Re: Buying vs renting

I think we need to frame the discussion, as it has been proceeding, a little more specifically. So far it might best be described as “Buying vs [Renting + Investing]: Which option will produce the most financial benefit in time?”

That’s a discussion that is of interest for this group. And perhaps appropriate to a large percentage of this group.  In my experience it’s not a discussion that is relevant or even of much interest, other than perhaps strictly intellectually, to most of the people I’ve met. That includes my personal friends and acquaintances, and over the years my staff, my peers, and even many of my bosses and their peers.

Most of the people of my acquaintance do not have the temperament nor, in their own estimation, the resources to consider themselves “investors”. The majority of them see a house purchase as a means of forced SAVINGS, not as an investment although they will often refer to it that way.

It’s still the same discussion, sort of. But how we frame it in our own minds when making financial decisions matters. A lot.

My wife is a good example. If you measure her financial risk tolerance on a scale of 0-10, it would be expressed as a negative number. She’s the classic example of the sock-under-the-mattress sort. For her, the purchase of our house was an accommodations comfort blanket, best expressed by “they can’t raise the rent or kick us out, especially once we’ve paid for it”.  She even expressed it just that way very early in our married life when we experienced 3 rent increases in less than 6 months that nearly doubled the rent.

And so buying a house and then paying off the mortgage became a major financial focus for us. She was only persuaded to consider other forms of investment once the mortgage payments became available and we were forced to deal with the question of what to do with them.

We are not atypical in my experience, except that perhaps we were able to pay down our mortgage much sooner than “average” because of our focus on doing so. Because of the way my wife viewed the issue, it was quite irrelevant – virtually a non sequitur - that there might be other ways of using the mortgage payments (eg. Renting + investing) which might be more financially beneficial over time.  She, and most of those of my acquaintance, simply don’t view the issue in those terms.

I’m not arguing in defense of such views. I’m just pointing out that in my experience they are common. Even those couples who do include “purchase vs (rent + invest)” as part of the initial discussion often drop it quickly when they discover that their personal concerns, at least at that stage of their lives, are better described as “forced savings” or “accommodations security”. Or a combination of some parts of each.

            …ken…

From: Hokkun Pang
Sent: Friday, March 2, 2018 9:01 PM
To: Friends of Rohit Khare
Subject: Re: [FoRK] Buying vs renting

if buying a house has the same return as stock market, nobody would be
investing with wall street anymore.

you have to realize that home owners making stock market like returns are
those living in high income areas like SFO, BOS, NYC etc. but whats driving
the economies of those areas are high return companies like high tech,
financials, biotech etc.

so a better peer comparison for buying houses in those areas would be
investing with google, amazon, apple, goldman sachs etc.

On Fri, Mar 2, 2018 at 8:54 PM J. Andrew Rogers <[email protected]> wrote:

>
> Greg, this doesn’t look right.
>
> The “own” side of the equation appears to be assuming capital that was not
> applied to the “rent” side of the equation; the calculation should be
> capital neutral. From your numbers below, the implied rate of return on
> your house investment is <4% and the basic rate of return from renting is
> >12%, so the mortgage being a superior investment immediately looks suspect
> (in truth the actual returns are far complex to model but I’m working off
> the numbers provided). Mortgage service costs vary depending on down
> payment, taxes, HOA, maintenance, etc which renters avoid but have to be
> included in the model.
>
> Interestingly, the expected return on buying a house derived from tax
> benefits is similar to the expected returns from market appreciation. The
> rough implication is that in many markets buying a house can be a
> justifiable investment *if* your expected return on liquid securities is
> <7% annually on average.
>
> To recast the original question, for someone with no inclination to learn
> anything about investing, buying a house probably has similar returns to a
> generic disinterested investment portfolio. For someone inclined toward
> investing, there is significant additional upside available by putting
> capital toward liquid securities instead, in which case renting will
> generally be the wiser choice financially.
>
> Obviously there are also significant non-financial considerations at play,
> otherwise everyone would just buy the cheapest available house in their
> region.
>
>
> > On Feb 28, 2018, at 5:01 PM, Gregory Alan Bolcer <[email protected]>
> wrote:
> >
> > You guys better check my maffs.
> >
> > I wanted to figure out what the actual numbers were.  I took my parent's
> old house in Santa Ana. From zillow:
> >
> > Santa Ana, CA is a single family home that contains 2,245 sq ft and was
> built in 1962. It contains 4 bedrooms and 2.5 bathrooms. The Zestimate for
> this house is $1,067,118, which has increased by $14,726 in the last 30
> days. The Rent Zestimate for this home is $3,764/mo, which has increased by
> $161/mo in the last 30 days.
> >
> > Est. Refi Payment
> > $4,251/mo
> >
> > 4251 - 3764 = $487/month
> > 487/month * 12 months = $5,844 per year
> > The mortgage & property tax deduction caps out at $10k under the new
> laws, so owning, you'd have a $4,156 advantage on tax liabilities.
> >
> > 10 years of house value increase = 57%
> > 10 years of dow increase = 100%
> >
> > Doing a simple savings calculator w/ annual compound interest you would
> have $97,359.64 in value plus a place to live for those 10 years.
> http://www.moneychimp.com/features/rule72.htm
> >
> > For owning, you'd have a place to live, better deductions and a $600,000
> asset? (Paydown + appreciation).
> >
> > Does that sound right?
>
>
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