Is It Better to Rent and Invest Rather than Buy a House?

Here's a very, very interesting argument from a Smart Money writer. He looks at the returns people have historically seen on real estate versus those in stocks and concludes it's better to rent a place to live and invest in stocks than it is to buy a house. His thoughts:

So to sum up why I rent: Shares right now cost 16 times earnings and over long time periods return 7% a year after inflation. Houses right now cost 19 times their "earnings" and over long time periods return zero after inflation. And they look likely to return less than that for a while.

If I understand this correctly, he's saying that buying a house is more expensive (you have to include taxes, insurance, repairs, etc. in the total costs). So if you rent and invest the difference into stocks, you'll be much better off financially in the long run. By extension he's also saying that it's a bad idea to pay off your mortgage early (you have more money into a non-producing asset) and to buy a huge house (again, the more expensive it is, the more money you have tied up in an asset returning 0%.)

But it seems to me that if you buy, at least you get part of your "rent" back (even though it may earn 0% -- according to his analysis.) So if I'm paying $1,500 on a mortgage, a certain part of that is money that I'll see again (it doesn't go towards interest but to the principal of the loan.) So my effective "cost" of owning is less than $1,500 -- making the spread between renting and buying even lower.

Hmmmmm. I'm not sure what to think of this. The numbers seem to support his conclusion (if he's using the right information) and he even addresses major questions people will have about his thinking. Anyone have a perspective on whether this guy is on target or a complete looney? I know that at least Lord will have something valuable to comment. ;-)

BTW, one of the points he makes in his answers sections deals with the mortgage interest tax deduction. It's used as an argument for not paying off your mortgage early, but he says:

The tax breaks aren't really breaks at all. Moreover, a majority of homeowners don't claim them. Their incomes are low enough to make the standard deduction a better deal.

Precisely the argument I use for paying off your home early. However, he'd disagree with this as well.

So, what do you think? Is it really better to rent and invest rather than buy a home? It's such a radical concept for me, but it does seem to at least have some validity.

Comments

[Livingalmostlarge]

I don't like renting. I would never again have a dog. It's too tough to find a place that will rent to someone with two dogs, and then soon kids. I do not want to keep moving and uprooting our kids so buying and not worrying about the rent increasing would be best.

Also in 30 years if you keep renting the rent will go up, but the mortgage payment assuming you got a fixed rate will not.

[Pat]

For me, I think there is an inner satisfaction that comes along with owning your own home that is more important to me than any dollar amount. I don't own a house right now, but I know that the day I do it will be an extremely joyous day.

[M.]

I feel the same way as Pat. I was talking about buying a house and my dad asked me if I was planning on buying it as an investment (that I would live in as well). I told him I was not planning on buying for the investment aspects, but for the pride of home ownership and being able to have a place that my husband and I could call my own (and then share with dogs and kids). That was an okay answer for my dad -- he just wanted to make sure that I wasn't doing it to try and make a buck, especially since that's getting less and less likely in my neck of the woods.

I have read this article before and it caused me to run some numbers and I must say I agree with the conclusion of the author. It was a hard thing to swallow.

This goes straight to the american dream for us, so it is hard to see the real picture because we have all been raised that we should grow up and buy a house - it shows what a great investor you are! Only bums and college kids rent!

Still, I and most others would continue to choose to own, even if it weren't the best option financially. Why? Because we own pets, we like to 'fix' and 'improve' things (again, a bad investment), and, oh yeah, there's that american dream thing.

[Blaine Moore (First Time Home Owner)]

I concur with all of the above. I can afford to own, so I do. I enjoy living in my house more than I enjoy renting from somebody else's property.

[Lord]

Another myth of averages. No doubt many people, those living in less expensive areas non-growing areas would be better off, at least if they were satisfied with what they could rent. Most commonly, they just have to rent what is available since building to rent is not really profitable there. Many others, living in expensive growing areas, would not. Rents in the latter areas rise faster than incomes so eventually even those that buy now will come out ahead if there long enough. I would recommend waiting a while, though, as prices or interest rates will have to decline.

Taxes are high in these areas as well. If you have to give up half of your stock returns to taxes and another 3% to inflation you may net 2% real, positive, but hardly stellar, while with bonds you might net 0% real, if lucky.

