I'll conceded that I might be missing something but houses in my area cost significantly more to rent ($1.5K+/mo) than my mortgage ($1.2K) and have a ton more restrictions (pets, modifications, etc). Every house or apartment I've rented I've had to fight tooth and nail with the owner/manager to get anytime fixed (I once had water seeping out of my kitchen floor for over 2 months in an apartment, it just finally stopped, they came out multiple times and did nothing). This doesn't even start to take into account the yearly monthly rent hikes to the tune of $50-$100. One apartment complex I lived in did these rent hikes like clockwork all while removing/closing amenities left and right.
The author here seems to be making the point that "not really that much money is going to the principal in the end and even the money that does could be better invested". Maybe that's true but it ignores a ton of other upsides to owning a home IMHO.
Are you including taxes, insurance, and maintenance (both minor and major) in your comparison? That $1,500 rent wraps all of those costs up, while only part of those costs are in a mortgage payment. Over time, it's easy to see how the $3,600 per year difference can be eaten up by maintenance on things like broken/dead appliances/general & major home repairs. A new roof may only be necessary every 20 years or so, but it's very expensive when it happens.
That being said, I just spent 10 years renting the same house. My rent did not go up during that time, and my landlord had fairly average maintenance costs during that time including:
* replaced broken fridge
* paid to have dangerous trees removed
* paid to upgrade flooring after a sewer backup flooded the house. Most of this cost was borne by insurance.
My former landlord is now selling the house. The market value of the house is double what it was when I moved in. That sounds awesome, but that's about a 7% rate of return, which is quite a bit less than if he had simply put his money in an S&P 500 index fund.
I'm including everything other than maintenance in those numbers. I had a 18 year old HVAC system I replaced earlier this year but I had been saving for it and knew it was coming. I had a new system installed within 3 days of calling out the company which I can almost promise would not have happened if I was renting. Can you get a good landlord? Sure, I know they must exist but I've not (nor have my close friends) ever found one. Heck, even if somehow (it's simply not possible in reality after staying for 5+ years from what I can see) you come out even on renting or buying a house I'd taking buying just so I didn't have to interact with and beg another party to uphold their end of the contract. I won't bore you or anyone else with stories of renting and waiting on things to be fixed or contracts to be upheld but suffice to say, I have no interest in renting again after the experiences I've had. On paper a lot of the places I rented were a good deal (especially for someone like me who doesn't want do most of the work themselves) but in practice it always sucked.
The article's analysis missed one big thing in the comparison: rent (necessarily) includes a profit margin for the owners. In a mortgage this is the interest payment on the loan, but in a mortgage the owner gradually shifts from lender to buyer. (In fact, one way of looking at paying down a mortgage early is that the buyer is earning higher returns at the expense of the lender.)
It wouldn't surprise me at all that a mortgage, after accounting for all factors, is still cheaper than renting.
Rent does not necessarily include a profit margin for the owner. There is a rental market rate and if the landlord's expenses exceed that rate, they can and do rent out the unit at that rate. It's still better than leaving it empty. Loss-making business ventures are common, and if we're talking about owners who have a separate source of income than property ownership, loss-making side hustles are exceedingly common. (there's a lot of complexity that sometimes does incentivize big commercial-property landlords to leave office spaces empty in some cities, but, I think that's a different market yet again)
It does not necessarily include a profit margin for the owners, because houses & condos are simultaneously purchased by non-landlords who aren't trying to generate a return- so that's who sets the prices. And in practice real estate attracts the deeply financially unsophisticated, or the wealthy doctor who's willing to take losses for 5+ years for future appreciation.
I mean, there's lots of small restaurant businesses out there, but they don't necessarily generate a real profit or make real financial sense. Some industries just attract irrational or unsophisticated people!
> That sounds awesome, but that's about a 7% rate of return, which is quite a bit less than if he had simply put his money in an S&P 500 index fund.
Yeah, he made a 7% return on the real estate itself. BUT, he was also collecting rent on the house the 10 years you were living there. That's a lot more than what he would have gotten from the S&P.
But then you have to subtract all of the costs of owning the physical property over a long time span- everything that broke. Plus the taxes, insurance, water & sewer etc., as Bruenig notes.
