These calculators don't reflect the reality/absurdity of the current economy. Anecdotal, but I bought a house in eastern California last year for $600k, now Zillow says it's worth $835k. Also, I'll unlikely ever be able to afford a house in the Bay Area, even though I make $220k/year at a company there. Still don't know what I'll do if my employer makes us return to the SF office in a few months. Relatedly, a ~70 year old woman bagged my groceries today and I doubt she's doing it for fun. Seems the accelerating wealth inequality is destroying our society/communities if it hasn't already.
If you had a significant other with a similar upper middle class wage, e.g., $220k * 2 = $440k you could probably swing it with more breathing room. You are wise to avoid the burden, in the chance you technically qualify for the mortgage but barely so in the Bay Area (e.g., leaving you house poor). The fact that home affordability requires a HH income in the top 2-3% is, to put it mildly, highly concerning.
It makes the trend of many millennials not trying (a bit of nihilism) seem reasonable. Why aspire for great career success and an above median income, when you can't get much for it? A better life, at that point, is likely to optimize for cheap hobbies and leave the high-pay work stress behind. Honestly, it sounds like a fairly rational decision.
The nihilism doesn't make sense from someone making $200k/yr though. If you're in a career with little advancement and making minimum wage then yeah sure, but if you write software at a FAANG, then lets back of the envelope for a second.
$200k is like 130k take home pay after taxes, (which is just shy of $11k/month). 20% down on a million dollar house is 200k. If you're able to put $4k/month towards a future down payment, that's 50 months, or just over 4 years. If you were making that when you are 30 years old, if nothing changes from then (which it won't), you can buy a million dollar house before you're 35.
If you put it into stocks instead of holding it liquid for those 4 years, then before long term cap gains tax (California and Federal), then you'll need closer to $300k. Which still seems like it should be doable before you're 40. (If you bought AAPL at the height of the 2008 bubble, you'd be doing quite well today.)
Does it seem reasonable to me that housing is this expensive in the Bay area? No! Does it seem feasible for someone who's software development career is going well, to be able to afford a house, eventually, if they make that a priority? Quite.
There are many directions someone making $200k/yr at 30 can choose to go with their money, and I don't begrudge anyone the agency to make their own decisions. But let's not say that someone making those kinds of wages can't afford a house. They may prefer to use DoorDash for every meal and extravagant vacations instead of buying a home, but people who make less money are forced to make much tougher, more existential choices on how to spend their money.
Nothing says you have to buy a house and settle long term in the Bay Area.
I’ve know people who get a rent controlled place, work 10 years, sock away $1M+ in savings, then go somewhere cheaper with good schools to have a family.
Being able to put away $1M+ in savings by the time your in your early 30’s is huge.
220 is a wage at the upper end of what can be typically made by the time your 30 if you’ve chosen the right careers. There are notable exceptions with recent top tech offers - but I work for a fang as a software engineer and didn’t break 200 take home until I turned 32.
If you need 2x those incomes to afford A basic necessity such as housing than we’re likely to have a problem.
I’ll offer a slight disagreement. They are more common than you think, and you don’t need to be exceptional to receive such a package. Positioning your strengths during negotiation is helpful. Knowing the market and laying out what you (presumably a developer) bring to the table goes a long way.
It is more common than you might expect across industries if you are good at what you do. I know a biz dev person at a mediocre book publisher that earns that much and they’ve worked remote much of their career.
It's not an uncommon salary - but its not typical as of 2021. The individuals with this compensation are typically either experienced, or educated in a remunerative field (including comp sci grads).
A society that sets the bar for home ownership at this level is going to have trouble, in an inflationary environment home ownership completely changes the savings rate for an individual as inflation eats away at the mortgage payment. By the time 30 years is up and the individual owns the home, they benefit from massively reduced housing costs into their retirement.
If instead these individuals are renting into their 30s/40s/50s they won't have the cash flow to backstop their retirement, fund college, create businesses, or other activities that result from capital accumulation.
What's worse is that a larger fraction of the eventual benefits that these individuals require will be paid into rent on properties that are likely owned by investment banks and others whose borrowing power is unconstrained.
EDIT: For more detail, many of the higher comps you hear about for junior engineers come from stock that appreciated much faster than the company intended when they decided your comp. The more Senior roles at most big tech companies also tend to require ~8-10 years of professional experience to be hired externally.
I'll echo this. The 6-7 years of "California" tech experience pays dividends in other countries. Ended up moving to Taipei so my example is a bit extreme, but I have quite a few friends making "low end" California $100k-120k USD/year wages while living in the middle of nowhere Canada.
I still wanted to live in a city, and Taipei has all the amenities Los Angeles or San Francisco had (nice bars, hipster coffee shops, great out doors areas). My friends wanted big wide open space and being close to family in Canada.
I was being paid on the "low end" for an engineering manager in California but in the top 1% in Taiwan.
For anyone considering trying "location arbitrage", whether that be in a "normal" city in a middle state of the USA, or a more extreme example like myself, I high recommend giving it a shot. You can _always_ move back to SF, LA, NYC, London, Hong Kong etc. The only risk you're making is the slope of your savings account decreasing slightly.
Remember, you'll never have _more_ time and _less_ responsibility then right at this moment. You'll only get less time and more responsibility as time passes on.
Just to follow up on a deleted comment that thought I was complaining, I guess my point is that decent housing (both renting and owning) has become unaffordable for most people. High-income earners like myself will be okay, if okay means spending half of my salary on rent where I literally step over homeless people as part of an hourlong commute. My greater fear is what happens to the "essential workers", the heroes making $15/hr? What happens when the firefighters, EMTs, teachers, grocery store workers etc have been priced out of the state?
Firefighters make 100k, some teachers do too. Depends where you live.
More over you need someone to buy your 800k house you spent 600k on. It’ll be a remote worker who buys it if the local economy can’t support that so…… hopefully remote work is here to stay.
The average salary of a firefighter in the United States is $52k. Teachers average $15/hour. No clue where you're getting these outrageous figures other than if you're a Californian and think anything about California is "normal" in the sense of the rest of the United States. If 30+ states pay firefighters $50k, and teachers make $15/hr in 40 states... actually makes California look like what it is, a massive bubble.
I submit the housing market of Phoenix, Arizona as an example of peak bubble. There are numerous houses on the market today that were previously sold... ~30 days ago. This feels more ludicrous than the speculative housing bubble of '07.
A co-worker from southern California just went to Arizona and purchased 4 homes as investments. He deemed them good value compared to current California market and was basically able to buy 4 units vs 1 around LA for the same price.
not a bubble in the sense that building new housing in most of California is practically illegal given the amount of local points of veto and existing zoning
Meanwhile for half the sale price of one 1200 sq. ft. 3/2 townhome on the Peninsula I could purchase 3 4-unit multifamilies on mortgage, each grossing about $50k/year in rents.
Will the appreciation of these properties be the same as that townhome? Almost certainly not. But money has time value, and the ancillary costs of ownership in CA are far greater.
I did a six month consulting gig in Cupertino a few years ago. I lived right at the edge of Cupertino and San Jose. I was paying well over $2k per month for a 1BR apartment — much more than my 4BR house payment here in Austin, where my wife stayed while I was in Cupertino.
I saw a house for sale there not far from my apartment complex. Literally a shack that was not fit for human habitation. It was selling for over $600k, and the land value alone was closer to $700k — yes, the “house” really was that bad.
I was a consultant, so I was barely within my “spend 1/3 of your income on housing” rule. I calculated that to be converted to an employee, they’d have to pay me north of $250k per year in order to be able to afford that same apartment.
I was not at all unhappy when they told me that my consulting contract was up earlier than expected, and I got to go back home to Austin just before Christmas of that year.
And housing prices in Cupertino has risen steadily by 20% year-over-year, and have done for at least a decade or two. Where else in the world can you get a guaranteed 20% annual increase on your investment?
California can keep their damn sky-high housing prices. I just wish they wouldn’t bring that shit with them when they move from California to Austin.
At the current rate of price increases it pays more to be a property owner than a top 3% income. There will clearly be no future implications to this /s
I used to think that, but really the monthly income is the harder and more important hurdle. It's not how much you put down, it's how much you can finance.
> Relatedly, a ~70 year old woman bagged my groceries today and I doubt she's doing it for fun. Seems the accelerating wealth inequality is destroying our society/communities if it hasn't already.
Savings and share-of-total-wealth rates (measured at same-age) are incredibly bad past the Boomer generation, dropping off with each generation.
There's going to be a whole lot more of this starting in about 10 years, when Gen X hits retirement age but can't retire at anywhere near the same rate their predecessors did.
I wouldn't count on inheritance to solve the problem, either. That's all gonna go to hospitals and nursing homes.
Similarly, I bought last Sept in Nashville, TN and Zillow says my house is up 13.5% already. The Nashville housing market is especially ridiculous, it's one of the hottest in the US.
> Relatedly, a ~70 year old woman bagged my groceries today and I doubt she's doing it for fun. Seems the accelerating wealth inequality is destroying our society/communities if it hasn't already.
Let's not forget about the error in extending unemployment and benefits that the current administration passed. We should all hope and petition that a 4th stimulus check does NOT go out (inflation). The fact of the matter is, these policies are keeping a lot of the lower income workers out of the job market because they are still making more off unemployment than going back to the workforce. I estimate, this imbalance in the market will correct in September when these benefits end.
In contrast, those companies that are offering $15+/hour wages are seeing applications through the roof. [0]
I don’t mean to discount inflation, as it will likely be an increasing issue in the immediate future [1].
But it’s very clear that the issue isn’t unemployment stipends: it’s the low wages of working class jobs that are the issue. Unemployment and the pandemic seemed to just be the push for many people to realize their worth as human beings is more than $7.50/hour.
I'm confused at your invocation of that quote. Are you saying the solution to this woman having to work a job she doesn't like is to force low income workers to work jobs they don't like? And the flood of low income workers who have no choice but to work these jobs will alleviate wealth inequality?
You get old enough, and you get tired of somebody else making decisions from afar that affect your day to day life with no real consequences to them.
Little things like the kitchen layout being moronic and having zero drawers get old when it isn't your choice to remodel or live with it.
And while it's nice to say "just move", let's not forget that moving costs a couple months rent and a massive time investment to find a place to move to that's actually better.
And then your current landlord gets some shitheel realtor to rent the place who repeatedly tries to schedule showings on an hour's notice.
I'm pretty convinced most people buy because they're either tired of the bullshit that comes with renting or want to buy into a specific school district, not because they're worried about making a return on their investment.
The more I get older the less I want to deal with bullshit home maintenance, and the infinite time suck that is customization and endless improvements.
Really part of a general life shift from "if you want it done right, do it yourself" and "if it's worth doing, it's worth doing right" -- to "outsourcing is a valuable tool" and "perfection is the enemy of the good".
I realize my time is valuable and I want to make sure I spend it where it counts -- on people, activities, experiences, travel.
When I rent a place, the kitchen layout and drawers are already good enough or else I wouldn't have rented it. And the things that aren't "perfect" I've decided I can live with, because nothing is perfect and there are more important things in the world to pay attention to.
To be clear: your viewpoint is entirely valid too, for yourself. But you're not speaking for everyone who "gets old enough" -- other people grow in the exact opposite direction.
Honestly, I think both of you have much better insight into the "rent or buy" tradeoffs than any calculator can provide.
Personally, I only think renting is "worth it" if you can't afford the house you want, or you just don't like homeownership. I also think owning is only "worth it" if you like the freedom to do whatever you want to your property or plan to stay put for a long time. No calculator can decide that for you.
Regarding the point about "freedom to do whatever you want to your property" - how does that fit with the rules that condo boards, home owner associations, and other relevant groups place on owners in their "jurisdiction".
I agree with you on your points, I have this rent-vs-buy mental agonising every few months. I'm just curious what folks are doing - if freedom is the key value, then basically you buy land somewhere where the least amount of people can harass you, and hope property prices and crime/services are at levels one can tolerate.