[Brian D]

Maybe I'm a bit confused by his numbers. He's comparing a $1250/month rent with the $300k homes around where he lives (already probably not apples to apples, since the homes will have more space, but let's go with it anyway). A $300k mortgage at 6% is 1798.65, a $500 difference. A $240k (20% down) at 6% is 1438.92/month, only a $200 difference. This doesn't take into account property taxes (and investing the 20% downpayment), of course.
So does a $200 (plus property taxes) difference really work out to a better investment? I suppose so, but I know people who rent houses, and almost all of them want to get out from under their landlord and into their "own" home. I guess I just have a hard time thinking of my home as an investment that needs to make money for me.

I LOVE the freedom of not having a house and all the baggage you need to furnish and maintain it. Of course, I have only a small dog and do not want children.

I spend weekends floating around the pool, reading, writing, or doing my hobbies (such as animal rescue), while my landlord works on the house and the yard and worries over all the things that break or need maintenance all the time.

Yes, my rent will go up over the years. But, so will my landlord's property taxes and maintenance costs as the home ages.

I have complete freedom to move at the drop of a hat (albeit with 30 day's notice) if I find an interesting job opportunity or if my neighbors or landlord gets too annoying. I keep my belongings to the bare minimum, so I could probably just pack up my car & go.

I'm 36 now. Perhaps I'll want my own home later in life, but I've become really accustomed to all my free time, easy living, and using my energy on more fulfilling endeavors. So, I can't imagine it now. Plus, if I DO decide to get a home, I'll be financially able to buy much more of it outright with all the cash that's been growing for me in the market and other financial instruments, without my having to lift a finger . . .

It's really exciting to see the math beginning to work in my favor. But, even it it didn't, I wouldn't trade my lifestyle for the weighty anchor of a home anytime soon, that's for sure.

[christianPF]

I have read a few articles along these lines in the past and I have ran the numbers myself and I agree with the author. I am young and freshly married and I am loving the few responsibilities associated with renting.

When I checked the numbers and realized (if I am investing the difference between mortgage expenses and rent) that I could come out ahead I got pretty excited.

That said, I DO think that it is generally good advice that people should buy a house. Because MOST PEOPLE WILL NOT INVEST what they are saving by renting. If they don't, then it will not be beneficial for them.

[BD]

I'm not buying it... Pay off the house in 10 years or less and now you have only taxes, insurance and association fees (for all the people who don't want to do any house work because of their "valuable" time) to pay monthly, much less than 1250/month for rent. 1250/month * 12 * 30 = 450k gone after 30 years. So, say you pay off the house in 10 years and invest all your extra cash in stocks, you'll catch up fairly quick to the 10 years you missed out on. Don't forget that your house probably appreciated at 6% over those years and if you really need the money you can sell your home and start renting again. Moreover, you'll be able to do "Leveraging" then since you can take out a home equity loan at 6ish % and invest all that money in stocks at 10%.

[Brad]

His numbers work that way only because a mortgage in his example is 50% more than rent. That's true in some places, but not in others (certainly not where I live, where the two are close and a mortgage can be cheaper). The answer to the question is "it depends." I've run the numbers on my house-- 44% annual return due to the leverage of the mortgage, and that's with good but not phenomenal appreciation. In my area it's a no-brainer. I suggest everyone run the numbers for his/her area, as there is no "right" answer for everyone. It's very much a market-dependent answer.

[Justin Yost]

I have to admit, although I am in college, I have never really wanted to own a house expect when I retire. I have always wanted to simply rent for several reasons, I don't desire a large family, I don't desire pets if any a cat, I want to live in a large city which would limit the availability of housing outside of renting or apartments. I don't see a point in decorating a home when I don't know if I'll be there again inside of 10 or even 2 years. My family has moved several times and each time my parents lost money, between finishing paying off the house and putting a down payment on their new house. They have finally given up and are now also renting. Majority of people hold several jobs in several different areas of the country, very few people are luck enough to be able to find a job that puts them in one place long enough to make owning a house worthwhile. I do feel that if you own a house over the long term it is worthy investment, however unless you buy just one, maybe two houses over your life time, you wind up losing money. Personally I will rent more than likely.

[Gerlad Rogers]

Most homeowners buy a new home every 5 to 7 years. That's a small window of opportunity for value appreciation. Of course like any investment, if you buy and sell at the right time.....