I previously worked in a commercial real estate brokerage for apartment buildings, got to know a lot of landlords, and saw the finances of their properties personally. Over a long enough time span, 90+% of the building has to be replaced- everything from the roof down to the basement is essentially on a clock to obsolence from the moment you sign the deed.
Plus the landlord was paying income tax on the rent while your market gains are untaxed till you sell, etc.
Granted, but look at it from a purely analytical point of view. The land lord has invested in the property, whatever property it may be. He/she is now renting out that property to you to make a profit and has factored in the cost of upkeep, taxes, labor and wages for not only their staff but also themselves. That's renting. If you're renting a single house from a landlord who rents out a couple of houses, that margin is smaller, but they are still going to want to pay for those houses, costs and make a small profit.
No one gets into these things to lose money. If they start to lose money, they fix up the property and hope for a good market, I would think.
Well many, many rentals were originally owner-occupied SFHs or condos. So they weren't purchased to be profitable.
From my experience at a commercial real estate brokerage, forming a personal relationship with dozens & dozens of landlords- it's an extremely unprofessional small business, attracted by people who think 'land, they're not making any more of it' is a sophisticated statement. It also attracts a lot of 'more money than sense' types who are willing to eat losses for the first 5+ years because they think they'll make more money over time. I would conservatively estimate 20-33% of new landlords are actually losing money every year. Could be way higher than that!
Imagine saying 'there's tons of day traders, no one gets into day trading to lose money, so they must all be making $'. In fact, no- it just attracts a lot of unsophisticated folks. Same thing with owning a small retail business or a restaurant- there's lots of restaurants, they're also terrible businesses! I would put being a small landlord closer to owning a restaurant
That seem crazy... not crazy in the, "I don't believe you" sense, crazy in the sense that people would just keep rolling with losses in renting and not just flip houses, which is still a pain, but you don't have to deal with renters and are sort of doing the same job.
A lot of the expenses happen when you switch tenants. In between tenants, before the new tenant arrive, the carpet may have to be replaced, the house may have to be repainted, various other maintenance jobs that are deffered must happen.
Market value doesn't describe returns on a house. Rental income (and thus defraying of the mortgage, and thus effective defraying of the cost of goods sold) significantly tilts that number.
I'm a little confused. If you owned the home or condo, you'd have to handle getting anything fixed yourself, including your water seeping example. So you have to pay out of pocket for it, plus handle dealing with the contractor, etc. Why do you think that's a case against renting?
If you have an unresponsive landlord, you can simply hire the handyman yourself, subtract the cost from your rent while emailing them an invoice, and dare the landlord to do something about it. You could even pay yourself a small fee for the time you invested in dealing with the handyman, time off work, etc. The landlord can't realistically sue you for such a small amount of money, they'd have zero case in court, and anyways the court system in blue states is very pro-tenant
> I'm a little confused. If you owned the home or condo, you'd have to handle getting anything fixed yourself, including your water seeping example. So you have to pay out of pocket for it, plus handle dealing with the contractor, etc. Why do you think that's a case against renting?
In that case I would have actually had it fixed instead of having to wear shoes in my kitchen for months. Also I budget monthly for things like this that might come up. I'd much rather manage that extra money (difference between mortgage and renting) than trust a landlord.
> If you have an unresponsive landlord, you can simply hire the handyman yourself, subtract the cost from your rent while emailing them an invoice, and dare the landlord to do something about it.
That's a nice story but it rarely play out well in practice. Time and energy are not free and I have better things to do with my time than try to claw back what I'm owed from a scummy landlord in small claims court or similar.
> The landlord can't realistically sue you for such a small amount of money, they'd have zero case in court, and anyways the court system in blue states is very pro-tenant
They can make your life hell in other ways or just refuse to renew the lease when your year is up. I'm not interested in moving every year until I find a competent landlord and I live in a red state.
>Time and energy are not free and I have better things to do with my time than try to claw back what I'm owed from a scummy landlord in small claims court or similar
I think you missed what I said. No courts are involved- if your rent is $2000, and the handyman was $1000, you send the landlord $1000 for the month along with the handyman's invoice. What are they going to do about it?