You need to weigh that when choosing where to buy. I walked away from a plot of land that came with a stupid HOA. The immediate neighbor wasn't part of the HOA and didn't have to follow the stupid rules.
(No plots within the HOA land had sold at the time.)
Regardless of age, needs and priorities change. There's no joy in moving, but it's still better than the time suck of hiring a contractor, electrician, and/or plumber. AND having to pay them.
Owning is nice. But it's more limited and more time consuming. There's a cost associated with that.
Owning is nice. But it's more limited and more time consuming. There's a cost associated with that.
I'm not sure I agree that owning is limiting, it can be more time consuming if you don't want to hire people to do the work that the condo gives you "for free", but there are few limits.
In my last condo, a neighbor spent months trying to get approval to put a pre-fab sauna on her outdoor patio, she submitted the architectural review forms, made several changes so it would "fit into the character of the complex" even though it was on a back deck facing a natural area, no one would see it unless they walked in that 5 foot strip of land behind the complex. I'm not sure if it ever go approved, I moved out before she had final approval.
On the other hand, my wife and I decided on a whim a few months ago that we wanted to put in a hot tub in our new house’s back yard. We talked to a contractor, he came out and did a site survey, then put us on a wait list for a hot tub. A few weeks later, he had a returned unit (new owner didn't like the way it looked) that matched what we wanted, the next week he brought it out and installed it. The whole process took about a month from start to finish, and probably could have taken a week or two if demand wasn't so high.
I very much identify with this. During COVID, we wanted to get a trampoline for our youngest kid who really enjoyed using a friend's.
How much aggravation was it? We own our house, so it was: Order it on Amazon, wait a couple days, then spend 90 minutes putting it together. The hardest part was finding one with fully enclosed springs that was in-stock.
He's jumped on it an average of at least 5 days a week, including sometimes in a light rain if he had excess energy to burn off. If we had a rented place or a shared yard or an HOA, who knows whether we'd have ever gotten it done?
Limited as in, you can't simply upgrade or down grade in say BRs or baths or location, or yard.
Owning is a commitment. And there's absolutely nothing wrong with that commitment; other than the fact there are costs associated with that. Those forgotten costs are often significant.
Ahh yeah, that's mostly true, but it's still possible to add a room to a house, or change the yard to suit your needs, so I still think owning a house is less limiting.
Though what you're calling a "limit" is really lack of stability -- you're free to pick up and move at any time when you live in an apartment, but your landlord is also (usually) free to ask you to leave at any time, so you can't count on having a long term stable place to live.
I was forced into leaving my last 2 apartments, one was was the owner wanted to stop renting and move back in to her place. The other was when the owner raised the rent by nearly 50% at the end of the lease term.
Now that I'm a homeowner, it's much less likely that I can be forced out of my home.
People have way too much junk here. I'm more of the mind "will I get my dollars worth out of this?" before I buy. I prefer the liquidity of cash over having to deal with owning, monitoring, moving, or selling another asset. I assume best case I can get half of what I paid for it. If it's super niche, I'll be lucky to even find a buyer. If it's expensive, I just assume I'm gonna take a huge loss. That's why I don't like buying too many things. Stuff is great...until you have to move.
Mow the lawn, water the lawn, tend the flower bed, paint the house (or replace the siding), replace the shingles on the roof after the hailstorm, fix the A/C, replace the refrigerator, etc. Some of the those are more frequent that others, of course, but things break over time.
Other costs of ownership are property tax (generally about 1% of the property value per year), gas/water/electricity are more expensive than renting because the house is bigger, there is home owners' insurance, and possibly neighborhood association fees. And then when you sell, you have capital gains tax and seller tends to pay the broker's fees for both the buy and seller, which totals up to about 6% of the selling price. There's probably sales tax, too.
As you say, needs and priorities are different. Yes, home maintenance is a pain--and at this point I have pretty much no interests other than maintenance or otherwise proactively dealing with issues. But I dread the thought of moving. And I probably have too much stuff but things are as they are.
In other words, buying vs renting shouldn't only be based on numbers/math. I own a home for 8+ years and I have probably spent shit load of money in maintenance/prop.taxes/repairs that I probably wouldn't if I was just renting but there is no way in hell I am giving up my freedom of doing whatever I want to my home (yes yes there are limits with township/HOA etc). I don't need no landlord to tell me what I can and cannot do with my home for the most part. That itself is worth it for me. And yes there are added benefits like Building equity over years, hopefully having a place of your own to retire etc etc.
Owning your own home is an emotion. It is a feeling that you have a place of your own. You cannot just put numbers on it. Yes don't buy a home if you are 23 and move every 2 years in your car etc. But if you are looking to raise a family, want to settle down in a place, owning a home is almost always worth it as long as you are doing it within your means.
I quite agree with this. People - often people with choices and means (money) - spend a lot of time agonizing over optimal monetary outcomes, except:
You're going to die.
The experiences you accumulate are what makes a life, as one moves through time in a one-way fashion.
No one gives a shit if you die old and efficent, unless that's the thing that made you sleep soundly at night.
I've rented and I've owned. They both have pros and cons. Now, as I get old, I like the idea of owning something where I can do whatever the hell I want, and moreoever, I can live away from humans who have parties, make noise or compete for space. Like you'd find in a rental building. I'd like to be able to build my own gym in a garage instead of timing my trips to a gym based on how crowded it is, and I'd like to buy a couch I'll use for many years to come instead of something that has to move around.
A cost-effective life is only a happy life if cost-effectiveness in and of itself makes you happy.
Yeah. By all means run the numbers. But at the end of the day most people probably shouldn't make a decision based on the numbers except maybe in some specific apartment vs. condo scenarios where they plan to stay in the area for a while.
Otherwise, the type of place you want, how important mobility is to you, your freedom to make changes (and conversely your interest and willingness to do maintenance/repairs/manage projects), etc. should probably mostly be the deciding factors.
I've heard people say they want to buy because they're tired of "throwing their money away." I think it's easy to underestimate how much money homeowners pay every month and never see again. I love the house I own but I don't know if I would have bought it for purely financial reasons. Though living in Washington DC, Zillow claims it's now worth a lot of money (which isn't really relevant to me since I'm not going anywhere for a long time).
I think it's implicitly assumed that anyone looking at the numbers is on the fence about buying vs renting to begin with, otherwise why would they care?
This can be true even if you've got strong opinions on lifestyle, in the case where you're pulled in multiple directions by different needs (e.g. you want to manage the risk of rent increasing at the same time as future house prices rise but you still value mobility, or you're frustrated with landlords but don't have a lot of project work planned, and so on).
> I'm pretty convinced most people buy because they're either tired of the bullshit that comes with renting or want to buy into a specific school district, not because they're worried about making a return on their investment.
Another big factor is noise. A detached house is going to be quieter than most apartments in a shared building. That was the big reason we moved to a house. I'm a light sleeper and noise from people walking around upstairs was driving me nuts. Moving to a house with no one walking around above me was a huge improvement in my sleep.
Edit: Yes, you can rent houses too, but at least where I live (Minneapolis) this doesn't seem to be very common.
Noise was a big one for us, but it was the opposite problem. We were starting to have children and I didn't want to worry about making noise and disturbing my neighbors. In single family detached housing we can make as much noise as we want and only disturb ourselves.
This is highly dependent on the building. I have been in houses where all night you hear loud motorbikes and bogans doing burnouts while my current apartment has incredible sound insulation and double glazed windows to the point I wouldn't know other people live here if I didn't see them in the hallway.
This is a 2019 30 level apt building. In the hallways I sometimes hear people talking but its very quiet. Inside my apt I can only hear the door directly opposite mine closing and it's also not very loud.
I'm guessing its all dependent on how much money was spent on noise insulation. Between rooms inside my apt there is very little sound insulation which is not a big deal for me but maybe for others.
Eh, almost no one I’ve seen has ever spent less by moving to their own home. They’ll typically end up spending at least half of what they spent as rent just on things other than the mortgage (which would typically be much higher than the rent by itself). Now of course they often would get a larger, nicer place that’s exactly what they wanted, but let’s not kid ourselves that home ownership is somehow cheaper. It never is (except during the times when the prices went up no matter what).
But you don't "lose" or "spend" the equity portion of your mortgage bill.
That's the difference. If you have a $2500/month mortgage, by year 10 or so that's probably $1000 equity + $1500 interest.
The "interest" portion gets tax-deducted (so you get a portion of it back), while the $1000 equity is literally yours. When you sell the house, that's the portion you get back.
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So really, $2500/month mortgage (after a few years of living there) is really a $1000 cost + $1500 forced savings account. Then some maintenance / taxes on top of that.
Since you're building equity while living in a home, a $2500 mortgage is in fact far far cheaper than a $2500 rental.
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If this is confusing, then think about the "down payment" when you first get the mortgage. A $100,000 down payment may have cost you cash, but its not like the down payment disappears. When you sell the house and close the mortgage, that $100,000 comes back to you (plus all the equity you gained).
I'm currently paying a $1600 / month mortgage, of which $1000 is principal, $400 is interest and $200 is escrow (tax / insurance) in an area with $2000/month rent.
So I'm really paying $600 / month for interest, tax, insurance. It's another $1400/month before I get to rent prices.
And even with a new roof and new deck last year, I'm no where close to renters prices in terms of actual cost. Especially considering that I had no maintenance costs in 2019 (lucky year)
And those $2000/month apartments are literally my next door neighbors. I get way more room than them, a private garage and lots of other benefits. (Those apartment dwellers occasionally ask me if they can park in my driveway when space runs out. That's how close they are.).
Your numbers don't seem normal. Looking at a mortgage calculator, given a new $370,000 home price, with 20% down, 3.92% interest... the P&I is $1,399. Of that, $967 is interest and $432 is principal. Those numbers are almost the reverse of yours. It wouldn't be until ~year 20 of the mortgage that the numbers would match yours.
Try again: 15-Year mortgage 2.375% interest. Aka: current market conditions. With interest rates so low, your monthly payments are minuscule right now and make the 15-Year a good option.
Any homeowner with good credit scores can right now switch off their current mortgage into a 15-Y 2.375% ish loan.
I bought a house three years ago. It burned down one year ago. I am buying another house this month that is 40% more expensive, and will be paying less on a monthly basis. This is due to (1) rolling over money invested into the first house, and (2) stupidly low interest rates.
If you can realistically afford a house, I don't see how renting could ever make sense, at least not when the prices are close. Basically, consider a mortgage payment as a rental payment where they match 50% of your rent into a nice investment fund you can cash out anytime you like.
- It's generally nowhere near 50% (of the cost of owning) going to principal
- Buying ties you into the house, or at least ties other costs to moving. If you're likely to need to move again in under 5 years, that cost is high.
- Related to the cost of moving, but... if you're moving to a new area and want to take some time to pick out where you're going to live for 20 years, then renting for a few makes sense.
Honestly, there's just a lot of reasons that can make it financially reasonable to rent instead of own.
Most of the homeowners I know have 30 year mortgages. As such, my comment that your numbers don't seem normal is fairly accurate given the people I know. Is it a lot more common to take a 15 yr loan among your friends / in your area?
If your mortgage is lower than the rent that means your location appreciated very significantly. Given stagnant prices mortgage being lower than rent doesn’t make sense. Now the question for someone buying today is if they expect that to happen in the future. For me the answer is not positive enough to gamble buying a place.
It's a townhome, so the appreciation I got is far less than the larger single family homes in my area. Furthermore, I've ignored appreciation from my calculations above (since my property has appreciated considerably, its as if I've gained $60,000 in equity). Frankly, appreciation of assets is one of the biggest reasons to own rather than rent.
Townhomes are like apartments but no worries about bothering people below your floors (or people above you annoying you when they move chairs). They also build equity at higher rates than renting. Bonus points: I have a dedicated driveway + garage while my neighbors are sharing their parking space with each other (and often run out).