Another thing to consider is the real estate broker's fees, usually 6% if you are a seller. That's $12k for a $200,000 home. OUCH!

As my property taxes get higher each year, I am seriously thinking about going back to renting and investing the difference.

[aaktx]

The article is compelling. Property taxes and fixed costs of owning a home are definitely making renting favorable. I think the American dream of home ownership has changed. It seems to make sense owning a home if: 1. You can afford it(spend less then you make), 2. Pay it off quickly if you can( mine in a year and a half), 3. Plan on staying there a long time(at least 10-15 years)
I still favor owning a home(especially one paid off), since that is one less monthly bill(rent or mortgage)to worry about. Clearly everyone's situation is different. We are definitely a more nomadic society when it comes to employment situations. I also think the bloat of an overinflated real estate market has not subsided yet.

[mysticaltyger]

I am in almost the exact same position as the 36 year old anonymous poster. I'm 37, have always rented, do not want kids, and have no pets and don't want any. I do NOT want to do ANY maintenance if at all possible. And, unlike a lot of people, I deliberately keep my rent to 20% or less of my gross income so that I can max out my 401K and put some additional funds in an IRA. I am priced out of the real estate market where I live and likely always will be. But that doesn't mean I have to resign myself to a live of poverty. My net worth just passed 180K because of diligent saving over the past 10 1/2 years. Most of that money is in stock mutual funds. As another poster, said it is definitely possible to not buy a house, keep your rent low, and put money in stocks. The problem is, most people don't do it (which personally boggles my mind, but there you have it).

[traineeinvestor]

There is no universially correct answer to this question. In the right circumstances, buying a home is a great investment. In the wrong circumstances, it can be a major drag on improving a person's financial status. Where you live and the state of the market at the time you make the buy/rent decision will determine whether buying or renting is the better decision.

Three general points worth noting:

1. home owners as a group are materially wealthier than non-home owners (yes, I know correlation is not the same as causation but it is still a point worth noting and I would rather have the statistics in my favour than the other way around);

2. various surveys show that home owners as a group are happier than non-home owners;

3. home owners who have a mortgage are forced to save through the principal component of their mortgage payments. For those who would not otherwise save, saving in a sub-optimal investment is better than no saving at all.

Of course for for retirement planning purposes (as opposed to general investment purposes) there are several advantages in owning rather than renting, only some of which are financial.

Personally, I have been both an owner and a renter at various times. The only time I felt that renting was the better choice was when I first arrived in Hong Kong and was not sure how long I would be here.

[steve miller]

The Smart Money writer is an idiot! Obviously he doesn't own real estate (primary or rentals like I do). There's smart debt and dumb debt. With a house you leverage your buying power by putting little of your own money into it. Over time a house keeps up with inflation (some call it appreciation). You get a tax deduction. You can borrow against it tax free to invest in the stock market (historical returns = 27% annual). This is a no brainer. Another timid guy making excuses for his in-action. The more calculated financial risks you take the sooner you retire. Go email Brian W at 1centworth.blogspot.com. He's got good ideas. Steve

[Edmund]

Where do you find historical return of 27% annual? ;)

You can say you don't agree with the article's conclusion. I think it's a bit over the top to say he's an idiot when he laid out such a compelling argument.

[kitty]

I don't agree with him for a number of reasons. I do agree that you have to be able to afford to buy before you do buy. I also think that a lot depends on timing. Sometimes it makes sense to buy and sometimes to wait. Real estate goes up and down, but one needs to be careful not to wait too long. You cannot predict the top or the bottom, you generally can predict long term trend much better than in stock market, IMHO.

1. His numbers. a) He compares the cost of owning a house vs renting an apartment. Isn't it a bit like comparing apples and oranges? If a house is too big for someone than why not consider buying a condo or a co-op? Would the cost of rental be still less for a comparable property? b)As it was pointed out, whether renting is cheaper than owning costs depends on timing as well as location. While now the cost of renting maybe lower than owning (need to compare similar properties, though), during the 90s, for example, before real estate prices skyrocketed the costs of ownership were cheaper than rent for the comparable properties. Most often they are equivalent. When rent is cheaper than cost of ownership very few people buy properties as investment(they cannot get enough in rent to pay for their costs) and the prices come down eventually. This is one indicator when the real estate is overpriced, by the way.

