RoR: Forum

Post 0

Thursday, January 4, 2007 - 4:23pm

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I once considered buying a house while living in Gainesville, FL. I decided not to, because I calculated that renting was way cheaper and much less risky than getting a mortgage (even with great credit and a low fixed rate interest).

Does anyone have some thoughts on housing? Like where one would ever buy a house or build one? Or does pretty much everyone rent?

Discussion on renting vs owning in San Fransisco

Post 1

Thursday, January 4, 2007 - 5:06pm

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Good link. I know in "Rich Dad, Poor Dad" the author talks quite a bit about how a house is a liability and not an asset and how home ownership is often much more expensive than you would think, with insurance and upkeep and all that. Right now in the Bay Area, renting is so much cheaper than buying that it's ridiculous.

Post 2

Friday, January 5, 2007 - 7:19am

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A lot of investment advisors that I read predict a collapse in real estate. That definitely makes it risky. It depends on the circumstances.

It doesn't help that my credit score is quite low. It's because I have hardly used credit at all.

Post 3

Friday, January 5, 2007 - 8:55am

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why are rental prices so low, then?

Post 4

Friday, January 5, 2007 - 9:04am

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Well, renting a small apartment is of course cheaper than owning and living in a big house. If you rent a house like the one that you would buy, I don't think it'll be cheaper.

Post 5

Friday, January 5, 2007 - 9:48am

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I don't know what the housing market is like there, but I bought a house and don't regret it. I also can't stand living in tiny quarters, it makes me mentally ill from being too enclosed.

Post 6

Friday, January 5, 2007 - 10:06am

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Low rental prices depends all on supply and demand. In a city where people seem to be moving (like Austin), rents seem pretty high. In Columbus, Ohio, rents were lower. I would see quite a few FOR RENT signs in my neighborhood in Columbus.

Low interest rates lead to a building boom. Some years ago, when in I lived in Columbus, I remember thinking: "Columbus needs a new office building about as badly as I need a third nostril." Overbuilding leads to low rents.

Post 7

Friday, January 5, 2007 - 10:40am

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Chris mentioned that low interest rates lead to a building boom and overbuilding leads to low rents. I agree.

But it is more than just new construction and more than just low interest rates. I believe that speculative purchases make up the largest part of real estate bubbles that exist in different locations. Someone buys a second or third house, not as a long term investment but to 'flip'. Lots of those owners have signs on street corners advertising "house for rent". They compete with each other for renters which is part of the supply demand picture Chris mentioned. At the same time, it is not only that rents are driven low.... It is also that purchase prices are driven high.

Post 8

Friday, January 5, 2007 - 1:39pm

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It absolutely amazes me that people buy property just to flip it. It's not like stocks and bonds.

Post 9

Friday, January 5, 2007 - 1:59pm

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I think that the rents are so low here relative to the housing prices, not relative to rents around the country, because the housing prices have been driven up by people buying houses as investments. As the percentage of houses that are owned as investments goes up, the number of people renting houses needs to go up, but I think that because of emotional attachment to the idea of buying a home, the marginal home buying are just buying farther out where the houses are cheaper rather than becoming renters. So the supply is going up and the demand is going down.

Traditionally rents are supposed to be around 2% of the housing price, I think, but we are paying about 0.28% of what this house would go for on the market, or about 1/7 of the historical ratio. As the article linked to in the first post says, buying a house under such conditions would be throwing your money away, because if you rent, you can take all that money that would be going into a down payment and mortgage payments and invest it and make a return.

Post 10

Friday, January 5, 2007 - 2:25pm

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>Traditionally rents are supposed to be around 2% of the housing price,

Is this 2% suppose to be the monthly rent? If so it would be drastically different from what I know in my area.

Post 11

Friday, January 5, 2007 - 2:46pm

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Hmm, I think I was subliminally influenced by a different 2% number in the article above, so now I don't remember exactly what it is supposed to be.

Anyway, using the mortgage calculator at mortgage-calc.com with all the default settings, the monthly mortgage payment on the house we are in is over 2x what we pay in rent, and that doesn't include insurance, upkeep, and property tax.

Post 12

Friday, January 5, 2007 - 3:21pm

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>subliminally influenced...

Hahaha, that's some excuse.

But I agree that house prices in Bay Area is just outrageous. I'd assume that in a normal situation, the rent would be more or at least equal to the sum of monthly mortgage payment (assuming 30 years fixed rate at current 5.7%) plus insurance and property tax so that the owner does not lose money. It is pretty much so in the area I live.

The difference is that when you rent, you throw all the money away. And when you buy, the principle you pay is your own saving, the interest (and property tax) you pay is tax deductible. Now that my husband and I have just payed off our mortgage, you can imagine how I feel about the whole thing. Hurray!!!