Also like, +1000 sq. feet. 3 stories of space helps a lot compared to the apartment sizes.
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Look, not everywhere is the crappy San Francisco housing market. There are plenty of locations in the USA where rent prices are terrible and ownership is much better financially. Any location that's constantly building new homes (pushing home ownership prices down, and therefore rent prices down) will probably have a market like mine where ownership is in fact the better financial decision.
If your building has HOA dues, renting doesn't mean you aren't paying it; it just means your landlord built the cost of it into your rent. Same with property tax and the landlord's home insurance payment. After which, if you want to be safe, you then need to spend more to get renter's insurance.
And I would expect a landlord would build estimated repair costs into the rent as well, at least to some extent. Of course that doesn't mean something unexpectedly expensive couldn't happen.
I see this claim a lot - "you can't save on rent because your landlord has to cover their costs".
But this is only true if your landlord purchased at the time you rented. I rented a $1.8M apartment for $3,000 per month (~1/3 of total ownership costs). That's because my landlord bought 20 years before when the apartment was worth $200k. His monthly costs were maybe $1,000.
Your landlord doesn’t save on HOA fees, repairs, taxes, or insurance because they bought 20 years ago. Those are all costs that are charged in present dollars. Repair services want to get paid in 2021 dollars. Property taxes are based on assessments of current value. Insurance premiums are set to cover present replacement costs.
The only thing your landlord saves on by buying 20 years ago is the nominal cost of the property itself, either as a low fixed mortgage payment, or as a paid-off property.
This is just the effect of time and a fixed mortgage rate. If you were able to buy now, in 20 years you could be in the same position with respect to your property costs.
Property taxes are capped in terms of growth. Likely paying 10% of what I’d pay if I bought.
And biggest of all, he locked in his mortgage payment while rents went up 4x. And rents were still lower than cost of owning as housing prices priced in appreciation.
I am extremely doubtful of the claim that an apartment that only nets 36,000 in rent per year is somehow worth 1,800,000. That's a 2% return before any associated costs. I literally just looked at another rental property that was netting 8k a month across all tenants and was listed at 1,150,000. There is no way that other owner could actually sell that place for 1,800,000.
There are plenty of places that rent far below what they cost the landlord in mortgage/taxes/HOA/repairs/etc.
Home ownership, especially buying a home as an "investment" is such an emotional thing that plenty of people buy property just to buy property, the math doesn't come into it. Most of the time, even with the appreciation of the property that they sell, the landlord would have been better off putting their money into other more liquid investments with higher returns.
But, many people just buy property because they don't know any better.
Not sure what to tell you. The place two doors down that was smaller went for $1.5M.
Of course the landlord couldn’t sell it for $1.8M with me in it (because of SF rent control). But when I moved out and it was empty? They absolutely could.
You can definitely spend less when your mortgage is paid off.
But I'll admit that part of my reason for buying was to prevent the situation where I might be living on a fixed income some day, and having my rent go up every year. That seemed like a good thing to try to prevent.
Buying a house requires a high monthly payment, which remains constant over time, and one day ends. Renting requires a high monthly payment that rises over time, sometimes unpredictably, and never ends.
At some point, though, the mortgage is paid off and maybe you're paying something like $1K/month for taxes and maintenance for a property that may have a decent amount of land if you're outside a city--an amount that isn't going to go up. (Taxes vary a lot of course although that is presumably reflected in area rents as well.)
You may be right, especially absent property appreciation, but there's a lot of value in having a fairly predictable set of costs into an indefinite future absent really unpredictable problems. And not being forced to move at some point.
If you look at the home as a long-term investment, it's almost always cheaper than renting since your mortgage stays the same, while rents almost always rise.
You may be paying more in mortgage+taxes+insurance+maintenance when you buy the house, but 10 year later, rents have almost certainly gone up.
> If you look at the home as a long-term investment, it's almost always cheaper than renting since your mortgage stays the same, while rents almost always rise.
We had our monthly house payment more than double due to hurricane insurance increases. This even tho our particular area hasn't had a landfall in 100 years & gets hit less than DC, NYC, etc.
Yes, but in an area with such a hurricane risk that it led to an increase so great that it more than doubled someone's home mortgage, it would have had to have had a large impact on landlord's structure insurance, raising rents. For someone with a $1000/month house payment, that's $24,000/year in extra premiums.
If that's a $200,000 house, in 10 years the extra premium would cover the house... I don't see how landlords could escape levying a rent increase when faced with such a huge increase in insurance prices.
> Yes, but in an area with such a hurricane risk that it led to an increase so great that it more than doubled someone's home mortgage,
I believe you assume that the increase was tied to our increased risk. It would be more accurate to say that it was tied to risk of other places, hundreds of miles away. In my post, I had stated that we were at less risk than major mid-Atlantic cities.
No, I'm trying to figure out how residential properties had such a huge increase in insurance rates (whatever the cause), while landlords were spared the increase.
I can understand that a huge insurance rate increase would make your house much more expensive than you thought it would be, I'm just trying to understand how such a rate increase only applied to residential houses, but not rental properties (many of which are just residential houses).
>let’s not kid ourselves that home ownership is somehow cheaper. It never is (except during the times when the prices went up no matter what).
It's important to take into account the intangibles of buying vs. renting. It's not just a straight up financial calculation. Buying makes your living situation far more stable than renting. If I miss my rent for 3 months, I'll be getting a knock from the sheriff and put out on the street. If I miss my mortgage for 3 months it can take over a year to be foreclosed on. On top of that, buying puts you in a community of owners. It's a completely separate population from renters. People are far more incentivized to act civil and be considerate of their neighbors when everyone owns and lives somewhere long term. Not to mention the ability to renovate, add on, and otherwise make a house into a home. Buying is an emotional decision as much as it is financial.
My home's mortgage + escrow payment is ~$200/mo more than the apartment I moved from. Of course there are additional costs, I now water a lawn in addition to my usual water usage, I have to factor in some savings for repairs, etc, so closer to ~$650/mo increase.
But in the end I have 2.5x the square footage, a private yard/pool/grill vs. community, a two-car private garage with guaranteed electric vehicle charging, the ability to furnish however I wish, and to top it off much less reduced risk of housing inflation (a very real concern).
Nine years ago in the same market where I own my house an apartment unit I used to rent was ~$900/mo. The same unit on the market today is $2,352/mo. Even if home values increase and my property taxes jump it won't jump that high.
Yeah, but the taxes I pay is less than a quarter of my monthly outlay of mortgage+escrow. Even if my taxes double from my home's value doubling my monthly outlay won'd double. Meanwhile my rent will easily double, probably even more than that in the same market.
Sorry I meant to say that if all houses double in value, and municipal costs don't change, then your taxes do not change. Just because the value goes up does not imply that taxes go up.
If they don't change the tax rate, and my home doubles in appraised value, my tax liability on the property doubles. True, the city might reduce tax rates if property values explode like that but they might also just continue to take in the revenue. ¯\_(ツ)_/¯ Another example of why its good to be active in local politics.
FWIW, I live in Texas so this place gets a good chunk of its tax revenue from property taxes. The odds of them cutting the tax rate just because your house shot up in cost at least to me seems pretty low. This is one of the problems of gentrification, where long time owners find they are unable to continue owning in the $90k house they bought 20 years ago because now they pay property taxes on a $750k property.
Taxes are a function of municipal costs and the value of all properties. If they all go up equally in value and costs remain constant then your taxes should not increase
In theory, you are correct. In practice, in a city or area with different valuations it may vary.
For example, in my city, 70% of households rent and half of those are in the hood. Bad neighborhood valuations are essentially a factor of Section 8 prevailing rent, and many properties fall off (as they stop meeting HUD standards) and get abandoned as they decay, because slumlords.
The effect is that in a good neighborhood, your pro rata share of the levy always climbs, even without an increase in value.
In practice, though, that's not the case. In many jurisdictions you get yearly reassessments as to your home's value, and your taxes change to match that value. I don't think I've heard of a place where they decide to lower your taxes (or keep them the same) when your home value is reassessed higher, regardless of what's happening with municipal costs.
It’s not day to day cheaper but you hope net zero in the end and maybe you make some profit. If you have a down payment to otherwise invest then maybe renting is ok…
Yeah, I wish we had German-style "unfurnished" apartments available in the US where you can rent an apartment that's literally concrete subfloor and unpainted walls, no kitchen appliances or cabinets, etc. I guess Americans move too frequently to make this viable.
Would your landlord pay you for the improvements you make? Is seems a full interior build out could cost tens of thousands of euros. Why not just buy if you have that much free cash sitting around for a down payment? And what happens if your landlord tries to push you out?
I think this is not going to make sense if your only point of reference is residential rentals in a typical American city, but this is how it is done in at least some places in Europe. People tend to stay in one place for much longer than Americans. If you're on a budget you can go to Ikea and buy a kitchen...based on my friends' places I'd say that's the norm.
Some people do yes, I’ve heard a few people dismantle and take it with them, more common is that you offer the next tenants to pay for the kitchen at a reduced rate. Keep in mind it’s very difficult to kick a tenant out of a rental here and you can often keep a flat for as long as you want so doing large renovations to a rented flat isn’t uncommon.
I really do not get the appeal of moving your own cabinets from apartment to apartment. But I guess it does allow you to customize your rented place more than is possible in the US.
The household who would move every time something annoyed them in a rental does not seem likely to remodel only the kitchen and nothing else between the time they buy a house and sell it. (You have to either tradeoff kitchen remodel costs against kitchen annoyances or many remodels against many annoyances, but it seems unreasonable to tradeoff kitchen remodel against all annoyances.)
In some areas, tenants pay a broker placement fee of a month's rent, plus an application and credit check fee. In all regions, tenants pay for the move costs itself. Many times you discover that your furniture isn't quite right, your Ikea-grade knockdown furniture didn't all survive the move intact, you "need" to buy a different rug for one of the rooms, you might want to have more than 0 days of overlap between the places to make the move easier (or you might be forced to take a month overlap to secure the place you want), and add some custom-sized blackout window shades to sleep, etc...
I read the above as "[an amount of extra expenses equal to] a couple months' rent" rather than literally "an extra two months' of rent checks to the landlord".
I have a dog, and after a lease ended the landlord told me they hired "experts" that said the dog ruined the carpet and i'd have to pay $1000 to replace it. Very hard to argue against without hiring expensive people as well.
To be clear, I don't think my dog caused $1000 in damage to the carpet, but i can understand how any damage may be undesirable and there is no partial carpet replacements.
This was first apartment with dog, so this was an unknown expense.
Oh let me list all the ways a landlord will screw you!
It depends, heavily, on lease agreement. Where I was, a lease is for a given period of time, often 12 months. (Not aligned to anything: literally $DATE_WE_SIGNED to that +12 mo.) Breaking the lease requires paying it to completion. On average, that means 6 months of rent. Now, if you did the work of finding a tenant that the landlord approved of, that new tenant could then take the apartment (and you'd be off the hook once they started renting).
Since I know many people think this: leases don't necessarily turn into month-to-months: legally, they could, but my landlord typically did not allow this to happen: at the end of the 12 month lease, they will typically raise the rent at which point the lease contract gets renewed: often you have two choices: renew for 12 months at the higher rent, or renew as a month-to-month at an even higher rent; IME, around 5%. Now you have to balance the likelihood of moving vs not: if you don't move, you'll pay 60% of a month's rent over the term of the lease for nothing. Even if you are moving, you might not be moving at your lease date exactly, so even with planning, if you degrade the lease to a month-to-month on the renewal prior to your move, there might be a few months were you're paying 5% more just 'cause.
Giving notice to quit usually requires, e.g., 30 days, so you'll be on the hook for next month's rent, too, even if you'll have moved out by then. This is hard to avoid, since otherwise you risk not having a home if you can't get the next play lined up.
Now, of course, if you're going to move, and you can plan, at all, then you do everything in your power to align these stars to minimize the cost, doing whatever is appropriate for whatever state your lease is in.
