Renting Vs Buying: How To Live Beyond Your Means!
The debate over renting versus owning isn’t dead. According to the WSJ, you can buy a 2 bedroom condo in Miami with a wrap-around balcony and stunning, jaw-dropping views for $400,000 (and this is after the market has already correctedly significantly). Apparently they come fully loaded too!
“You’ll have at least one private pool in the building, along with saunas and fitness centers and all sorts of other conveniences. Of course, you have a 24-hour concierge and valet parking. Many have private cinemas, bars, restaurants, spas and the like. They’re like cruise liners on dry land.”
But these facilities cost money. About $1,100 every month or $13,200 a year!
Assuming you put down 20%, and finance the remaining 80% at 6% interest rate, that’s going to cost you $19,000 per year. Then you still have 2.25% property tax which is another $9,000. Add everything up and your annual costs are $41,200.
And how much can you rent it out for?
Only $2000/month (that’s only $24,000/year). And the rents are dropping too! Even if you pay cash for the condo, your annual profit is $1,800 on a $400,000 investment! Even a bank CD pays more than that!
For speculators who bought at the top of the boom, real estate is turning out to be a lousy investment. But atleast renters can live well on only $2,000 a month!
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May 26th, 2008 at 3:49 pm
Good post. This is happening all across the country and I’m on the good end of it. I live in a 1700 sq ft home in a gated community within a city that is (was) very popular with speculators. My rent is at least $1,000 less than the monthly note of my landlord. When I was looking for this place, there were plenty of offers from “motivated” owners dying for tenants.
May 26th, 2008 at 5:27 pm
I’m glad the debate isn’t dead because I can’t buy right now anyway. But when I do I’ll also be renting rooms out. I hope the years of easy real estate aren’t forever gone and that prices really do stay down for a reasonable period of time. I’ve looked at buying in Toronto and if you’re lucky you might get a place for $280,000… in Scarborough.
May 26th, 2008 at 6:13 pm
can’t say anything about the Toronto market, but here in San Diego prices are down 20-35%.
at this rate, I think properties should start cashflowing in 2 years!!
real is cyclical. you just need to buy at the right time.
May 26th, 2008 at 8:17 pm
Here in the North West, the prices haven’t fallen down. They have been flat for over a year. Its still very expensive to buy a house here. I was in California(Los Angeles) some time back and found a lot of real estate cheaper compared to Seattle.
May 27th, 2008 at 3:13 am
Interesting post. Here in the southeast, prices have stayed steady. There are many people moving into the area (from the midwest and northeast) for jobs, but they can’t buy homes because they can’t sell their old ones. So right now, all of these people are renting. It is difficult to find rentals, so it is actually higher to rent as opposed to buying. I have began looking for a starter rental to get my feet wet in the real estate market but am a rookie. Any suggestions on where to find good information for newbies?
May 27th, 2008 at 3:53 am
Seeing this further North in Orlando too - a swarm of posh new condo towers in the center of downtown, prices and rents are crashing but those $1,000 a month HOA fees are still there - more than the rent in some cases (and more than the entire monthly rent on properties less than 2 miles away).
May 27th, 2008 at 5:52 am
Interesting stuff. I think that owning is better than renting in the long run. A friend of mine rented for 4-5 years, and spent about $30K in rent over that time period. HAd my friend bought a house, my friend would have been better off financially..
And of course I am not talking about some flashy Miami apartment, but about a normal family house, with no $1000/month in maintenance fees. Just property taxes and normal maintenance.
From an economics perspective however..buying the condo costs you 41,000/year, but after 30 years you have something to live in.. If you just rent however.. You are exposing yourself to fluctuating rent prices. And yes, you are saving $17,000/year versus the owner. But at the end of 30 years you would have paid tens of thousands of dollars ( assuming the numbers saty constant) and have nothign to show for it.. In other words, the extra $17,000 that the owner pays over the renter is the “price” for having a home..