File eviction papers? Refuse to renew your lease? (though I understand this would probably not be an issue in this situation since you wouldn't want to renew) Ignore all future maintenance requests? Stop upholding other parts of the contracts? Try and tank your credit? The list goes on...
I used to think like you appear to on this issue, but it's a different story when you are actually in the thick of it. Just like how people say "well that's against labor laws" or "your employer can't do that legally", it doesn't really matter for the person who needs that job to survive, they can only find a new job or put up with it, they don't have the money/time/energy to fight it. It's very similar to dealing with a bad landlord. I don't care about being right, I just want to be happy. Renting leads to unhappiness for me, it doesn't make how right I am, I still have to deal with the landlord's BS. At the end of the day "legality" is cold comfort if you have a toxic landlord.
Other than not renewing your lease, they literally can't do any of those things. (Your credit? You have to be a certified financial institution to be able to report things to your credit report. Fun fact, small claims court judgements are no longer reported on your credit anymore either). In a blue state if a landlord tried to take you to housing court for paying for a repair they refused to fix (obviously you have email documentation that you asked several times first), they would probably walk out of court paying a large fine. There's a whole parallel (landlord-hostile) housing court system.
I think what you're missing is rather than taking anyone to court yourself, you control the cash flow (when & how much of a check you write every month), and they're the ones who have to do anything about it if they disagree. That's different from a labor dispute where you're the one getting an attorney, filing a lawsuit, etc.
The broader point is that blue states are very pro-tenant, so you're starting off with an incredible advantage
I 100% understand how I might be in the right and win anything brought against me. What I'm trying to say is I don't want to deal with that headache or become an expert on how this works in order to win. Also, like I said before, I live in a red state and while I don't know exactly what rights a renter has, I don't want to know. I shouldn't have to become informed on this stuff when I'm doing everything right. Also just because something isn't legal, doesn't mean a landlord won't do it. I don't want to eventually win, I want to never deal with it in the first place.
Bad landlord, they say you over inflated it, and are now behind on rent. This gives them the opening to evict, or you have to take to small claims, or your local tenant's rights group.
Going to court over this in California, New York or Massachusetts:
You: Here are 3 emails I sent documenting the problem and asking for it to be fixed, here's a 4th email stating I would be hiring the handyman myself if it wasn't fixed, here's the 5th email with the invoice
Landlord: (who cares. Also they don't have an attorney because the cost of an attorney in court exceeds the repair by a huge margin)
Magistrate (in the 15-20 minutes you get in small claims or housing court): Landlord, you are fined $5000 for not fixing the issue fast enough. Next fine is $10k if you don't shape up. Dismissed
That's great for the 20% of Americans that live in those states. In many of the other states, you're evicted and looking to find another rental that will take you even though you were just evicted for not paying rent.
TFA mentions the other costs that you're (potentially) not including: property taxes, maintainance, building insurance (depending on your escrow situation).
I think MB's point is that there's a lot of talk about how "investing" in home ownership is a smart financial move, and that a more careful consideration of this suggests that it's not so clear that this is true.
There are definitely other reasons to own, if you're of the right inclination (I certainly am).
I'm also a new homeowner, and my mortgage + property taxes + insurance + utilities are about 2/3rds of what I was paying for rent last year. Will ongoing maintenance on my home eat up the $400 a month I'm saving? I guess that's possible... but even if it did, I'm still breaking even, and I own my own home.
That's particular to the area I live in, though, where the rental market is extremely tight in comparison to the buying market. In my particular case, the article's advice about "what else you could do with the money" is moot. The rental market here exists for people who need transient housing, or who's financial situations makes a loan difficult to get.
That's because rent of $1.5k is for the whole of a house, whereas the mortgage is only covering whichever part of the house you don't own.
My rent would be $3k, but I own one third of the house, so my mortgage is $2k.
The alternative would be paying $3k in rent and investing the $100k in equity. The cash-flow from the equity investment would off-set some of the cost of renting.
The author here seems to be making the point that "not really that much money is going to the principal in the end and even the money that does could be better invested". Maybe that's true but it ignores a ton of other upsides to owning a home IMHO.