(In my case, we opted to turn the lease into a month-to-month, and paid exactly 2 months at the higher rate, or ~10% or $200 over the 12 month. That renewal weirdly also came with a 15 mo option, which was new; over that rate it cost $300 to abandon ship. Honestly, other factors dominated, like pay adjustments due to new locale, local housing costs, even just the moving costs. But it did occupy time, worry, and made logistics unnecessarily more difficult. We also had no overlap due to the magic of family and the nature of our move.)
> And then your current landlord gets some shitheel realtor to rent the place who repeatedly tries to schedule showings on an hour's notice.
Yup. "We know you work from home so we've told the realtor to be considerate of your time". Bear in mind I have a dog and a cat.
4 days and FOURTEEN showings later (often spaced with little gaps, so it's in and out not blocks of time), I'm complaining to the landlord, who agrees that that is ridiculous. Realtor: "Oh well, it's a hot market and they'll be out of the house soon enough."
The people buying are millennials (currently the largest generation) that are settling down in their location of choice.
I predicted this would have happened slowly over the next 15 years, but covid and inner-city violence triggered a flight to the suburbs....hence increases in real estate.
Conversely, to me that the flexibility to just pick up and leave is far more appealing than settling down and owning something. I've moved 7 times in the last 6 years, and I'll probably move again when my current lease is up next year.
Similarly I've hated renting from owners doing it for the "investment", where the going rent is typically much cheaper than the mortgage for the property (California). Many landlords think they are giving you some great deal when they are the ones who bought beyond their means..
For multifamily housing the price of a building is usually such that if you put around 40% of the purchase price down the building is cash flow break even after mortgage, taxes, expenses. The same is basically true if you buy a house to rent out. This is the case because over long periods of time real estate has appreciated by 8% per year with much less volatility compared to the stock market, and favorable tax rules (particularly depreciation) mean you can "lose" a lot of money on paper and claim those losses to offset other income. Your landlord is not giving you a great deal.
Be careful. If you are thinking of renting out a house remember you need to return a large portion of that depreciation back to the IRS. It isn't free money. Even professional landlords don't know about this.
Anyone with a competent accountant will avoid that. You can invest in like investments and avoid recapture.
There’s a whole industry around this generation of “free money”. The owner of a Hampton Inn / Fairfield Inn, etc, makes more money on selling off accelerated depreciation than on renting rooms.
Yes. There is a 1031 exchange. That is when you purchase another like kind investment property. I should have stated during a 'sell'. Lots of landlords actually need to sell homes. So no, a competent accountant will not avoid it during a sell.
I don’t know about CA, but in Toronto there are so many “investment” condos that renters can get great deals. Renting a new condo for $2,000 per month that costs $800,000 to buy (~$4,000 per month total costs with HOA and down payment opportunity cost) is an amazing deal.
In 2021, the buy vs rent decision is a little like Should I buy a whale ranch on Mars or Venus?
I suggest that the decision whether to rent a house might want to take into account that each rental ad is getting hundreds of applicants, each day - with few new ads showing up.
Fair enough. Maybe this is a recent trend in your area, but in Vancouver people have started referring to asking prices as "liar prices" or "marketing prices" -- they're often set low to attract interest with no intention of actually selling at that price.
In my case, I bought a house last summer and offered exactly the seller's asking price -- which they rejected, countering $5k higher (which I agreed to).
Yeah, but people are listing low to attract more eyeballs.
I sold a place in the bay area 5 years ago. I knowingly listed it about $200k under what we expect it to go for based on comps. Huge swarm of interest and many buyers offering a price at around what we expected.
> Yeah, but people are listing low to attract more eyeballs.
Any other year I'd accept that. However, that's unlikely to be true this year - in most US markets. Buyers and renters alike are bidding up properties because there is one property or less for every 100 prospects.
Here, landlords get 400 applicants the first day a rental is listed. The second day they get 400 more unique applicants. The rental we just moved into was up for less than 2 hours and received 50 applications. We won by paying 6 mos in advance + last + 1.5x security.
Look, you don't have to take my word for it, the data is public. Go look up the comps and you'll see they match. There's nothing to "accept," it's just a fact.
There have always been hundreds of prospects for each house sold. When I sold the aforementioned house we got roughly 500 people the first weekend and we were in contract after just a few days. It's been a hot market for a very long time.
Sellers set a low price because the price doesn't matter. It will be bid at the market price regardless.
A majority, or even a large minority, of sales cannot be above market price, by definition. If there are enough cash buyers that it's being difficult to buy at a given price, the market price is clearly somewhere above it.
You seem to be leveraging specific terminology in order to obscure the larger point - that buyers & renters are making substantially higher offers than homeowners are looking for. It is unclear how that helps move this discussion along.
In volatile markets, sellers often set the initial price well below their reserve price to attract a bidding war. This forces buyers to make their own determination of market value rather than anchoring to the list price. You most commonly see this in markets where there is a lot of price volatility or supply constraints such that it is difficult to determine a priori what a fair market price is, which describes a lot of markets these days.
Most buyers know this and bid their estimate of the fair market price, which may be well above list and hopefully the reserve price. This is a sensible strategy when the seller has no idea what a reasonable price actually is but there is a large number of buyers.
Why would you assume it's to rent a house? It's a great time to be an apartment renter in big markets like NYC. I just got 2 months free on my lease renewal and I've seen even better deals out there but I didn't want to move.
Same here in Somerville outside Boston. There was a giant exodus last year due to COVID and landlords are desperate for any warm body even at a steep discount from the former rent.
Completely the opposite here in Seattle. The rental market is bonkers right now, with very little inventory in places where people want to live. That is very different to how it was just a few months ago.
Isn't that the trick where the price looks good initially and then it goes up wickedly after 12 months because they won't give you free months when you renew?
The price can always be raised at the conclusion of a leasing period so there isn't really any unusual trickery involved. If anything the disclosure that the free months apply only to the first leasing period is less deceptive than raising the rent without any warning upon lease renewal.
My wife wants to buy a house, but I'm unable to make life decisions without trying to minmax them. I wasn't satisfied with existing rent vs. buy calculators, so I decided to build my own! I'm not a developer, so I apologize if it's a little rough looking...
Some things it takes into account:
- The actual rate of return on your down payment and extra costs of a house
- Inflation
- Itemized deductions on your taxes
- The impact of state taxes
- Mortgage interest deduction limit and SALT tax deduction limit
Let me know what you think or what improvements you would like to see!
This is missing a rate of return on the money you would otherwise use for the down payment, information on whether that return would be taxable or is sheltered in a Roth or similar tax shelter, current and anticipated tax brackets if one sees that income taxed (at both time of sale and possibly retirement), current and anticipated capital gains rates that might apply to the gains from the home sale in the future (if you're over the threshhold)...
> rate of return the money you would otherwise use for the down payment
Really the most important number, but all of these suggestions are crucial to the calculation. Money that doesn't get invested in a house gets invested in other things. Pretend it's in an index fund.
But when you take out a morgage you can leverage 800k of the banks money at negative real interrst rates, effectively paying you tens of thousands over the course of the loan and any appreciation of that asset gets multiplied by 5x on your initial down payment.
Yup, mortgages are around 3% and the fed rate is near 0 for the next year or 2. If inflation averages over 3% per year, you are getting paid the difference to borrow.
Probably want to allow for the possibility of rent rises over time.
One thing that I think this actually shows pretty well is the notion that part of the answer depends on how long you intend to stay in a place. If you expect to move in two or three years, it's probably not worth the hassle/expense of buying. If you intend to stay 5+ years in one place, it makes more sense to buy.
>Probably want to allow for the possibility of rent rises over time.
Most definitely, my apartment before buying a home was ~$100/month less than my current mortgage, now (3 years later) the rent for the exact same apartment is ~$300/month more than my mortgage.
Rents are only a part of inflation measurements and can easily outpace the general rate.
California's recent rent control laws caps rent increases at 10% or 5% + the yearly CPI increase (whichever is less) every year, for example, explicitly allowing rent increases to outpace the general inflation rate. Personally, the rent I pay has gone up 9% this year.
Rents can change based on whether an area becomes more or less desirable, as insurance or other costs for landlords change, as ownership of rental units consolidates, etc.--that is, for many reasons that might be only tangentially connected or even completely divorced from the reasons that the costs of other goods and services are changing.
That is another type of inflation, but it's an interesting point that you may care about both the general consumer inflation rate (for its interaction with the mortgage interest rate) and the rent price inflation rate.
I just assumed the inflation rate was applied to both rent and house price, as a general change in the value of a dollar. While they mostly move in line together, rent prices and home prices don't always move together so a change in value term that effects one and not the other might be useful.
This all depends on geography though. Buying in the bay area and only staying for 2.01 years could get you a pretty hefty ROR assuming you don't remodel anything, considering the supply constraints. Maybe covid & remote work will change that.
Maybe. Flipping is a risky business. Returns are not guaranteed. If you're just looking for a place to live, you should really evaluate it on that basis.
I know something who went bankrupt and got a divorce after flipping condos in chicsgo just before the housing bust. It works until it doesn’t and it’s usually catastrophic.
browsing it might give you some ideas of features you can add to your calculator. It's also a small thing but having the choice to select the downpayment based on percentage down might be nice.
I don't know why your calculator tells me getting a house is not worth even if it thinks the transaction is profitable. It states my cumulative profit is $29,030 but I shouldn't get a house.
The determination of whether to buy the house is based on the calculated rate of return. So even if you make a profit, if the time horizon is large you’d be better off investing that money in stocks.
Houses are both leveraged investments (in a non-productive depreciating asset, I know, I know) and a forced savings mechanism. Investment in stocks by average people is not leveraged, and nor is there a forcing function that makes you put money into the stocks every month or you end up homeless.
These two functions have some value - especially the latter.
> The determination of whether to buy the house is based on the calculated rate of return. So even if you make a profit, if the time horizon is large you’d be better off investing that money in stocks.
Can you give a more detailed example? What time horizon are you picturing? After you pay off the house you lose the leverage advantage of returns on selling a house you bought with a mortgage vs selling stocks, but you also stop having to pay the mortgage at all while you'd still be renting, likely at a far higher market rate, so looking at the post-mortgage-payoff curves, it's hard for me to see where the invested down payment + (mortgage + tax + upkeep - minus - rent) returns would be expected to be high enough to make up for that.
(The more rational counterargument, though, would likely be around diversification? Better to have land + stocks then just one...)
It doesn't always make sense to buy rather than rent, but it all depends on your assumptions for stock returns vs house prices changes, inflation, maintenance, real estate tax increases, rent increases, how long you expect to live in a house and if there's an arbitrage in the local market between renting and buying.
Also most people don't buy a house for life, and if you sell the house through a realtor they get 6% or so of the proceeds.
This isn't something you can just logic an answer for without running it through a rent vs buy calculator, but investment expert and author William Bernstein suggests a rule of thumb that you should not spend more than fifteen years of market rent on a house purchase. In other words you can look up what the house you are considering buying would cost to rent, and as a rule of thumb if the sale price is more than 15 years of rent it's a bad deal. This is obviously an imprecise rule of thumb since it doesn't account for variations in real estate tax per region, but it's a starting point if you don't have a good rent vs buy calculator.
Stock returns are generally higher than real estate. So you might start off with higher YoY values for the house initially, due to leverage (1.03x a big number vs 1.07x a small number), but stock would catch up over time.
Some decisions aren’t mathematical. Sometimes it’s better to make a decision based on whether or not it makes sense for the family as opposed to dollars and sense.
If your wife wants to buy a place, I suggest finding a compromise to figure out how to make both parties happy.
At the same time, you should be highly skeptical of anyone encouraging you to make what might be the single largest purchase of your life without carefully working through the financials. Maybe your preferred option will cost you an extra $50,000 over the next decade and you decided to go with it anyway. That's totally fine as long as it is a conscious choice. If the difference is $500,000 then perhaps you should consider how strongly you actually care about renting vs. buying...