May 27th, 2008 at 6:06 am
don’t forget interest on home loans is tax deductible. the guys losing money each month are hopefully writing off the losses against companies that make money in other ventures. i found it crazy when jim cramer did his rant on renting. he was all about renting and not owning. personally i feel it depends on your situation…
May 27th, 2008 at 9:46 am
I was going over a spreadsheet with a friend who is thinking of buying a house in san diego.
we wanted to find the true rate of return for buying a house and renting it out if you bought today and held it for 10 years. it assumes you put down 20%, you’re in a 33% tax bracket, and you see 3% appreciation a year.
At the end of 10 years, his $100k deposit has shrunk to $95k! so even the tax break can’t make up for extended periods of negative cashflow!
however, if he waited a year or 2 and saw another 10% drop in prices, and experienced 5% average appreciation (because of the drop) his annual rate of return jumps to 13.7%
timing is very important when the numbers are so out of whack.
instead of paying an extra 17k more in housing, if you rent and invest the difference, you’ll def. come out a head in 30 years.
May 29th, 2008 at 7:02 am
I ran the numbers for my house. For a comparable house, rent might be 2400/mo. Actually, prob closer to 3k, but let’s say 2400 to be conservative. I tried to figure out how much appreciation I needed from my house each year such that the monthly cost to own and rent were equiv. That appreciation req’d was 0.74%/yr. The math is below. Im not saying buying is better than renting - Im just saying there is a lot to consider when making this evaluation. This is a simplified analysis, making many assumptions.
900000 Value of Home
598000 mortgage
6% mort. Int rate
360 length of loan (months)
($3,585.31) Mort Payment (PI)
($2,990.00) Interest Payment, month 1
($35,880.00) Sum of interest payments per year
($43,023.75) PI /yr
-7500 Prop Taxes/yr
-900 Insurance/yr
-2000 Maint./yr
($53,423.75) Sum of housing cost
($4,451.98) Total Housing cost /mo
33% Personal Tax Rate
10,700 Stand. Married Deduction
$10,784.40 Tax benefit of interest + tax payment (subtract std deduction)
7143.745685 Sum principle payments/yr
($35,495.60) Sum of housing cost, subtract tax bene & principle
($2,957.97) Per month cost …
0.74% Home appreciation rate
6695.599988 Home appreciation/yr
-2400.000001 Cost of owning home per month
May 29th, 2008 at 10:36 am
I’m in one of the worst markets in California, and it has dropped so much that I can pay about 20% more per month ($1200 vs $1450) and buy a similar house to the one I’m renting. So it isn’t always the same in every market.
May 29th, 2008 at 11:04 am
Mike,
your house has $300k worth of equity in it.
If invested in tax-free munis at 5%, that would yield 15k per year.
so your cost of owing a home just went up!!!
Brandon,
You’re right, every market is different.
there are houses in Moreno Valley that are currenly selling for 70% discounts to what they were selling for 2-3 years ago. However, this is the exception rather than the rule.
May 29th, 2008 at 3:19 pm
This always seems to be the issue. It is definitely better to own than to rent. However you can get yourself in over your head if you are not careful.
May 31st, 2008 at 2:12 am
“It is definitely better to own than to rent.”
I live in Hong Kong– in the New Territories, where prices aren’t outrageous like on the Island. I live in an apartment that would cost me US$250k to buy but costs only US$750 per month to rent. If I buy, I need something like US$15k minimum in up-front costs, plus my monthly cost would jump to US$1200 or so. I just can’t make the numbers justify buying, no matter how I crunch them. Keep in mind that if I buy, then over, say, a 15 year loan, the down payment and additional monthly costs COULD have been earning a return in some other investment rather than merely being a down payment and additional monthly costs. Even if in, say, 8 years my RENT would jump up to $1200, it would still not offset the fact that I could have avoided a down payment and saved each month for 8 years by renting rather than buying.
And indeed I am assuming that any money I save by not buying DOES end up invested rather than blown, because in my experience it does end up invested. Other people may have different experiences, but I can’t see how those experiences would be relevant to me.