These costs were roughly comparable until recent bubble. My totally uninformed guess is the real estate market will get worse before it gets better - both because of foreclosures and because of disparity between rent and owning costs, so maybe right now it does make sense to wait for prices to come down a bit more. But not always and not everywhere.

As to many people not being able to itemize, mortgage and property taxes most often add up to a large enough number so most people who own can indeed itemize.

2. Average stock market returns. Yes, if you take 100 years or so the market gives you pretty nice returns. But most people do not live 100 years, and nobody works and invests for 100 years. We are only interested in 20 to 40 years between the time we start working and the time we retire. Nobody can predict the market's performance during this period. Take 20 or 30 years before 1987 for example. If you are unlucky enough to approach retirement just as stock market crashes, you will not have any money or a place to live. At least if you own property, you have a place to live and, as people pointed out, it will be paid off by then.

3. You can take advantage of real estate market ups and downs much as you can of stock market. For example, if you need or want to move when the market is down, you can rent out your old place instead of buying. Real estate doesn't stay down forever, so you can always wait out the bad times, especially since when the real estate market is cheap you can get enough rent to cover your costs. When I "upgraded" from a one-bedroom condo to a two-bedroom townhouse in mid-90s I rented out my old place. At first my expenses on my old place were roughly equivalent than what I was getting in rent ($1200 in expenses and $1250 in rent), but I was getting tax deductions on most of the expenses, not to mention depreciation, so I still came out ahead. It got even better after I refinanced. Then a couple of years ago I sold my old property with enough gain to pay off the mortgage on my current place - the easiest $100K I've ever made. In hindsight I could've made more if I waited for another couple of years, but my tenants moved out and I was afraid that the real estate market may turn. It seemed ridiculous that people were willing to pay $215K for a one bedroom condo, but in two years they were willing to pay $300K. Still, even selling a bit too early, I came out ahead. So now I own a bigger place outright (whose value went up from $180K when I bought it to $450K a year ago to about $420K now) and you cannot rent a studio in this area for what I pay a month for a townhouse-style condo -- this is in Westchester cty, NY, I think only NYC and California is more expensive than here. A friend of mine has done a similar thing moving from a one bedroom (co-op in her case) to a two-bedroom townhouse condo to a house, renting a co-op and selling townhouse with $100K gain. She then sold a co-op for over $100K gain as well (bought - $35K, sold- 156K).
My parents, on the other hand, have always been renting. So while they've always lived very modestly and saved enough money to retire and buy a small co-op outright (when it was cheap), they still live pretty modestly. They missed a couple of opportunities of buying a house and reselling it that they regret. Many of their friends who bought came out ahead financially.

3. Pride of ownership, ability to do what you want with a place, quality. It's nice to own a place - you can remodel it to your taste, you can keep a pet or not - I have a cat now. Barring a disaster or some rare circumstance, if you pay your bills on time, nobody will take it away from you. Whereas, a landlord can decide not to extend the lease (unless you live in rent control area) or raise the price by a high amount or decide to sell. So you may need to move again and again which is a hustle, especially if you have nice furniture. I rented when I started working, then I bought a condo. After I started living in my own place I decided I couldn't rent again.

Still, I do believe that one should buy what one can afford, ideally below.

[GotKitty'sback]

I like what kitty had to say! Makes sense to me!

[Mike]

I think the article leaves out some important points.

1) Leverage. Most people buy a home with a 20% (or less) down payment. If your property appreciates at 3% per year, you divide that by the percentage you have in equity to get your real return. So for example, you buy a $300,000 property, but you only put $60,000 down. The property goes up to $309,000, so your return is $9,000 on a $60,000 investment, or 15%. If you put 10% down, your return would be 30%.

Now to be fair, those returns decrease over time as your equity increases, unless you continually refinance to take money out of the property (and presumably invest it in the stock market, or other property, or something else that gets you a good return). That isn't a common occurrence--most people who do a "cash out" refinance aren't doing it for investment purposes. But still, unless you pay 100% down for the property, the real return isn't zero, because of this leverage.

Leverage in the stock market is possible (margin accounts being the primary mechanism), but you're only allowed to have 50% margin (you have to pay 1/2 in cash), and because stocks are so much more volatile compared to residential property, you're taking a much bigger risk of getting into financial trouble that way. Real estate is a relatively safe way to employ leverage.