This is nice. I definitely played around with some calculators like this when I was deciding to buy a house a few years ago.
Off the top of my head, some things I'd add to make this more useful to a wide audience:
- I don't know what I pay in state income and sales taxes. But I do know my income and my state's tax rate; income tax could be derived from that. I'm not sure how you'd estimate sales tax, though - you'd have to know how much of my spending is taxable.
- I've heard a rule of thumb that home maintenance costs are 1% of the home's value per year; maybe default to that, especially since a first-time home owner doesn't really know what those costs are. However, older houses will require more maintenance and that cost probably scales with square footage, not cost.
- you're assuming a 30-year mortgage - I'd put in the ability to change mortgage length. (Also, maybe a link to somewhere where I can find out what mortgage rates are.)
Maintenance cost likely scales with both size and cost. Size, for obvious reasons, and cost because the labor/materials cost of a repair is likely correlated with housing prices in the area. You then have to account for the portion of cost that's already correlated with size...
+1 to mortgage length. We heavily pivoted our decision to buy on getting a 7 year ARM because my friend and I knew we wouldn't grow old together there (wanting to do things like get married and have our own families). A time bomb on the mortgage was a feature, for us, and a cost savings.
In my experience as a small-time landlord, maintenance does scale somewhat with cost, but not linearly. A lot of big costs on the materials side (like say, a furnace) are more or less fixed. At least, repairs don't cost 4x as much in a 800k house as they do in a 200k house of the same size.
> I've heard a rule of thumb that home maintenance costs are 1% of the home's value per year
It's a very poor rule of thumb. Contrary to the other comment, these costs don't increase linearly with value of the house. Sure, if I live in an expensive area, it may go up 30%, but not much more. Looking at how much my house has appreciated, I can assure you I pay not much more in maintenance than when I bought it.
The 1% rule came about when the median house price was under $200K.
There's a very interesting subset of people on Reddit's Personal Finance forum who seem to think that buying was the right move (kinda, see below) for them, but that renters "don't know how good they have it".
Watch any one of the threads on "should I buy/can I afford/pros/cons", and you'll see a vocal subset who seem hellbent on convincing people that owning a house is nothing more than opening your wallet/checkbook/credit card every other weekend for the "next four digit maintenance issue".
Furthermore, if you live in an early 1800s farmhouse like I do (which was very much a fixer-upper when I moved in and still sort of is), that's a very different situation from a modern in-city condo or even a new development.
Nice project but if you are serious about buying a home, don't just look at numbers. Figure out what you and your wife want for yourself in next 2-5-7 years. If you see you guys staying in 1 place and build a family further, buying a home may not be a bad idea considering your finances are in shape (good credit, have 20% downpayment etc etc). I would say rule of thumb is 7 years in 1 place. If you are going to live in same place for 7+ years, buy with 20% down and total cost not >25-30% of monthly pay.
Life opportunity cost. When you buy a house you are making a big commitment. It will guide the path of your life. These days with remote work that's less and more of an issue. What if you would be happier living in the south of France?
I'd love it to provide some mechanism for guestimating my taxes (maybe based on the state or city I live in) - I was too lazy to dig out a tax return to fill out those fields, which meant I couldn't easily use the calculator.
Especially outside of major cities, there are about a gazillion towns that have different tax rates that go to paying the local schools, emergency services, and town administration. Maybe there are APIs for that sort of information but I don't know.
That's why I want a guesstimate - give me a rough idea of how the tool works and that will convince me to dig out a tax return and fill in the fields for the most accurate estimate possible.
The home only expenses (down payment, home owners, etc) when you chose rent should be converted to a standard rate of return of VOO (index of SP 500) for the 15 years. THIS would be the greatest calculator ever built ever.
It is accurate! While the house cashflow is negative in the example, it's at least less negative than the apartment cash flow. Maybe the moral of the story is living with your parents for free is better than either option!
Depending on your circumstances, it may not be possible to seriously consider it, but another alternative to rent-vs-buy might include various van/camper/coach options, which can be parked for months at a time at "seasonal" campsites, often for $500-1000/month.
Obviously equipment like this isn't going to appreciate either, and you'll be subject to all the same maintenance costs of owning, so in some ways it's the worst of both worlds— but it may still be cheaper than trying to rent if you can't or won't enter the market right now and mooching from family isn't an option.
If this calculator is rent vs buy, why does the graph compare house vs apartment? For both houses and apartments, they can be bought or rented. Are you someplace where one type of home can only be bought and the other can only be rented?
Nah this is just bad terminology on the site. I’ll fix it. In my personal situation I’m deciding between continuing to rent my apartment vs. buying a house.
A pilot once shared with me the rule of the three F's. If it floats, flies, or fornicates, it's cheaper to rent than to own. You may substitute a 4 letter word for that last one.
Anyway, you got a wife already so thats one. House don't start with F, so buy.
Where do I enter the intangible value of owning: "Don't have to worry about getting priced out if the neighborhood becomes popular; can do any improvements I want, when I want, how I want, and they become an asset; don't have to worry about not getting lease renewed at an inconvenient time (perhaps in the middle of a school year) when the owner's nephew gets divorced and needs a place; on the other hand, don't have to worry if I do want/need to move unexpectedly, but I'm in the middle of a lease."
Versus, of course, for renting: "don't have to worry that the roof will need replacement, etc."
Finally, you can do all the calculating you want, but retrospectively the biggest effect on financial outcome is liable to be whether you bought in what turns out to be the Detroit vs. Silicon Valley of say 40 years ago. Who knew back then? Who knows now? You pay your money and you take your chances.
> Versus, of course, for renting: "don't have to worry that the roof will need replacement, etc."
This is kind of a tangent, but worrying about maintenance is exactly why I own a house. When I rented, poor maintenance issues were my problem whether or not they were my responsibility. I'd much rather be empowered to do preventive maintenance or fix things immediately, than be forced to wait until something fails plus a few days for someone to show up to fix it.
presumably for a renter, if the roof fell off, you leave and stop paying rent. The owner will have to fix it at their own expense, before putting it back up on the market.
The majority of issues that people face with their dwellings are nuisance issues. Leaky or clogged plumbing. Malfunctioning appliances. Faulty fixtures. These aren’t things anyone would pay a lease break fee for, nor would they be anything that would preclude the sale of a home.
If a roof had a leak in a rental, you could easily find yourself with a landlord who patches it, regardless of the fact it really needs replaced. What do they care if you have to make a renters insurance claim every 6 months? It ain’t their stuff!
This is the whole point of doing the calculation. If you determine that you're going to have $10,000 less in pocket per year, then you can make the call whether the freedom of owning a house is worth it for you for that price or not.
A hidden intangible that cannot be measured is that owners are much more likely to know and socialize with their neighbors. Even in a mostly homeowner neighborhoods, "the renters" often don't develop social ties the same way that owners do. There is something about knowing you are stuck there quasi-permanently with the same people.
A hidden major problem too can also be your neighbors, who can be incredibly annoying and won't go anywhere anytime soon. If you rent, oh well, go somewhere else.
Not so easy with a house, also excluding neighbors who do legal things that devalue your home.
This is the main thing I'm wondering about. Most people I know who own homes enjoy working on them. Home improvement becomes a hobby that they like, whether it's basic plumbing or painting the walls or building a deck. I despise this work (even though I do basic carpentry), and I fully consider it work that detracts from my life. It's like doing the dishes, it's a chore, and often stressful. Is owning a home worthwhile if I have no interest in these things? I do have great interest in privacy, not answering to a landlord, and not being priced out of an area.
> I despise this work (even though I do basic carpentry), and I fully consider it work that detracts from my life.
I felt that way when I bought my house too. My experiences:
Get used to the house never being fully OK. Things will continue to break, but over 90% of them aren't urgent. By the time I get one thing fixed (either by myself or by paying someone), something else is broken. That's OK. As time goes by, you realize that most of these things aren't really that important.
Yes, my toilet has a leak so I've turned it off for now: I have 2 others in the house. It's not urgent.
I cannot make ice in my fridge because the water hose to the fridge is leaking - had to shut off faucet. Am I going to chuck an otherwise good fridge over this? No. So for the past so many years, I manually add the water to the ice maker to make ice.
My over-the-stove microwave died. Twice. Am I going to rush and buy another brand new one? No. I'll wait till there is a sale. In the mean time, I can get a perfectly good used microwave for $20.
The list goes on and on.
If you want everything working all the time, then it will be a major pain.
Just learn how to find decent professionals/contractors, and learn to research prices before calling them.
I do a substantial majority of the repairs and maintenance on our cars and our house. It's a hobby of sorts, but it's also a real stretch to say that I enjoy it.
I do it because it's a phenomenal way to save money (and that savings is not taxed, meaning that if I avoid paying a contractor $5000, it's about the same financially as earning an extra $8500) and many of the jobs don't take an extraordinary amount of time or skill once I factor in the time required to get three contractors to actually show up and submit bids, choose the one I want to use, and do what project management is required to hold them to the standards we agreed to in the contract.
I don't know if you need to have interest in doing home repairs, but you need to have a willingness to do or to manage them.
Homeowners are at the bottom of the pecking order when it comes to contractors’ priorities. Property managers, landlords, and general contractors/builders can all give them more repeat business than homeowners can, so we get put at the bottom of the stack.
I enjoy part of it. I like creating something new... building a shed or trellis, adding a new light fixture. I don't like fixing leaks, patching walls, and so on.
But doing this stuff yourself is so much better financially. You don't turn a profit by paying contractors to improve your house; you profit by investing your own labor to do it at 20% of that cost.
Imagine investing in a stock where you could put in some labor now and then, and have that actually result in substantially higher stock prices.
I felt the exact same way, I bought because I had a few rental properties in a row that would take us in, then kick us after the minimum contract length. Nothing to do with us, just selling, renovating and driving up rent etc.
I got so sick of moving a family with an energetic one year old, I just recently purchased a place. Now my extended family has come to help on the house and I’ve found the work surprisingly pleasing(where I felt I have always hated this type of work).
After so many years moving pixels around on a screen, physical work with a group of people is just, nice.
But that’s just me, I’m sure you very well might still hate it but I was pleasantly surprised.
I think it is still worthwhile, especially if you have an interest in privacy. In an apartment, a landlord is generally allowed to have reasonable access to the premises, can choose whoever they want to do the repairs, etc. They generally control the property.
With a house, even if you have all maintenance outsourced, you choose who performs the labor and when they do. My last apartment was horrible with surprise inspections, and I've had similar issues with them scheduling contractors at inconvenient or unknown times. It's much nicer owning a home even if you don't like doing the maintenance yourself.
I was renting a great place last year, reasonable rent, fantastic location, etc. But my landlord lived next door and believed, with him being the 'owner', he could call round for a chat anytime he felt like it, this would go as far as him coming up to the kitchen window as I was making dinner and hanging around at the usual time I would return from work.
Within a couple of weeks I was staying at work later, leaving in the morning earlier and generally avoiding the place at every opportunity.
I left a few months ago at significant expense and don't regret doing so one tiny bit.
> can do any improvements I want, when I want, how I want, and they become an asset
Depends on the HOA rules, if you have an HOA.
As for whether they'll be an asset, it depends on the improvement ;-) I tour open houses often, and people definitely have done some typically undesirable improvements.
That depends on what state you live in. CA property taxes can't go up by more than 2% (or thereabouts - the specifics don't matter) per year, and aren't pegged to the actual current value of your home.
This is the one to use, the OP is overly simplistic. The NYT model is great, if only to realize that only two variables drive the output; what do you forecast the stock market to do, and what do you forecast the housing market to do.
The compound interest from allocating your resources to the faster growing of the two vastly overwhelms small compounding or even large fixed costs.
The real question is therefore - how long do you believe housing prices will keep increasing in your chosen area?
