What savings?
Rent as you stated already includes anticipated maintenance costs, property taxes, the landlord's mortgage costs, often an agency fee, plus a margin for the landlord.
I don't think I've seen rental rates ever cheaper than a personal mortgage. The main advantage of renting is avoiding long-term commitment but you'll pay a premium for that flexibility. Otherwise there wouldn't be an incentive for landlords.
The rental market and housing market are two separate markets. Just because it costs $X to own a home doesn’t mean rent has to be $X or higher.
The same home could be rented for ~$4500 per month.
Keep in mind that most rented houses were purchased a while ago. If you bought the same house when it was $700K, you could still make a profit on a rent of $4500.
The reason why owning costs more is because buyers are also assuming appreciation. If you sell the same house for $1.5M 5 years later, you still make a nice profit even if your monthly cash flow is negative.
Also, once you hit 20% ownership, you no longer have to pay mortgage insurance.
I haven’t run the numbers lately to figure out which side wins, but the analysis is significantly more complicated than comparing monthly outlays in the first year.
That assumes that you can sell the house for more than what you bought it at.
You are correct that principle may be recouped and in addition, you get a mortgage interest tax deduction. However, you also pay 6% when you sell the place and maintenance costs (~1% per year) need to be accounted for.
There are several assumptions you need to make for owning to be cheaper than renting - that usually involves owning for a longer period of time (>5 years) and some modest appreciation (~3%+).
Of course, my numbers were from the SF market. There are many cities in the US where owning is cheaper than renting from day 1. SF just isn't one of those.
A good place to mention the NYTimes rent versus buy calculator: https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
Not necessarily; as long as the value of the house[1] doesn’t fall more than the principal you’ve paid, you’ll get more cash from the sale than you put up as a down payment. The trouble with buying on margin, though, is that it amplifies losses— the worst single day in the stock market[2] was about a 20% drop, but you get the same effect from a 1% drop in your house value if you hold the 95% mortgage that you described.
[1] Folding transaction fees into the effective value
[2] https://en.m.wikipedia.org/wiki/Black_Monday_(1987)Now I own my own place and I finally actually have rights and I will choose when I move on.
You cannot evict people because you want to sell (the new owner is your new landlord) or because you want to increase the rent. Unless you do something really wrong (like break things on purpose) you cannot be evicted.
About the only time to get rid of tenants is when you want to move in yourself, and then there is a longer protection time (3-9 months depending on the time you lived there). (Or I guess you can pay the renters to move out which I've seen sometimes.)
The rent can only be increased up to 15-20% in 3 years (without amenities), and can only be increased every 15 months. If you do renovations that improve the place you can demand 8% of the costs per year, but only up to 3€/sqm (or 2€/sqm if the place was cheap).
Still, prices in the cities have been going up a lot in the last few years (you can increase the rent when new tenants move in), but the prices to buy have gone up even more.
This is why you shouldn't agree to a rolling tenancy. When the initial tenancy period is over, negotiate for a year or two. Most landlords, in my experience, don't want their houses sitting empty so they're happy to have you on the hook for a year. Although, it depends where you live: I work remotely so I tend to rent in less expensive parts of the country like Devon where there isn't so much volatility in the market.
https://www.gov.uk/government/news/longer-tenancy-plans-to-g...
Periodic (rolling) tenancies can be ended with two-month's notice, so the landlord might decide to evict rather than repair. With longer tenancy agreements, the landlord can't evict until the tenancy expires, and so tenants can use their legal rights to compel the landlord to make repairs.
In short, the landlord can't kick people out as an alternative to spending money on repairs.
Yes, they're technically "obligated" but only real recourse is to pay somebody to fix it yourself and deduct that from the rent. While doing that you have to be 100% reasonable though (no overcharging, get multiple quotes and landlord must be kept informed).
If you stop paying rent because repairs aren't made you can be evicted.
And then you get evicted after the negotiated period ends anyway.
You are correct that rent includes all the costs plus markup. But a big factor is that housing costs (esp in california) remain pretty steady once you buy. So that rent does include the housing cost...from 10, 20, x years ago.
Alternatively a developer builds a building and rents out the unit instead of marking up and selling units. So the cost isn’t as high as market price. An example: I recently rented a 1 bedroom in a desirable neighborhood for $3500 per month. Equivalent condos are over $1m dollars in that area. But it certainly didn’t cost the developer of my building $1m to build my unit.
This pattern is really common in high cost of living cities.
