes, mortgage interest, utilities, repairs, advertising, legal fees, on and on.

You could live there for a year and then search for another duplex. You could pyramid this concept until you have say, three duplexes. You may get lucky enough to have enough additional income from your tennants so that when you finally do buy your dream home, none of the money for your mortgage payment comes out of your pocket !!

It gets better from here Neo. Suppose the properties rise in value while the pay off on principal drops. We're talking home equity loan here, probably two or three percentage points above the first mortgage. Say 10%. Now you could borrow 10% money for further acquisitions or money for buy to hold.

I have a lot I could tell you. If you want me to evaluate any sceanarios, send me an E-mail. I have always been a bit miffed by the lack of commentary on real estate at the Fool. My opinion is that one should diversify while having fun. I like 50% in real estate, 35% in equities, 10% in cash and 5% in insurance. Thats for me though.

Real estate is the rock. It is better than Berkshire Hathaway.

Mike Fink
No. of Recommendations: 0
You are missing few things beside lifestyle considerations.

1. The interest is tax deductible. Depending on your income and the state you are living in, this could mean that the real cost of the mortgage is reduced by up to 48% including Federal and State taxes. On the other hand owning a house requires insurance and you must pay property taxes. In time, your income will rise and your taxes will creep upward.

2. Taking a deduction for the mortgage lets you take other deductions and may reduce your taxes further. If you don't have a mortgage, you may not have enough deductions to make it worth your while to forgo the standard deduction.

3. If you take a fixed mortgage, you always have the option of refinancing later when interest rates are lower.

4. For many people, paying the mortgage is the only way to save money. Many people say that they will save and invest the money, but in reality, they never do.

5. If you can pay for a mortgage AND save money for investment, buying a house reduces the risks you are taking in the market place. It is unrealistic, in the long run, to expect more than 10-12% return on your market investments. When inflation kicks in, homeowners benefit, but the market can tank! REMEMBER THE 80s!

GK

No. of Recommendations: 3
In spite of the effects of the tax code (heavily lobbied for by the home building industry, Realtors, and others) the long term data pretty clearly indicates that equities beat real estate (including houses) as investments ... this does NOT take away from the substantial emotional benefits of owning a home. The only thing that we can say with certainty is that Americans are most definitely NOT penalized for home ownership.

Many people feel that they are ahead financially because of their investment in their home, but this is probably because they lack the discipline to save as much money as they spend on everything that goes into their home. Also, they are unwilling to work for the same wage (net, after ALL tax effects) that gladly they pay themselves to mow the lawn, fix the gutters, stain the woodwork, etc. If they did this work for as many hours at a comparable second job and INVEST the money, they'd be substantially better off ... but they can probably do even better by wisely using their "free time" with their own personal development / creative fulfillment, with their families, being involved in their communities, etc. But, again, it's very much a matter of personal discipline. A house is a socially-acceptable, but very demanding taskmaster and enforcer of the puritan work ethic.

Living in the same place for 30 years is fantastic! I'd highly recommend it AND I'd highly commend it. {BUT IT'S NOT EVERYONE!} It seems to me that there are NOW fewer and fewer reasons to plant one's self than there were 30 years ago ... mostly because our communications and travel options are facillitating better and better and better ways of maintaining our relationships, yet being highly mobile. For example, I couldn't even consider taking advantage of things like \$640 round-trip tickets to Russia, exceptional exchange rates, and yet being able to remain in daily contact with my family, friends and business associates if I had to KEEP MY JOB because I had that mortgage payment schedule to meet AND I couldn't even begin to contemplate selling my house and all of the acquired junk ...

Home ownership is completely senseless in more and more situations. The times, they are a changin'
No. of Recommendations: 1
Here is an idea. What about buying a multi-family home? Instead of paying part of another person's mortgage payment. Some other person can pay part of your mortgage payment. I'm not saying buy a 18 unit condominium complex. A two or three-family house will allow tenants to contribute a substantial portion towards your mortgage. Yes, I know it can be a hassle at times. However, if you screen your tenants properly, there shouldn't be too many headaches. Where else can you make \$1000.00 a month for working a couple of hours?

Chris
No. of Recommendations: 1
You are forgetting that you get to depreciate the home at 3% a year ( which on a 250K loan is a \$7500 write off) plus the interest (250,000 at 8% loan = 20,000 write off) plus property taxes, school taxes and insurance (which depends on your tax bracket) for assumption sake lets say \$4000 total.

\$7500 depreciation
\$20000 interest
\$4500 taxes
=32,000 tax break
@ 15%
=\$4800 back in your pocket from Uncle Sam
or approx \$45000 over ten years.

Also, you are forgetting that if you make just one extra payment a year, you halve a 30Yr mortgage to 15 years.
No. of Recommendations: 0
Neo,
The bottom line is that NUMBERS TELL THE FACTS!!
And to be Financially Intelligent, one NEED to be able to distinguish between facts and opinions!!!
A whole lot of opinions have been exchanged on this board.

A home has long been considered one of the biggest
investment decisions you will make in your life. But
the point is that YOU can make it an INCOME-GENERATING ASSET or a LIABILITY!!! Again,
the NUMBERS TELL THE FACTS!!!!

Robert T Kiyosaki.

Pete.
No. of Recommendations: 0
I remember the 80s VERY WELL!

There are many people in agriculture who lost MILLIONS because of their investments in real estate. The same conditions of the ag land boom in the 70s (low interest rates coupled with increasing income expectations) are now driving the current housing boom. The same irrational expectations that now prevail in the housing markets (i.e., the expected rates of annual increases in valuations) were prevalent in the early 80's in the ag land market before the bottom dropped out! When income expectation cease to rise (the question is when, not if) and when the effect of recent interest rate hikes begin to hit home, the housing market will not look as rosy as it does today.

I would absolutely NOT recommend that anyone buy a house as an investment unless they are completely undisciplined and CANNOT SAVE money! Buy a home because you want to live there, because you want to do your own thing without worrying about your landlord ... but don't imagine that it's a fantastic investment.
No. of Recommendations: 0
Don't forget that the landlord makes the rules for your apartment including whether you can continue to stay. A house (without neighborhood restrictive convenants) allows you to create your own rules. The neighbors probably change slower in a housing development vs an apartment (could be bad or good).
No. of Recommendations: 0
Neo
Great post and great responses. I see one thing you left out of your calculations. I didn't see any increase in rent over 10 years. From my renting days the rent went up every year (on a one year lease). Sometimes as much as 10%. How does even a small increase of 2% a year affect your numbers and what types of increases have you and others had over the years?
No. of Recommendations: 1
TMFCookie: "Don't forget that the landlord makes the rules for your apartment including whether you can continue to stay. A house (without neighborhood restrictive convenants) allows you to create your own rules. "

You do NOT really create the rules. The housing market and your acquired possessions stored in your house will make the decision about how long your house will lock you in place.

TMFCookie: "The neighbors probably change slower in a housing development vs an apartment (could be bad or good)."

Voting with your feet makes more sense every day because of there are better and better options out there. People are generally pretty friendly almost anywhere on the planet as long as you show them some decency and respect ... and don't pretend that your stuff is more important than their well-being (in spite of what you might want to think, that isn't the case). Some of the most self-absorbed and therefore least interesting, least creative, most obnoxious people are homeowners with too much turf to mow, too many possessions to protect.

No. of Recommendations: 1
This is Great! When I am ready to buy a home, I will know EXACTLY where to go to figure out whether it is a good idea.

I think there is one additional monetary plus on home buying side. Doesn't the federal government give a one time capital gains exemption for the sale of a home? This allows you to keep your gains on any home real estate appreciation tax free once in your lifetime. This could be a major bonus for a couple going from a four bedroom home into a two bedroom retirement home because 1) there are no capital gains on the home sale 2) Already lower taxes on salaries in retirement 3) no loan on the new home because often the sale price on the old home covers the cost of the new one, with some \$ left over 4) The tax-free capital gains can fund new investments, vacations, etc.

kobalt
No. of Recommendations: 0
"I just cant see how buying a house is a better deal. IS there something big I'm missing here?"

The only thing I see here is that in my local housing market, the quality, size, and location you will get in a \$270K house is much better than what you would get for a \$1K apartment. Thus, the difference you are paying is for the lifestyle perks. In my experience, that payment on a house is not much higher than the rent on a comparable apartment (maybe a couple hundred \$s). This means that lost return on your downpayment, your taxes, and your maintenance costs are what shift the balance one way or the other.
No. of Recommendations: 0
If you're planning to raise a family, don't forget about the school system. In my area, apartments are clustered in towns with lower rated school systems. You might need to factor in the cost of quality private schooling.

A well-chosen house would not incur this added expense.
No. of Recommendations: 0
I'm in the process of getting ready to buy a house. All you said is probably very valid and based on numbers alone you are right. Buying a house doen't make FINANCIAL sense in most cases. But then again, so is having children, spending extra money/time on quality of life, and giving money to the needed. Personally, I'm not planning to stay in a small little appartment as a better financial decision. Not all decisions are financial and that should be reminded every now and then. After you separate your personal life goals from the business life goals you can make as many financial decisions as you'd like. Good financial article though!
No. of Recommendations: 0
There are other risks of home ownership. In home ownership, you are not diversified at all. There are a lot of things that can negatively impact property values. You could end up selling at a loss down the road because of any number of natural disasters, political changes, economic changes to your area, all things beyond your control. If you have an older home, maintaining it is a very significant cost in most climates. In many areas, taxes are quite high as well. The only advantage I see to home ownership is that you can do with it what you want, and you can plan to live there for a long period of time. But one should realize that what you want in a home now is not going to be what you want as a senior, so you won't likely be able to keep it for your entire life.
No. of Recommendations: 0
If you adjust your rent figures to take into account rent increases, I believed the final sum will look very different.
No. of Recommendations: 0
Sir Nero,

There are a few factors you should include when making this descision.

1: Inflation: The cost of renting and houses will go up over time. The same house that was \$100k today will be \$200k 10 year from now, if not more depending on where you live. Not only will the value and cost of a house increase, so will the rent. I'm very surprised that you can rent a comparable home for half of the cost of buying one, that's pretty lucky. Even so, if you were to rent that same place over the next 10 years, the cost of rent will go up and the mortgage payment will not.

2: Tax shelter: The interest you pay on the mortgage is tax deductible. Good way to recover some of that money. In your case this still might not be enough to convince you buying is better :)

3: Discipline: Having to pay a mortgage payment is the easiest way to invest. You don't have to wonder how you should use or invest that money. It takes away a good amount of temptation. Having that liquid cash is quite tempting.

4: Investment risk: I'd be willing to bet that investing in a house is safer than investing in the stock market. The bond market is about as safe, but you'll only get a 6% or so yield.

5: Timeline: From books I've read, my understanding is that if one is able to live in a house for at least 5 years, it's worth the investment. This of course is taking into account a smaller discrepency between the rent and buy cost.