A secondary concern that is harder to price and seldom included in these models is that buying housing is a good hedge against being priced out of the area you work & want to live.
Of course it’s not a purely financial decision but I think it’s important to be aware of what you’re leaving on the table whichever option you choose.
One piece of millenial defeatism I hear a lot is "Ugh, I'll never be able to afford a 20% down payment, home ownership is impossible"
I'm not sure where this myth came from, but as a millenial who went through the buying process in 2012 and again in 2016, I remember both times the lender just asked how much we wanted to put down. We could have gone as low as 3%, or maybe even lower.
Yes, you have to pay PMI (private mortgage insurance) for probably a couple hundred bucks extra a month if you don't have 20% equity in the house- but you can stop paying it as soon as you get to 20, and you can count increases in the home value towards that (through renovations or just market conditions). You can even have the interest rate increased very slightly instead of a separate PMI payment if you want to spread out the cost over the entire loan.
The point is, you'll likely need to have 3 months rent for first, last, and security deposit when you start an apartment rental anyway, so the initial costs might be closer than you think.
I mean this is the definition of a strawman argument. Whether it's 10 or 20% down payment is not that significant. Even 5% is un-affordable.
The median sale price of a home was $347,000 last month (0). 5% down on that is $17,350, accounting for closing costs you're going to need around $24,000 in cash to purchase a home.
Which isn't all that much money, except if you consider that it's more than 1/3rd of the median family income (1) and nearly 3 times the median household savings balance (2).
The takeaway from these numbers should be that swathes of people cannot afford homes.
5% is not not 3x the median savings balance of families seriously trying to buy a home. That’s setting aside that lower income families tend to live near lower priced homes.
Lower down payments meaningfully increase access to real estate. It matters hugely to be able to accelerate purchase timing by years, or decades.
This reads a bit like "if you exclude all the people that can't afford a home, then the data suggests everyone can afford a home."
Of course lower down payments increase access to real estate. The problem is half of all Americans can't even afford closing costs, let alone a down payment.
Close-it’s saying that there is a group of Americans approaching a 3.5-5% down payment who are in economically similar situations to people without savings, the difference being their saving/spending priorities.
Appreciate the concession about the lower down payment mattering.
The median household savings account balance is not relevant to this discussion. Savings accounts are an anachronism, most people don’t have them regardless of how much money they have. By that standard of “savings”, I am flat broke.
The median household in the US has >$12,000 in cash that can be saved per year after all ordinary expenses, not even just necessary expenses, per government survey data. So your $24,000 is an easily achievable two years of savings for the median household.
It looks like the flow of your idea is to examine a "typical" family, demonstrate that they can't easily afford a home, and rely on most real-world distributions being nice to conclude that many people can't easily afford homes.
Ignoring the conclusion for the moment, that kind of an argument shouldn't just take into account the median savings balance; the median family has one or more individuals age 35+ and $40k+ in home equity -- they can afford a home as evidenced by the fact that they already bought one, and that additional factor to net worth is sufficient to allow them to easily switch homes if desired.
The conclusion itself definitely seems true in many cases, but if families are willing to move and switch careers I'm not sure it's that big of a deal. In every city over 30k people I've visited I've been able to clear $25+/hr just delivering doordash, and many of those have nice 2-3 bedroom homes under $150k. I nearly bought a $180k triplex after a couple years as a lowly pizza driver, and the only reason I didn't become a landlord then and there is because my girlfriend at the time convinced me college would be a better investment (I don't know that it necessarily was, but looking at my current career trajectory I don't have any evidence to the contrary).
Home ownership still wouldn't be totally trivial per se (maybe taking up to 3-5yrs), but in the vast majority of circumstances I'd wager without further proof that the things holding people back from home ownership are stronger alternative preferences (particular careers, cities, ...), and a lack of knowledge about what opportunities are available.
You still hear of people in these markets snagging homes for like 5% down even with the competition. Maybe I misunderstand, but you don't pay any realtor any money until you buy the home. Seems that there isn't any pain being 'in the market' continually getting out offered 99 times out of 100, if it means you get an offer that one time and are going to be renting anyway until then. Plus the whole time you are presumably saving more money and coming up with a stronger down payment.
Yes, but if you make an offer contingent on bank financing, and someone else makes an offer contingent on nothing, which offer would you choose as a seller? Guaranteed money now? or probably getting money after the bank completes their paperwork? Many people selling a home already have another home somewhere else, and they're not interested in keeping around another empty house to make payments on.
Even if you're financing, you don't have to make your offer contingent on financing. It puts your deposit at risk, but it might be easier than finding a seller who will accept that risk.
For sure, I'm just expanding on why it might be smart not to.
I bought in a buyers market and still opted to put down as much as I could, rather than as much as I was required, so that I could have a better chance to get my 1st favorite pick. I personally wouldn't want to be in the position to settle on my 15th(+) favorite house. There's a lot of people being forced to make a lot of compromises right now -- will they be happy with their decisions years from now?
For a lot of people, the thinking is years from now they will walk out with enough equity and gain to put a down payment on what they want without compromises. Hardly anyone gets everything they want in a first house.
But if you go with 3% down, add pmi to your monthly payment and it's going to be tough to be in the same ballpark as a rental.
Example: 377k home, 3% down is a $1461 payment; the $673 of equity you build each month is offset by $300 of pmi (not tax deductible). To sell will cost 6% (~24k if it appreciates to 400k). The likelihood of this being > rent of a equivalent home or leaving you underwater in 3 years is high.
I just sold a house a week ago without an agent. You can list on MLS for $45 and pay a flat fee to a broker in your neighborhood for ~1-2k. If you are selling do not pay agents. The market is red hot - they wont do anything except call you in 48hrs with offers. The title company does all the important paperwork anyway.
I understand this is necessary for a lot of buyers, but if you are able to afford more of a down payment, it can be more prudent financially. Besides avoiding PMI, you're less likely to be underwater on the loan. If you only have 5% equity, you will have to pay to move if your home price drops more than 5% and you have to move for a job or other circumstance. 20% is a lot, but if it's doable, it gives you more of a buffer in the event of some bad luck.
Would it make more sense to invert it and plot cumulative cost?
Rate of return in the results is basically the opportunity cost of your increased spend on the house. That can be compared to other possible investments.
Another factor people miss is that the place you buy might be much worse than a place you could rent. Atm I share a rented place with others, but it's in a great location - walkable distance to Melbourne's CBD. I pay $250 per week for a good size room and the house is worth at least $1.5M.
If I were to go buy a place in the current market I could only afford a place perhaps around $850k at most. I'd have to move away from the city and wouldn't be close to all the trendy bars and restaurants. I'd also be stuck having to work to pay my mortgage.
Instead, I've taken up part time work, quit my job and work on building my own business full time.
For my situation it makes zero sense to own a home.
The market around me is the opposite. The single family home I bought was just remodeled with modern amenities and the house is in a nice walkable neighborhood. The rentals around me costs less than my mortgage but they're not nearly as nice. I'd be willing to rent a place like mine, but there simply isn't any rental inventory like it. Maybe above a certain price people would rather spend that on a mortgage than rent.
- some (large?) portion of mortgages will not allow PMI to be removed until you either a) inject cash to get to 20% equity or b) get to the time in the amortization schedule when you are scheduled to get to 20% equity. That is, if your home increases in notional value by 20%, you still have to pay PMI. So the PMI line item should probably not terminate after 3 years.
- It would be awesome to include a rent growth factor. When I bought my first house, my annual mortgage was > the amount my next-door neighbor paid to buy his (similar) house. (Which would be driven in part by rents at that time.) Part of the benefit of home ownership is insulation from rising rents, and adding a rent factor would capture that.
+1 to including some kind of rent-growth factor. Where I live the amount a landlord can increase rent every year is capped fairly low (like 3%?) and I stayed in the same apartment for 7 years. In the beginning my rent was market rate and by the end it was way below. By not bouncing around apartments every couple of years I saved a ton of money which I ended up using for a down deposit on a house. On paper the decision looks crazy because the mortgage payments are higher than the rent I was paying but it doesn't take into account that moving wasn't an option, I'd have to stay in the same place forever (or at least until I got "renovicted").
If your home value has increased you can usually ask/tell the lender you believe the value has increased enough that PMI should fall off and that you'd like/are willing to pay for an appraisal (typically a few hundred dollars). Or, if your loan is owned by Fannie/Freddie, you may not even need an appraisal if the new value/increase is within certain percent range. I know this because I spoke toy lender (a credit union) about getting an appraisal to remove PMI. Knowing the outstay loan amount was X I said of it appraises at X/.8 thenwe should be able to drop PMI. Lender called me back and said that X falls within Fannie/Freddie allowed range that an appraisal wasn't needed. This only works in a market where prices are increasing. Your mileage will vary depending on your lender.
> Your mileage will vary depending on your lender.
This is why I raised the issue. Some big prominent lenders do not allow this practice. (IIRC Wells Fargo & BofA fall into this category; they hold roughly $600B of mortgages between them.) IMHO it's not something to bank on before purchase unless your lender is willing to write the specific terms into the mortgage.
Reviewing the Fannie Mae requirements [1], it appears that you also need to either get to 75% LTV (not 80%) unless you have held the property for 5 years, so the 3-year timeout in the calculator is still not likely to be valid in many cases. (Also note the Fannie Mae requirements have changed in the last ~2 years and are subject to change going forward. I would not bank on this provision being exactly the same in 5 years.)
Mine won't let me remove PMI early if value has risen until I have 2 years of payment history with them. I'm just looking at refinancing as it will be appraised that should remove PMI since we'll have more than 20% with the new value
I would make a new factor, so that people can input expected increases for their areas. I would expect many urban areas will continue to see rent increases far in excess of the broader inflation number. Rents may not track home prices due to supply issues.
Genuinely curious, having lived in 6 major metros across 5 states from coast to coast. Are these jurisdictions anything like common? Where are some of them? I would love to do some further research.
I've heard of rent-stabilized units, but never an area where rent increases are capped.
I had colleagues living in Ontario (Canada), perhaps just limited to Toronto? Anyway they had rent increase caps based on age of building which was surprising [1]. Also California has something like this since 2020 if I understand correctly. Some areas of UK also. I'm sure there are more.
[1] If I recall correctly there was a process to apply an above-limit increase if you could demonstrate expenses, say a renovation.
There's no way to put this into a calculator, but this decision isn't purely monetary. Do you enjoy having to maintain a home and property? If not, maybe buying a house isn't for you. Even if you hire someone, that can be a massive hassle, you have to worry about being ripped off, ...
If you're not settled in your career to where you can comfortably take off long stretches of time during the day, you probably shouldn't buy a house. It's generally a bad idea for someone at the beginning of a career. There's so much to learn and it never ends - that's valuable time that could go to refreshing your mind or building up career capital.
There's also the matter of risk. Are you willing and able to handle replacing your air conditioner, furnace, and roof in the same year? If you rent, you call the landlord and have them replace those things. You'll be okay if you have a big savings account or you don't mind putting it on a credit card with a high credit limit. If you've been in your house for two years and you spent everything on the down payment and furniture, you might have trouble sleeping at night.
Being in a unique position of renting out properties that I own while simultaneously renting, it seems like some of this is taken a little out of proportion.
My net experience is that the burden of dealing with said landlord to get something fixed or maintained is roughly similar to fixing it yourself with equal pros and cons on both sides.
Consider a $150 repair for your AC going out in 95F weather, 70% humidity. Landlord can and is allowed to take 2 weeks to fix that. (even with the best of intentions, he might still take 2 weeks) Whereas you can easily call and have it fixed within 5 hours if you owned it. Also, many repair companies will refuse repair if you are a renter unless they receive authorization. Also, consider that you want to upgrade to a smart thermostat, because your mercury-laden thermostat is from the 1980s.
Also worth noting that a home warranty program helps a lot with these things both for my landlord and for myself as a landlord.