But what will the price be in 10 years? The mortgage will go down, especially if you pay above minimum repayments, your wages will go up (theoretically) helping you make those payments. The mortgage price will go down, bottoming out at $0 while the rent will always increase.
note: Amsterdam an outlier like SF.
(This is why I'm still renting...)
I would imagine things would be quite different and more like you say in more normal markets.
For example, you can rent an apartment on the peninsula in the Bay Area for less than $3,000 a month, but buying the smallest house you can find on the peninsula will cost you at least $4,500 a month for just the mortgage.
If you rent in this case you can take the $1,500 in savings (plus the savings from no property tax, maintenance, homeowners insurance, etc.), and save/invest it.
As a Swede in the middle of buying a house in the U.S. I have to say it's surprisingly similar.
The big differences between Sweden and the U.S. is the loan terms. Here in the U.S. the terms are extremely long, you'll typically get 10, 15 or 30 years with a locked interest rate. In Sweden you'd normally lock your rate for 1-5 years up to 10 years depending on your financial situation. When I owned a condo in Sweden I went for 1 year locked rate and then month-to-month once that first year passed. What you have instead of a fixed term is a fixed amortization. By law you have to pay back 2%/year until your principle is down to 70%, 1% until it's down to 50% and after that you can just pay interest if that's what you want to do.
It's not unusual for people to accept different compromises when they're not necessarily going to have to live somewhere indefinitely.
This comparison is usually apples to oranges. For example, in Austin, a 20s-30s homebuyer may have a budget of 300-400k for a property. This amount pretty much limits the options to homes on the edge of town or in suburbs. The same person may prefer renting in or near downtown, if they aren’t buying, and that could cost just as much as a mortgage on a much larger house (in a much less expensive location).
So, hard to do fair comparisons.
I suspect people, especially people considering buying their first home, have a specific profile of locations that behave in this new way because of that interest.
Basically just strike SF, NYC, Boston and Seattle of your list. Then strike off every city that lots of people from SF, NYC, Boston and Seattle are cashing out their inflated home values and moving to to raise their families off your list. The US is a big country. You're left with a very long list.
My sample size is <10 but 100% of the first time home buyers I know opted for a 2nd tier city or an exurb that's just barely within commuting range of wherever the big fat salaries are. The nature of the city other than physical location had approximately nothing to do with it. The techies who can drop a quarter mil on a 800ft^2 condo that's within biking distance of work and walking distance of a bunch of overpriced bars are in the minority and not indicative of overall trends. Take your narrow world view and even narrower assumptions of what young people want and shove it somewhere.
It can still be cheaper to rent, at least if you look at the small scale. Because in 30 years, those 4 million will be yours while people who rent will still have nothing. It’s also risky, because maybe those 4 million will really be 1 million.
Over all, owning real estate in a safe location is always going to be much better than renting. At least in Denmark. Hell, if you can manage to buy around 15-30 lower-cost apartments in a university city and rent them out, you’ll be able to pay your loans and have enough spare in passive income that you never have to work again.
- Mark Twain
Just have to be careful to only buy land 2.4m above sea level.
Are you saying the prices droppped sharply the last 5-6 years?
But I probably should have been more clear. I mean, first of all, there are more cities than Copenhagen. I have a 3 room 92m^2 apartment that is 15 minute walking distance from Aarhus H that cost us 2.2 million. Secondly, I’d personally call a place like Valby “downtown” Copenhagen even though it would probably be more correct to label it surburbia like you do.
Of course, there are other Danish cities than Copenhagen, and prices do vary. The parent comment I replied to simply stated that there are no 4M DKK houses, which simply isn't true.
Sure, so why is the sofa rental company in the business of owning sofas?
You've got to ask the question from the other side. You're paying someone else's cost of ownership and interest and overhead and profit margin.
In practice what consumer goods rental competes with is consumer credit. People don't sit on the floor for months while they save up the $2000 for the sofa, they buy it on credit. Lots of places offer interest free credit too! e.g. https://www.dfs.co.uk/content/finance
For most people there is no "rest of the money".
And in case of damages and repairs, if you own the sofa, you're always sitting on the damages. Homeowners for example routinely spend thousands of dollars per year on their houses, whereas renters (generally), have repairs covered by the landlord.
this is a basic situation of opportunity cost. You can't just tally up the renting costs while ignoring the freed up capital, this is the exact mistake people make when they prematurely buy.