Finally, as many have noted life style has lots to do with the buy descision. If you're one who is single and moves around a great deal then buying may not be the best idea. If you're close to your retirement age and you have money in the bank, I'd say millions, to jaunt around the world and don't plan to live in any one place then I'm surprised you even gave the idea any thought. For the rest of the mortals that plan to live 20 or more years after retirement I would suspect buying a house would be a good idea.
No. of Recommendations: 0
Buying a home is a lifesyle choice. It is true in the beginning a home does cost you more money but you do not have a landlord saying no cats or dogs, or how you want to decorate your house. I prefer to live in a house for the above reasons. Financially it makes little sense for under 10 years but then the cost curve comes into effect. Your Rent will continue to rise and in my area of the country the prices are going up more than 5% for apartments. Eventually the rent will be more than your mortage payments.

You also need to add in the tax benefits of owing a home. They do give substanial deductions on your income taxes, ie mortage intrest, property taxes.
No. of Recommendations: 0

Rent goes up 2- 3 % per year while a fixed rate mortgage stays fixed.

Rent inlcudes all maintenece items, lawn care, etc. and in some cases, swimming pool(s), exercise rooms, etc. When you own, you have to pay for all repairs and you get to sit at home waiting for them to show up.

Owning a home lets you itemized on your taxes. Unless you have some very large deductable expenses, you cannot itemized if you rent (that needs to be changed, but that's another discussion)

I have owned two homes, but I currently rent. I went through your calculation before I bought my first house, and because of where I lived, housing was appreciating 15%/year, it made sense to buy. I bought the second house to avoid capital gains tax from the first house. Now, with the capital gains tax on homes gone, I prefer to rent (I made no money on the second home, as I was living in a different part of the country, where housing appreciated much more slowly). I can rent a nicer place for less money that what I could afford to buy.
No. of Recommendations: 0
you can not compare living in a 275000 house to living in a 1000/ mo apt. That's like saying it's better to buy a used VW instead of a cadillac because that would be less expensive.

You also have to factor in increasea in rent over 10 years. If your 1000/ mo apt. is already averaged out over 10 yrs then that means your starting rent 500/ mo.
Now which would you rather live in, a 275000 house or a 500 dollar apt. You probably can't even find an apt. in the guetto of most large cities for 500/ mo.

So if you are going to be comparable your apt. would cost at least 2000/mo or more.
No. of Recommendations: 0
In your example you compared living in a 250K house to an apartment. Sure renting looks pretty good in that respect. Your example has you saving over 900 bucks a month just in "rental" costs. However, if you were renting a townhouse or looking to buy a townhouse then buying might be a good way to go. Your rent payment would almost be as much as your mortgage payment, taxes and insurance. Of course, as time goes on your rent will rise anywhere from 1-5% a year. So in a few years you will be paying much more in rent than you would if you bought. Plus, you have zero equity.

The other thing you have to look at is how long do you plan on living in an area. If you will be moving in a couple years, buying probably isn't the way to go. Conversly, if you plan on staying for some time, then buying is the way to go.

You can't really consider your living arrangements as an investment. You have to compare various living arrangements to see which is more beneficial to you finiancially and personally. If you assume your living arrangements were an investment then renting gives a 100% loss and owning would almost always underperform the market. But if you make your decision just based on renting vs. owning, you will come to the right decision.
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I can't imagine equating renting for \$1000/mo to buying for \$270K. The rent should be more like \$2500/mo. That certainly changes your math.
Phil White
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What you're not taking into account is that at the end of the mortgage you own the property. While you're purchasing for the property it does seem that you may be better off renting. But once you own the property, you're wiser to own. Consider your 10-year mortgage scenario. If you begin the mortgage when you're 25 years old, then you will pay it off when you're 35. You could then live rent and interest free, possibly for another 30 years. You need to include that in your equation. Along with the fact that if you didn't buy, that means you'll be renting for those thirty years.
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Neo writes:

I just cant see how buying a house is a better deal. IS there something big I'm missing here?

-----

Heh. Just try to find an apartment with 4 bedrooms for a \$1000. Just try to find an apartment with 4 bedrooms! And then cram a family of six into it! With no yard. And a dog. And then find a place to put that woodworking bench. And the wife's scrapbooking stuff. And then make room to homeschool the kids. And an office. And great-grandma's dining room suite. And geraniums.

Yep, there is something to owning a house that you just can't get in an apartment.
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First, let me qualify my reply by stating that I have owned seven homes and my wife is a Realtor.

If you are content living in a \$1,000 per month apartment, why would you want to spend \$270,000 on a house? Surely there are smaller homes available in your area that would keep your monthly note approximately equal to your rent payment.

When we pay rent, we are paying someone else's mortgage note, taxes, and insurance. To me, that's not a good investment, particulary when all most landlords will do is raise your rent.

If by some fluke of the economy, you have to sell your home at a loss, at least you've been able to deduct the interest and real estate taxes on your Federal income tax.

I bought my first home in 1971, and have bought and sold homes in Pennsylvania, Texas, Tennessee, Georgia, and Lousiana in 1975, 1977, 1979, 1983, 1988, 1992, 1994, and 1996. I have never lost money. Many of those years were not so kind to investors.

As with any investment decision, you have to do your research. The three things you need to know about real estate are location, location, and location. To me, that is a lot simpler than what I needed to know before buying equities.
No. of Recommendations: 2
You seem to forget all the charges that a bank
puts into the loan like origination fees and closing
costs. Not to mention that you have to carry more
expensive insurance on the property.

A house cannot be considered like an investment. If you try then you will always find that you come up
short.

Most people don't realize that a house is more of
a liability that an asset. A true asset will put
money in your pocket every month, not take it out.

I believe that the key is to buy or rent just what
you need and invest the rest.
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Sir Neo,
I don't have time to go into a full pro forma analysis here ,but yes, you are missing quite a bit in your analysis of rent v.s. buy. The first and most glaring ommission are the tax savings involved(probably over \$100,000 in your case). You will benefit by purchasing because interest payments on a home are tax deductible( the last great tax break for the average man). Secondly, property tax payments are deductible. Thirdly, your rent assumption is not at all reasonable,you will not find a rental for \$1000/mo. that would be equivalent to a \$275,000 house. In my neighborhood the rent would be more like \$2000-\$2500 a mo. You would also need to take into account rent increases over the years and which lately have been substantial due to shortages in rental housing.You had better run your numbers again. I trust you will find home ownership a better deal on further analysis.
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one has mentioned the Fool rent versus own calculator.
That takes into account the tax benefits, increases in rent etc.

For now, I have decided that renting is better for me because:

1) I don't know how long I will be in the area, although I don't really want to move.

2) I would prefer to buy something better than I can afford at my current salary.

3) I save money on rent by having housemates

I have also used the calculator to decide how much in
rent I am willing to pay. I keep the rent well below
what it would cost to own. Then I don't worry so much
about throwing money away on rent.

I like the idea of owning and having my own place, but
for now its not right for me. But I do keep up with
the real estate market just in case.
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One disadvantage of a global forum is that your "apples to apples" comparison in the Seattle area might be vastly different than an "oranges to oranges" comparison in another part of the country. Here in the Phoenix Metropolitan area, for example, renters abound, and you can generally get a 10 to 25% premium by renting out your house. In other words, the cost of renting a property is 10 to 25% more than the cost of owning the same property (based on current mortgage rates). Renting the same number of livable square feet in a comparable area isn't much better.
No. of Recommendations: 1
SirNeo
You're not missing a thing. You prettymuch got it right about renting vs buying a home. My observation as a real estate broker for many years is that most people don't do an analysis of anything other than price, interest rate and if their friends like the house. They also listen a lot to their well meaning friends and family who are usually clueless about real estate in general.
And headaches for the realtor, who should probably be telling them that the smart financial move is to rent right now.

Why rent? Well...the financial side of the picture (as in your analysis) says that renting pays off financially down the road.
Especially when home values are falling. Are values falling now? Nope. But are they likely to fall in the near future? Probably. Home values are interest rate sensitive BIG TIME. Interest rates are going up now.
This will likely kill the upward momentum of home prices soon. And prices will either go flat or decline. Did you want to buy a home now for \$270k that is soon to be worth \$250k in 12 months? Say goodbye to your down payment. How about 230k in 24 months AND find that you need to move to another city? Now things are really rotten because you're out your down payment, you still owe the bank \$250k, and it will cost you \$18k to sell it(darn'd greedy realtors!). You get about 212k out of the house you paid \$270k for.

Moral of this story: Rent someone else's house when home values are falling or likely to decline. We may be near the end of the current up cycle in home values.

Having said all that...Owning your home for the long term is not just a financial decision. It is
important for many non-financial reasons that can be of higher priority.

Happily Renting,
Patrick M.

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Buying a house makes sense over rent. Here is where your logic is wrong: The house that you would be paying \$1966 a month for would cost you maybe \$2500 a month in rent. That's how landlords make money, they aren't in this to take a loss. Also you forgot to count the 30-60 years after you pay of the house that you would be paying rent. There are hidden factors too like improved credit for other purchaces, a lawn, trees, etc.

The advantage to buying over renting is twofold, one you gain capital, two you work your way out of payments in the future. However my favorite reason for buying a house is the market crash scenario. If you own a house you have a place to sleep even if you lose everything. Bankruptcy lets you keep a house if you own it outright.
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Neo,

Everyone else has all kinds of ideas for handling YOUR MONEY, don't they? Actually, you have left a large variable from the numbers. The expense of the mortgage does replace your current rental expense. How much will that save you every year?

To make the numbers fair, you need to put the payments of the home in your analysis down to the fair market price of your apartment. If you buy a much nicer home than what you are renting, I agree, the risk of homeownership (not to mention the commitment and ill-liquidity of investment) can be too great. As long as your house payment is not much more than your rent payments are now, you are only turning what is now an expense into an investment. ALL proceeds are then FOOLISH gains.

Thanks for playing Devil's Advocate as most people think all house investments are wonderful. They are not!

