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Financially Speaking, Renting Beats Buying

posted April 18th, 2007 @ 6:38 am by The Tim

Maybe I’m going overboard on this whole renting vs. purchasing thing, but here’s yet another article that hopefully will help drive the point home: Renting Makes More Financial Sense Than Homeownership

I HAVE SOMETHING un-American to confess: I rent an apartment, despite having enough money to buy a house. I plan to keep renting for as long as I can. I’m not just holding out for better prices. Renting will make me richer.

I normally write about stocks for, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I’d rather rent the latter and own the former.

Shares of businesses return 7% a year over long time periods. I’m subtracting for inflation…

The average real return for houses over long time periods might surprise you. It’s zero.

“You say houses return zero. But I’ve made a fortune on my house in recent years.”

I’m referring to inflation-adjusted returns over long time periods, absent external boosts to demand. You’re referring to gross returns over a short time period that combined lax borrowing standards and ultra-low interest rates.

Remember, I’m not saying “don’t ever buy a house.” I’m saying “don’t ever buy a house as a means to generate a profit.” I’m nowhere near as hard core as this guy, in that I would probably have already bought a house by now if prices were sane. But as long as things are this far out of whack, the financial benefits of renting far outweigh the psychological benefits of purchasing (for me).

4 Responses to “Financially Speaking, Renting Beats Buying”

  1. pat Says:

    I can’t see that.

    My recall is that historically houses appreciate (I’m talking single family residences) appreciate about 4%/year on a national basis.

    That’s not great, but, if you consider that you get a leverage
    effect from the initial downpayment that of course declines over time,
    but if you offset interest against appreciation, it’s about 1% gain.
    the nice thing is you need aplace to stay, so if you acccount the
    rent credit it’s not a bad deal.

    Now the last 5 years, prices have gotten so out of hand compared to rent,
    that it’s been way smarter to rent in the coastal zone and the bubble cities.

    The key is that once you pay off the mortgage, the discounted saved
    rent can become meaningful. Say you plan to live to 85,
    and you buy a house at age 25. and you have a 30 year mortgage,
    once you turn 55, do you really want to be paying a landlord?
    Far nicer to be paying yourself at that point.

    but right now for the last 5 years and probably for the next 5
    it sure makes more sense to rent.

  2. Dr. Housing Bubble Says:

    Buy when it makes economic sense. If you don’t care about losing money or taking major depreciation then buy anytime. We’ve all heard those NAR ads about “today’s a great day to buy” and they’ve been running this for years. If it were up to them they would sell ice to eskimos but the market is bad right now and trending down.

    Even Shiller examined data in Amesterdam for 400 years and found that historically prices appreciated around 1%. Not exactly the best investment long-term. But of course things go in cycles and real estate is also an emotional purchase. If you have a family this can be especially pressing.

    Rent, invest the difference, and when the time is right (when rent/buy ratios are more inline) you buy. The time to get a home is when blood is running in the streets.

    Doctor Housing Bubble

  3. -JiM- Says:

    I totally disagree. You guys need to stop thinking of houses as an investment! I house is a “home” a place to live and a place to call your own. We all need a place to live period, regardless if we rent or own. I own and I’d rather own because there are also benefits like tax deductions, appreciation, etc…………..but i don’t look at my house as an ATM. I’m old school like my parents and want to pay it off clear and free before I retire. You guys that are renting are simply throwing your money away period. You can go ahead and justify why it is better but it isn’t. Think of it this way……….even if your renting your paying a mortgage…………..somebody elses mortgage!!!!

  4. KH Says:

    Overall, the thesis that houses are a poor investment is sorta, kinda, maybe true.

    It’s true if you average every house in the country, the ones in fading, rust belt cities, the decaying neighborhoods that will not recover until someone bulldozes the houses and drives out the drug dealers. The overpriced and soon to go out of style, areas.

    On the average, if you just threw a dart, you’d hit an asset that barely keeps up with inflation. If you were unlucky, you’d lose money.

    If you picked well, and it’s not that hard, your assessment will double about every 10 years. With the typical leverage of real estate, you will turn a typical 10% downpayment into 10 or 20 times that much in equity in 20 years.

    To pick well, find a region that has jobs and will have jobs into the future. Choose the best city, low pollution, good climate. Locate a neighborhood with style and access to services, roads, schools, shops, entertainment. Buy property that you can afford, maintain it, and hold on to it.

    That’ll put you on the plus side.

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