2) Mortgage payments can be seen as a way of forced savings. Most people who rented because it cost less than buying would *not* invest the difference in stocks, they would spend it. You can show me all the numbers you want about what *could* happen if you saved and invested every spare penny in stocks, but if the average person isn't going to follow the plan, the plan isn't really that valuable. I could argue that if you would only live in a multi-generational home, you and your aging parents (and maybe grandparents) could save a ton, and by investing the difference you could all be much richer. Is that going to make you do it? Probably not.

By owning a home, both the principal payments and the property's appreciation can be considered savings, and if you commit to a 30 year fixed rate mortgage (something that *does* commonly happen), you can reasonably expect to build significant equity over time.

3) Rents rise with inflation every year. Mortgage payments do not. You might be paying a bit more "per square foot" on day 1 to buy your house, but on a 30 year fixed rate mortgage, the principal and interest portions of the mortgage aren't going to change with inflation. Taxes, insurance, and maintenance costs will probably rise with inflation, but overall it will most likely not rise as much as inflation. Mr. Renter is going to get a 3% (or more) hike in his rent every year, while Mr. Buyer can keep a much more stable payment. As they both get raises over the years, Mr. Buyer will find his mortgage payments easier and easier to handle, and can invest the difference in stocks if he so chooses. Mr. Renter won't get those benefits, and over time the $200/month or whatever the renter is saving over buying will go away, and probably go negative.

4) Homeownership is at an all time high in percentage terms. Yes, that has pushed the cost of renting down vs. buying, in simple supply and demand terms. But banking on that as a long term decision would be like saying the stock market is at an all time high valuation, therefore it must be a great time to invest. The pendulum swings both ways. It's quite feasible in my mind that with all the foreclosures and "housing bubbles", more people will decide to (or be forced to) rent, and that will drive the demand (and therefore cost) of renting up vs. buying.

5) If you're really comparing apples to apples with renting vs. buying, you'd have to look at comparable properties. Renting a house with a yard is pricey, and generally speaking you're going to be paying every dollar that the landlord is paying for the mortgage, taxes, interest, and maintenance, plus profit. Saying you're OK with living in a small apartment is one thing, but you can't say that's the same as buying a house. You might get a deal for a while, but in most cases you're probably looking at a landlord that bought the house a long time ago and therefore in low-rental-demand times can offer you a deal, temporarily, where you're saving some over what it would cost to buy. But it's temporary--see #3 and #4.

Bottom line, I think for some people it can make sense to rent--if you don't need or want anything more than an apartment offers, or if you are going to move every few years for whatever reason, then it probably does make sense to rent. If not though, in the real world I think most people would be financially better off purchasing an affordable home.

[plonkee]

Really, whether or not it is better to rent and invest compared to buying is dependent not on financial issues but lifestyle ones. Its far more important to invest towards your retirement or just in general as either renting and investing or buying and investing can be made into a successful strategy.

Its about which will make you happier (including the happiness that comes from being able to afford your housing).

[Miguel]

Owning is almost always the better long-term option for all the reasons Mike stated above.

[ty]

Think of all the wealthy people you know. How many rent?

Exactly.

[db]

I think the author does have some valid points, and home ownership is a GOOD thing but not a NECESSARY thing.

My situation is that I am a renter, and I don't feel inclined to change that for a few more years. I've lived in the same apartment since 1999, and my rent has NOT significantly increased (it's actually only about $25 higher than 1999). I live in a nationally managed complex billed as "luxury apartments" and I pay moderately high rent for the area.

If I were to go buy a house right now, with what I could afford to put down, I'd only be able to buy a $90-100K house or condo to pay the same as I do in rent. Great. The problem is that nothing is available in the $90-100K range that I'd actually consider buying.

There are reasonable properties for sale at around $175-200K that I could (barely) afford -- but then I'd have to stop all debt reduction and savings. And there is nothing available below $175K that I'd really consider.

Not to mention that these are all condos, with HOA fees on top of the mortgage. And you have to remember property taxes. Yep -- I'd definately have to stop the debt repayment and savings efforts.

Of course, the homes that I really like are all $275-400K -- HAHAHA! The mortgage would take my entire salary.