Sincerely,
Steve
Salt Lake City
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Though well-intentioned your argument is so completely full of holes thats its laughable. First off, you can't compare paying a mortgage on a 270k house/apt against rent of 1k/month. Most owners of rental properties are in it to make money and few will rent with a gross return of 4.44% 12k/270k. So basically your first premise is thatyou will have more money left if you lease a Yugo than if you buy a Lexus. True, but not meaningful. Secondly, unless I was a sucker before I bought my house, rents go up every year. So let's be conservative and assume 3%/yr. Then your rental out of pocket is 137,544 not 120k.If it goes up by say 5% it gets ugly fast(1550/month in year 10. Furthermore, the sale of aprimary residence is free of capital gains, not so with your portfolio which appears to be compounding tax free. So let's lop off 20% of your portfolio gain. In the first example 197K becomes 157.6k versus equity in the house of 223K. Unless my calculator broke, thats 50% more\$\$. But most importantly yoo tend to mix up equity and profit; The 197k you have at the end from your investment of 966 per month is the future value of your invesment, not the profit. the profit is 82K (197k -(120*966)) In the 10% home appreciation example, your equity is cash and its more than three times the value of the cash (509K vs 157.6k)from investing the \$966.
Sorry, but you are missing a lot. Home buying is risky, but your calculations are wrong!
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IÃ•m suprised how you could miss the flaw in your reasoning.
I also live in Seattle, and I more or less agree that one can compare living in a \$1000 rental to living in a \$270,000 house, which in the city limits is a fairly crummy house. By your own calculations your landlord would have to be losing \$1000 a month for you to rent that space if in fact it is equivelant to a \$270,000 house rental. Or they would sell the house and finance it themselves, netting \$2000/month for the next 30 years(probably the rest of their lives).What youÃ•re missing is in your calculations of an AVERAGE rent of \$1000 throughout the ten year period. For \$1000 to be the average, you would need to be comparing rents of say \$500 to the \$270,000 house today, and say \$1500 in rent, to the value of the house in ten years. What you compared was a constant rent of \$1000 to todays home prices, AND to prices 10 years from now . Obviously it is not possible to rent a \$445,000 house for \$1000 today, and it wonÃ•t be possible ten years from today.What is todays rent on a \$445,000 rental house? This is what you could expect to be paying to rent the exact same \$270,000 house ten years from now. Your mortgage payment is the constant, but rents follow the value of the house up over time...Your landlord rents to you because he is probably only paying a fraction of the \$1000 for the morgage which was taken out on a house costing maybe \$20,000. Back then they probably charged \$200 for rent.
Another missing variable is the long forgotten INFLATION. Imagine the effect of say6% inflation on wages and building materials. Your 10% price appreciation figure becomes much more realistic in an inflationary period. As a renter of course, your rents follow inflation up, whereas your mortgage remains the same. I believe we are entering a period of higher inflation than we have seen in the previous ten years, in effect underpinning home appreciation prices to at least the extent of that inflation.
Some advice from a fellow Seattle homeowner... buy the house (a duplex would be better). In ten years you can rent the whole thing out and it becomes a business and the house can be depreciated. You can also borrow money against the equity (home-equity interest is also dedectible) giving you a source of very cheap money to invest in the 10% return investment you described. The difference between 10% and the cost of that money (today about 5.5% if you are in a 39% tax bracket) and you make 4.5% on a substantial sum of money AND get the appreciation on the house while somebody else pays the mortgage, taxes etc.essentially paying for your borrowing costs with their rent. That is how the rich get richer...and how you might have a prayer of retiring in ten years...just ask your landlord.
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Cheers,
Steve
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Yes - something big is the house. Where you'll get an apartment that's the functional equivalent of that house is beyond me. And where I live, it would cost you \$4000/ month. At least.

And you'd spend all that money on restaurants and vacations and cameras and whatever. And you would look at the alterations and fix ups you'd like to do in the apartment and how they'd then belong to the landlord, and you wouldn't do them.

And then you'd get tired of the apartment and want another, and you'd find that rents had appreciated to \$6000/month.

Your hypothetical is like comparing a car with a bicycle. Reconstruct it taking the whole picture into account, and we can all look at it.
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A capital gains tax of 30% works out, with growth of 12%, to equal 3.6% of the total investment. Compare this with the typical real estate agent fee of 6% (3% for the selling agent and 3% for the buying agent) of the total house worth.

Real estate agents add considerable cost to selling & buying houses. This is why I'm thinking of getting a real estate license in preparation from shifting from a renting strategy (I am young and will probably change residence within the next 5 years) to an owning strategy.

Modern real estate agents are nothing more than front-ends to collective property listing databases and interfaces to appraisers and banks.
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You missed in calculating deductions on your yearly IRS form which helps out in paying less taxes.Plus, homesteads in most states cannot be taken away from you for bad debts, etc.
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If you are buying for 270k your rental at 1k/mo isn't likely the same quality of property, size, neighborhood,etc. You are also losing out on the point that when you buy, there comes a day that you stop paying mortgage.

I will grant that buying a house is not the home run investment it used to be, but if you are not going anywhere for a while, it is certainly a better option for lifestyle, finance and the like...
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Neo,

You forgot to take the 20K downpayment into consideration when calculating investment returns from the rental option. I figure that you would have an extra 20K invested for ten years on top of the monthly investments. That 20K at 10% be be an additional
\$51,874.85. This is assuming you immediately dump the cash into a stock investment rather than dollar cost averaging.

I don't have the time to do the rest of the calcs. but this factor will further strengthen your renting arguement.

Dan

Dan,
Please keep in mind what leveraging multiplication power that downpayment has. 20K invested in the market may yield 12%, but 20K invested as downpayment secures your right to the gains in the value of the home, not just your 20K's worth. You keep the entire gain, not just 5%. Its like having a margin account where you can be 95% leveraged! 50% margin is the legal maximimum in stocks.

A home may increase only 3-6% annually compared to12% for stocks, but a downpayment of only 5% suddenly pays off with 3-6% TIMES 20 to equal 60-120% rate of return.

Before I get pummeled for oversimplifying things, please understand I am only glorifying the power of LEVERAGE and MARGIN. Most other variables have been gladly ignored.

Steve,
Salt Lake City
No. of Recommendations: 1
Neo,
As previously stated, you've had lots of good posts in reply. I've just got to point out a couple of things as an experienced mover.
1. Not every community has a balanced \$/sqfoot relationship for buying vs renting. I've had every combination. On our latest move here to Las Vegas, it's actually much cheaper to buy than to rent. The last address in Southern California...much the opposite.
2. From the \$'s you were talking in mortgage, I'm assuming you're making 100K+/year; and "girlfriend" implies no marriage, hence no dependants. These combine to say you pay out quite a bit in taxes. If my assumptions are correct, a house is about the only way you can shelter your \$'s.

Just a bit of yammering.
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"You are forgetting that you get to depreciate the home at 3% a year ( which on a 250K loan is a \$7500 write off) plus the interest (250,000 at 8% loan = 20,000 write off) plus property taxes, school taxes and insurance (which depends on your tax bracket) for assumption sake lets say \$4000 total.

Not sure to whom this is directed, but a homeowner is not permitted to take depreciation WRT his/her personal residence, nor may a homeowner write-off insurance for his/her personal residence. The rules are different for investment property.

"Also, you are forgetting that if you make just one extra payment a year, you halve a 30Yr mortgage to 15 years."

How many payments are saved is partly a function of the interest rate of the loan, but I have never seen an amortization where one extra annual payment halves a 30 year mortgage (at least not any any recently typical mortgage rate). In my experience, it saves on the order of 7-8 years (or roughly 1/4 of the 30 year term).

Just my \$0.02. Regards, JAFO
No. of Recommendations: 1
As others have said -- taxes are important here. Property taxes you counted, but not the deductibility of them and mortgage interest. Of course, it's only the difference above the standard deduction, but that's substantial.

You also need a fair comparison (also previously mentioned). Take a real world example of a \$100K townhouse (which I recently bought) and rent out at \$1000/month. That 1% rent level is a reasonable assumption, given my and other's experiences. The mortgage with taxes, insurance, mortgage insurance, and interest, and community association fees is also around \$1000/month. Not much savings there by renting, is there? (It's why I'm the landlord.)

The first few years, your mortgage interest and prop. taxes are \$12K, leading to a tax savings of \$3000 a year, \$250/month. It goes down as you pay down principal, of course.

And, of course, you need to add in rent inflation, as others have said.

One big advantage to housing as an investment is leverage. If you put 5% down (\$5K in my example), and your house appreciates at 5% a year (historical range is 4%-6%), you make 5% of \$100K, not 5% of \$5K. Closing costs add another \$5K to your costs, but you can see how this helps. In 10 years, your house is worth \$151K (after deducting the sales commission to sell it). Your \$10K investment became \$56K, without counting your principal payments. If you can save \$125/mo. by renting, after 10 years your \$10K plus the savings will have about the same \$56K (at 11% compounded monthly -- historical avg. on equities).

On the rental side of the ledger: Home maintenance is not insignificant, however. Painting, carpet, furnace, a/c, appliances all need replacement. But if you're anal enough, you can project costs using reasonable expectations. Say, paint every 5 years, a fridge lasts 11-13 years, carpet lasts 7 years, etc. For a \$100K house, I'd set a rate of \$100-\$150/mo for maint/repairs.

Plus, closing costs eat up a lot of equity. And there's that 7% realtors commission when you sell.

But your rental option's stock capital gains are taxable, while home appreciation is not.

Don't be distracted by the depreciation comments -- that's only for investment real estate, and is kinda balanced by having to pay capital gains on that.

Since you've asked for the financial analysis, you should ignore all that "quality of life" stuff, it's not relevant. Try to compare renting a house just like you'd buy. To do that, get a local real estate agent to get some listings in an area you're familiar with. (They're happy to do it for a potential customer.) There's sure to be some rents quoted. That'll give you a real apples-apples comparison. Or, see what condo apts are selling/renting for; that will also negate the whole lawn-care arguments, too.

Yes, buying a house is a life-style choice, but you CAN factor that out. The illiquidity issues and the frictional costs (closing and commissions) are significant and so you must really be planning to own for more than 5 years to recoup those, but given that time frame, you can make an objective financial assessment. You just need better numbers.

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I get to hammer on my house. You can't knock down any walls in an apartment. At least not if you want your deposit back.
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Just one thing comes to mind...a 270k home in my part of the country .. Richmond VA...buys about 4000 sq ft home in some nice communities...1000 rent ...rents you maybe a 1200sq ft apt...quality of life is unquantifiable...just food for thought...
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I think the one thing being overlooked here is that you're comparing \$1,000 in rent vs. a nearly \$2,000 mortgage. Where I live (No. Virginia), \$1,000 in rent will not get you much, where as you can find a lot of nice houses for \$270,000. In your comparison, the \$1,000 in rent will always look better, but a better comparison might be \$1,000 a month rent vs. a mortgage that is close to \$1,000, say \$1,100 or \$1,150. I think that comparison will favor buying vs. renting.
I used to share a house and pay \$360 per month in rent, and I had tons of excess cash to invest. Now that I have a house, I don't have as much cash to invest, but I would much rather have my own house than share it with 3 other guys.

It's these type of individual decisions that must be made for each person to determine what the best route is.
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Nice points. How about the housing market in the
Bay Area in California. Average house price is
in the \$500K range, if not more. Use your calculation,
Bay Area.

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Yes, SirNeo, you are missing something, a BIG something (2 of them actually).

First and most important; once you purchase a house, your housing prices are permanently fixed. With the exeption of property taxes and insurance, you'll never pay more on a monthly basis than you do now. Your landlord might not give you such a guarantee (he'll be too busy rolling on the carpet laughing hysterically). While you won't have enough equity in your home in the year 2010 to beat the apartment scenario you mentioned, you will have sidestepped right past 10 nearly-inevitable annual rent hikes. Since rents generally follow some kind of "property value x interest rates" formula, you can almost assume that for every 5% rise in property value, there would be a roughly equivalent 5% rise in rents.

