Quote:
Originally Posted by jeffk
Here is another way to think about this that takes all the complicated calculations out of the way. When you rent, the owner has all the costs involved that you would if you owned the house. The rent he charges you will recoup ALL his costs PLUS he will want to make a profit, let's say 5%. Your extra cost while renting is his profit margin. This extra cost is money that you cannot invest in your 9.5% return investment. You are paying a "middle man" and that always adds expense; to you.
For argument, lets accept rent on a single family, 2 bedroom home worth $300,000 is $2500/month. At a 5% markup, you are paying ~$125/mo./$1500/yr. profit to your landlord, money that as an owner you would NOT have to pay. You would also lose $142.50 (9.5%) on not being able to invest this money = $1642.50 lost per year x 30 years (life of a mortgage) = $49,275 lost at the end of 30 years. This ignores compounding effects so it's really far worse than that, a quick spreadsheet calc for compound losses came up with $120,000 after 30 years. PLUS, at the end you have no asset while the owner has a $300,000+ value escalated asset. PLUS+, the above treats rent as fixed while it certainly will NOT be vs. the owner has a fixed, predictable mortgage. PLUS++ at the end of 30 years if you rent, you would still be paying an ever increasing rent while if you owned, your mortgage would be paid off. That's a nice perk as you head toward retirement and a decreased income.
I don't care how you work your numbers. If you come to the conclusion that paying a middle man landlord will be cheaper than owning yourself and building an asset in value, you are missing something BIG. Your rental costs will be the same as his PLUS his profit. Your rent also gains you NOTHING permanent while it funds paying off his mortgage and building his asset value which is also increasing due to inflation. He meanwhile gets to charge you inflating rent prices.
Oh, BTW, when you get around to selling your house (primary residence), you can write off $250,000 ($500,000 joint return) of capital gain on your federal taxes. Try THAT with your 9.5% investment.  FURTHER, you can do this every 2 years. Over time, you could shelter $$millions of home value growth from capital gains taxes. $2 million sheltered @22% tax (or more) would save you $440,000. Project that back 30 years and it is worth almost $15,000 per year! As a renter, you get ZIP when you change apartments. |
While I agree, there are some caveats to this 30 years is a very long time and in that you have:
roof is 20-30 year replacement
windows
maintenance to the property
included utilities
Landscaping costs -even a decent lawn mower is $350 and up
and more you name it,
some might wager that 5% if that is the case, is less than a $20,000 roof and $15,000 for windows or $5,000 for a furnace and $500 or so for a water heater. pipe bursts, re-tile of the tub and shower, flooring refinishes
It would cost far more than $49,000 over 30 years to maintain the property if owned by yourself, think of what you spend in maintenance every year on your property, more than $1500 that is for sure.
It all depends on rent cost versus ownership costs for now, and location location location.
I actually rent in MA and own my lake property. Just happened this way, but at my rent numbers it makes zero sense for me to buy and my rent has not changes in years, have a great landlord and property to use. To buy would cost me about $1,000 more a month.
Yes I will not have the asset at the back end, but I am investing what I am saving now over the months. Since this time my landlord has replaced the roof, the water heater, fixed a retaining wall that was washed out in a bad storm, will be painting the house in the Spring, replaced an appliance or two, had a leak in the shower wall from tile needing to be re-grouted, and has painted when I have asked to change things. (this has been over the past 9 years). He has owned the property for 26 years. - 9 years at $1,000 a month is $108,000 (no accounting for fluctuations in the market on rates and prices). Money that helped me rebuild our lake property out of pocket. In that time his taxes have gone up. why my rent has not I do not know, I am not going to ask, but I have a number in my head and on paper that if it ever gets to that is the time I decide to buy/move.