Also, seems like some of the conversation implicitly revolves around “renting an apartment” vs “buying a house”. I own 2 apartments and rent a house. I don’t have to maintain the yard for the apartments I own. I do have to maintain the yard for the house that I rent.
These are precisely the examples I was cursing after I bought my house. They were the ones existing homeowners always talked about.
A $150 repair for the AC is nothing. The prospective homeowner needs to think about things like:
"Your roof is shot." The lowest bid is $15,000. Check is due before they leave your property.
"Your trees are dying." Cost of cutting them out and replacing them is $2000. When you give us the check, we'll start the job.
"Your water heater needs to be replaced." And what you learn is that it's a special type of gas water heater that costs $2500 and up. Payment is due before they leave your house.
On any of these, you call the landlord (or don't even need to in the case of the dying trees) and you don't think about it again.
Having experience with most of these types of issues, I think there might be a bit of a scarecrow here.
In particular, the remedy to each repair is presented as “replacement”. It is my experience with most landlords that they will not “replace” anything unless they 100% absolutely must. When a roof needs to be replaced that has tenants in it, a landlord will patch the roof to avoid replacement for as many years as they can (a roof replacement is a well known item that is inspected prior to purchase) - Like the landlord, the homeowner can elect to patch the roof. A landlord will repair a water heater or AC by any means necessary, not replace it.
As a tenant, you have no say in the repair process. The likely scenario is that the landlord will patch the roof 3 times during your lease and take weeks for each repair. Leaving you to deal with weeks of water running down your walls as you wait for the landlord. (this is known from rental experience)
As a homeowner, you might elect to patch the roof. You could pay in full for replacement. You could pay in monthly installments. You could also choose to install a Tesla solar roof instead. But I don’t think your options as a homeowner will be limited to “check is due in 2 weeks”.
> "Your roof is shot." The lowest bid is $15,000. Check is due before they leave your property.
When you buy the house, you should have had an idea on how much it costs, and saved for it. $15K over 30 years is nothing.
Also, of course this depends on where you live and how big your roof is, but for my house, $15K is overpriced. I recently got bids and while the numbers varied quite a bit, $11K was more typical. Of course, there are people who quote as high as $25K - learn to shop around.
And none of them wanted all the money up front.
> And what you learn is that it's a special type of gas water heater that costs $2500 and up.
I think $2500 is a fairly standard price.
One definitely needs to research these costs before buying! Especially for:
Roof
Garage doors
Water heater
Furnace
Central AC
Any pending yard work (like dying trees)
Any kind of code related work you may need to do (asbestos, old electric wiring, etc).
Move the decimal one place to the right if you're DIYing.
Most people are going to DIY 1/3 to 3/4 the stuff on that list depending on whether or not their checking account is fat enough to easily write the check in the first place.
Would not recommend if it's plumbing related. That's one of those things where a screw up could cost a lot more than calling a plumber in the first case.
Not to mention going days without water because no plumber is available.
> Also worth noting that a home warranty program helps a lot with these things both for my landlord and for myself as a landlord.
Not the home warranty programs I've had, which seem to be focused on getting revenue via call-out fees and not doing a whole lot else. Even when the last one replaced an air handler because of a bad fan (seemed like they could have replaced the fan, but I dunno), and gave me a check to replace an oven with a bad control board (no replacement parts), the fact that everything took months to go through made the experience negative for me, even if it was a positive fiscally.
Oh yes. My HVAC system died before the recent PNW heatwave. Three days plus of 110F+. A week or so of ~100F either side, a week or so of ~90F either side.
Despite me being able to find a HVAC repair company able to come out the next day, warranty company said they would not reimburse anything because they were able to find a company in their network... that could come and see me in just under four WEEKS.
"Oh, I understand it's an emergency and that's very hot. This is our policy."
I canceled that call-out. And then had to remind them that that meant they should also refund the call-out fee.
>Whereas you can easily call and have it fixed within 5 hours if you owned it.
The caveat with these sorts of fixes is these service companies will sometimes upcharge a big fee for "emergency work" to have it fixed within 5 hours rather than in two weeks. I literally had water shooting out of my ceiling and the property manager admitted as much to me when I asked why the owner left me without water for days.
Huge +1 to this. Don't get me wrong, I've been in my house for 10 years, and I probably won't go back to renting, but I think most people wildly underestimate these things.
In the first couple of years I remember getting so irritated by all the time it took to take care of the house and yard. Nowadays, I've gotten used to it, and I view it as a welcome distraction from work, but that definitely wasn't true in the beginning. Even paying someone to do all these things is a large hassle. You have to be at the house to meet contractors, get competing bids, worry about the contractors doing stuff wrong, etc.
I also think people wildly underestimate maintenance costs.
I bought a 50 year old house, 10 years ago. I don't think I've had a single year where I didn't have to spend 10K on maintenance. I always wonder how most people handle these expenses - and then I realize that most people just don't take care of their houses.
> In the first couple of years I remember getting so irritated by all the time it took to take care of the house and yard.
It's always been a problem for me. My work keeps me so busy (that's how I can afford the house) and much of the limited free time I have goes to my son's activities. The only thing that allows me to get it done is that my son is old enough to help me.
> I don't think I've had a single year where I didn't have to spend 10K on maintenance.
I kept hearing $150-200 a month for maintenance before I bought my house. That was just a bit on the low side. I had one year where I paid 20K for maintenance on a house less than 20 years old. There's always something, and if you postpone your maintenance (when it's even possible) you're going to have to find a way to catch up in the future.
Maintenance and upkeep costs are so noisy. Free CL push mower and $100 weed whacker is being compared to professional landscape service. Quotes from professionals are all over the place. I've never spent more than ~$500 at a time maintaining my house but there's nothing I wouldn't DIY.
> If you rent, you call the landlord and have them replace those things.
You also have to negotiate everything with landlord: color of paint, removing walls, replacing stuff you don't like because of the design alone.
Home ownership gives you almost infinite options to fit the place 100% to your needs.
So I agree that there are things hard to express with money. One can reverse the question: buying could set you back $xx.xxx, is it a fair price to be able to do anything with the property?
> Even if you hire someone, that can be a massive hassle, you have to worry about being ripped off
This is a huge problem with home ownership, at the very least where I've owned homes (California and Michigan). The quality of contractors varies dramatically, and many will happily rip you off or at the very least just do a bad job. If you can't get a good recommendation from someone you trust, you really roll the dice hiring someone. IMO, if you're going to own, you should be willing to do a lot of work yourself. At least then you know exactly what's happening to your house.
Yes, exactly. Or maybe you want a guarantee of being able to stay in one place for a long period of time, say to send your children to a particular school, or be close to neighbors or family.
The part about neighbors or family might be true, depending on whether they're going to stay put, but the part about the school is one of the biggest risks to buying a house. School boundaries get changed all the time. This is something I'm dealing with right now, and it could shave tens of thousands off the value of my house if it turns out wrong.
This is true, but it really only applies to someone with a pile of money laying around. It's nice to have the option to remodel your kitchen. The percentage of new homeowners that can afford to do it is likely small.
1. Do you have strong positive family ties to the area? Including in-laws.
2. Is your area where you’re currently living your querencia, your place of the heart? As contrasted against just the first place you landed after university.
3. Do you have or expect to have kids in the near future, or does your ideal potential mate want kids?
If the answer is yes to any of these three questions, lean towards house.
Overheated markets? Not your querencia? Want your family raised in a detached house in a decent area but priced out for the foreseeable future? You have a relocation decision, not a rent/buy decision.
Bonus question: Can you support two mortgages, or rent+mortgage? There are a lot of paradises where you can build a house pretty cheaply. Rent for work, and build/buy for life. There’s a Buddhist calm that comes over your life when you own your own house free and clear in a place you love.
If I spend less overall by renting, I don't care because I can't pass the property as an inheritance to my kids. If I buy, they get a house for free when I pass on.
Also, if I rent, I have to continue to pay the same (high) rents through retirement where my income will likely drop drastically once I stop full time work. The aim of buying is to be mortgage-free when you retire so your pension gives you a decent quality of life.
You aren't looking at the calculations correctly, where the rent is a "win" it's because your overall net worth is higher than if you had bought.
You might not have the house to pass to your kids, but you would have more cash than the value of the house. As to your second point, think of it this way: the tipping point on these two means you could just buy the house cash when you retire, and end up with more money in the bank also.
The more sophisticated calculators allow you to compare buying and spending more on housing per month vs renting at a cheaper price and investing the extra money you have in the stock market. (Although many people may not have such discipline, and renting costs verse purchase costs are going to vary from market to market.)
There's no advantage to passing on a house to kids verse passing on stocks. Also, similarly, there's no advantage to going mortgage free in retirement verse being rich on stocks and selling the stocks to buy a house 30 years from now, or paying rent by selling stocks.
The calculators are used for "Downpayment is HHHHHH, mortgage is XXXX/month. Renting is (XXXX-YYYY) a month. HHHHH and (XXXX-YYYY)/month invested in [other investment] for 30 years = Z,ZZZ,ZZZ." Then you compare all the Z's the the estimated price of the house.
And the more it includes (expected rent changes, repairs, HOA fees) the better the math becomes.
"Apartment" means rent and "House" means buying? I think that's confusing.
It would be nice to auto update the graph every time something changes.
It's nice that it has tips. Hi from Argentina! We have a somewhat different customs here so some fields are hard to guess. For example, I don't know if I can fill my taxes jointly.
Another detail that confused me is that I didn't expect to sell the home after 14 years. It's not usual here, but I guess it changes in each country.
Protip: Add a field that says "My S.O. want's to move anyway" :)
A lot of things out of SV are built around American culture. "HOA", "State income taxes". "Property tax" as a percentage.
Which is fine, but it's sad how it's just assumed a site on a .com is for america only. Of course a monoculture of 350 million customers is more than pretty much any other country which explains why SV produces so many successes.
Defaults are crazy too - $2,750 for home insurance?!
I see this like a personal project, so I don't mind some local bias. I thing it's a good post.
HOA: I can translate it to the monthly payment in my building to pay for the cleaning, electricity for the lift, and other stuff.
House vs Apartment: I think it's confusing. It's correct for the personal case of the OP, but it's confusing for everyone else.
Mortgage interest <= 10%: In pesos? :) Most mortgages here are now in a fake money "UVA" that somewhat tracks the inflation. So if the interest is 5% in UVAs and the annual inflation is 40%, the actual interest is 45% (approximately, read the fine print before signing).
In North American lingo, "apartment" exclusively means a multi-family unit that you rent and don't own. If you own a multi-family unit it is a Condo (condominium) and never refered to as an Apartment. I know, confusing.
That’s entirely dependent on the region. In Chicago, two-floor apartments are routinely referred to as duplex. In Cleveland, a duplex is a house with two dwellings, too and bottom. If the house is split side-by-side, it’s a double. There are other places where these two terms are reversed.
The Deluxe calculator here is the one I used 10 years ago, it's quite good, but it doesn't have the best SEO, so it hide on the second page of the Google results, after a swarm of advertisement pages from mortgage companies:
There's a separate parameter to control the increase in house prices. My assumption is that houses have tended to increase faster than inflation in most markets.
Good point. The CPI increased 20.4% from june 2012[1] to june 2021 was 20.4%, but the "Rent of shelter" component increased 29.7% in the same time period.
> My assumption is that houses have tended to increase faster than inflation in most markets.
Historically this is usually true, but also usually less than the equivalent amount in say (equivalent to) index funds. Not sure where/how this is factored in.
Yes, and here is the great fallacy of current times economics. Whilst house price increases leave younger people unable to afford one, inflation (official numbers) keeps at its lowest levels ever.
I think the largest issue for me with renting is dealing with someone that pretends to be following the law. All I see is a bunch of management companies that are collecting $40 here and $40 there. If it truly wasn't about the background check fee, those prices would be pass through and automated on a website - not a $40 check made out to the management company. It's an industry rife with a ton of illegal and evil practices. We don't have a dog and someone tried to charge us $300 cleaning fee for a giant dog piss area in a closet. I loathe renting with a passion.