Also, I think your point was that you can get a cheap apartment instead of an expensive house and invest the difference. Absolutely true - everyone should try to live WELL below their means. But I think a more realistic comparison would be comparable properties. You can buy a \$270k house for about \$1966/month, but you could never rent that same house for \$1000/month (at least not in CA). Since landlords have to cover their expenses, they'll rent a house for about what they pay for them on a monthly basis (they might go a little lower, since they're riding the appreciation and taking the write-off). They don't get to buy them any cheaper than you do, so it'll still wind up costing you about \$1966/month.

Additionally (sorry for making this long), the equity in in a home begins to really take off after about 10 years (where your scenario stops). I'll bet if you run the numbers after 15 years with 5% appreciation, you'd see somthing remarkably different.

It might not be a good time to buy, but if you plan on living there for 10 years, it's probably not a bad time either. If you want to pay year 2000 prices for a home in year 2010, you'll have to buy it in 2000. You might get lucky by betting against the housing market (it seems a shrewd thing to do, considering the inflated prices of the past few years), but you'd be betting against something that ALWAYS goes up in the long run.

Just like the stock market;)

Good luck.
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Yes. There is something that you're missing here. You're missing the fact that after 30 years you will own your own home. The homeowner will no longer have any monthly expenditures, while the renter will continue to pay rent. The homeowner will not require large monthly distributions from their 401(k) or IRA, thereby likely putting them in a lower tax bracket. The renter will have to take anywhere from \$20k to \$40k in additional annual income to provide for the cost of rent, thereby putting that person in a much higher tax bracket. The homeowner will have the security of a roof over their head regardless of any adverse economic circumstances. The renter has no such guarantee. Finally, the renter doesn't have the pleasure of one day leaving the family home to one of their children...perhaps the most valuable asset to have accumulated!
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By the way...there's one more very critical thing that you missed. While crunching your numbers, you forgot to assume an average annual 5% increase in your rent! Your \$1000 per month apartment today would look more like a \$3500 per month apartment 30 years from now. Your \$2500 mortgage payment continues to be just that for the entire duration.
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The original poster said s/he would not be staying longer than 10 years. For others who are following this thread and wonder whether they actually will stay the "average" of 5 years listed elsewhere or longer, think about the people who know or who have similar lives and how long they have lived in the same place. The vast majority of my relatives, for instances, have moved at most once since buying their first home. Many are around 20 years in the same house.

But then there are my parents who moved suddenly after 15 years in the house they built. :( (They left their job and Mom got a new one across the country.)

I'd also like to note to the naysayers, that the original poster's plan to invest the difference should not be so quickly pooh-poohed as unlikely. I should think that here at the Fool, especially, people have a tendency towards saving when they say they will save.

Selphiras

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One person already pointed out that you're comparing apples to oranges when you compare the cost of buying a HOUSE to the cost of renting an APARTMENT.

Another factor your financial equation is missing is the cost of future rent increases for the apartment dweller. This is quite likely to rise annually at 5% or more, even in areas with rent control.

On the other hand, the cost of a fixed rate mortgage stays the same for 20 or 30 years. Hence the homeowner CONTROLS the cost of his payments over time.

My guess is that renting makes more financial sense over a 5-10 year period, while buying makes more sense for longer periods.

Anyway, I'd love to see your revised numbers
No. of Recommendations: 1
There are a couple of problems with your analysis. First, you assume a constant rent of 1k per month for the whole period. Rents increaseover time! Believe me, I'm a landlord and I raise rents any time I can. Factor in constantly increasing rents, about the same as real estate values. Second, profits on a personal residence come out tax free--( up to about a half million dollars)--profits on stocks do not. You need to factor in capital gains on alternative investments.

Further, you are comparing apples and oranges. At least in my area, living conditions in a 270k house and an apartment renting at 1k per month are very different--more space in a house,(and expense to furnish), more lawn care, household jobs, and general responsibilities. Just different lifestyles. First you need to decide whether you want a house lifestyle or an apartment lifestyle. That might well drive your decision, not the money.
No. of Recommendations: 1
Not sure if this adds anything to this thread but here is a real life apples to apples comparison.

Last April I was looking to buy as my lease was up and the landlord was selling the property, I rented a two bedroom apartment and paid \$1100 with parking. This was actually about \$200 a month below market value but I got a good deal since the landlord kept his rent low in order to get more application to pick and choice among. I had about 1000 sq ft. 2 bedroom 1 bath, kitchen living a/c w/d d/w.

I bought a house that was being used as a rental. 3 stories, two units. The landlord got about \$1700 for the upper two floors (1700) sq feet, which is where I live. The upper floors have 3 bedrooms, 1 1/2 baths, kitchen, dinning room, living room a/c w/d d/w. The house has a yard, two parking spaces (a biggie in DC) and is on the corner so it has lots of windows. It has a rental unit in the basement which generates \$800 a month in rent.(which is below market but I learned from my old landlord )

Ok now for the comps. I paid 296K, put about 5% down (15K), I pay \$2150 a month on a 30 year mortgage. I have a 80/15/5 set up, so I pay no PMI, home owners insurance with full replacement is included in that figure. (I did not see rental insurance in your comps Neo but maybe I missed it) I can now have a dog, got to plant my own yard etc, I have a patio and a deck. Taxes are 2K a year.

Of the \$2150, I pay about \$1550 in interest and \$295 in escrow (for taxes and Insurance)which leaves about \$300 or so in principal paid each month. If you deduct the \$800 in rents I recieve from the \$2150 mortgage payment, I pay about \$1350 a month versus \$1100 for a difference of only \$250 a month. Yet I am building over \$300 a month in equity (\$305.21 this month to be exact) and that gets bigger each month (only fractionally but still bigger). In addition, I get a tax deduction of about \$11,000 (taxes and interest and depreciation on the apt {\$20,000} - rents received {9600} = about 11,000) which works out to \$3300 a year tax refund. So I pay \$250 a month extra to build \$300+ a month in equity for a monthly return in excess of 20% not including the tax refund.

As I mentioned earlier, a year ago the landlord was getting \$1700 in rent for the space I am living in, so I can say with confidence that it is actually cheaper to own then to rent. It would cost me another \$350 a month to rent the same space I am living in now which if you factor in all the little extras like the greater gas and electric bills, the plumber, the exterminator etc works out about even in terms of absolute dollars. But I am building \$300 + a month in equity so I think that is a good deal; no extra cost but \$300 in equity.

Two other items of note. First: I looked around alot and hired a great realitor. He found this place and I was able to purchase it at what we both considered well below market value. The owner offered the house at a price which we both felt was below market value. I put an offer in before it was publically listed and it was accepted. I have since had it cleaned up put about 5K in cosmetic repairs, improvements. It was just appraised at 375K. Other similar houses on my street have sold for that amount or more and my house is worth more by virtue of its being a corner unit. I realize I am very lucky but my point is a smart shopper can get better then 5% return just by finding an undervalued property (sorta like picking undervalued stocks I suppose) and investing a little time and effort. The second item is that in DC there is a \$5000 tax credit for first time home buyers in DC. (not just first time home buyers, you can own a home elsewhere but if this is your first home in DC you qualify). That was a might big incentive for buying versus renting.

Andy
No. of Recommendations: 0
Having recently graduated from college and landing my first full-time job, I have the itch to get out on my own (that and the fact that I have a 1 to 1 1/2 hour commute, one way).

So, I started apartment shopping. I figured how much I could afford to spend each month for rent and started looking from there.

Needless to say, I was shocked at the Chicago-area rental market. For what I was able to afford, I would not want to live in those areas/complexes or the amount of apartment I was getting was dismal.

So, I began investigating buying. I found that I could get a townhome (similar accomodations as the apartments I was looking at) with a little more room and a garage (paying mortgage, taxes and insurance) for less than what a similar size apartment costs.

Yeah, I know I'll have to cut the lawn and rake the leaves and clean the gutters and shovel the snow...but I'm already doing that for my parents :)

As many posters have already said, it is a lifestyle decision. And where I live (and for me) it will work for me!
No. of Recommendations: 0
I'd also like to see some kind of real estate INVESTMENT forum here on Motley Fool.

I'm currently living in a 2 bedroom condo. Half my rent is paid by my roommate, and the condo has appreciated approximately \$70,000 in 3 years. (More from luck than my economic acumen, unfortunately.)

I'm now in the process of buying a "vacation home" in a popular resort community. I intend to rent the home for what I'm paying for it and sell the appreciated home for what I think baby boomer retirees will be paying in 10 or so years.

The investment, therefore, pays for itself. For someone like me starting from scratch, I don't see how stock investing can bring comparable results in long term wealth building. If I could figure out how to borrow money to buy stocks, then have someone else pay off my loan, I'd do that, too....
No. of Recommendations: 0
Neo, the real payoff comes after retirement when you no longer have a house payment - then your retirement income doesn't get sucked up in rent.
No. of Recommendations: 0
A few things that you're neglecting to consider in your analysis:

First, you have to compare apples-to-apples. I doubt you can rent an equivalent \$270k value house/condo/coop for \$1,000/mo. anywhere in the country. You need to compare attributes of a \$1,000/mo. apartment (i.e., # of BR and BA, square footage, finish, etc.) to a house/condo/coop with similar attributes and in a similar area. So, in your analysis, you monthly rental payment # needs to be higher OR your housing price needs to be lower.

Second, you've neglected to take into account the tax aspects in your buy/rent decision. As you may know, mortgage interest and real estate taxes are tax deductible; it will more than likely permit you to itemize your deductions rather than just electing a standard deduction.

Also, when you sell your primary residence, the appreciated gain (up to \$500k) is not taxed as long as you've lived there at least 2 years. Unless you invest in the stock market via a Roth IRA or a variable life insurance, your stock market gains would be taxed. Therefore, you need to analyze on an after-tax basis.

Third, the amount of down payment you assume in your analysis would impact your decision of whether to buy vs. rent since it affects your financing cost. If you can afford to pay down only 7% of the purchase price, maybe it is worth it to wait until you can pay down 10-20%--at which time the economic decision would be clear cut.
No. of Recommendations: 0
I appreciate the author taking time to inform other prospective first-time home buyers. I am about to be a first-time home buyer myself. But, I see a couple of discrepancy in his argument. 1. He is comparing a \$1000/month apartment with a \$270,000 house. They are not exactly the same standard of living. 2. I am not sure if I am following his tax benefit calculation. If the total paid tax over \$208K, I think the saving should be greater than \$66K.

Does anyone have more accurate information to argue one way or the other? I would really appreciate that.

donshin

No. of Recommendations: 0
"I just cant see how buying a house is a better deal. IS there something big I'm missing here?

Neo"

Yeah, I think you are missing a big something, but I think you need to move outside the realm of dollars and cents to...well to quantify it.