So for the time being I'm a renter, and I am convinced that because of it I'll be wealthier in the end. Because renting gives me the chance to save and invest, and right now buying doesn't (unless I'm willing to bet the farm on the house as my only investment, which I'm not.)

DB

[Anne]

Some random thoughts and counter-points:

As Kitty has already pointed out, Mr. Hough's article includes one of my biggest pet peeves: the assumption that renting means renting an apartment and owning means owning a single-family home. Maybe I'm oversensitive as a condo owner, or maybe it's a factor of where I live (Chicago city proper), but I have a real problem with this. You can own an apartment (condo) unit, and you can rent a house.

Having gotten that off my chest... let's compare apples to apples. In the neighborhood where I live, the rent on an apartment unit is about the same as the mortgage, taxes and assessments on a comparable condo unit (assuming 20% down). That's just looking at monthly payments--before backing out the principal pay-down and an interest deduction. Sure, you are putting the 20% down upfront. But for that, as others have pointed out, you're locking in a monthly mortgage payment (taxes and assessments are still susceptible to inflation, but this is a smaller portion of the monthly outlay). Of course this doesn't apply to every neighborhood. But where it does apply, it's a no-brainer to buy, unless you plan to move within a short timeframe and won't be renting out your new home.

I also want to echo what others have said along the lines of pride of ownership. When I made the decision to move here, I looked at rental units--I wasn't even considering buying at the time. But what I found was that rental units were simply not very nice; they had only bare-bones appliances, white walls, cheap carpeting. The people I bought my condo from had taken care of it and had remodeled the kitchen and bathroom with higher-end materials. I simply enjoy living here more than I would in a rental.

[Rob]

The author deceptively compares apples to oranges in that he says the value of a house only goes up by the rate of inflation, while stock go up by 7%. However, this necessarily implies that you have paid off the house in full, in which case YOU ARE NOT PAYING ANY MORTGAGE INTEREST WHILE HE IS STILL PAYING RENT THAT GOES UP EVERY YEAR. The alternative, as some have mentioned, is to buy using leverage, in which case both of you are paying "rent" (rent for the renter and tax deductible mortgage interest for the buyer), and both of you have the same amount to save every month, BUT YOUR DOWNPAYMENT ON THE HOUSE IS RETURNING 20% PER YEAR (for example a $300,000 house appreciating at 2% per year is $6,000 per year, but if you only put $30,000 down, you are making $6,000 on the $30,000 principal, or 20%). I'm not sure I buy his 2% number either, but asuming so.

Instead the author basically assumes that you have bought the house outright but are still paying a mortgage, which makes buying sound like a bad deal, buty also obviously makes no sense. The author is either a loon or deliberately deceptive.

[Rob]

And to follow up on the point that almost all wealthy people own, even property that is rented is owned by someone! If they weren't making good money on it, why would they bother to own it in the first place? The ownership is where the money is and they rent it to people who don't get that renting is just paying his mortgage for him.

When you own your own house, you are basically owning it and renting it to yourself. This way you have to suffer some of the bad (i.e. paying your own mortgage instead of having a real third-party renter pay it for you) but you also get all the good that comes with ownership. The only way for most people to build real wealth is through real estate.

Renting is for people who can't afford the downpayment to buy, don't have stability in terms of where they live, or just don't get the finances.

[JOSH HARTWIG]