How you weight the various factors involved with choosing a location varies by your stage in life. But a key consideration should be, "Do I want to live here? Does it accommodate my interests? Will living here bore me?" If you don't ask these questions the ROI will be less meaningful.
And to an extreme, as I purchased after retirement, "Is this the house and community I'm won't terribly mind dying in?" It's a damned odd thing to ask yourself, if like me, it's your final house, but you'd better do it, the devil with ROI.
Anyone have luck with that default $2500 maintenance budget? My lawn guy is basically that whole budget. Any service call is $500 minimum. I’ve replaced roofs, siding, HVAC systems, water hearers, etc. Trimming my mature trees costs over $3000!
I know it’s just a placeholder but I always see an insanely low placeholder on these calculators and can’t help but think they are not properly setting expectations for prospective home buyers
I interpret the typical advice to cover DIY materials, required service calls (e.g. plumbing issue), and occasional high-ticket items (roofs, water heaters) but not relative luxuries like paid lawn care. I guess it depends how fancy your neighborhood is, but professional lawn care is not the norm at all where I grew up.
Yes, depending on the condition of the house, and how temperamental it is. I was lucky with my last house, in 5 years of ownership only spent $6000, I took care of the lawn on my own. Roof was changed a year before I bought it so never gave me an issue and was under warranty. Water heater was a rental and was taken care by the company I was paying $20/month. After I sold the house, furnace gave up a week before the closing date so I got it fixed for $500. There was a water issue in the basement which cost $5000 to fix, but it still didn't blow the budget.
Just a datapoint, but sometimes $2500/year is a reasonable budget.
I don't spend anywhere near $2500 a year on my '53 house. I did just get a new $10k roof, though, but annualizing everything my maintenance budget is maybe $1500.
For me the quality of life, security and mental health that comes from owning trumps whatever the results a calculator like this is going to say. It doesn't factor in the anguish from having a family and seeing 30 other groups inspecting every single decent rental open home. Has been like that the last 3 years or so in Brisbane.
These always fail to take into account enormous legal and tax advantages of purchasing a home. First time home buyer tax credits, IRA tax credit, mortgage interest tax credit, capital gain tax exclusion rollover, one time capital gain exclusion, and on and on.
It is almost always better to a buy somewhere you can afford to given your salary and savings. If you want to pay for a certain lifestyle at the exclusion of owning a home that's just fine but don't pretend it's a better deal.
If you are looking for a good up and coming place I think it is all but guaranteed at this point that homes in and near cameron county texas will 10X if not 100X within a couple of years due to spacex.
One of the reasons I planed to put most of my money in an expensive home and paying cash is to protect against liability. I had always thought your entire home is protected against lawsuits, but according to the link below it is only between $300k-$600k in CA. Meaning if someone 100% owns their $1M primary residence in CA, a lawsuit could force them out of their home. Please tell me I am misunderstanding this.
Everyone should consider a manufactured home (mobile home) as an option. I lived in New Jersey where house prices were very high ($200,000 minimum for anything on the market). I bought a mobile home (1st house for me) for $50,000 and lived there for 6 years. Thanks to the crazy prices recently, I was able to sell it for more (this is not typical). But during the time, I paid significantly less in per-month costs than I would have, had I been renting.
Be wary of mobile home parks, though. The owners of the parks are increasingly selling them to two types of folks:
1. Those who are looking to jack up rates and price people out.
2. Those who are looking to replace the park with, say, an office building or a mall.
Particularly in the 2nd case, you are being evicted. And despite the name, mobile homes are not mobile in most cases. You will lose everything. Some states are passing regulations to protect the homeowners, so check your local laws.
I do a lot of work on houses, many of which are mobile homes. Many of them are made as cheap as possible and don't last well. The newer ones tend to be much better, as standards have improved. I would highly recommend having someone who has experience with mobile homes give it a thorough inspection before buying a used one. They can be great, though. I have an 1800 sq ft double wide built in 1993 that is in pretty good condition, but it had been fairly well maintained and I've had to do only minor repairs.
I have some friends in Texas who had their first home as a manufactured home in a trailer park. But note that the validity of mobile homes / manufactured homes depends strongly on your local culture... culture that's quite different from state-to-state, or city-to-city even.
There are plenty of locations where mobile homes were driven out by NIMBY laws, and are simply not an option.
This would be better if it included a slider for what yearly investment return you would expect for assets not in a house. If I don't spend my down-payment on a house, I'll put it in the stock-market or something. Those gains are typically a huge part of the calculation when considering to rent vs. buy. I might be mistaken, but as far as I can tell that isn't reflected here.
I tried to account for that with the rate of return number in the results. You can compare rate of return to your expected returns in the stock market.
Oh, great, I misinterpreted that! (I thought it was the return on investment in the house, not your non-house portfolio.) A slider would still be nice. I've attempted calculations like this in the past, and I was surprised how much the choice ended up depending on the difference between the assumed investment rate vs. house rate.
Based on checking a 500k house with a 50k down payment, this tells me PMI will be about 2k/year for the first 3 years. Is it really that cheap? Is there any reason to not go for a <20% down payment if it allows me to accelerate my house planning by several years, if it only ends up costing around 6k extra?
Yeah, my home was ~$320k, ~10% down, my PMI is $140/mo. The mortgage is written so if the house appraises higher that speeds up the point where PMI is taken off.
Personally I think some people overly freak out about PMI. When you're talking the size of numbers involved in the mortgage and escrow accounts, $140/mo for a few years really isn't that crazy especially if it means you can get into the market sooner in a home you really want. I probably wouldn't have bought the house I'm in now looking at comps in my neighborhood. In a bit over a year comparable houses in my neighborhood are $60k+ more than what we bought at, and Zillow's estimate for my house (take it with a massive grain of salt) puts it a hair over $400k. If we would have waited a year for 15-20% we wouldn't be where we are now.
Great point. In a way, the PMI becomes like an added aspect to the investment side of buying a house, in that you can either pay more money up front (the PMI, I mean) but get a better return on investment by having gotten in the market earlier. Whereas if you wait to save up for a down payment, the rising house prices may outpace your savings.
If data exists on historical growth between single-family homes vs townhouse vs condo, it would be quite interesting to show here. Since SFH are not being built in certain metro areas anymore their prices seem to rise dramatically faster than space-efficient property.
This fails to take into account the average salary increase associated with moving to another location. For me, it was like 20% every few years. I think, over the years, the faster career advancement for a more mobile person dwarfs all the other costs in that table.
FYI: Historically home values keep place with inflation. Homes will depreciate in many markets if they aren't maintained; or sometimes just because the value doesn't go up as fast as inflation.
Inflation is really around 4%.
(I figured this all out when I built a house a few years ago.)
This doesn't consider the opportunity cost of having more money now for other investments. Say an index fund or what have you. That's fine but I don't think the rent vs. buy scenario exists within it's own vacuum sealed container.
It would be cool if this took in zip code to automate things like property tax rate or wherever else that data is relevant. It would be interesting to have some check mark too if you are a first time home buyer to apply those benefits.
Judging by how hard it was to get a concrete answer on what my property tax would be after actually buying a house a couple months ago, I suspect this might be a big lift.
There is an edge case I see. When I set downpayment == to purchase price, it assumes I'll still be making payments, when there actually wouldn't be a loan. Not sure this matters.
Buying is better, if you are thinking a bit long term like 4-5+ Years.
Now, why I said that: Here’s my story - I had lived in an apartment for 5 years. It’s my longest stretch at one place so far. I paid about $100k in rent for all of those years. When I left that place, I got nothing out of it. If I had a house, then I would had built some equity.
Edit: removed - ‘Buying is always better’ from the first sentence
The first several years of the mortgage you are paying mostly interest and not as much towards equity. Plus, you have paid closing costs when you bought, will pay 6% to a realtor when you sell, and have paid property tax and homeowners insurance.
If you sell after 5 years, you are only making money if your home value happened to have gone up. This is by no means a guarantee on a short time frame.
So don't sell. Rent the house, take the income and move on. I'm building house #8 right now and the rent from the other homes (some of which are now paid off) provides an income to my family that would keep them housed and fed should something happen to me.
Of course, you have to consider this when you buy because many homes are terrible investments. If you come in with the view that you're buying what will eventually be an investment property you'll make better buying decisions.
I am a few months in to a 15 year mortgage after recently refinanced at a 2.125%. Here's a rough breakdown of where each dollar of my last mortgage payment went:
Principal: 60%
Interest: 22%
Escrow(Taxes + Insurance): 18%
And of course the percentage going to interest only goes down with each passing month. The conventional wisdom that you are paying mostly interest in the beginning a) really only applies to 30 year mortgages, and b) was way more true when interest rates were higher. We're currently near some of the lowest interest rates in history, so interest eats a lot less than it used to.
I'll add that I pay a good bit less on my mortgage than it takes to rent an equivalent place in my area. But yes, paying 6% to realtors when you sell is huge, so you still need to own the house a few years for buying to make sense.
Yea, you are right about the 2% interest rates changing the breakdown. I was referencing numbers I ran back when rates were 3-4%. That said, most folks still rely on 30 years mortgages!
I got a 30 year fixed at 3% back in march. My first payment had 40.7% going towards principal which is not bad at all in my opinion. Also, I wouldn't count property tax and homeowners insurance as something additional about owning as you are effectively paying that when renting, it is just baked into the rental price. Stupid realtor fees though definitely will bite you in the ass.
Always is a strong word. I move around a lot, from 6 to 18 months at a time. The time it would take to search, purchase, and resell a home doesn't make sense in that scenario. Renting gives some flexibility in moving compared to buying. If you're staying in one spot though, then I agree with you more.
Does it have to be mutually exclusive? My current mortgage and previous rent are almost the same.
A friend of mine bought his house in 2011-2012 for $200k. Now, it's worth ~$500k.
>stocks have a higher longterm ROI than property.
That's debatable. And, it depends at what point you were in and for how long you can stay as there'll be set backs during the ride. Unfortunately, if you have to cash out due to emergency during a dip then ROI would not be favorable.
Selling your house in an emergency would be similarly bad as exiting the stock market at an unfortunate time.
The long-term ROI after costs and inflation of stocks (global) is about 3% higher p.a. than of property (global). Unfortunately this source is in german, but it cites research papers too, you can check those for further investigation: https://www.gerd-kommer-invest.de/die-rendite-von-direktinve...
Buying a house can have an advantage over stocks in the leverage you get with a mortgage, and in certain cases tax incentives. Whether that’s enough to compensate for the better returns of stocks is the hundred thousand dollar question.
Tax incentives depend on your legislation, but they can make a difference, yes. Leverage also comes with higher risk, which makes it a bit of an unfair comparison in my opinion. If you really wanted, you could also use leverage on your stock investments, but I personally would never do that.
Assume he paid cash. If he had instead invested $200k in the S&P 500 in 2011, his account would be worth ~$756k today. So he essentially paid $256k, or roughly $2k/month, for housing over 10 years. If he could have gotten a similar place for an average over 10 years of $2k/mo, it's breakeven. That's before paying property tax but also before writing off interest & tax.
Although this ignores the fact that you can make what's essentially a $200k investment with only $40k, and you still have to find a place to live - and the rent is virtually guaranteed to go up -- if you go the S&P route.
That would be true if you paid that rent, and then went and lived outside in a cardboard box. You DID get something out of it. You got a place to live (potentially maintenance free)
The point of a calculator is to check this. If you could have invested more money in retirement account because you are renting you might end up ahead.
In the US, the only way to generate passive wealth is through homeownership for most people. Others know how to invest and manage their portfolio actively.
Assuming you live in a city, don't buy yet. We're in another historic bubble.
The pop is on its way. Many homeowners have taken advantage of Covid related forbearance on their mortgages. Expect a lot of foreclosures once they expire (begining now).