Owning a home is not just about equity, it is about OWNING a home. It is yours to make into what you want. It is a source of endless work and enjoyment.

If you enjoy that type of lifestyle, it is worth every penny. It is something that goes far beyond dollars and "sense".

That is my bottom line on home ownership.

Bob
No. of Recommendations: 0
m sorry, but "equities" are not "cash". You will have to sell the equities and you will have to pay taxes on the capital gains.

Ok, I'm agressive. However, if I put the money in a Certificate of Deposit, my statement still stands.

Did you notice in my example you DO pay capital gains on the home? You're only covered for \$250k

Furthermore, you assume that homes never loose value. IF the stock market goes down, your house may well loose value (or more accurately, the houses that I have to choose from here WILL loose value.)

You might want to re-read my original post- I covered a lot of this stuff. One of the examples assumed the house did the same growth rate as the stocks- %10. IF you change that growth rate to %5 it still works out that certificate of deposits are a better deal than a home-- they are more than inflation (and homes are usually inflation) AND they are safer-- a CD's value is federally insured. Your homes value isn't.

But, you've gotten off of my point anyway.

Neo
No. of Recommendations: 0
You have not mentioned in your mail, the interest
rate you are assuming. Also did you consider the
tax-break you get on the mortgage interest and property
taxes you pay on your first/second homes. Quicken
provides a calculator which provides a breakup of how
each year your mortgage payment is used towards the
principle and interest. Use the interest portion
to calculate the taxbreak you get (depending on your
tax bracket - Quicken provides a calculator for
this too). Once you factor in the tax break you will
get an effective monthly mortgage payment, which will
be less than the actual mortgage dollars you pay.

Also consider the joys of home ownership, fulfilling
the American dream, and other intangibles which come
with home ownership. Of course, home-buying is not
done for investment purposes. It is done for other
reasons.
No. of Recommendations: 0
Neo,

Many have replied about buying v/s renting from subjective viewpoints. Let me point out financial issues that you have not taken into account.

Ok, you buy a 270k house. Putting \$20k down.
You finance \$250k. 360 month loan. \$1966 is your monthly payment.
This assumes zero points, no PMI, etc. No maintenance costs, no property taxes.

After 10 years, you've paid \$208K in interest and your loan balance is \$222k.
Your house is worth \$445K assuming %5 annual growth.

Your equity is \$445k - \$222k = \$223k.
Your total payments are: \$236k + \$20k down, or \$256k.

Note that the \$208K in interest is tax deductible. That averages to about \$1800 in interest per month. That should give you a tax break of \$450 to \$600 (for most people. This obviously depends on a lot of factors, including your federal and state tax rates).

So, your net payments are between \$1350 and \$1500 per month.

If you rent for \$1000, you can save \$350 to \$500 a month. Over ten years, \$500 a month at 10% becomes \$100K. Plus the \$20K down payment becomes \$50K. So you'd have \$150K in the bank (stocks really :).

As you pointed out, if the house appreciates 5%, your equity is \$223K. You're ahead by \$73K. You'll be ahead even at 4% growth.

By the way, to do all this accurately, you have to include PMI, maintenance, buying and selling costs, etc. Fifteen years ago I'd written a calculator that asked about 40 questions and came up with the NPV of buying v/s renting. I don't even know where the source for the damn thing is.

- Marq.

No. of Recommendations: 0
ivan-

I'm sorry you feel threatened by my postings. Its a shame that you chose to belittle my retirement plans.

Your assumptions about my age, strategy, how long I've been saving for retirement, and expectations are all incorrect.

If you wish to disagree with me on house purchasing, please point out an error in my calculations. That way we can all learn from it. Snide comments don't really gain us much.

Neo
No. of Recommendations: 0
cmab72,

You are forgetting that you get to depreciate the home at 3% a year ( which on a 250K loan is a \$7500 write off)....

I highly doubt that you're suppose to depreciate your primary residence. May want to check with the applicable IRS publication on your aggressive tax position.

No. of Recommendations: 0
For the usage of it. Period. You don't expect to make a profit on your car, do you?

Rayvt-

Do you realize how foolish a notion that is! For years the Wise have been telling us that our houses are our best investment and best asset!

Until I did the numbers that started this thread, I had figured that it was the case that buying a house made sense. It was quite a surprise to see the numbers come out the way they did.

Neo
No. of Recommendations: 0

JAFO- I was groovin right a long with you until I got to this part. Could you explain it for us laymen? (Muchas Gracias in advancias)

IMO, there are real differences that you are glossing over and that are not captured in you other examples. Are you aware that real
estate is one of the few areas in which the law (equity) allows for specific performance? Certain personal services contracts are
another. Equity permits this remedy in those areas because they are considered unique and not fungible.

Neo
No. of Recommendations: 0
Betty-

But I want to buy a house- I would rather own where I live. It just doesn't seem to make financial sense. The question I'm asking the board is not "Should Neo buy a house." Only I can answer that. The question I'm asking is "From a financial perspective, is buying a house a good place for your money?"

Neo

PS- thanks JAFO for the link to the retire early page. Had been there in the past for other reasons, didn't realize they covered the housing choice.
No. of Recommendations: 1
Neo,
The numbers do not come out the way you crunched them. Many have pointed out the flaws in your number crunching:

1. Interest payments are tax deductible. You did not include that.

2. Rents go up with inflation. You did not include that.

3. Your comparison at the end was incorrect - you can't subtract what you paid in from the equity and compare the result to the nest egg you've built by money saved from renting. You have to compare the equity to the nest egg. Both have the same cash inflows.

4. You've ignored capital gains taxes on your investments. There is no capital gain tax on homes.

Do the numbers correctly, and, in most geographies you'll come out ahead if you own the home for 10 years, with home prices appreciating at 3% and inflation at 3%.

- Marq.
No. of Recommendations: 0

Dave--

The value I used for rent is the expected average rent over 10 years. Its %33 higher than the current rent for the given apartment. So, yes, I included rent increases. The apartment is quite large- large enough to support my current family and an assumed kid (though I don't plan on a kid.)

Its true I didn't include frictional costs of an apartment, but deposits aren't really a cost- they come back to you. I didn't include any maintenance for a house which I think will be a much bigger expense over 10 years.

Being at the mercy of the renters market does suck.

I think the conclusion from this is that owning a house is a good investment for the average person-- most people aren't foolish and a home is their only investment. A Home may even be a good investment for a Fool. But Homes are not the Great investment that the wise tell us.

Neo
No. of Recommendations: 0
I did not fully analyze your example, just took a quick look. It does seem to me that your example is too simple.
In order to fully consider this you must assume that if you can afford a house in that price bracket then you are
able to fully itemize your Federal Income taxes. If that is the case then you must include mortgage interest
deductions as well as local property tax deductions. I would suggest that most financial planners these days would
argue against buying a home while many other types of financial advisors would favor it, depending on the
individual. A home is for most people a form of forced savings, if you have the fortitude to stay with an investment plan for 30 years you can probably beat the home buying game. For most of the average folks out there I don't
think so. I would like to see a more detailed work up that does not leave out the "devil in the details"
No. of Recommendations: 0
SirNeo, thank you so much for your support!

As a middle age member of a military family, we have replicated many of the scenarios describe in the postings. Our current stage reflects the ability to do both--own real estate as part of a diversified portfolio (don't underestimate the steadfast quality of real estate in your portfolio) as well as rent our current abode.

Financially speaking this works quite well. We are able to take standardized deductions and schedule E deductions on our income taxes. This is helpful since we are currently in some excellent earning years with a high marginal tax rate. Also, I have some great tennants who pay the mortgage while I build (admittedly slowly) real estate equity.

As you have read, the question of being a homeowner is similar to many financial decisions, the decision is only as good as the assumptions--e.g., rent remains fixed for 10 years. Also, certain factors are subjective, less easy to quantify--influences of relationships, neighborhoods, marriage, children etc. As your stage of life changes, so may your perception of home ownership.

But I do digress, I thank you for being one of the people who chooses to rent and pays my mortgage for me!

BellaMama

No. of Recommendations: 0
only on the basis of a few key assumptions, the most important of which are 1) that your rent stays constant at \$1000/month over many years

This is NOT assumed! The rent given is an average rent and is higher than the current rent.

2) that you'll faithfully invest the entire difference between it and what you'd have paid on principal plus interest on your mortgage in the stock market.

Actually, I'm investing far more than the difference... but if you're saying its good to have a forced investment plan, then sure. It just looks to me that an auto withdrawel from your checking into a CD is a better forced investment than a House. Amortization really bites you when you only have the house for 10 years on a 30 year loan.

Also, I'd personally, rather have the freedom to not put as much toward retirement if I was unable to work for awhile than to have that mortgage hanging over my head-- then its not so much a forced savings plan as a threat of losing your biggest asset!

While its true that I did not count the tax advantages- which do reduce some of your cost, I also did not count the significant maintenance of a home. It looks like the tax advantages would be about \$5k a year.

But giving \$1 to the bank is still not better than investing that dollar just because you got \$0.28 back from Uncle Sam.

Neo
No. of Recommendations: 0
Five important factors:
1) Rent is variable (usually increasing)
2) Mortgages are stable
3) You can buy a less expensive home
4) The larger the % of down payment, the less interest you pay.
5) TIME: Eventually, it will be the owner, not the renter, who has the excess cash to invest in the market.

A less expensive home and a bigger % down, combined with time, would change your numbers. I wonder how they would crunch if you tried a 120K home with a 20K down? (did you set up a spreadsheet for this? <g>)

My mortgage is only 2-300 bucks more than what I would pay to rent. And rents will increase. My mortgage will stay the same. Based on my experience renting for about 10 years in my city, rents will probably increase within the next 5 years to the point where my monthly payments equal what I would pay in rent. Eventually, it will be cheaper to make mortgage payments than to rent, which turns your comparison on its head. By owning, rather than renting, I will have excess cash to invest. Once the house is finally paid off, I will have nothing to pay but property taxes and maintenance, freeing up even more cash to invest. But the renter will continue paying ever-increasing rents.

...and, for people like me (who like to garden and fix things up), there's the sweat-equity factor. If you enjoy taking care of a place that belongs to you, then you add value to your investment--essentially getting paid to do what you enjoy and improve your dwelling. When renting, I got fed up with making a place look nice and then leaving it when we moved.

As far as markets are concerned, don't forget that the population as a whole is generally increasing, despite the different percentages that define demographics.

Mr. Ed
No. of Recommendations: 0
lastdragon-

This is a good point. A lot of people have said you can't get a decent apartment for \$1,000 and that it would be fairer to assume an apartment would cost as much as your house payment.

It turns out that in my case this really isn't true. I think its often- not always, but often-- not the case... but it is not something you want to hear when you're on the hook for six figures.