I LIVE IN SOUTH FLORIDA. I AM A MORTGAGE BROKER AND HOME OWNER. ON AVERAGE, HOME VALUES HAVE INCREASED 65 PERCENT OVER THE LAST 5 YEARS. ONE HUNDRED SEVENTY FIVE THOUSAND DOLLARS FOR THE HOME I LIVE IN NOW IN 2002. CURRENT MARKET VALUE, EVEN IN THE PUTRID MARKET WE ARE CURRENTLY EXPERIENCING..475000. IM SURE EVERYONE CAN SEE THE NUMBERS AND HOW ONE COULD ARGUE FOR HOMEOWNERSHIP. THERE IS NO GREATER INVESTMENT OVER THE COURSE OF HISTORY THAN REAL ESTATE. PERIOD. OTHER THAN A FEW MARKETS SUCH AS DETROITS, NATIONALLY HOME VALUES HAVE RISEN MORE THAN 5-7 PERCENT PER YEAR AFTER INFLATION OVER THE LAST TEN YEARS AND IN SOME AREAS AS MUCH AS 200 PERCENT. NOR DOES ONE HAVE NEARLY THE VOLATILITY, EVEN IN THE BEST OF CIRCUMSTANCES, AS IN THE STOCK MARKET. LOOK AT RENTAL PRICES VS. HOMEOWNERSHIP COSTS. IF ONE WERE TO SAVE THE DIFFERENCE IN RENTING VS. OWNING AND PUT THAT MONEY INTO AN ACCOUNT RETURNING 5 PERCENT PER YEAR AVG. MINUS...PER SE..2PERCENT INFLATION LEAVES ONE WITH A THREE PERCENT RETURN. 2PERCENT EVERY YEAR VS. 5-7 PERCENT ANNUALLY. POPULATION INCREASE CAUSES MORE DEMAND FOR LAND AND DEVELOPMENT. UNTIL WE STOP HAVING CHILDREN AND STOP LIVING LONGER, REAL ESTATE OWNERSHIP WILL ALWAYS TRUMP STOCKS OVER THE LONG TERM

[cami]

Ty, I know some very well off younger people who rent. Why; because they did the math and realized that for where they live renting is a fraction of the cost of owning an equivalent place.

As far as apples to oranges go, there are plenty of places where renting a house is far less expensive than purchasing an equivalent house in the same subdivision. Check out the rent versus purchase prices or 4S Ranch in San Diego on Craiglist in your interested. Or read this article out of Arizona.
http://www.azcentral.com/news/articles/0706shortsale0706.html
It's mainly about short sales, but it describes a brother and sister who bought for almost $600k in 2005, couldn't sell for more than $500k now, and wouldn't be able to command more than $1800/mo in rent.

While housing trends certainly change through out time (often making one choice more favorably at times than the other), it seems to be quite short-sighted to make blanket statements either way. What I can't figure out is, why we can't let people do the math and make informed decisions either way based on their personal situations?

[Ellen Talford]

Well, I am presently a homeowner, and it has been great experience. I found out that my spouse use the equity in our home to buy a condo for his mistress. I am leaving and cannot afford to buy,he refuse to sell or refiance to get my share. So now i having to rent. It really depends on your situation to buy or own.

[Diana]

Well, I'm a longtime renter and have an annual income in the mid-6 figures. I love my investments and appreciate my cheap rent that makes it possible.

Think about this . . . rich people eat steak and poor people eat hamburger. Does that mean eating steak makes you rich? It just could be that rich people have so much more money that they can "waste" it on buying their own residence.

[Roy]

Truly rich will skip the hamburger and save what the difference in steak would have been and have a healthy diet. They also just look like the rest of us. No need to show that they "are" rich. Look at Warren Buffett.

I own, outright. Not having a mortgage or equity line of credit is pretty nice. That much less to worry about and I'm free to try whatever job I want to do next. The cat has a place to stay too, somewhat difficult when renting.

On the other hand, I could have thrown the proceeds from my last place into some good mutual funds and have done better. But it's hard to beat the psychological security of your on roof.

What is rich anyway? I owe nothing but make little. There is little financial pressure other then for taxes, food, utilities and the occasional pair of shoes.

[Phil]

In many of the current markets he's absolutely right. Renting is financially better than buying over any time frame, even assuming a ridiculously conservative market return. The NY Times has a nice calculator that runs the numbers. See http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?ex=1185249600&en=aa7e66bdfdc52c12&ei=5070

For example, I live in the DC metro area. I pay $1200/month to rent a nice apartment. If I were to buy an equivalent condo it would cost me 350k. Now when we go to the NY Times calculator and plug in the current interest rate of 6.3% (for people w/ great credit) and long term real market returns of 7% (10% minus 3% inflation) it quite clearly shows us that renting is better than buying here in DC, by a landslide. Even if you use the calculator's default 5% rate of return (which we can get, for sure, in a savings account) renting is still better than buying by quite a bit.

I'm pretty sure this isn't the case in every metro area. But, here in the DC, you'll end up much, much poorer if you buy a home.