Post 13

Friday, January 5, 2007 - 5:09pm

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No matter what you need somewhere to live so the question is what gives you more bang for your buck? Renting means you pay someone else to pay for a mortgage and build equity. You will never see that money again when you pay a rent check. Owning means you pay your own mortgage and build equity for yourself. I don't think it's all that risky to mortgage a home. Of course what is risky is a matter of perspective. I own an 8 million dollar business, that's far more risky to me than a house mortgage. I'm currently building a house (unfortunately there will be individuals I'm suing as a result of it) but ultimately I will be making a profit off of it. My house will be valued far more than what I paid to have it built.

Post 14

Friday, January 5, 2007 - 5:52pm

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It's not a static comparison. Buying is difficult at first but the situation improves every year until your house is paid off, then its' YOURS. Renting, your situation never improves, you are at the mercy of the market. Buying a house helps to bring your long term financial goals into focus. Interests rates were 11.5% when I bought my house in 1985. The first 3-4 years were very tough, I worked two jobs to make ends meet. I've refinanced several times [timed with remodeling projects and interest rates] now my monthly payment is about 2/3 of what is was in the beginning and 1/4 of what renting a comparable house in my area would be. In three years or less I'll have it completely paid off.

Another up side: you always have something to do. Maintenance and improvements are a constant.

Post 15

Friday, January 5, 2007 - 7:25pm

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Mike, Hong,

What if you rented your home and invested the extra money long term in the stock market instead of paying the mortgage? Would you have more money now?

Post 16

Saturday, January 6, 2007 - 7:27am

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If you're concerned about the risk of owning a home verses investing in the stock market, I don't think you've fully realized just what the risks of each are. Stock market is far more risky. Owning real estate is probably the safest investment you can make. You also have to live somewhere. So while you rent out your home (assuming of course you could rent it out to cover your cost of owning that home) where do you plan on living?

Post 17

Saturday, January 6, 2007 - 10:29am

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Dean,

I consider the stock market to be a form of gambling. If you study hard and make the right decisions you can make a lot of money. Like a professional poker player. I don't play the stock market for the same reason I don't play poker. I don't want to spend a couple of hours a day studying something I'm not particularly interested in. I do invest in a money market fund and buy CD's at the credit union I belong to.

When I bought my house I was married and finding that saving was impossible with my wife's spending habits. Buying a house was how I accomplished "forced savings". It was very difficult to qualify given our income and lack of savings but I learned what it took to do it and did it. 3 1/2 years later we were divorced, I kept the house.

I agree with John. Owning a house is safe, it also gives you financial stability. Don't underestimate the effect owning a house has on your peace of mind. I "grew up" as a homeowner. I don't know how to explain it, but I became more decisive. Of course, probably very few objectivists have this problem.

Post 18

Sunday, January 7, 2007 - 4:26am

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I just want to add to the chorus of those supporting home ownership. One strategy to consider is to rent rooms in your house. I did this for about five years into my fifteen year mortgage. Check the local ordinances but you should be able to do it without having to register with any bureaucracy. The http://www.roommates.com site can help you to locate suitable roommates. Their payments can offset any financial hardship a mortgage might inflict. Furthermore, if you only charge them for rent and any long distance calls they make, you can eliminate arguments about thermostat settings, etc.

You can also consider buying a condominium or townhouse if you do not want to bother with a full ranch style house with its lawn maintenance, etc.

Owning your own home offers many benefits, chiefly financial. Unlike rent, which can increase with inflation and never ends, a fixed term mortgage does end eventually and stays the same over the term of the loan. Not only do you enjoy equity buildup as you pay the principal of the loan, but you also experience appreciation of the property value not just from inflation, but also from an increase in demand due to population growth. In these regards, I simply consider Robert "Rich Dad" Kiyosaki flatly wrong in his warnings against owning a home.

You might want to pay a visit to a local chapter of the National Real Estate Investors Association to meet some people who can help with creative financing, etc. as well as some good deals on homes. If you have a handyman streak, you can make a good profit on a structurally sound but cosmetically challenged house.

A good reason not to buy a home centers on your career plans. If you plan to move often, then it makes sense to rent as cheaply as possible rather than to buy and sell homes every year or so.

Post 19

Sunday, January 7, 2007 - 8:19am

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Dean,
Like Mike, I am also not stock market savvy. The only thing that I could have done is probably mutual funds. But given the pathetic performance of the stock market in last several years, we probably would lose money anyway. So we decided to paid off the mortgage earlier instead. Sometime buying a house can be a brilliant investment, though I never count on it. But at least you'd never lose if the house you buy is priced reasonably.

Housing Market & Renting