Glad you found a house you like--

Neo
No. of Recommendations: 0
But who says you have to buy a 270K house. What about a small 2 or three room cottege

\$270k IS a small 2 bedroom "cottege". While there are one bedroom houses around here for \$150-\$200k, 2BR Condos and houes in the area likely to appreciate at %5-%10 over the next ten years run \$270k.

If the house appreciated at less than %5 then the difference between investing in the house and the stock market would be even wider. I actually skewed things toward the house by assuming a \$270k one that was going to appreciate at that large rate. (Which is what we have been seeing, but may not see for all of the next decade.)

Neo
No. of Recommendations: 0
There is a major flaw in your reasoning. You cannot 'rent an apartment' comparable in living accomodations to the house for \$1,000/mo.

Why do people keep saying this? Its the case here. I am doing it RIGHT NOW. It may not work for you, but it works for me.

Remember also, profits on sale of your home are now tax exempt for all practical purposes,

This is NOT True. Only the first \$250k are tax exempt for a single person. One of my examples completely ignored the extra \$25k in tax you would have to pay when you sold the home.

IF you roll the properyt into another property then you can avoid the tax-- but I know already that I won't be doing that... so that doesn't apply here.
No. of Recommendations: 0
You forgot to take the 20K downpayment into consideration when calculating investment returns

Good point. I'll add that to the list of errors and re-do the calculation this weekend.

Thanks!

Neo
No. of Recommendations: 0
yea, how about living in it. Believe me, it cheaper to put 25% down on million dollar house, pmi is about 7500.some of which you deduct. Renting it will be atleast 6-7000. It won't be as nice, and you will never fix it up and enjoy it. You right though, a house is not a geat investment financially. But for most it is emotionally. What price do you put on that?
No. of Recommendations: 0
Neo: "PS- thanks JAFO for the link to the retire early page. Had been there in the past for other reasons, didn't realize they covered the housing choice."

you are most welcome. Regards, JAFO
No. of Recommendations: 1
SirNeo: "JAFO- I was groovin right a long with you until I got to this part. Could you explain it for us laymen? (Muchas Gracias in advancias)"

<<<<<IMO, there are real differences that you are glossing over and that are not captured in you other examples. Are you aware that real estate is one of the few areas in which the law (equity) allows for specific performance? Certain personal services contracts are another. Equity permits this remedy in those areas because they are considered unique and not fungible.>>>>>

I will explain in more detail when I can compose a fair response; maybe later tontight or it could take a few days.

Regards, JAFO

No. of Recommendations: 1
Comparing a \$270k home with a \$1000 rental is probably Apples to Oranges in some places, but not in the Silicon Valley. The ratio between monthly rent to purchase price is typically about .8% to 1% in most areas of the country, but in strange markets like the Silicon Valley it can be .4% to .5%. Just one example: A 3 bedroom 2 bath condo in my complex just sold for \$552,000, but it would probably only rent for about \$2200 a month.

So figuring out that ratio in your area is useful in making the financial part of the buy/rent decision.

In my case I bought a condo despite the fact that it quadrupled my monthly housing payment, and it turned out to have been a good investment, gaining \$100k value in less than 2 years. But of course such anecdotal evidence is almost useless. The best way to make the financial decision is to do a detailed analysis of how much money you would have at the end however long you will stay in one place, buying versus renting and investing. I ran long-term historical numbers in a very detailed spreadsheet, and found that it really depends on details like the interest rate, rental cost, appreciation, and how long you stay. It's definitely not a no-brainer either way, and anyone who tells you it is missing something.

Both renting and buying have different risks. Renting gives you the risk that you will be ousted from a market by rising rents. Buying gives you the risk of owing money on your mortgage if you have to leave when your property has lost value.

It's interesting to me that many people who advocate 80 or 90% mortgages really don't understand that this is a leveraged investment in the same way as a margin account. People who wouldn't margin 10% in the stock market will happily margin 80% with a mortgage. Now there are good reasons for this; housing has much lower downside risk than stocks. But don't pretend that prices can't go down. Make sure you are comfortable with the risk you are taking.

-Tom

No. of Recommendations: 0

Mike-

I'm just assuming you invest the money that would have gone to interest. I'm not assuming you're borrowing money to invest. Things would get really complicated if I did that (though if you buy a house assuming it will go up in value you are borrowing money to invest.)

I have looked at a duplex or triplex situation. The only issue is getting a mortgage for that much money (\$600-\$800k easily) and the question of whether I will really be free after 10 years or will I have bought myself a LOT of responsibility.

Getting someone to make your payments does change things a lot. If I re-did this assuming someone was paying me rent for a room in the house things would be a fair bit different and that's not an unreasonable assumption.

Darn, more to investigate. Thanks!

Neo

PS- I've emailed this too you so if you want to take it offline just email me back.
No. of Recommendations: 0
GK-

Yes, I'm sure many people say they will invest the difference and never do. Currently (and for quite awhile now) I've been investing far more than the total monthly payment in the two scenarios so I'm pretty sure I'll continue to to invest at least that amount.

I'm going to have to add teh capital gains taxes on both the investment and the sale of the home (in the scenario where it occurs) as well as investing the down payment and see how the numbers come out.

Good point about inflation causing home prices to be higher while the market goes down... but over the long term (ie: the assumptions I have to make for these calculations) the market returns significantly more on average than a home.

Yes, you can't count on more than %10-%12 on your investmetns, and I am not, but there are some investment strategies such as the foolish four, buying berkshire hathaway or AFLAC that have never returned less than %18 over a given 10 year period.

Thanks for your points- I need to rework the analysis.

Neo
No. of Recommendations: 0
SirNeo,

Don't you have to factor in the joys of owning a home -a swingset for your kids, garden for the wife, your own studio to work in, no neighbors pounding on your ceiling, etc.?

If the Fool has taught me anything, it's the joy of controlling my own destiny. A house let's a man control his ultimate destination... the one he lives in.

Best,

B.D.
No. of Recommendations: 0
Has anyone else mentioned the huge tax break you get by deducting the interest paid on your mortgage? run those numbers by calculating the deductions and difference in taxes paid and i suspect home ownership might seem more appealing.

skndoc
No. of Recommendations: 0

Can you really depreciate an appreciating asset? A home thats going up in value %5 a year can be written off on your taxes? This is news to me.

I know you can shorten the payoff time by paying more than the minimum... but is this a better investment? How is this different from a 15 year loan (which I did calculate out.)

Neo
No. of Recommendations: 0
Can you really depreciate an appreciating asset? A home thats going up in value %5 a year can be written off on your taxes? This is news to me.

It's true SirNeo...you can depreciate an appreciating asset.

One catch though....you can't actually live in the house...this little loophole applies to rental properties.

v/r

Michael
No. of Recommendations: 1
SirNeo wrote:

Ok, you buy a 270k house. Putting \$20k down.
You finance \$250k. 36month loan. \$1966 is your monthly payment.
This assumes zero points, no PMI, etc. No maintenance costs, no property taxes.

After 10 years, you've paid \$208K in interest and your loan balance is \$222k.
Your house is worth \$445K assuming %5 annual growth.

Your equity is \$445k - \$222k = \$223k.
Your total payments are: \$236k + \$20k down, or \$256k.

You have lost money. You spent \$256k for an asset that is worth \$223k.

Assuming the house rises in value at %10 a year its worth \$730,901.
Your equity would be \$731k - \$222k = 509K.

You have made money. You spent 256k for an asset that is worth \$509K. Your profit is \$253k.

IF, instead, you rented an apartment those ten years at an average rental of \$1,000 a month, you would have spent \$120k in rent. The \$996 monthly difference from a mortgage, if invested for 10 years at %10 would net you \$197,880.

...

I just cant see how buying a house is a better deal. IS there something big I'm missing here?

My response:

The "something big" you were missing is the risk of rent rising faster than you anticipate combined with the risk of the stock market. Keep in mind Warren Buffet likes to point to the 17 year period in which the Dow rose 0.1% (that is not an annualized number, but the total return for seventeen years of compounding in the Dow, minus dividends). The possibility of losing over a ten year period is real.

It seems to me that if we assume the housing market is appreciating at 5% per year, the rent would likely do so as well. If it is appreciating at 10% the rent is likely to appreciate at 10%. Therefore if you mean the apartment to average \$1000 in the 5% scenario, it would start at \$795.05 and average \$1,267.10 in the 10% scenario for a total of \$152,051.78. That alone would lower you by \$32,051.78, but you're actually even worse off than that because you were saving that \$32,051.78 and earning 10% on it!

If you mean it to start at \$1000 it would average \$1,257.79 in the 5% scenario (\$150,934.71 total) and \$1,593.74 in the 10% scenario. In this case, the rent comes to \$191,249.10. You were counting on \$71,249.10 of this money plus interest compounded at 10%.

Even if you were assuming a \$795 rent to start, you could be off by over \$32K plus interest. If you weren't considering it, you are off by over \$30K plus interest in the 5% scenario and more than \$71K plus interest in the 10% scenario.

By the way, I don't personally expect the market to do badly or the housing market to do well, I'm just showing you why your friends think it is risky to rent. You'll probably be better off renting, investing, and buying a house for cash, but you should realize the genuine risk involved.

Lerk
No. of Recommendations: 0
Neo:

Hmmmm...What about the "Pride of Ownership"?

Actually, your analysis is far more detailed than most homeowners have performed (or understand). However, I offer the following "Other issues" to consider:

Will the rent for an apartment (with space comparable to a \$270K home) realistically be \$1,000 per month (on average) for the next 10 years? Depending on your location, this may or may not be true. In my location (near Sacramento, CA), new homes start at around \$120 per square foot, decent existing homes drop to \$85 or so. Thats a far cry from what you can get for \$1,000 per month apartment! (again, your location's results may vary)

Your mortgage, however, WILL be \$1,966 every month for 30 years (assuming you used a fixed rate loan). So, in year 10, your mortgage payment will be \$1,966 but your rent will likely be \$1,600 plus (assuming the same 5% growth rate).

If you take that out a few years further, the tables start to turn.

Also, on a tax side, the equity from the sale of the home is non-taxable (assuming you roll it into another dwelling of equal or greater value). If you realize income from investments, that WILL be taxable (at the Capital Gains rate, at best).

You make another very good point...your market assumptions may be very different than mine, or anyone elses, for that matter. The perception of those assumption is a big driving force.

And, in my experience, if you show me a person who can afford a home, yet still rents...I'll show you a person with a lot of toys! Most people do not have the discipline to invest the "difference between a mortgage payment and a rent payment" as you outlined. Sad, but true.

If you can see yourself as an owner for the long term, it makes more sense. Short term ownership really is a losing proposition when you figure in commissions, etc. About 7% of a homes price gets paid to "others". If you short term buy and sell it'll cost you 7% each time (A total of \$37,800 on your example.)

My recommendation...become a buyer and remain one! There is a reason it is the "American dream" and most peoples single largest investment...because over time, you have something to show for it. Besides, who wants to give their hard-earned money to a landlord!?