And you're deliberately oversimplifying the calculation, which is just as bad. You're assuming a guaranteed return of 7%, and that the capital isn't touched for the years. If withdraw $50 from your investment capital per month to pay the rental, the numbers don't come out as favourably. similarly, if you reduce the returns (7-8% is an average return, but it's not a guaranteed return, especialy on smaller sums where you may have to pay $25 per trade, or 1+% fees in fund management every year, or tax on the returns).
Your point about renting being a viable option is valid though, your numbers are just inflated.
I’m not sure what you do when you’re in a down market. Last time I lost a lot of money because I was dumb.
mind you renting your toothbrush probably isn't worth it, but if you're thinking about spending thousands of dollars and compare that to the compound interest you earn in a passive fund over a few years, you'd be surprised how much you lose out on.
In fact that's one of the drivers between middle class and upper class inequality. The upper class invests primarily in capital.
So I did. Remember you've still got pay the $50/month out of that savings. Even with 7% guaranteed annual interest on your initial investment you're still losing money after month 46 with renting at $50/month compared to paying $2000 up front.
And you still don't own the couch.
$50 a month for a $2000 couch is equivalent to a debt at 26%. You can't overcome that with investment. It only makes sense if you're planning to throw it away very soon.
Putting money in a property especially if you can do your own upgrades can really pay off. Example, bought a house for $280k,I invested about $50k, its worth about $400k now.
Yeah 2008 happened, however, the prices at least in my area are back to 2007 levels. Short term real estate can be risky but long term it is a relatively safe investment.
Edit: As long as you are diversified and not putting all your money into meme stocks, of course
$2000 is a lot for a sofa, and if I understand correctly is what people spend if they want a sofa for a long time and not just a cheap IKEA sofa to throw out after the dog / kids ruin it in 2 years. If someone’s spending this much on a sofa, I hope they expect to keep it 10 years and should be buying not making payments!
That said, you don't get what you pay for, you never get more than you pay for. Not being an expert in evaluating sofa quality I'll take the cheap Ikea sofas that last half as long.
Same with electricity. You get a better insurance policy if you have it new.
And I am getting an exempt, because I am using Holzpellets ( not sure how are they called in English )
EDIT: Wood pellets, that is.
Wood stoves last basically indefinitely (i.e they are only taken out of service when the building owner decides they're sick of using wood) but you're probably gonna have to do something to make the seams seal better every several decades.
Fireplaces last as long as the masonry they're made from (~250yr and counting) as long as you don't let them fall apart and leak CO everywhere. I know some people who live in a house built in the 1700s and while they have forced hot air for "base load" they use the fireplaces to make the downstairs rooms extra warm almost daily in the winter. That said, this is only one step above your "open fire".
You also ran pretty clear of the housing bubble. I wonder if there's a connection there.
I think the real difference is that Germany has proper tenant's rights and a functioning social landlord system.
Paying rent isn't that much lower than pay off a loan. And in one case you actually end up with property. Additionally, people invest much more in their own homes than rented property.
I am not in the US with a high property tax, but I believe this to be true almost universally.
Of course, you always pay a price if you commit to anything.
I live in a national average housing market, bought a house in 2006, and save about 30% on a monthly basis as compared to a much smaller two-bedroom apartment. I include mortgage, tax, insurance and a 7% holdback for repairs.
Long term, renting is always losing proposition given the low cost of capital.
Also in your cost calculation did you include the rate of return you would've made of your principal by putting it into equities? I imagine if you bought in 2006 and held you would be very happy right now.
From a cash flow perspective, I'm spending about $20k in housing related costs annually. Given that it was 2006, I did a 15 year 105% ltv fixed mortgage. Renting, I would have saved a few bucks for a few years. Right now, renting a 3 bedroom in a neighborhood acceptable to me would add about $750/mo in costs. Total cash in hand with market returns would be around $10k.
Meanwhile, the house will be free and clear in a few years. When we move in 5-7 years, we'll be recovering the original equity, plus capital gains, which will likely be in the $50-150k range depending on the market timing.
If the choice was between have near zero housing costs and living on property my family owns or buying a house as an investment, I would agree you that the market is a lower cost, likely higher return investment. Unfortunately, I don't have that choice!
When you are owning a house or apartment - each payment of mortgage builds your own equity. This is not the case with renting, plus when you actually own it and have to move - you can also rent it.
Also, rent over here costs almost as much as mortgage(or in some cases - even more) - the only issue is the down payment - so the investment bit is very off.