One thing that might surprise people is just how much more money you'll make in the long term by renting. Notice that, as time goes on, the graph makes a nosedive towards renting being better when you use assume long term market returns. That's entirely because of compound interest. That is, by throwing a substantial amount of money into the market early you'll get exponentially larger amounts as time goes on. When you invest in real estate you're guaranteed to be late to the party while locking in 0% real returns.

I think the problem is that people think "I'm throwing away money by renting", so they just buy anything at any price. Buying should be a much more rational decision. You figure out how long you're going to spend in a particular location. Then you run the numbers and determine if you're going to be better off renting. In this market, most people's result is that renting is better.

All that said, I encourage people *not* to come to their senses and to continue driving up the price of real estate. That way, my rent will stay really low and I can continue to make tons and tons of money in the market.

Now, I'm not saying that there are not valid non-financial reasons for buying a home. Maybe some people like to be able to customize their place without having to check with a landlord. Who knows.

[Bill]

I have rented houses in many locations and I have owned houses. I have rented my house to others.

1. In almost all cases, over the decades, I have found a comparable home with rent that is less than mortgage/ interest/taxes. Not having to repair or improve is whip cream on this sundae, not paying association fees is the cherry. Not having to pay the thousands to get in and out of Real estate is a big advantage to a renter. The ability to "pull stakes" with little cost is another related renter advantage.

2. The thought that I can be thrown out on my ear at the whim of the Landlord is grossly over stated. First I have a lease. Second, the biggest threat to a landlord is LOSS OF CASH FLOW. A good tenant is an asset to any landlord. If you try to raise my rent then I might take action to go elsewhere. I know this because I have lost tenants and the next thing I know I'm paying two house notes. Financially very unpleasant.

3. If you make enough income, then your state and local taxes on your 1040 Sch A will approach the level that you can itemize. If they are close to this limit then the mortgage interest and the property taxes are a tax write off. In effect, all or most of your housing payment is tax free plus the amount discounts your income. That's not true of rent (you pay full tax on your rent checks) and it doesn't discount your taxes (both Fed and local).

4. If your local/state taxes on your income doesn't approach the itemizing limit, then the effect I just explained is discounted. One of the great advantages of being in a low income group (poor, retired,college) is the Standard Deduction. It is a tax discount for these people.

5. The big advantage of renting your home out is the 1040 Sch E, which allows you to take EVERYTHING off your Adjusted Gross Income. Plus you get depreciation.

Final comments: Renting vs Buying is very situational. The location, your finances, taxes, timing in the market, etc. Taxes considerations are important because you will have to pay for housing one way or the other. $1000 rent does not equal $1000 owned. This is the problem with renting. On the other hand, most people "go for the max" which sounds good, but it ensures that if you rent it out later, it will rent for much less than your payments. The depreciation advantage is a sad consolation prize. Better to shoot to meet your needs, and leave some of your credit margin in your pocket. Real Estate agents would be very upset in that case.

[Bill]

Renting vs buying is going through a major generational change. The baby-boomers are moving out of their mac-mansions into something smaller (the kids are gone) and there aren't enough people with the money to buy in behind them. This is a long term problem for the lending and construction industries. It is ultimately the cause of the current credit meltdown. All actions to date to "solve" the current credit crisis focuses on the symptom not on this fundamental cause. Because of this many people are going to be driven into the rental market. Many will lose lots of money. The discussion of which is better will lose meaning, as owners-turn-renters will have burnt fingers. Renters will not be able to shift to owning, due to tightening credit rules.

[Alex Kogan]

As with anything there's upside and downside. Personally, when you buy, there is an end when it comes from mortgage payments. However when you "rent and invest the difference" the downside is just too great unless your rent is incredibly low. Also, you never really make money in the market until you sell, it's all on paper. For example during 2008 when the market was at a 12 year low, one felt like they were robbed literally. To me that potential downside will be a nightmare. I would rather buy and eliminate the payments eventually vs the uncertainly involved with "investing the difference.

[YO]

You're ridiculous Alex Kogan -- the same scenario can be said of the housing bubble.

For example during 2008, people who bought their homes at the height of the market felt like they were robbed literally. To me that potential downside will be a nightmare. I would rather rent and invest the difference.

I save $2500 each month after bills as a single bachelor. I max out IRA, and trying to max my 401k. However, I live off my first starting salary despite having two pay raises and earning $20k more (gross).