Then again...maybe I'm just trying to justify being a homeowner myself! (7 years and counting)

Good Luck!
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Can you really depreciate an appreciating asset? A home thats going up in value %5 a year can be written off on your taxes? This is news to me.

Neo,

In my case I have to depreciate the value of my rental unit even though it is in my house. It decreased the cost basis of my house however so when i sell, my cost basis is lower then the actual purchase price. My sister is an accountant and she said that even if I didn't the IRS would treat my basis as if I did when I sell so I would be foolish not to take the depreciation.

Not sure if that helps but there it is.

Andy
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The thing most people don't think about when arguing against buying a house is that it won't take more than 15 years before the rent on an apartment half the size of the house will be higher than the house payment, taxes and insurance put together. At 4% for 15 years, you get a multiplier of 1.80. I have a 650 sqft apartment that I pay \$695 for right now. A home in this area can be purchased for \$135k, with twice the sqft. To compare apples to apples, you would have to rent two \$695/month apartments and a garden and garage in order to have what you have when you buy a house. On the other hand, I plan to earn more than 10% or 11% in the market, and shouldn't buy a house until I have some screaming ruggrats to send outside to pull weeds. Also, if you have a house, your career choices are slighlty more restricted because you are less likely to take that high paying consulting job across the country.
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Dear Neo,

Yes, there is something big that you've missed. I didn't read anywhere in your post about tax savings when you own your own home. This is still probably the biggest tax advantage that Uncle Sam gives to us homeowners: You get to deduct the total interest and property taxes that you pay in a year from your personal income tax liability! Please recalculate your figures now, factoring in that you have this huge deduction to look forward to at the end of the year. Also, do you know of many other investments that you could live in? Are there many other investments where you could personally contribute to its value by making improvements to it? Also, the figures you are using for housing appreciation values are obviously rather low because of the unprecedented housing decline that we've just recovered nicely from. Historically, were it not for this past recession, I would expect appreciation to be more in the 10%-20% range.

Disclosure: I'm long on real estate.
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Neo,

In your case, I would have assumed that you were correct; with housing prices so high relative to rents (I'm just going to take it on faith that you know more about the area you live in than I do, if that's okay with you), renting is a bit of a no brainer. I ran the numbers through the fools calculator:

http://www.calcbuilder.com/cgi-bin/calcs/hom10.cgi/themotleyfool

As follows:
Rent: 1000/mo
Renters insurance: 15 (the default)
Annual rent increase: 3%
Purchase Price: 270k /appraised value 270k
Apprciation: 5%
Savings Rate: 10.5 (S&P average)
Tax Rate: 38%
Years in house:10 ( that's what you said, right?)
Loan Amount: 216k (20% down)
30 yr, 8% loan, 1pt, 1% origination, loan costs @ 3k,
4k property taxes, 2k in maintance, 600/yr in home owners insurance, 8% selling costs.

The fool ( not me, the guys at the motley fool ). This takes into account the ROI on the down, plus assumes that you invest the difference. So, yes, you were missing something.

Now, if I were in your shoes, I'd ignore those calculations entirely. You can picj up a 44' Saber for about 210k (cheaper than the house!), and spend your weekends practicing your sailing in Puget Sound. YMMV, though.

Justin
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Hi Neo,

Unless I missed something, you didn't factor in those pesky yearly increases in rent (which can be *quite* substantial over 10 years at 5-10% per year).

In our area, for folks who are staying put 3 or more years, owning is a no-brainer since it costs more each month (after tax, 28% federal, 9.3% CA tax) to rent a house than to own it. In addition, owning a home serves as diversification for those of us with mainly stock assets; yes there are risks, but they are different than the risks of equities.

Just my \$0.02

Espresso
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If you buy your house later you'll have to pay about 250% more than now. So, you better be lucky with your stock investments. Home are built to last hundreds of years. Most homes will still be standing after many people have lost their money to the stock market.
I tell my children that renting is less expensive than owning. Although, I'd rather live on a bus bench than deal with a landlord and neighboring tenants. I deal with landlords every day in my business and I don't like the way I see tenants treated with filthy living conditions and rules that are from unbearable to ridiculous. The price for freedom is worth the difference.
Leonard
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Yes you are missing something. Mortgage interest is deductile and capital gains are not. This is one of primary financial advantages of home ownership.
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Too much figuring. You are not comparing living. You said the home was in the 270 range.-that's a fairly nice home. It would rent for 2,500 per month. But you are comparing 1000 a month. Thats a 2 bedroom condo at best. I'm a land lord. I love for people to buy my home for me and I get the write off's. Buy as quick as you can-just be sure of the three rules-lacation, location, location./
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For me, buying a house HAS made sense. However, I didn't buy a 250K plus home. Before buying I spent time studying different neighborhoods and decided to buy in the starter home price category in an excellent location which has a terrific history of sellability. The reason why I picked this price range was that they can't build quality homes for this amount any more. (Law of Supply and Demand. When supply is limited and demand remains the same or increases, the price rises.)

Even though I'm in an older neighborhood, I have good neighbors, can walk to the grocery store, am near recreational facilities, a new library, the best shopping areas, and the largest employers. My house has appreciated about 50% in the last thirteen years, and taking all that into consideration plus all expenses and taxes that it has cost me less to live here than to live in the cheap apartment I left thirteen years ago. Wow! Because I didn't stretch my finances to the limit, I was able to pay CASH for the house---lucky me! At normal interest rates with the usual down payment, the average house costs about 2.5-3 times the sales price over thirty years. Ouch! I need a place to live and SLEEP in at night. I really don't want to live on borrowed money to invest in the stock market.

There are other reasons why I bought a lower priced home in an established area. First, starter homes are always in demand and will drop a lot less than pricey homes should the economy hit the skids. Second, I don't have to worry about unpleasant changes in developement around me. Third my "used" home is not competing with newer homes in the same price and location as mine so I can more likely get my asking price.

This is just my cock-a-maimy opinion. Make of it what you will. Keeping up with the Joneses has never been my thing.
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mzbruns wrote:
* A home is an EXTREMELY ILLIQUID investment ... recently homes have been selling too fast -- this will not continue!!!! People forget that when an economy stagnates or sours --> you CANNOT SELL A HOME ... at almost any price.

How well I know this. Back in the middle '80s, I started work at a new company with another physicist. He'd recently moved from Bartlesville, Oklahoma, where he'd worked as a goephysicist for an oil company. Some of you may know that at that time, Bartlesville was a company town. Everyone worked for that oil company.

He was laid off when the company seriously downsized and closed the local facility. He needed to sell his townhome and move if he was to find a new job. But everyone else was selling their homes so that they could move.

To cut a long story short, in order to sell the home, he'd had to borrow \$20,000 from his father to pay off the balance of the mortgage. He arrived in Colorado in heavy debt. Without the parental funding, he'd have been trapped.

Not my idea of a great investment!

-Ron
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Neo,

I read your post and felt compelled to reply. I haven't read the other replies so forgive me if this is repetitive. As much as I love the stock market, I love real estate more. And I have to say, a good home purchase is still an American's best investment. I know I'll receive a lot of grief for this, but here is why.

First, to answer your questions, you have to compare apples to apples. You priced a house at \$270k with a \$250k loan at \$1966/month, yet your comparison is with an apartment at \$1,000/month. The numbers would work better if you worked with equal values. Stating it the way you did is like saying you bought \$10,000 worth of Cisco in one purchase and \$5,000 in a second purchase, and can't figure out why the \$5,000 purchase isn't doing better than the other. If your reply is that you can't find a house that would be livable with a \$1,000/mo. mortgage, I beg to differ.

It's all about being creative. I couldn't afford the type of house I wanted on my salary and the fact that I Foolishly would not accept anything less than saving 25% of my gross for retirement. That being said, I expanded my horizon and found a beautiful duplex with a mother-in-law apartment, which I rented for 43% of my mortgage payment. The tax benefits were incredible and it made the home affordable. Contrary to what most people think, being a landlord isn't all that bad. There's risk, like any investment, but the rewards are far greater. Although planning to live there for a long time, a job opportunity came up that I couldn't pass over, so after only a year and a half, I regretably sold the home. However, when all was said and done, I walked away with \$16,000 net. Not huge, but many people think you can't even make a profit for 5 years. (BTW, sell it yourself...it's easy).

Ok, so being a landlord isn't your thing. Consider a less expensive home. Maybe the one your considering holds emotional value but there are others that are better opportunities, such as a lot that can be subdivided, a garage that could be built, or one that is only partially completed but livable, while you finish it at your leisure. If you move, you can rent it, get write-offs (PITI) and depreciation as well as tax free income. Of course, like any investment, you must think long term and not let the fools convince you it's bad or wrong, or too difficult, or scare you with horror stories. It's just like the stock market...simple enough for a Fool, if you don't listen to fool's.

Lastly, just like your portfolio, you grow to love your home, except it's real, not on a screen. You raise your children in it, you have your best moments with your spouse or significant other in it, and much more. It's not the investment our parents and grandparents had, but it's still one of the best. I'm not a real estate professional, just an investor. And I do it because I love it. I suggest you try it out.

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Your concerns over buying a house are extremely valid. Ive been reading the replies to your post and have seen some interesting points of view. Your answer may lie in a mortgage called a COFI (coffee) ARM (Adjustable Rate Mortgage). These loans are typically tied to a lower index than your standard treasury ARMs or nonconforming loan tied to LIBOR. You have four payment options. A minimum payment, an interest only payment, a 15 year amortization payment or a 30 year amortization payment. (some companies will do 40.)If you choose to make the minimum payment you run the risk of negative amortization (your balance goes up.)
The object is to use the money you save in interest to invest and hopefully realize a larger gain on your investment. I will not do the math for you right now but if you pay 6.5% interest and never pay down your balance but realize 5-15% equity gains and take the \$ you save each year over an 8.5% 30 year fixed mortgage and assume an average annual return of 10% on this money, are you ahead? Probably. Try different loan amounts and interest rates and see what you get. These loans completely break traditional thought but may be your answer. You need a solid track record on your credit report to qualify for this type of loan.
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If you buy a \$300,000 home with 10% down and you see your house appreciate 5% to \$315,000 because of the high leverage your equity actually has increased by 50% from 30k to 45k. Is this a valid argument for buying a home?

mike
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To all who claim that rents and housing prices always rise, I offer a reminder. I live in Houston, and and for a 5 year period in the mid 80's my rent was essentially flat (and for the same apartment); it came nowhere close to rising by 5-10% annually. In addition, there were people who purchased homes in 1981-1982 who waited over a decade for prices to recover so that there sale price would equal or exceed their purchase price.

And for the person who mentioned the home increasing in value by 50% in 13 years, I dislike being the bearer of bad news, but by my rough calculation, that rate of growth is slightly less than 3.8% compounded annually.

Just my \$0.02. Regards, JAFO
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Neo,

You have made many excellent points on renting vs buying a home. Some key perspectives of this equation depend upon your age, the time frame you are examing, and how the housing market compares where you are living now to where you may be living later in life.

