SmartMoney article on Renting

[cashman]

Good read about the financial sense of renting vs. buying. Be sure to read page 2 where he rebuts the usual arguements.
http://www.smartmoney.com/home/living/index.cfm?story=rent&afl=myyahoo&pgnum=1

Not sure I totally agree with his prediction that prices will stay flat for the next 20 years instead of going down. Interesting concept. I guess that is one way to eventually bring the Case-Shiller Index curve back down to normal levels, however painfully slow that would be for all of us waiting to buy. Personally, I would much rather own than rent, even if it does cost something more.

[Bugs]

Those arguments do make some sense when prices are as distorted as they are right now. However, if/when the prices drop back down below the long term trend again the cost of owning the home will be a lot closer to rent. At that point, a homebuyer has an opportunity to control their housing costs.

Here’s an example: I have a friend who bought a home in 1997 for $185k and subsequently refinanced – without taking any money out – when the interest rates dropped to 6%. Not counting his home improvement costs, his PITI (Principle, Interest, Taxes and Insurance) costs are about 30% less than his rent would be on that same house.

Now granted, he did put in a $15k downpayment, but the point remains – it’s now cheaper for him to stay in his 2-story house 4bd/3ba house than it is to rent a 3bd apartment of similar age and half the size. That leverage will increase as the long term trend progresses, and will jump when the mortgage is finally paid off. Prop 13 will continue to limit his property taxes to whatever the present value of $2,500/year is in perpetuity. The feds could do away with the mortgage interest exemptions and he’d still be way ahead.

Besides that, there is the opportunity to leave an inheritable estate, which would be of tremendous economic benefit to the heirs if it passes in one piece.

[Anonymous]

Good article, but the author fails to mention the “L” word – Leverage. One can (or could?) buy a $300k house by only putting down 3% ($9k). So if the house appreciation yields 3%, that’s 3% on the whole $300k ($9,000). Which actually comes out to a 100% return on the investment ($9k down payment).

Stocks cannot be leveraged this much. Federal regulations require at least 50% down, so to speak.

But, having said that, I did sell my house almost 2 years ago and plan on renting for a little while.

[blahblahblah]

Good article, but the author fails to mention the “L” word – Leverage. One can (or could?) buy a $300k house by only putting down 3% ($9k). So if the house appreciation yields 3%, that’s 3% on the whole $300k ($9,000). Which actually comes out to a 100% return on the investment ($9k down payment).

Hold on there, this isn’t E*Trade we’re talking about here, it’s a house — after your transaction cost of 6% to sell the place ($36K), you’re actually $27K in the hole. And of course that appreciation knife cuts both ways, so a 3% decline is gonna hurt a lot more on a leveraged investment.

[Author]

Posts