First, if you are 30 years old and the average life expectancy is somewhere around 75, you may be able to resonably complete house payments within 15 years, leaving you 30 years of "rent-free" living aside from taxes, maintenance etc. However, if you continue to rent for the rest of your life, you will rent for all of your remaining 45 years. Thus, if you do buy a home sooner is always better than later (with all other aspects being equal.

Second, if you live in California now, you can use the equity in your home to buy two equal houses in Colorado or four equal houses in Nebraska.

Good luck,

Jerrod
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You talk about a \$1,000 a month apartment as though it is equivalent to a \$250K house. That might be true some places, but where I live you would be lucky to have a 900 sq. foot two bedroom apartment with a carport.
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Re SirNeo, post 11495.

Just wondered where you would find a rental at a constant rent of \$1000 per month. (You must live in LA to have such a disparity between mortgage payments and rent!)

Just a thought.
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I'm sorry you feel threatened by my postings. Its a shame that you chose to belittle my retirement plans.

Your assumptions about my age, strategy, how long I've been saving for retirement, and expectations are all incorrect.

If you wish to disagree with me on house purchasing, please point out an error in my calculations. That way we can all learn from it. Snide comments don't really gain us much.

Neo

SirNeoSir,

Forget the girlfriend since that's too difficult of a variable. Rents do rise fast especially when the securities markets do too. So to get back to the subject, just make sure you plug in inflation into quicken.

Hey, nothing like a little drama on the Mighty Fool. I guess we should save this kind of garbage for Howard Stern.

Sincerely,
ivan
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SirNeo (post 11527) I have "owned" houses for the last 35 years, never lost money, often made more than the monthly payment (on a per month basis), so I'm pursuaded of the value of ownership. The tax benefit alone indicates that the government WANTS you to buy! My average occupancy time would be around 6 years. The downside? Houses are very illiquid. You can spend a lot of non-recoverable money in customizing/fixing. And, if you wind up selling into a down market, the results can be just too sad for words (just like stocks.)

There has been at least as much wealth accumulated by real estate as from stocks. The "average" American often accumulates little outside the value of his house. Of course, thst won't apply to you. I still believe the house/shelter is a very conservative, albeit a very good, foundation for an investment plan.

Regards
PVFOOL
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JAFO (Post 11540) You didn't mention that the tax advantage is strongly influenced by the tax bracket you're in. Low income people gewt little benefit. I get 38%.

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You have identified one of the key variables which is: how much does the real estate appreciate over time?

Another major variable is: what is the alternative rental costs? For families, this is a lot higher than singles, which is why it makes more sense for them to buy - ignoring the hassles families may have with landlords, access for children to a yard, etc.

I would suggest you build a serious spreadsheet for your own personal situation. I haven't found one that begins to answer the question you ask, so I had to make my own.

Items that have a major impact on the calculation that you don't mention in your example are: Earnings on the downpayment; the gain on the house is tax free but the rate of return you quote on stocks is pre-tax; increase the rent by 4-5% per year; increase the taxes and insurance and utilities by 3-5% per year; the different in utility expenses between the house and the apartment; investing psychology - did you hold your index fund intact for the past three months?; at times, you might be able to buy the house on a 5/25 or 7/23 loan and lower your interest rate; you not only need the marginal tax bracket, but also how much of the standard deduction do you have in expenses before home interest and taxes (most people without a house do not file a Schedule A).

You can get the tax rate for your area. You may want to borrow the down payment from your 401k or margin brokerage account, which is another set of interest expenses and monthly payments.

If you really want to get serious, I would suggest you find a good loan officer by referral and get pre-approved for a loan. This shouldn't cost much over \$30 for the credit check. You should be able to learn all the costs to buy the house (loan origination fee, appraisal, escrow, title - these are in the good faith estimate. You also should be able to learn the relationship between points and interest rates; the relationship between per cent down payment and the PMI rate; different types of loans (and different interest rates for different planned holding periods of the house); programs in your state or area for first time home buyers that might lower closing costs or interest rates; and how much house you qualify for (I had real estate agents underestimate mine over the phone by 40% over what a loan officer calculated). I would also suggest taking a 5-hour home buying class put on by your state housing commision, or next best, a real estate brokerage office.

Once you have your spread sheet, you can also look at what impact cutting your rent by 40% by sharing a place might have on your net wealth.

Best wishes. There is not an easy answer. You may actually want to look at a few houses and price a house you would be willing to buy - \$270K may be way off in either direction, which would impact the calcs. The variables (or assumptions) I found that had the largest impact were: the price escalation in real estate; the difference in costs between renting and buying; and with lower price homes, the amount of the standard deduction already covered without home interest and taxes.
No. of Recommendations: 1
Neo, a few more points...

1. The \$250K tax exemption from primary residence profits will likely be higher ten years from now - especially if national real estate markets appreciate anywhere CLOSE to 10%.

2. Financially speaking, the rent vs. buy analysis is totally dependent on local real estate conditions. Rent proportions vs. comparable mortgages from market to market vary so much that any blanket statements are nonsense. As with any other investment, you have to look at the options available to YOU to make your decision.

3. If you are willing to do a little more work yourself (and take on additional risk), you are always free to sell your home yourself without paying a 6% commission to an agent. Granted, there are drawbacks, but would you consider paying a stockbroker \$24K to sell a \$400K investment? I can put up with a LOT of grief for \$24K.

4. For most people, the intangibles (mentioned often in previous posts) have value (and are priceless to some). If your numbers are close, consider the value of the intangibles as an independent purchase, and then decide whether or not the price is worth it to you.
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SirNeo: "JAFO- I was groovin right a long with you until I got to this part. Could you explain it for us laymen? (Muchas Gracias in advancias)"

<<<<<IMO, there are real differences that you are glossing over and that are not captured in you other examples. Are you aware that real estate is one of the few areas in which the law (equity) allows for specific performance? Certain personal services contracts are another. Equity permits this remedy in those areas because they are considered unique and not fungible.>>>>>

Definitions (and URLs) from online dictionaries at the end of this post.

The usual remedy for breach of contract is damages [see two defintions below]; compensatory damages are intended to make the injured party "whole" or, IOW, put the injured party in the position he was in prior to the injury. [Injury not necessarily meaning physical injury but the breach of contract; if you do not like injured, read "harmed" or "damaged"]. The usual expectation is that the damages received (funds) can then be used to an equivalent replacement from another source, because the item to have been purchased is fungible or not unique.

Let's use buying a new car as an example. One 2000 Honda Accord with the same features is essentially the same as another 2000 Honda Accord with the same features, and it generally does not make much difference whether you buy it from dealer A or dealer B or whether it has VIN No. AAAAAA or Vin No. BBBBBB.

Damages are a remedy at law. Sometimes damages are not an adequate remedy; courts of equity [see definition below] developed to address some of the harshness of remedies at law. Specific performance is an equitable remedy; so is an injuction. There are others.

Specific performance recognizes that sometimes the item (or person) is unique and while it can be replaced, the damages party is not getting essentially the same good (or service).

Let's say I hire Jack Nicklaus to design a golf course. Now there are plenty of other golf course designers, including other famous ones, but not one of them is Jack Nicklaus. Giving me money to hire another designer is not the same as giving me a Jack Nicklaus designed golf course. If you do not like golf, what about I.M. Pei for your new headquarter's office building architect.

Courts at equity have long recognized that each piece of land is unique; it occupies a specific location and no other land can occupy that same location. Thus, because of its unique nature, specific performance has long been a remedy available for breach of contract to sell/buy real estate while it is generally not available for the average breach of contract case.

Hope that helps. NOTE - I have simplified and constructed this largely from memory without hours in the library doing research; it should be accurate in a general sense, but IT IS NOT LEGAL ADVICE; it is only general information. NO CLIENT RELATIONSHIP IS INTENDED TO BE CREATED, NOR IS ANY SUCH RELATIONSHIP SO CREATED. FOR SPECIFIC LEGAL ADVICE YOU SHOULD TALK TO A LAWYER IN YOUR AREA.

http://www.nolo.com/dictionary/

Specific performance - A remedy provided by a court that orders the losing side to perform its part of a contract rather than, or possibly in addition to, paying money damages to the winner.

Damages - In a lawsuit, money awarded to one party based on injury or loss caused by the other. There are many different types or categories of damages that occasionally overlap, including:

compensatory damages -Damages that cover actual injury or economic loss. Compensatory damages are intended to put the injured party in the position he was in prior to the injury. Compensatory damages typically include medical expenses, lost wages and the repair or replacement of property. Also called "actual damages."

general damages - Damages intended to cover injuries for which an exact dollar amount cannot be calculated. General damages are usually composed of pain and suffering, but can also include compensation for a shortened life expectancy, loss of the companionship of a loved one and, in defamation cases (libel and slander), loss of reputation.

nominal damages - A term used when a judge or jury finds in favor of one party to a lawsuit--often because a law requires them to do so--but concludes that no real harm was done and therefore awards a very small amount of money. For example, if one neighbor sues another for libel based on untrue things the second neighbor said about the first, a jury might conclude that although libel technically occurred, no serious damage was done to the first neighbor's reputation and consequentially award nominal damages of \$1.00.

punitive damages - Sometimes called exemplary damages, awarded over and above special and general damages to punish a losing party's willful or malicious misconduct.

special damages - Damages that cover the winning party's out-of-pocket costs. For example, in a vehicle accident, special damages typically include medical expenses, car repair costs, rental car fees and lost wages. Often called "specials."

statutory damages - Damages required by statutory law. For example, in many states if a landlord doesn't return a tenant's security deposit in a timely fashion or give a reason why it is being withheld, the state statutes give the judge authority to order the landlord to pay damages of double or triple the amount of the deposit.

treble damages - Lawyerspeak for triple damages. To penalize lawbreakers, statutes occasionally give judges the power to award the winning party in a civil lawsuit the amount it lost as a result of the other party's illegal conduct, plus damages of three times that amount.

http://www.duhaime.org/diction.htm

Equity - A branch of English law which developed hundreds of years ago when litigants would go to the King and complain of harsh or inflexible rules of common law which prevented "justice" from prevailing. For example, strict common law rules would not recognize unjust enrichment, which was a legal relief developed by the equity courts. The typical Court of Equity decision would prevent a person from enforcing a common law court judgment. The kings delegated this special judicial review power over common law court rulings to chancellors.

A new branch of law developed known as "equity", with their decisions eventually gaining precedence over those of the common law courts. A whole set of equity law principles were developed based on the predominant "fairness" characteristic of equity such as "equity will not suffer a wrong to be without a remedy" or "he who comes to equity must come with clean hands". Many legal rules, in countries that originated with English law, have equity-based law such as the law of trusts and mortgages.

Damages - A cash compensation ordered by a court to offset losses or suffering caused by another's fault or negligence. Damages are a typical request made of a court when persons sue for breach of contract or tort.